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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934 [No Fee Required]
For the transition period from to
Commission File No. 0-21519
INTERNATIONAL TELECOMMUNICATION
DATA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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Delaware 06-1295986
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
225 High Ridge Road, 06905
Stamford, Connecticut (Zip Code)
(Address of principal executive offices)
(203) 329-3300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this Chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |_|
The aggregate market value of voting Common Stock held by nonaffiliates of
the registrant as of March 22, 1999:
Common Stock, $.01 par value -- $174,994,525.48
The number of shares outstanding of the issuer's common stock as of March
22, 1999:
Common Stock, $.01 par value -- 17,341,894 shares
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the Annual Meeting of Stockholders
to be held May 19, 1999 are incorporated by reference into Part III of this
Report.
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Item 1--Business
International Telecommunication Data Systems, Inc. ("ITDS" or the
"Company") is a leading provider of comprehensive transactional billing and
customer care solutions to providers of wireless and satellite
telecommunications services. The Company uses its proprietary software
technology to develop billing and customer care solutions which address customer
requirements as they evolve, regardless of the 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 or fixed-fee basis. As a result, a
substantial portion of the Company's revenue is recurring in nature, and
increases as a provider's subscriber base grows.
In recent years, the telecommunications services industry has experienced
rapid growth and dramatic change, ranging from the introduction of such new
technologies as cellular, PCS, dispatch and satellite communications, to new
features and services, in a wide variety of combinations and at a great
diversity of prices. The Company's systems are designed to respond to the
dynamic requirements of this market for cost-effective transactional billing and
customer care solutions by drawing on the Company's core technology and skilled
human resources. The Company's software currently supports the predominant
wireless telecommunications protocols, including Advanced Mobile Phone Systems
("AMPS"), an analog service predominant in the U.S., the Global System for
Mobile Communication ("GSM"), Time Division Multiple Access ("TDMA") and Code
Division Multiple Access ("CDMA"). In addition, the Company is the market leader
in supporting carriers that deploy IDEN technology.
The Company's advanced billing and customer care systems form the
foundation for its suite of applications that provide not only subscriber
billing and service support, but also subscriber activation, remittance
processing, collections, data retrieval and reporting, electronic funds
transfer, Authentication Key (A-Key) management, retail point of sale, credit
management, inventory management, data archiving and electronic bill presentment
and payment on the Internet. Its systems architecture permits providers to draw
on those features and functions most appropriate to their 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 customer care systems; to identify and respond
to subscriber demands through analysis of billing and subscriber databases; to
reduce costs with accurate and timely receivables information; and to manage the
subscriber relationship in a comprehensive and cost-effective manner.
Industry Background
General
The U.S. telecommunications services industry currently generates
approximately $352 billion in annual revenue and has experienced rapid change
and greatly increased competition in recent years. Deregulation and rapid
technological advances are resulting in convergence of previously separate
segments of the telecommunications market. Markets that were once rigidly
segmented by service within geographical areas are converging into a single,
world-wide communications market, which includes both traditional service
providers and a variety of new participants. Each segment of these converging
markets is experiencing significant growth, increased complexity in service
offerings and greater competition.
Rapidly evolving technical changes have dramatically increased the features
and services available to subscribers. These changes have ranged from the
evolution of new communications media, such as the Internet, to innovative
services, such as PCS, to a rapidly evolving and growing range of vertical
services such as short message services, voice mail, paging and dispatch. For
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example, many cellular providers are now offering such innovative features as
group ringing, which initiates a call on all of an individual's lines (whether
business, personal or mobile) and connects the call as soon as one line is
answered, and cell site sensitive billing, which, for example, enables carriers
to apply local wireline rates for calls to or from a telephone within the
vicinity of the subscriber's home or business and apply cellular rates
elsewhere. Improved switching technology is permitting local exchange
telecommunications services providers to offer a variety of new features and
services to their subscribers such as call delivery beyond the subscriber's home
area, call waiting, voice mail and others.
Internationally, privatization and deregulation are resulting in similar
increases in competition, the emergence of newly authorized telecommunications
providers, and the provision of additional features over a variety of media.
Wireless Communications
The Cellular Telecommunications Industry Association ("CTIA") estimates
that the number of cellular subscribers in the United States increased from
500,000 in June 1986 to 60.8 million in June 1998. In the twelve months ended
June 1998, wireless providers generated more than $29 billion in revenue in the
United States. In addition to growth in the wireless telephone market, the
emergence of new wireless communications technologies and services, such as PCS,
dispatch and satellite-based telephony, is expected to increase the quality and
capabilities of wireless communications, including, to varying degrees, seamless
roaming, increased service coverage, improved signal quality and greater data
transmission capacity.
Other Segments
Other segments of the telecommunications services industry are experiencing
similar change and convergence. Industry sources estimate that wireline
providers, including providers of local, long-distance, network access and
related services, provide services to approximately 187 million customers in the
U.S., generating an estimated $212 billion of revenues in 1998. 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 wireless 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 Microsoft Network (MSN), 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
the most significant recurring 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 and customer care systems developed internally or
through cooperative joint ventures for
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operation on a provider's mainframe computer. These 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 monitoring service, referred to as "legacy
systems," have proven inadequate to respond to the evolving and dynamic
requirements of the telecommunications services marketplace. The enormous growth
in the number of subscribers, and the proliferation and range of services
offered, require highly capable, flexible and scalable support systems, which
can adequately support the size and nature of customer offerings on a cost
effective basis.
Other service providers have elected to out-source billing and customer
care-related functions because of the significant level of technological
expertise and capital resources required to implement systems successfully. In
addition, many emerging telecommunications service 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 creating
billing systems. These providers typically seek to outsource the billing
functions because efficient flexible billing solutions are often too costly and
time consuming to develop and staff internally.
Recent Developments
In February 1999, ITDS announced the formation of a strategic business
alliance with Novazen, Inc. to include Novazen's Internet-based billing and
customer care software in ITDS's suite of products and services. ITDS has the
exclusive right to provide its clients with Novazen's advanced Internet-based
billing and customer communication software.
In addition, in February 1999, Lewis Bakes resigned as Executive Vice
President, Chief Operating Officer and Secretary; Paul K. Kothari resigned as
Chief Financial Officer; and Peter Masanotti resigned as Executive Vice
President of Operations - Stamford. Also in February 1999, Susan L. Yezzi was
promoted from Executive Vice President of Operations - Champaign to Chief
Operating Officer; Peter L. Masanotti became Secretary and Acting Chief
Financial Officer; and Kevin Piltz was elected as the Company's Chief
Information Officer.
On March 23, 1999, the Board of Directors authorized the repurchase of
shares by the Company of its Common Stock in the open market and/or in privately
negotiated transactions, for an aggregate purchase price of up to $10 million.
Any repurchased shares will be used for the Company's stock incentive plans,
employee stock purchase plan and other corporate purposes. As of March 29, 1999,
the Company had not repurchased any shares pursuant to the repurchase plan.
The ITDS Solution
The Company's solutions are based upon software systems that not only
provide reliable and accurate transactional billing and customer care support,
but also include the means to automate subscriber activation, remittance
processing, collections, data retrieval and reporting, electronic funds
transfer, credit management, automation of inventory management, and data
archiving, running in either
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single or multiple telecommunications services markets, including wireless,
ESMR, paging, dispatch and satellite. In comparison with traditional solutions,
the Company's software and services:
o 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;
o permit providers to introduce new features or combinations of features,
either directly or with others, on a timely basis;
o assure that providers have immediate access to multiple databases on an
integrated basis, to improve marketing and sales planning;
o 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;
o 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;
o support a robust retail support structure through the utilization of its
Point of Sale product suite;
o allow for a variety of bill presentment options, including Web-based
presentment; and
o complement a service provider's anti-fraud efforts by providing for
management of the provider's Authentication Keys (A-Keys).
Products and Services
Core Systems
The Company provides its customers with transactional billing and customer
care solutions through the installation of its software systems and the
provision of billing services. The Company's software is installed at a customer
site to interface directly with the customer's systems and generate relevant
subscriber billing and other data, as well as to support a wide range of
transactional billing and subscriber management functions. The Company processes
the billing information through the use of its software, eliminating the need
for customers to maintain their own "back-office" data processing operation.
