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 SEPTEMBER 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.
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(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 06-1295986
- ------------------------------------------------------------- ------------------------------------
<S> <C>
(State or other jurisdiction of incorporation or organization (I.R.S. employer identification no.)
225 High Ridge Road, Stamford, CT 06905
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(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (203) 329-3300
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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 November 3, 1998
- ----------------------------- -------------------------------
Common Stock, $.01 par value 17,286,583
<PAGE>
International Telecommunication Data Systems, Inc.
and Subsidiaries
Form 10-Q
Index
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<CAPTION>
Part I. Financial Information- Page No.
<S> <C>
Item 1. Financial Statements (unaudited)
Consolidated balance sheets--September 30, 1998 and December 31, 1997......... 1
Consolidated statements of operations--three months and nine months ended
September 30, 1998 and 1997................................................. 3
Consolidated statements of cash flows--nine months ended
September 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 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, except share and per share data)
<TABLE>
<CAPTION>
September 30 December 31
1998 1997(1)
---------------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 38,926 $ 28,967
Accounts receivable, net of allowances for doubtful
accounts of $2,851 and $486 respectively 27,044 5,008
Prepaid expenses, and other current assets 1,040 741
Deferred income taxes 1,076 220
----------------------
Total current assets 68,086 34,936
Property and equipment
Computers, including leased property under capital leases
of $1,150 and $1,105, respectively 8,713 4,844
Furniture and fixtures, including leased property under
capital leases of $33 in 1998 and 1997 1,758 447
Equipment, including leased property under capital
leases of $54 in 1998 and 1997 706 373
Leasehold improvements 970 589
----------------------
12,147 6,253
Less: accumulated depreciation and amortization 4,594 2,319
----------------------
7,553 3,934
Other assets:
Goodwill - net of accumulated amortization of $2,303 in
1998 43,763 --
Product development costs--at cost, net of accumulated
amortization of $4,437 and $1,105 at September 30, 1998
and December 31, 1997, respectively 21,460 3,698
Deferred taxes 4,541 --
Other 398 1,884
----------------------
70,162 5,582
----------------------
Total assets $145,801 $44,452
======================
</TABLE>
See notes to financial statements.
1
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<TABLE>
<CAPTION>
September 30 December 31
1998 1997(1)
--------------------------------
(Unaudited)
<S> <C> <C>
Liabilities and stockholders' equity Current liabilities:
Accounts payable $ 4,197 $ 1,192
Accrued expenses and income taxes payable 6,773 560
Accrued compensation 3,062 333
Customer advances and deferred revenue 2,697 --
Current maturities of capital lease obligations 148 279
-----------------------
Total current liabilities 16,877 2,364
Capital lease obligations 27 73
Deferred income taxes -- 1,667
Other -- 30
Stockholders' equity
Common Stock, $.01 par value; 40,000,000 shares authorized, 17,271,423 and
12,786,740 shares issued and outstanding at September 30, 1998 and December
31, 1997, respectively 172 128
Additional paid-in capital 139,120 44,447
Retained deficit (11,984) (4,026)
Foreign currency translation adjustment (7) --
Tax benefit associated with stock options 1,666 --
Unearned compensation (70) (231)
-----------------------
Total stockholders' equity 128,897 40,318
-----------------------
Total liabilities and stockholders' equity $145,801 $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
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International Telecommunication Data Systems, Inc.