Typically, customers contract for the use of the Company's software and the
provision of the Company's services on a long-term basis, generally between two
and five years, and are billed monthly on a per-subscriber or fixed-fee basis.
The Company's suite of applications allows customers the flexibility of
rapidly changing their billing services to implement, for example, immediate
rate plan changes for access, toll usage or toll discounts without the need for
programming. Drawing on its client/server architecture, the systems can be
integrated with a customer's other communication and data systems to provide
customers with the ability to generate up-to-date subscriber analysis and
reports. To further assure its operational flexibility and usefulness, the
systems support key industry standards such as the CIBER standard for the
wireless clearinghouse for AMPS, CDMA and TDMA wireless systems in the U.S. and
the TAP standard for international clearinghouse for GSM cellular systems. The
Company also interfaces with major U.S. credit bureaus, the Federal Reserve
system and various U.S. banks for electronic funds transfer and credit card
transactions. The Company's solutions include a complete library of billing and
financial reports for production as part of the month-end billing process. These
reports provide
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customers with critical transactional billing data and can be modified or
configured by customers to respond most appropriately to their specific
information requirements.
ITDS has completed and recently introduced XCEDE, its newest billing and
customer care solution. XCEDE has a Windows95 graphical user interface, runs on
industry standard UNIX servers and supports Oracle's relational database
management system. It is modular in architecture, intuitive in design and
scaleable in capacity, capable of supporting millions of subscribers.
The Company's solutions perform the following transactional billing,
subscriber management and information functions, while updating the relevant
customer database on a real-time basis:
On-Line Customer Care and Management Support -- Provides end-to-end support for
all subscriber interface requirements:
Subscriber Acquisition Credit Bureau Interface
Integrated Point of Sale Transactional Credit Card Billing
Phone Number Assignment Rate & Feature Assignment
Network Element Provisioning Interface Equipment Inventory Assignment & Tracking
Lead Generation & Tracking Multiple Account Receivable Options
Automatic Clearinghouse for Bank Automatic Call Credit Adjustments
Draft Payments
Multi-tiered Security Systems Multiple Search Keys at Account or Phone Level
Automatic Notes and Reminders Management of Authentication Keys
Message Processing and Rating -- Includes the collection of raw call detail
records from the customer's switch network, and the editing, formatting, rating
and guiding of all traffic events necessary to produce subscriber invoices,
traffic reports and other call related information:
Data Collection from all Switch Types Polling or Receipt of Near Real Time Records
Roamer In/Out Collect Processing Up to 999 Rate Plans per Market
Error Management & Reporting Rating, Re-rating and "Pseudo Roaming" Support
Discounts by Amount or Percentage Variable Time Periods for Air and/or Toll
Selective or Global Exceptions Unlimited Toll Plans On-line
Billing & Invoicing -- Application of rated messages to invoices, summary files
and reports:
Multiple Bill Cycles by Market FIFO Overdue Payment Application
Balance Forward Billing Invoice Format Options
Multiple Level Invoices Global, Group or Individual Messages
Full Lockbox Support Federal Reserve Bank Interface
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Currency Conversion Language Options
International Addressing Print Fulfillment Options
Web-based Bill Presentment and
Payment
Customers transmit call detail records from their switching network or
other network provider directly to one of the Company's data centers. In
addition, the Company extracts necessary data from the customer's file server.
The Company formats, guides, rates, and taxes the call records in accordance
with the appropriate subscriber parameters and produces print image data output
and various reports. The Company's bill verification personnel provide an
additional level of assurance that subscriber invoices and management reports
are accurate and timely. The Company then arranges with third-party vendors for
the printing and distribution of subscriber invoices on a monthly basis, or,
through its new bill presentment and payment capability, the Company can enable
end users to access and pay their invoices over the Web.
In addition to the foregoing general features, the Company's systems
incorporate a modular system architecture which can support a number of
complementary applications to meet a customer's specific requirements, including
the following:
o XCEDE/NP is a direct multi-switch interface between XCEDE systems and all
types of telecommunication switches, including cellular, paging and voice
mail platforms. XCEDE/NP manages line and feature activation or
deactivation in connection with XCEDE service order activity.
o XCEDE CreditLink module interfaces with several U.S.-based credit bureaus
to provide on-line credit analysis of potential subscribers.
o XCEDE Collections module provides support for dedicated collections
personnel.
o XCEDE InventoryScan is a complete inventory management system which allows
easy bar code scanning and on-line inventory record maintenance from the
physical receipt of equipment to entry into the XCEDE inventory subsystem.
Other Products and Enhancements
Point of Sale System
The Company offers a Point of Sale package, which is a highly capable sales
tool designed to incorporate the entire sales process into a quick and
convenient on-line function. The system can be used in-store or as a mobile
unit, so that customers can market wireless products and services a true retail
setting. The system enables sales clerks to quickly process initial service
applications, on-line credit checks, inventory updates, assignment of telephone
numbers, rate plan selection, invoicing and payments. Upon credit verification,
the system immediately creates an entry in the customer's subscriber database
and can activate telephone service at the switch.
A-Key
A-Key is the latest addition to the Company's product line for supporting
the customer acquisition, billing, customer care, and process control efforts of
wireless service providers. A-Key is compliant with the EDI A-Key Guidelines as
published by CTIA. In addition, it is also capable of
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utilizing private formats as requested by a wireless service provider, or a
mobile unit manufacturer. The A-Key system encompasses six integrated modules
which can be deployed with XCEDE or as a stand-alone product that interfaces
with an existing service order/provisioning application. These modules include:
o A-Key security and encryption
o real-time EDI interface
o reconciliation process
o A-Key service order interface
o obtain key
o random key generation
Customers
As of December 31, 1998, the Company's solutions supported a variety of
technologies (including AMPS, CDMA, GSM and TDMA), serving over seven million
subscribers. In the year ended December 31, 1998, the Company's customers
included a broad range of wireless telecommunications service providers,
including Aliant Communications Co., Dobson Cellular Systems, MCI WorldCom,
Inc., Nextel Communications, Omnipoint, Sygnet Communication and Western
Wireless. Revenues from Nextel Communications and Western Wireless represented
30.2% and 11.9% of the Company's total revenue in 1998, respectively. The loss
of any such customer could have a material adverse effect on the operating
results of the Company.
Customer Support
The Company provides support from the time a customer converts to the
Company's software, continuing through the on-going provision of transactional
billing services. The Company assigns to each new customer a dedicated
implementation 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 including an account
manager, a customer service representative and a programmer/analyst 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 service and support activities
are supplemented by the provision of on-going training classes to customers, to
assist customers in utilizing the system capabilities more effectively. In
February 1999, the Company's customer service and support department consisted
of 156 persons, with an additional 22 dedicated quality assurance employees.
Sales and Marketing
The Company's strategy has been to establish and maintain long-term
customer relationships. As customers' subscriber bases grow and as customers add
systems features to their existing ITDS solutions, the Company generates
increased revenue. The Company's customer support programs enable it to
understand customer needs and offer strategic solutions from its suite of
products and
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features. In addition, the flexible and scalable architecture of the Company's
core technology enables the Company to maintain customer relationships as
customers enter into additional telecommunications markets. In February 1999,
the Company's sales and marketing department consisted of 9 persons.
System Development
The Company's research and development efforts are focused on enhancing
existing products and services as well as developing products, features and
services that can be integrated into the Company's core technology. The
Company's product development team reviews product and service development
proposals and establishes internal guidelines for efficient development. The
Company's product management team also works closely with customers to perform
customization of products to meet specific needs. In addition to internal
development, the Company works with its strategic partners Hewlett-Packard,
Oracle and Novazen to develop products compatible with their product offerings.
Currently, the Company has a number of new releases under development to meet
evolving customer requirements.
The Company actively participates in industry standards associations,
committees and forums 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. The Company is currently
represented at such regularly scheduled industry groups as CTIA's CIBERNET
Advisory Group for Industry Standards, which evaluates proposed changes to
standards for wireless industry data exchange; the CIBERNET Net Settlement Users
Group, which evaluates proposed changes to the net settlement process; the CTIA
Number Advisory Group, which addresses issues related to numbering; the CTIA
Advisory Group for Network Issues, which addresses interoperability network
issues; and the North American GSM Alliance BARG/TADIG, which evaluates proposed
changes to the standards for data exchange within the GSM industry including the
international market. In addition, the Company participates in or has
participated in other groups and meetings as required including CIBERNET Data
Message Handler Working Group, CTIA's International Forum for AMPS Standard,
Bellcore Ordering and Billing forum, CTIA's sub-committee on ESN Exhaust and
CTIA's sub-committee on Wireless Local Number Portability.