Consolidated Statements of Operations
(In thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30 September 30
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Revenue $28,832 $ 6,039 $82,198 $16,671
Costs and expenses:
Operating expenses 10,789 1,309 31,571 3,994
General, administrative and selling
expenses 5,177 1,737 15,138 4,819
Depreciation and amortization 2,795 428 7,903 1,162
Systems development and programming
costs 4,068 906 11,386 2,177
In-process R&D and indirect acquisition
costs -- -- 25,513 --
----------------------------------------------
22,829 4,380 91,511 12,152
Operating income (loss) 6,003 1,659 (9,313) 4,519
Other income 524 464 952 1,305
Interest expense (47) (24) (2,696) (101)
----------------------------------------------
Income (loss) before income taxes and
extraordinary item 6,480 2,099 (11,057) 5,723
Income tax expense (benefit) 2,603 859 (3,861) 2,342
----------------------------------------------
Income (loss) before extraordinary item 3,877 1,240 (7,196) 3,381
Extraordinary loss (net of $562 tax
benefit) -- -- 826 --
----------------------------------------------
Net income (loss) $ 3,877 $ 1,240 $(8,022) $ 3,381
==============================================
Income (loss) per common share- basic:
Income (loss) before extraordinary item $ 0.22 $ .10 $ (0.48) $ 0.27
Extraordinary loss -- -- (0.05) --
----------------------------------------------
Net income (loss) $ 0.22 $ .10 $ (0.53) $ 0.27
==============================================
Shares used in computing basic income
(loss) per common share 17,253 12,748 15,038 12,709
Income (loss) per common share- diluted:
Income (loss) before extraordinary item $ 0 .21 $ 0.09 $ (0.48) $ 0.26
Extraordinary loss -- -- (0.05) --
----------------------------------------------
Net Income (loss) $ 0.21 $ 0.09 $ (0.53) $ 0.26
==============================================
Shares used in computing diluted income
(loss) per common share 18,205 13,320 15,038 13,060
See notes to financial statements.
</TABLE>
3
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International Telecommunication Data Systems, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30
1998 1997
-------------------------
<S> <C> <C>
Operating activities
Net income (loss) before extraordinary loss $(8,022) $ 3,381
Adjustments to reconcile net income (loss) before
extraordinary loss to net cash provided by operating
activities:
Write off of in process R&D 20,800 --
Depreciation and amortization 8,004 1,162
Deferred taxes (7,064) 506
Change in operating assets and liabilities:
Accounts receivable (16,326) (2,156)
Prepaid expenses (96) 639
Customer advances and deferred revenue 1,601 --
Accounts payable, accrued expenses and accrued
compensation 5,561 72
Unearned compensation 161 63
Tax benefit associated with stock options 1,666 --
Other assets and liabilities, net 2,353 (306)
----------------------
Net cash provided by operating activities 8,638 3,361
Investing activities
Capital expenditures (2,709) (2,425)
Purchase of Intelicom (73,832) --
Purchase of securities available for sale -- (27,780)
Purchase of investments -- (2)
Proceeds from maturities of investments -- 350
Proceeds from securities available for sale -- 27,339
Product development costs (5,295) (1,378)
----------------------
Net cash used for investing activities (81,836) (3,896)
Financing activities
Principal payment of long term debt (70,177) (319)
Proceeds from long term debt 70,000 -
Proceeds from sale of common stock 84,817 430
Financing Fees related to acquisition (1,483) -
----------------------
Net cash provided for financing activities 83,157 111
----------------------
Net increase (decrease) in cash and cash equivalents 9,959 (424)
Cash and cash equivalents at beginning of period 28,967 4,139
----------------------
Cash and cash equivalents at end of period $ 38,926 $ 3,715
======================
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 2,695 $ 101
Cash paid during the period for taxes $ 1,220 $ 1,659
</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 nine month periods ended
September 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 at the time of the acquisition of approximately $46
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 nine months ended
September 30, 1997, as if the acquisition occurred on January 1, 1997, would
have been revenues of $20.5 million and net income of $1.5 million or $.10 per
diluted share for the quarter ended September 30, 1997 and revenues of $57.2
million and net income of $4.3 million or $0.31 per diluted share for the nine
months ended September 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 underwriter's 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 nine months ended September 30, 1998.
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
an affiliate of CSC in connection with the Intelicom acquisition. The Company
amended the registration statement on August 12, 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 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 Subsidiaries
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 September 30, 1997 changed as a result of the restatement
to conform with FAS 128. For the quarter ended September 30, 1997, shares used
in computing basic and diluted income (loss) per share differ by the effect of
common stock equivalents (572,000 shares). Earnings per share for the nine
months ended September 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 nine months ended September 30, 1997 differ by the
effect of common stock equivalents (351,000 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 Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") 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.
In June 1997, 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.