In the years ended December 31, 1998, 1997 and 1996, the Company incurred
cash expenditures on systems development, including the acquisition of ITDS
Intelicom Services Inc. (formerly, CSC Intelicom, Inc.) ("Intelicom"), of $61.3
million, $5.8 million and $3.0 million, respectively, of which $23.5 million,
$2.9 million and $858,827, respectively, were capitalized as software
development costs in each of such years. In February 1999, the Company employed
366 people in product and systems programming and development and engaged 144
independent contractors in conjunction with the continued development of its
software products.
Competition
The market for billing and customer care systems for the telecommunications
service industry is highly competitive and the Company expects that the high
level of growth within the telecommunications service industry will encourage
new entrants, both domestically and internationally, in the future. The Company
competes with both independent providers of transactional systems and services
and with internal billing departments of telecommunications services providers.
The Company believes its most significant competitors in the wireless
telecommunications segment are, within the service bureau model, Alltel
Information Systems, Inc., Convergys Corp. (formerly Cincinnati Bell Information
Systems, Inc.), H.O. Systems Inc. and, within the licensing model, LHS Group,
Inc. and Amdocs, Ltd. 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
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Company competes with several international providers of billing and customer
care 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 and management systems as their needs and the needs of their subscribers
change.
In addition, the Company believes that its ability to compete successfully
will depend in part on a number of factors outside its control, including the
development by others of software that is competitive with the Company's
products and services, the price at which others offer comparable products and
services, the extent of competitors' responsiveness to customer needs and the
ability of the Company's competitors to hire, retain and motivate key personnel.
Many of the Company's current and potential future competitors have significant
financial, technical and marketing resources and have greater name recognition
than does the Company. In addition, many of the Company's competitors have
established commercial relationships or joint ventures with major wireless and
other telecommunications services providers.
Proprietary Rights and Licenses
The Company relies in part on trademark, copyright and trade secret laws to
protect its proprietary rights. The Company distributes its products under
service and software license agreements which typically grant customers
non-exclusive licenses, subject to terms and conditions prohibiting unauthorized
reproduction, transfer or use. The Company believes that because of the rapid
pace of technological change in the telecommunications and software industries,
the technological expertise of its personnel, the complexity of its system
architecture and the frequency and timeliness of product and service offerings
are more significant than the legal protections of its products. In addition,
the Company enters into non-disclosure agreements with each employee and
consultant and each third-party to whom the Company provides proprietary
information. Access to the Company's core source code is greatly restricted.
The Company licenses from third parties technology that is important to
certain functionalities of its products. The Company is not aware of any patent
infringement or any violation of other proprietary rights claimed by any third
party relating to the Company or the Company's products.
Employees
In February 1999, the Company had a total of 673 employees, of whom 156
were engaged in customer service, 366 were engaged in systems programming and
development, 22 in quality assurance, 31 in new customer conversions, 9 in sales
and marketing and 89 in office administration, finance, human resources and
training. None of the Company's employees are represented by labor unions. The
Company believes that its employee relations are good.
Item 2--Properties
The Company subleases a 48,222 square foot facility and a 13,000 square
foot facility in Stamford, Connecticut and a 60,400 square foot facility in
Champaign, Illinois for systems and programming, client service, operations,
quality assurance, documentation and training, and
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administration. In addition, the Company has entered into a contract to lease an
additional 25,000 square feet in Champaign, Illinois beginning the summer of
1999. The Company's headquarters are located at its Stamford facility.
Substantially all of the Company's assets, including its equipment and
inventory, are subject to a security interest in favor of the lenders who are
parties to the Credit Agreement.
Item 3--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 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 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
Not applicable.
Executive Officers of the Registrant
The following table sets forth the names, ages and positions of all
executive officers of the Company.
Name Age Position
Lewis D. Bakes 41 Chairman and Director
Peter P. Bassermann 49 President, Chief Executive Officer and Director
Susan L. Yezzi 49 Chief Operating Officer
Peter L. Masanotti 44 Acting Chief Financial Officer, Executive Vice President,
General Counsel, Secretary and Director
Joseph A. Juliano 49 Executive Vice President of Strategic Product Management
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Kevin M. Piltz 40 Chief Information Officer
Lewis D. Bakes co-founded the Company in 1990 and has served as a director
since that time. He was elected Chairman of the Company in February 1998. Mr.
Bakes served as Executive Vice President, Chief Operating Officer and Secretary
from the Company's inception until February 1999. Mr. Bakes is also an attorney,
licensed to practice in Connecticut.
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.
Susan L. Yezzi joined the Company in February 1998 as Executive Vice
President of Operations -- Champaign. In February 1999, Ms. Yezzi was appointed
Chief Operating Officer of the Company. Prior to joining the Company, Ms. Yezzi
served as Vice President of Customer Billing 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.
Peter L. Masanotti joined the Company in 1996 as Vice President and General
Counsel. He has served as Executive Vice President since January 1998, serving
as Executive Vice President of Operations -- Stamford from January 1998 until
February 1999. Mr. Masanotti was elected as a director in August 1997 and became
Secretary and Acting Chief Financial Officer in February 1999. 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.
Kevin M. Piltz joined the Company in August 1997, serving initially as Vice
President of Applications Development, and, from January 1998 until February
1999, as Senior Vice President of Applications Development. In February 1999,
Mr. Piltz was elected as the Company's Chief Information Officer. Prior to
joining the Company, Mr. Piltz served as Director of New Technology at
Subscriber Computing Inc., a provider of wireless billing solutions, from May
1995 through August 1997. From May 1990 through May 1995, Mr. Piltz worked at
Transamerica Insurance Group/TIG Insurance, initially as a Program Manager and
then as Assistant Vice President of Systems.
-12-
PART II
Item 5--Market for Registrant's Common Stock and Related Stockholder Matters
Price Range of Common Stock
The Common Stock has been quoted on the Nasdaq National Market under the
symbol "ITDS" since the Initial Public Offering on October 24, 1996.
The following table sets forth the high and low sales prices of the Common
Stock on the Nasdaq National Market for the periods indicated (as adjusted to
reflect the three-for-two stock split effected on March 9, 1998).
High Low
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 Ended December 1998:
First Quarter................................................. $29.00 $20.83
Second Quarter................................................ $34.25 $22.00
Third Quarter................................................. $35.63 $19.63
Fourth Quarter................................................ $29.38 $11.38
Fiscal Year Ending December 1999:
First Quarter (through March 22, 1999) $21.88 $ 9.19
On March 22, 1999, the last reported sale price for the Common Stock as
reported by the Nasdaq National Market was $10.63 per share. As of March 22,
1999, there were approximately 64 holders of record of the Common Stock.
Dividend Policy
The Company paid no cash dividends in 1997 or 1998. The Company currently
intends to retain earnings, if any, to support the development of its business
and does not anticipate paying cash dividends for the foreseeable future.
Payment of future dividends, if any, will be at the discretion of the Company's
Board of Directors after taking into account various factors, including the
Company's earnings, financial condition, operating results and current and
anticipated cash needs as well as such economic conditions as the Board of
Directors may deem relevant.
Recent Sales of Unregistered Securities
Set forth in chronological order below is information regarding the
unregistered securities issued by the Registrant since January 1, 1996 (as
adjusted to reflect the three-for-two stock split effected on March 9, 1998).
Also included is the consideration, if any, received by the Registrant for such
securities, and information relating to the section of the Securities Act of
1933, as amended (the "Securities Act"), or rule of the Securities and Exchange
Commission under which exemption from registration was claimed. No sale of
securities involved the use of an underwriter and no commissions were paid in
connection with the sales of any securities.
-13-
On September 27, 1996 as part of the Company's recapitalization, (i) all of
the Company's Series A Preferred Stock was converted into an aggregate of
787,212 shares of Common Stock and promissory notes in the aggregate amount of
$450,000 and (ii) all of the Company's Series B Preferred Stock was converted
into an aggregate of 492,006 shares of Common Stock and promissory notes in the
aggregate amount of $375,000.
Upon the consummation of the Company's initial public offering of Common
Stock in October 1996, 129 shares of Class C Convertible Preferred Stock held by
Connecticut Innovations Incorporated converted into an aggregate of 154,800
shares of Common Stock.
On December 19, 1996, the Company loaned Mr. Masanotti and his wife
$50,000, which is due on June 18, 1999, and on April 10, 1997, the Company
loaned Mr. Masanotti and his wife $110,000, which is due on April 9, 1999. The
interest rate on both of the loans is 8-1/2% per annum. The indebtedness is
secured by a pledge in favor of the Corporation of Common Stock held by Mrs.
Masanotti.
On December 31, 1996 and January 1, 1997, the Company loaned Mr. Joseph
Juliano an aggregate of $106,000, at an interest rate of 8.5% per annum pursuant
to three promissory notes. Of the total amount, $40,000 was due on February 28,
1997 and was repaid in February 1997 and $12,000 plus interest was forgiven. As
of December 31, 1998, Mr. Juliano owed $53,426, which is payable on demand. The
loan is secured by a pledge in favor of the Company of 27,000 shares of Common
Stock held by Mr. Juliano.
On April 11, 1997, the Company loaned to Mr. Barry Lewis $32,000, which is
due on April 10, 1999. On December 15, 1997, the Company loaned Mr. Lewis
$6,960, which was due on December 14, 1999 and was repaid in May 1998. The
interest rate on both of the loans is 8-1/2% per annum. On January 2, 1998, the
Company loaned Mr. Lewis $36,240, which is due on demand. The indebtedness is
secured by a pledge in favor of the Corporation of Common Stock held by Mr.
Lewis.
On December 1, 1997, the Company loaned Mr. Kevin Piltz $100,000 at an
interest rate of 6% per annum, with interest payable monthly commencing on
January 1, 1998. The principal amount outstanding under the loan is payable as
to 20% on December 31, 2001 and as to 40% on December 31, 2004, and the
remaining principal and interest is payable on December 1, 2008.
On January 2, 1998, in connection with the Company's acquisition of all of
the issued and outstanding shares of capital stock of Intelicom from CSC
Domestic Enterprises, Inc. ("CSC Domestic"), an indirect subsidiary of Computer
Sciences Corporation, the Company issued to CSC Domestic 606,673 shares (the
"Purchase Shares") of Common Stock. The Purchase Shares represented $10,000,000
of the total purchase price of the acquired corporation.
The shares of capital stock and securities issued in the above transactions
were offered and sold in reliance upon the exemption from registration under
Section 4(2) of the Securities Act or Regulation D or Rule 701 promulgated under
the Securities Act, relative to sales by an issuer not involving a public
offering.
-14-
Item 6--Selected Consolidated Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
The following selected financial information has been derived from the Company's
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, 1995 and 1994 and the balance sheets as of December 31, 1996,
1995 and 1994, appear elsewhere in this Annual Report on Form 10-K. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements and Notes thereto included elsewhere herein.
Year Ended December 31,
1998 (1) 1997 1996 1995 1994
--------------- --------------- --------------- --------------- -------------
Statements of Operations Data:
Revenue........................................... $115,460 $23,429 $16,689 $10,821 $6,324
Costs and expenses:
Operating expenses............................. 44,334 5,617 4,283 2,788 1,647
General, administrative and selling expenses... 20,798 6,760 6,523 4,601 2,410
Depreciation and amortization.................. 10,846 1,596 1,054 641 406
Systems development and programming costs...... 16,974 2,911 2,115 1,183 755
Personnel and indirect acquisition costs....... 4,713 - - - -
In-process research and development............ 20,800 - - - -
--------------- --------------- --------------- --------------- -------------
Total cost and expenses........................... 118,465 16,884 13,975 9,213 5,218
--------------- --------------- --------------- --------------- -------------
Operating income (loss) .......................... (3,005) 6,545 2,714 1,608 1,106
Other income...................................... 1,550 1,702 316 49 29
Interest expense.................................. (2,740) (120) (416) (453) (390)
--------------- --------------- --------------- --------------- -------------
Income (loss) before income tax expense........... (4,195) 8,127 2,614 1,204 745
Income tax expense (benefit)...................... (1,095) 3,326 1,112 378 37
--------------- --------------- --------------- --------------- -------------
Income (loss) before extraordinary item........... (3,100) 4,801 1,502 826 708
Extraordinary loss (1995 net of $158 and 1998 net
of $562 tax benefit).............................. (826) - - (224) -
=============== =============== =============== =============== =============
Net income (loss) (2)............................. $(3,926) $ 4,801 $ 1,502 $ 602 $ 708
=============== =============== =============== =============== =============
Per common share (loss) data basic (3):
Pro forma income (loss) before extraordinary item. $ (.20) $ .38 $ .15 $ .09
Extraordinary loss................................ (.05) - - (.03)
--------------- --------------- --------------- ---------------
Net income (loss)................................. $ (.25) $ .38 $ .15 $ .06
=============== =============== =============== ===============
Shares used in determining pro forma basic income
(loss) per common share........................ 15,607 12,728 9,890 9,291
=============== =============== =============== ===============
Per common share (loss) data diluted (3):
Pro forma income (loss) before extraordinary item. $ (.20) $ .36 $ .15 $ .09
Extraordinary loss................................ (.05) - - (.03)
--------------- --------------- --------------- ---------------
Net income (loss)................................. $ (.25) $ .36 $ .15 $ .06
=============== =============== =============== ===============
Shares used in determining pro forma diluted
income (loss) per common share................. 15,607 13,193 10,109 9,291
=============== =============== =============== ===============
(1) 1998 results include Intelicom which was acquired on January 2, 1998.
(2) Excluding the $25.5 million ($15.8 million after tax) non-recurring in
process research and development and personnel and indirect acquisition
costs associated with the Company's January 2, 1998 acquisition of
Intelicom and the extraordinary loss resulting from the early
extinguishment of debt, earnings for the year ended December 31,1998 were
$12.7 million or $0.77 per pro forma diluted share.
(3) Computed on the basis described in Note 4 of Notes to Consolidated
Financial Statements.
-15-
Year Ended December 31,
1998 1997 1996 1995 1994
--------------- --------------- ---------------- --------------- ------------
Balance Sheet Data:
Cash, cash equivalents and short term investments. $40,735 $ 28,967 $ 4,487 $1,468 $ 512
Securities available for sale, at estimated
market value................................... - - 25,023 - -
Working capital................................... 56,825 32,572 31,639 1,210 157
Current assets.................................... 78,131 34,936 33,942 3,117 1,457
Current liabilities............................... 21,306 2,364 2,303 1,907 1,300
Total assets...................................... 155,156 44,452 38,398 5,434 2,651
Total long-term debt and capital lease obligations 25 73 878 2,437 1,353
Redeemable Preferred Stock--Class C............... - - - 640 -
Total stockholders' equity (deficit).............. 133,825 40,318 34,717 379 (186)
-16-
Item 7--Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
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 the 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
or fixed fee basis. As a result, a substantial portion of the Company's revenue
is recurring in nature, and increases as a provider's subscriber base grows.
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 Intelicom. This acquisition
was accounted for in accordance with the purchase method of accounting. The
purchase price, after working capital adjustments aggregating approximately
$14.2 million, aggregated $83.7 million, before direct costs of approximately
$1.2 million and consisted of 606,673 shares of Common Stock of the Company
valued at $10 million (before registration costs of approximately $100,000) and
$73.8 million in cash. In addition, the Company made a $6 million payment in
January 1999, which was contingent upon certain performance factors. 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 $45.3 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 $16.6 million, and other
non-current assets of $3 million and assumed accrued liabilities of $7.9
million. In addition, purchased research and development costs of $20.8 million,
before income tax benefit, and personnel and other indirect transaction costs of
$4.7 million, before income tax benefit, (principally hiring and temporary staff
of $1.8 million, special bonuses paid to the Company's employees and management
of $2.3 million and systems and other costs of $600,000) associated with the
Intelicom acquisition have been expensed in 1998. All of the personnel and
indirect acquisition costs were paid during 1998 with the exception of
approximately $220,000. The operations of Intelicom are included with the
Company's financial statements since the date of acquisition.