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 nine months ended September
30, 1998 and 1997 is comprised of the following (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1998 1997 1998 1997
---------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) as reported $3,877 $1,240 $(8,022) $3,381
Unrealized gain on available for sale
securities -- 39 -- 35
---------------------------------------------
Other comprehensive income (loss) $3,877 $1,279 $(8,022) $3,416
=============================================
</TABLE>
As of September 30 1998, the Company had no accumulated other comprehensive
income.
7
<PAGE>
International Telecommunication Data Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
7. Officer, Director and Employee Loans
As of September 30, 1998, prepaid expenses and other current assets and other
long-term assets included approximately $.4 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.
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 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 $6.0 million for the quarter ended September 30, 1997 to $28.8
million for the quarter ended September 30, 1998. For the nine months ended
September 30, 1998, revenue increased $65.5 million to $82.2 million from $16.7
million in the comparable period in 1997. Service revenue related to the
operation of customer billing systems accounted for 86.9% and 93.7% of total
revenue for the three months ended September 30, 1998 and 1997 respectively. For
the nine months ended September 30, 1998 and 1997 service revenue related to the
operation of customer billing systems accounted for 86.1% and 90.2%
respectively. Total operating costs and expenses increased from $4.4 million for
the quarter ended September 30, 1997 to $22.8 million for the quarter ended
September 30, 1998. Operating expenses for the nine month period, excluding
nonrecurring in process R&D and indirect costs associated with the Intelicom
Acquisition aggregating $25.5 million, increased from $12.2 million in 1997 to
$66.0 million in 1998. Additionally, interest expense increased from $24,000 for
the quarter ended September 30, 1997 to $47,000 for the quarter ended September
30, 1998. For the nine months ended September 30, 1998, interest expense
increased to $2.7 million from $101,000 for the same period in 1997 primarily as
9
<PAGE>
a result of the Company's $70 million term loan obtained in connection with the
Intelicom Acquisition. The Company's effective tax rate decreased to 40.2% for
the quarter ended September 30, 1998 from 40.9% for the quarter ended September
30, 1997. For the nine month period, the effective income tax rate decreased
from 40.9% in 1997 to 34.9% 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 September 30, 1997 were $20.5 million
compared to actual revenues for the quarter ended September 30, 1998 of $28.8
million, an increase of 40.5%. For the nine month period, revenue increased
43.7% from $57.2 million on a pro forma basis in 1997 to $82.2 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 September 30, 1997 were $16.9 million compared to actual
operating costs and expenses for the quarter ended September 30, 1998 of $22.8
million. Operating and other expenses for the nine month period increased 42.2%
from $46.4 million on a pro forma basis for 1997 to $66.0 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.
Income for the quarter ended September 30, 1998 was $3.9 million or $0.21 per
diluted share. 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. For the nine months ended September 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 nine months ended September 30, 1998 before nonrecurring and
extraordinary items were $8.6 million or $0.54 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 September 30, 1998, the Company had $38.9 million in cash and cash
equivalents, $27.0 million in net trade accounts receivable and $51.2 million in
working capital.
For the nine months ended September 30, 1998, the Company generated $8.6 million
from operating activities. 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 $22.6 million and
cash flow from investing activities would have been a negative $95.8 million for
the nine months ended September 30, 1998. The Company also generated $83.2
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 and cash generated from operating activities enabled
the Company to fund its operations, apply $5.3 million to product development
cost and make $2.7 million in capital expenditures.
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 at the date of acquisition of approximately
$46 million will be amortized over 15 years. In addition, purchased R&D 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 R&D 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 $30 million line of credit
remains available to the Company.
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 has established a Year 2000 Task Force (the "Task Force") which
includes employees with various functional and divisional responsibilities,
material third parties and outside consultants. The Task Force has identified
five phases in becoming Year 2000 compliant:
(I) awareness--locating, listing and prioritizing specific technology that is
potentially subject to Year 2000 related challenges;
(II) assessment--determining the level of risk that exists through inquiry,
research and testing;
(III) renovation--resolving Year 2000 related issues that were identified in
previous phases by repair in a testing environment.
(IV) validation--testing, monitoring, obtaining certification and verifying the
correct manipulation of dates and date related data, including systems of
material third parties; and
(V) implementation--installation, integration and application of Year 2000
ready resolutions by replacement, upgrade, or repair of Information
Technology systems, including those of material third parties.
The Company is performing its Year 2000 analysis on both the front-end of its
systems, which are located at its customers' sites, and the back-end of its
systems, which are located at the Company. The awareness and assessment phases
of all of the Company's systems have been completed in their entirety. With
respect to the front end portion of the systems, the Year 2000 Task Force has
completed the renovation phase and is currently in the validation and
implementation phases. The Company expects to be completed with all five of its
phases of the front-end of the systems by early 1999. At that point, upgrades
and replacements will be provided to the Company's customers. However, there can
be no assurance that customers will accept and install the upgrades and
replacements in a timely manner. With respect to the back-end portion of the
Company's systems, the Year 2000 Task Force is currently in the renovation
phase. The Company expects be completed with the validation and implementation
phases of the back-end systems by mid 1999. If validation and implementation of
the Company's critical systems fail to meet the Company's expectations, or
identify a risk of noncompliance with a particular functionality, the Company
will reperform the renovation phase to identify alternative solutions.
11
<PAGE>
In addition to internally generated systems, the Company relies on third parties
for its system infrastructure, operating systems, human resources, financial,
and supporting billing and customer care software, some of which are not yet
Year 2000 compliant. The Company is in the process of obtaining assurances from
third parties that their systems are or will be Year 2000 compliant in a timely
manner.
While the Company does not anticipate delays or postponements in implementing
Year 2000 resolutions by the previously stated time frame, there can be no
certainty that implementation of solutions will be made in a timely manner until
the validation phase has been completed. The inability to address all issues in
a timely and successful manner, could have a material adverse effect on the
Company's business and results of operations. The failure of third parties to
provide Year 2000 compliant software products could have a material adverse
effect on the Company's financial condition and results of operations. Such
risks include, but are not limited to, failure to accurately report and bill
existing subscribers for phone usage, accept new orders, activate new
subscribers, and the inability to perform other customer care tasks.
Based on information developed to date as a result of the Task Force assessment
efforts, Management believes that the costs of becoming Year 2000 compliant will
be approximately $3 million. Through September 30, 1998, the Company has
incurred $1.2 million toward this development effort. Although the Company does
not expect the cost to have a material adverse effect on its business or 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 has not deferred any specific projects, goals or
objectives relating to its domestic and international operations as a result of
implementing the Company's Year 2000 compliance efforts.
Certain Factors That May Affect Future Results
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 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. The parties are currently in the
discovery phase of the litigation. In addition, on September 11, 1998, Mr.
Greene filed an age discrimination suit against the Company in the Connecticut
Commission on Human Rights and Opportunities and in the Equal Employment
Opportunities Commission. The Company filed its Answer and Position Statement,
disclaiming any liability relating to age discrimination, on November 5, 1998.
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 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 November 11, 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 nine
month period ended September 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 September 30, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 38,926 38,926
<SECURITIES> 0 0
<RECEIVABLES> 27,044 27,044
<ALLOWANCES> 2,851 2,851
<INVENTORY> 0 0
<CURRENT-ASSETS> 68,086 68,086
<PP&E> 12,147 12,147
<DEPRECIATION> 4,594 4,594
<TOTAL-ASSETS> 145,801 145,801
<CURRENT-LIABILITIES> 16,877 16,877
<BONDS> 0 0
0 0
0 0
<COMMON> 172 172
<OTHER-SE> 128,725 128,725
<TOTAL-LIABILITY-AND-EQUITY> 145,801 145,801
<SALES> 0 0
<TOTAL-REVENUES> 28,832 82,198
<CGS> 0 0
<TOTAL-COSTS> 10,789 31,571
<OTHER-EXPENSES> 12,040 59,940
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 47 2,696
<INCOME-PRETAX> 6,480 (11,057)
<INCOME-TAX> 2,603 (3,861)
<INCOME-CONTINUING> 3,877 (7,196)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 826
<CHANGES> 0 0
<NET-INCOME> 3,877 (8,022)
<EPS-PRIMARY> 0.22 (0.53)
<EPS-DILUTED> 0.21 (0.53)
</TABLE>