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 4, the
Company retired the $70 million term loan and terminated the Hedge Agreement. In
connection with this, the Company recorded an after tax extraordinary charge of
$826,198.
The $30 million line of credit remains outstanding at December 31, 1998. No
amounts were drawn on the line of credit during 1998.
Costs for acquired in-process research and development ("in-process R&D") for
projects that did not have future alternative uses were $20.8 million. This
allocation represents the estimated fair market value based on risk-adjusted
cash flows related to the in-process R&D projects. At the date of acquisition,
the development of these projects had not yet reached technological feasibility,
and the in-process R&D had no alternative future uses. Accordingly, these costs
were written off in the quarter ended March 31, 1998.
On the date of its acquisition, Intelicom's in-process R&D value was comprised
of three primary R&D programs that were expected to reach completion between
late 1998 and 2000. These projects included the introduction of new technology
aimed at customer care and billing. At the acquisition date, Intelicom's R&D
programs ranged in completion from 35% to 80%, and total continuing R&D
commitments to complete the projects were expected to be approximately $5.5
million. On the acquisition date, expenditures to complete Intelicom's projects
were expected to be approximately $3 million, $2 million and $500,000 in 1998,
1999 and 2000, respectively. These estimates are subject to change, given the
uncertainties of the development process, and no assurance can be given that
deviations from these estimates will not occur. Additionally, these projects
will require maintenance expenditures when and if they reach a state of
technological and commercial feasibility. Based on the activities during 1998,
the Company believes that the assumptions used in the valuation are reasonable.
-17-
Management believes the Company is positioned to complete each of the major R&D
programs. However, there is risk associated with the completion of the projects,
and there is no assurance that any project will meet with either technological
or commercial success. The substantial delay or outright failure of the
Intelicom R&D could adversely impact the Company's financial condition.
The value assigned to purchased in-process R&D was determined by estimating the
projected net cash flow from Intelicom's purchased in-process R&D projects once
they had reached commercially viable products and discounting the net cash flows
to their present value. The revenue estimates used to value the in-process R&D
were based on estimates of relevant market sizes and growth factors, expected
trends in technology and the nature and expected timing of new product
introductions by the Company and its competitors. The valuation anticipates
revenues beginning in 1998.
The rates utilized to discount the net cash flows to their present value are
based on Intelicom's weighted average cost of capital. Given the nature of the
risks associated with the estimated growth, profitability and developmental
projects, Intelicom's weighted average cost of capital was adjusted. A discount
rate of 30% was deemed appropriate for Intelicom's business enterprise. This
discount rate is intended to be commensurate with Intelicom's maturity and the
uncertainties in the economic estimates described above.
The estimates used by the Company in valuing in-process R&D were based upon
assumptions the Company believes to be reasonable but which are inherently
uncertain and unpredictable. The Company's assumptions may be incomplete or
inaccurate, and no assurance can be given that unanticipated events and
circumstances will not occur. Accordingly, actual results may vary from the
projected results. Any such variance may result in a material adverse effect on
the financial condition and results of operations of the Company.
The Company derives revenue (i) primarily from service contracts, whereby a
customer contracts with the Company to operate and maintain its transactional
billing system and (ii) to a lesser extent, from the development of new software
and enhancement of existing installed systems together with the provision of
related customer maintenance and training, which is largely based on a time and
materials basis. Service revenue related to the operation of customers billing
systems accounted for 85.4%, 93.2% and 96.6% of total revenue for 1998, 1997 and
1996, respectively. Services are generally billed monthly and service revenue is
recognized in the period in which the services are provided. The remaining
revenue relates primarily to development of new software and enhancement of
existing installed systems.
Operating expenses are comprised primarily of the salaries and benefits of
technical service representatives, operations personnel and quality assurance
representatives and costs to produce and distribute invoices for customers.
General, administrative and selling expenses consist mainly of the salaries and
benefits of management and administrative personnel and general office
administration expenses (rent and occupancy, telephone and other office supply
costs) of the Company.
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.
This Annual Report on Form 10-K contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects" and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause the Company's actual results to
differ materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth below under the caption
"Certain Factors That May Affect Future Results."
-18-
Results of Operations
The following table sets forth, for the periods indicated, certain financial
data as a percentage of revenue for the years ended December 31, 1998, 1997 and
1996:
Year Ended December 31,
1998 1997 1996
---------------- ----------------- ----------------
Revenue.............................................. 100.0% 100.0% 100.0%
Costs and expenses:
Operating expenses................................ 38.4 24.0 25.7
General, administrative and selling expenses...... 18.0 28.9 39.1
Depreciation and amortization..................... 9.4 6.8 6.3
Systems development and programming costs......... 14.7 12.4 12.6
Personnel and indirect acquisition costs.......... 4.1 - -
In process research and development .............. 18.0 - -
---------------- ----------------- ----------------
Total costs and expenses............................. 102.6 72.1 83.7
---------------- ----------------- ----------------
Operating income (loss).............................. (2.6) 27.9 16.3
Other income......................................... 1.3 7.3 1.9
Interest expense..................................... (2.4) (0.5) (2.5)
---------------- ----------------- ----------------
Income (loss) before income tax expense.............. (3.7) 34.7 15.7
Income tax expense (benefit)......................... (1.0) 14.2 6.7
---------------- ----------------- ----------------
Income (loss) before extraordinary item.............. (2.7) 20.5 9.0
Extraordinary loss................................... 0.7 - -
================ ================= ================
Net income (loss).................................... (3.4)% 20.5% 9.0%
================ ================= ================
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Results of Operations
Primarily as a result of the Intelicom Acquisition, the Company's revenues
increased from $23.4 million for the year ended December 31, 1997 to $115.5
million for the year ended December 31, 1998. Service revenue related to the
operation of customer billing systems accounted for 93.2% and 85.4% of total
revenue for the years ended December 31, 1997 and 1998 respectively. Operating
expenses for the twelve month period, excluding nonrecurring in process research
and development and personnel and indirect costs associated with the Intelicom
Acquisition aggregating $25.5 million, increased from $16.9 million in 1997 to
$93.0 million in 1998. Additionally, interest expense for the twelve months
ended December 31, 1998, increased to $2.7 million from $120,355 for the same
period in 1997 primarily as a result of the Company's $70 million term loan
obtained in connection with the Intelicom Acquisition. The Company's effective
tax rate for the twelve month period decreased from 40.9% in 1997 to 26.1% 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 year ended 1998 increased 43.6% from $80.4 million in
1997 to $115.5 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 and other expenses increased 38.6% from $67.1 million on a pro forma
basis for 1997 to $93.0 million in 1998 excluding nonrecurring in process
research and development and personnel 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.
-19-
For the year ended December 31, 1998 non-recurring charges of $25.5 million
($15.8 million after tax) for in-process research and development ($20.8
million) and personnel and indirect acquisition costs (principally hiring and
temporary staff of $1.8 million, special bonuses paid to the Company's employees
and management of $2.3 million and systems and other costs of $600,000)
associated with the Intelicom Acquisition. All of the personnel and indirect
acquisition costs were paid during 1998 with the exception of approximately
$220,000. Earnings for the twelve months ended December 31, 1998 before
nonrecurring and extraordinary items were $12.7 million or $0.77 per pro forma
diluted share.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenue
Revenue increased 40.4% from $16.7 million in 1996 to $23.4 million in 1997, due
primarily to the addition of new customers and the growth of recurring revenue
from existing customers.
Operating expenses
Operating expenses increased 31.1% from $4.3 million in 1996 to $5.6 million in
1997, due primarily to the addition of new personnel required to support the
growth of the Company's business. As a percentage of revenue, such expenses
decreased from 25.7% in 1996 to 24.0% in 1997, due to the fixed nature of a
portion of the Company's operating expenses.
General, administrative and selling expenses
General, administrative and selling expenses increased 3.6% from $6.5 million in
1996 to $6.7 million in 1997. This increase was primarily due to increases in
salaries and employee related expenses resulting primarily from staff increases
(other than senior management salaries and related expenses) of $592,504,
increases in outside programming consultant costs of $778,005, increases in rent
and office expenses of $322,379 and increases in marketing and trade show
expenses of $205,492. These and other less significant expense increases were
partially offset by a reduction in senior management costs of $1.8 million
resulting primarily from the 1996 charge ($909,548) related to two newly hired
senior executives and the full year benefit from the reduction in senior
management's salaries and bonuses after the Company's initial public offering
("IPO") in October 1996.
Depreciation and amortization
Depreciation and amortization expenses increased 51.5% from $1 million in 1996
to $1.6 million in 1997 primarily due to the purchase of computer equipment and
the increased capitalization related to product development costs to enhance the
Company's solution system to support Unix based file servers and further
development of its integrated billing and management information system.
Depreciation and amortization expenses increased as a percentage of revenue from
6.3% in 1996 to 6.8% in 1997.
Systems development and programming costs
Systems development and programming costs increased 37.6% from $2.1 million in
1996 to $2.9 million in 1997, primarily due to increased programming support
required by a larger customer base. As a percentage of revenue, system
development and programming costs decreased from 12.6% in 1996 to 12.4% in 1997.
In addition, the Company capitalized $858,827 and $2.9 million in software
development costs in 1996 and 1997, respectively.
Other income
Other income increased 439% from $315,914 in 1996 to $1.7 million in 1997,
primarily due to an increase in investment income of $1.3 million.
Interest expense
Interest expense decreased 71.1% from $416,148 in 1996 to $120,355 in 1997, as a
result of the Company reducing outstanding debt and capital leases in the fourth
quarter of 1996 and throughout 1997.
-20-
Income tax expense
The Company's effective tax rate decreased from 42.5% in 1996 to 40.9% in 1997.
This reduction is partially a result of the elimination of non-deductible
expenses and reduced state income taxes.
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 December 31, 1998, the Company had $40.7 million in cash and cash
equivalents, $34.7 million in net trade accounts receivable and $56.8 million in
working capital.
For the year ended December 31, 1998, the Company generated cash of $10.6
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 provided by operations would have been $24.6 million and
cash used for investing activities would have been $98.5 million for the year
ended December 31, 1998. The Company also generated cash of $85.6 million from
financing activities, including the sale of Common Stock in June 1998 for $83.1
million in net proceeds. Using proceeds from the follow-on offering, the Company
retired the $70 million term loan, obtained in connection with the Intelicom
Acquisition. The offering and cash generated from operating activities also
enabled the Company to fund its operations, apply $6.9 million to product
development costs and make $3.7 million in capital expenditures.
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 has a $30 million unused line of credit available for future cash
requirements.
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--updating code to resolve 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. As of March 1, 1999, the awareness,
assessment and renovation 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 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 mid 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 validation
phase. The Company expects to 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 perform the renovation phase to identify
alternative solutions. As of March 1, 1999, approximately 80% of all validation
activities and 50% of all implementation activities are complete.
-21-
The Company is in the process of developing a working contingency plan for the
Year 2000 issue. The contingency plan is scheduled to be completed during the
third quarter of 1999. The Company will perform testing on all subsequent
upgrades of software deemed Year 2000 compliant to ensure continued compliance.
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 $4.0 million. Through December 31, 1998, the Company has
incurred $2.5 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.
New 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.
Effective January 1, 1998, the Company adopted the FASB's Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information ("SFAS 131"). SFAS 131 superseded FASB Statement No. 14,
Financial Reporting for Segments of a Business Enterprise. SFAS 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. SFAS 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The adoption
of Statement 131 did not affect results of operations or financial position. The
operating results of the Company is regularly reviewed by the chief operating
decision maker as one well-defined line of business. Therefore, the Company has
determined that under the requirements of Statement 131, it continues to have
only one operating segment.
As of January 1, 1998, the Company adopted SFAS 130, Reporting Comprehensive
Income ("SFAS 130"). SFAS 130 establishes new rules for the reporting and
display of comprehensive income and its components.
Certain Factors That May Affect Future Results
The following important factors, among others, could cause actual results
to differ materially from those indicated by forward-looking statements made in
this Annual Report on Form 10-K and presented elsewhere by management from time
to time.
Reliance On Significant Customers
For the year ended December 31, 1998, revenue from Nextel Communications
represented 30.2% of the Company's total revenue and revenue from Western
Wireless represented 11.9% of the Company's total revenue. As a result of the
Company's acquisition of Intelicom in January of 1998, the Company has
several new customers with substantially larger subscriber bases than its then
existing customers. It is likely that certain of the Company's new customers,
including each of Nextel and Western Wireless will continue to represent over 10
percent of the Company's revenues in the future. The Company has contracts with
all of its significant customers, however the Company's relationships with its
largest customers have only been established since January 1998, in connection
with the Company's acquisition of Intelicom. There can be no assurance that
any such customer will renew its contract with the Company at the end of the
contract term or may not seek to terminate its contract on the basis of alleged
contractual defaults or other grounds. Loss of all or a significant part of the
business of any of the Company's substantial customers would have a material
adverse effect on the Company's business, financial condition and results of
operations. Additionally, the acquisition by a third party of one of the
Company's substantial customers could result in the loss of that customer and
have a material adverse effect on the business, financial condition and results
of operations of the Company.
Industry Consolidation
There has been a tremendous amount of business consolidation within the
wireless telecommunications industry. The down stream impact is that there are
less wireless customers requiring the services of billing and customer care
providers, increasing the level of competition in the industry. In addition,
these consolidated wireless companies have also strengthened their purchasing
power, putting pressure on reducing prices and challenging margin levels, and
they strive to streamline their operations as they bring multiple billing
systems onto one system, reducing the number of vendors needed. Although the
Company has sought to address this situation by continuing to market its
products and services to new customers, entering contracts up to five years to
protect current price and margin levels and working with existing customers to
provide the services they need to remain competitive in the market place, there
can be no assurance that the Company will not lose significant customers as a
result of industry consolidation.
XCEDE May Not be Commercially Successful
The Company has devoted substantial development and marketing efforts to
complete and promote its XCEDE product. XCEDE has not yet been installed
commercially, and it is currently anticipated that it will first be installed in
the second quarter of 1999. There can be no assurance that XCEDE will be
commercially successful. In addition, there can be no assurances that XCEDE will
perform in accordance with customer expectations. Any unanticipated program
development on the XCEDE system could result in substantial costs to the Company
and could delay the Company's commercial introduction of the product. Such costs
or delays could have a material adverse effect on the Company's business,
financial condition and results of operations of the Company.
-22-
Rapidly Changing Telecommunications Market
Over the last decade, the market for telecommunications services has been
characterized by rapid technological developments, evolving industry standards,
dramatic changes in the regulatory environment and frequent new product
introductions. The Company's success will depend upon its ability to enhance its
existing products and services, and to introduce new products and services which
will respond to these market requirements as they evolve. To date, substantially
all of the Company's revenues are attributable to wireless customers, many of
whom are expanding their product offerings in the face of competition. There can
be no assurances that the Company can develop products that will meet the
evolving needs of its customers. 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.
Integration of Intelicom
In January 1998, the Company acquired Intelicom, and substantially
increased the size of the Company's operations. 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, and there can be no
assurance that this will occur. The successful combination of the two companies
will require, among other things, integration of the companies' respective
product offerings and platforms and coordination of their sales and marketing
and research and development efforts. There can be no assurance that integration
will be accomplished smoothly or successfully. The difficulties of such
integration may be increased by the necessity of coordinating geographically
separated organizations with distinct cultures. The integration of certain
operations has required, and will continue to require, the dedication of
management resources which may temporarily distract attention from the
day-to-day business of the combined company.
Management of Growth
The Company has experienced rapid growth and intends to continue to
aggressively expand its operations. The Company's total revenues have increased
from $3.1 million in 1993 to $115.5 million in 1998. In addition, the Company
substantially increased the size of its operations, as well as the number of
subscribers it serves, by acquiring Intelicom in early January 1998. The
growth in the size and complexity of its business, as well as its customer base,
has placed and is expected to continue to place significant demands on the
Company's administrative, operational and financial personnel and systems.
Additional expansion by the Company may further strain the Company's management,
financial and other resources. The Company's future operating results will
depend on the ability of its officers and key employees to manage changing
business conditions and to implement and improve its operational, financial
control and reporting functions.
The number of the Company's employees has increased from 26 as of January
1993 to 673 as of February 1999. A substantial portion of the Company's current
employees joined the Company in January 1998, in conjunction with the Company's
acquisition of Intelicom. 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.
-23-
New Products and Rapid Technological Change
The market for the Company's products and services is characterized by
rapid technological change. The Company believes that its future success depends
in part upon its ability to enhance its current 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.
Dependence on Wireless Telephone Industry
Although the Company's products have been designed to adapt to a variety of
current and future technologies, substantially all of its revenues to date have
been generated by sales of its solutions to service providers in the wireless
telephone industry. A decrease in the number of wireless service products served
by the Company's customers could result in lower revenues for the Company.
Although the wireless market has experienced substantial growth in the number of
subscribers in the past, there can be no assurance that such growth will be
sustained.
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,
and Susan Yezzi joined the Company in late 1997 and assumed the role of the
Company's Chief Operating Officer in February 1999. The Company is currently
seeking a Chief Financial Officer to replace Paul K. Kothari, who served in that
capacity from February 1998 to February 1999. Peter L. Masanotti became the
Company's Acting Chief Financial Officer in February 1999. 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 histories with
the Company, there can be no assurances that the new officers will be successful
in assimilating into their managerial roles with the Company.
Competition
The market for billing and customer care systems for the telecommunications
services industry is highly competitive and the Company expects that the high
level of growth within the telecommunications services industry will encourage
new entrants, both domestically and internationally, in the future. The Company
competes with independent providers of transactional systems and services, with
the billing services of management consulting companies and with internal
billing departments of telecommunications services providers. The Company
anticipates continued growth in competition in the telecommunications services
industry and consequently the entrance of new competitors into its market in the
future.
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
-24-
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.
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; 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 wireless 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.
-25-
Item 7A--Quantitative and Qualitative Disclosures About Market Risk
At December 31, 1998, the Company does not have any derivatives, debt or hedges
outstanding. In addition, because the Company's foreign operations are minimal,
the risk of foreign currency fluctuation is not material to the Company's
financial position or results of operations. The Company's available line of
credit requires interest on outstanding borrowings at various rates. Therefore,
the Company is not subject to interest rate risk, but could be subject to
fluctuating cash flows on outstanding borrowings.
-26-
Item 8--Financial Statements and Supplementary Data
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Auditors.................................................................................. 28
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and 1997.................................................... 29
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.............................................................................. 31
Consolidated Statements of Stockholders' Equity (Deficiency) for the years ended
December 31, 1998, 1997 and 1996.............................................................................. 32
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.............................................................................. 33
Notes to Consolidated Financial Statements...................................................................... 34
-27-
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, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Stamford, Connecticut
February 16, 1999
-28-
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31,
1998 1997
-----------------------------------
Assets
Current assets:
Cash and cash equivalents............................................................ $ 40,735 $28,967
Accounts receivable, net of allowances for doubtful accounts of $2,362 and
$486, respectively................................................................. 34,713 5,008
Prepaid expenses, and other current assets........................................... 1,843 741
Deferred income taxes................................................................ 840 220
-----------------------------------
Total current assets.................................................................... 78,131 34,936
Property and equipment
Computers, including leased property under capital leases of $1,150 and $1,105,
respectively...................................................................... 9,506 4,844
Furniture and fixtures............................................................... 2,005 447
Equipment, including leased property under capital leases of $54 in 1998 and 1997.... 706 373
Leasehold improvements............................................................... 970 589
-----------------------------------
13,187 6,253
Less: accumulated depreciation and amortization...................................... 5,450 2,319
-----------------------------------
7,737 3,934
Other assets:
Goodwill - net of accumulated amortization of $3,010 in 1998......................... 42,249 -
Product development costs--at cost, net of accumulated amortization of $5,810 and
$1,105 at December 31, 1998 and December 31, 1997, respectively ................... 22,511 3,698
Deferred income taxes................................................................ 4,138 -
Other................................................................................ 390 1,884
-----------------------------------
69,288 5,582
===================================
Total assets............................................................................ $155,156 $44,452
===================================
See accompanying notes.
-29-
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS--Continued
December 31,
1998 1997
------------------------------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable............................................................. $ 10,921 $ 1,192
Accrued expenses and income taxes payable.................................... 2,919 560
Accrued compensation......................................................... 3,026 333
Customer advances and deferred revenue....................................... 3,862 -
Current maturities of capital lease obligations.............................. 74 279
Other........................................................................... 504 -
------------------------------------
Total current liabilities....................................................... 21,306 2,364
Capital lease obligations....................................................... 25 73
Deferred income taxes........................................................... - 1,667
Other........................................................................... - 30
Stockholders' equity
Common Stock, $.01 par value; 40,000,000 shares authorized, 17,313,231 and
12,786,740 shares issued and outstanding at December 31, 1998
and December 31, 1997, respectively........................................ 173 128
Additional paid-in capital................................................... 141,662 44,447
Retained deficit............................................................. (7,952) (4,026)
Unearned compensation........................................................ (58) (231)
------------------------------------
Total stockholders' equity...................................................... 133,825 40,318
====================================
Total liabilities and stockholders' equity...................................... $155,156 $44,452
====================================
See accompanying notes.
-30-
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
Year ended December 31,
1998 1997 1996
----------------------------------------------------
Revenue $115,460 $23,429 $16,689
Costs and expenses:
Operating expenses.............................................. 44,334 5,617 4,283
General, administrative and selling expenses.................... 20,798 6,760 6,523
Depreciation and amortization................................... 10,846 1,596 1,054
Systems development and programming costs....................... 16,974 2,911 2,115
Personnel and indirect acquisition costs........................ 4,713 - -
In-process research and development ............................ 20,800 - -
----------------------------------------------------
Total costs and expenses........................................... 118,465 16,884 13,975
Operating income (loss)............................................ (3,005) 6,545 2,714
Other income....................................................... 1,550 1,702 316
Interest expense................................................... (2,740) (120) (416)
----------------------------------------------------
Income (loss) before income taxes and extraordinary item........... (4,195) 8,127 2,614
Income tax expense (benefit)....................................... (1,095) 3,326 1,112
----------------------------------------------------
Income (loss) before extraordinary item............................ (3,100) 4,801 1,502
Extraordinary loss (net of $562 tax benefit)....................... (826) - -
----------------------------------------------------
Net income (loss).................................................. $ (3,926) $ 4,801 $ 1,502
====================================================
Income (loss) per common share--basic:
Income (loss) before extraordinary item......................... $ (.20) $ .38 $ .15
Extraordinary loss.............................................. (.05) - -
----------------------------------------------------
Net income (loss).................................................. $ (.25) $ .38 $ .15
====================================================
Shares used in computing basic income (loss) per common share...... 15,607 12,728 9,890
====================================================
Income (loss) per common share--diluted:
Income (loss) before extraordinary item......................... $ (.20) $ .36 $ .15
Extraordinary loss.............................................. (.05) - -
----------------------------------------------------
Net income (loss).................................................. $ (.25) $ .36 $ .15
====================================================
Shares used in computing diluted income (loss) per
common share.................................................... 15,607 13,193 10,109
====================================================
See accompanying notes.
-31-
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(In thousands, except share and per share data)
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
---------------------- ---------------------- -----------------------
Balance at December 31, 1995 18 $ 400 1,500 $328 7,312,800 $ 76
Net income
Net unrealized loss on
securities available for
sale
Comprehensive income
Preferred stock dividends
declared
Retirement of treasury (2)
stock
Recapitalization of Class
A & B preferred stock (18) (400) (1,500) (328) 1,279,218 13
Compensation paid in
common stock 106,152 1
Conversion of Class C
convertible preferred
stock 154,800 2
Exercise of warrants 501,786 5
Sale of common stock, net
of expenses 3,300,000 32
---------------------- --------------------- -----------------------
Balance at December 31, 1996 - - - - 12,654,756 127
Net income
Net unrealized gain on
securities available for
sale
Comprehensive income
Secondary sale of common
stock 75,000 1
Employee stock purchase
plan 9,078
Exercise of stock options 47,906
Amortization of unearned
compensation
---------------------- --------------------- -----------------------
Balance at December 31, 1997 - - - - 12,786,740 128
Net (loss)
Comprehensive (loss)
Shares issued in
connection with
Intelicom acquisition 606,673 6
Secondary sale of common
stock 3,662,750 37
Employee stock purchase
plan 24,300 -
Exercise of stock options 232,768 2
Tax benefit from stock
options
Amortization of unearned
compensation
---------------------- --------------------- -----------------------
Balance at December 31, 1998 - $ - - $ - 17,313,231 $ 173
====================== ===================== =======================
Unearned
Compensa-
tion Accumulated
Additional Treasury Retained Restricted Other
Paid-in Stock at Earnings Stock Comprehensive
Capital Cost (Deficit) Awards Income Total
-----------------------------------------------------------------------
Balance at December 31, 1995 $(400) $ (25) $ 379
Net income 1,502 1,502
Net unrealized loss on
securities available for
sale $ (37) (37)
--------------
Comprehensive income 1,465
--------------
Preferred stock dividends
declared (79) (79)
Retirement of treasury
stock $ (398) 400 -
Recapitalization of Class
A & B preferred stock 10,115 (10,225) (825)
Compensation paid in
common stock 969 $ (336) 634
Conversion of Class C
convertible preferred
stock 638 640
Exercise of warrants 818 823
Sale of common stock, net
of expenses 31,648 31,680
-----------------------------------------------------------------------
Balance at December 31, 1996 43,790 - (8,827) (336) (37) 34,717
Net income 4,801 4,801
Net unrealized gain on
securities available
for sale 37 37
--------------
Comprehensive income 4,838
--------------
Secondary sale of common
stock 172 173
Employee stock purchase
plan 113 113
Exercise of stock options 372 372
Amortization of unearned
compensation 105 105
-----------------------------------------------------------------------
Balance at December 31, 1997 44,447 - (4,026) (231) - 40,318
Net (loss) (3,926) (3,926)
--------------
Comprehensive (loss) (3,926)
--------------
Shares issued in
connection with
Intelicom acquisition 9,894 9,900
Secondary sale of common
stock 83,107 83,144
Employee stock purchase
plan 456 456
Exercise of stock options 1,887 1,889
Tax benefit from stock
options 1,871 1,871
Amortization of unearned
compensation 173 173
-----------------------------------------------------------------------
Balance at December 31, 1998 $141,662 $ - $ (7,952) $ (58) $ - $133,825
=======================================================================
See accompanying notes.
-32-
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31,
1998 1997 1996
--------------------------------------------------
Operating activities
Net income (loss)...................................................... $ (3,926) $ 4,801 $ 1,502
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Extraordinary loss................................................ 826 - -
Write-off in process research and development..................... 20,800 - -
Depreciation and amortization..................................... 10,846 1,596 1,054
Amortization of unearned compensation............................. 173 105 -
Compensation paid in Common Stock................................. - - 634
Deferred income taxes............................................. (6,425) 1,084 612
Change in operating assets and liabilities:
Accounts receivable............................................. (23,996) (1,775) (1,884)
Prepaid expenses and other current assets....................... (900) 414 (875)
Accounts payable and accrued expenses........................... 8,900 320 391
Customer advances............................................... 2,766 - -
Other assets and liabilities, net............................... 1,580 (1,789) 12
--------------------------------------------------
Net cash provided by operating activities.............................. 10,644 4,756 1,446
Investing activities
Capital expenditures................................................... (3,749) (2,738) (1,853)
Purchase of securities available for sale.............................. - (25,329) (25,060)
Purchase of investments held to maturity............................... - (3,062) (353)
Proceeds from maturities of investments................................ - 3,411 300
Proceeds from maturities of securities available for sale.............. - 50,389 -
Purchase of Intelicom.................................................. (73,832) - -
Product development costs.............................................. (6,918) (2,872) (859)
--------------------------------------------------
Net cash (used for) provided by investing activities................... (84,499) 19,799 (27,825)
Financing activities
Principal payments on long-term debt................................... (70,000) - (1,811)
Proceeds from long-term debt........................................... 70,000 - -
Tax benefit associated with stock options.............................. 1,871 - -
Financing fee related to acquisition................................... (1,484) - -
Payment to retire Preferred Stock...................................... - - (825)
Principal payments on notes payable.................................... - - (77)
Principal payments on capital lease obligations........................ (253) (385) (362)
Proceeds from sale of Common Stock..................................... 85,489 658 32,502
Dividends paid......................................................... - - (82)
--------------------------------------------------
Net cash provided by financing activities.............................. 85,623 273 29,345
Net increase in cash and cash equivalents.............................. 11,768 24,828 2,966
Cash and cash equivalents at beginning of year......................... 28,967 4,139 1,173
--------------------------------------------------
Cash and cash equivalents at end of year............................... $ 40,735 $ 28,967 $ 4,139
==================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for interest................................. $ 2,738 $ 120 $ 434
Cash paid during the year for taxes.................................... $ 1,420 $ 2,342 $ 820
Supplemental disclosure of noncash financing activities:
Capital lease obligations totaling $685,604 in the year ended December 31, 1996,
were incurred for the acquisition of new equipment.
See accompanying notes.
-33-
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
International Telecommunication Data Systems, Inc. ("ITDS" or the "Company") 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 the 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
and fixed fee 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
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. Amortization of assets under capital leases is included in depreciation
expense.
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, 1998, 1997 and 1996, $4.7 million, $518,398 and $300,105,
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. Custom programming contracts are accounted for upon completion of
short-term projects. For longer-term custom programming projects, the percentage
of completion method is used. Accounts receivable at December 31, 1998 and 1997
include $12.3 million and $2.3 million, respectively, for services rendered
prior to December 31 which were billed in January of the following year when the
billing cycles were complete.
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.
-34-
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expenses for the
years ended December 31, 1998, 1997, and 1996 were $670,542, $233,673 and
$194,097, respectively.
Other Income
Other income for the years ended December 31, 1998, 1997 and 1996 includes $1.4
million, $1.6 million and $313,132, respectively, of investment income,
primarily interest income.
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.
Major Customers
Revenues generated from Nextel and Western Wireless accounted for approximately
30.2% and 11.9%, respectively, of 1998 revenues. For the year ended 1997
revenues from Aliant Communications and Sygnet Communications accounted for
18.4% and 11.7%, respectively, and for the year ended 1996 Aliant Communications
and Horizon Cellular accounted for 19.1% and 12.5%, respectively, of revenues.
The loss of either Nextel or Western Wireless could have an adverse impact on
the financial condition and results of operations of the Company.
New 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 limited 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.
Effective January 1, 1998, the Company adopted the FASB's Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information ("SFAS 131"). SFAS 131 superseded SFAS 14, Financial
Reporting for Segments of a Business Enterprise. SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The adoption of
SFAS 131 did not affect results of operations or financial position. The
operating results of the Company are regularly reviewed by the chief operating
decision maker as one well-defined line of business. Therefore, the Company has
determined that under the requirements of SFAS 131, it continues to have only
one operating segment.
As of January 1, 1998, the Company adopted SFAS 130, Reporting Comprehensive
Income ("SFAS 130"). SFAS 130 establishes new rules for the reporting and
display of comprehensive income and its components.
-35-
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. ACQUISITION
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"). This acquisition was accounted
for using the purchase method of accounting. The purchase price, after working
capital adjustments aggregating approximately $14.2 million, aggregated $83.7
million, before direct costs of approximately $1.2 million and consisted of
606,673 shares of Common Stock of the Company valued at $10 million (before
registration costs of $100,000) and $73.8 million in cash. In addition, the
Company made a $6 million payment in January 1999, which was contingent upon
certain performance factors. 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 $45.3 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 $16.6 million, and other non-current assets of $3 million
and accrued liabilities of $7.9 million. In addition, purchased research and
development costs of $20.8 million, before income tax benefit, and personnel and
other indirect transaction costs of $4.7 million, before income tax benefit,
(principally hiring and temporary staff of $1.8 million, special bonuses paid to
the Company's employees and management of $2.3 million and systems and other
costs of $600,000) associated with the Intelicom acquisition have been expensed
in 1998. The operations of Intelicom are included with the Company's financial
statements since the date of acquisition. All of the personnel and indirect
acquisition costs were paid during 1998 with the exception of approximately
$220,000. Assuming the acquisition occurred on January 1, 1997, revenues, net
income and diluted earnings per share for 1997 would have been $80.4 million,
$5.2 million and $0.37, respectively.
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 4, 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 $826,198.
The $30 million line of credit remains outstanding at December 31, 1998. No
amounts were drawn on the line of credit during 1998.
Costs for acquired in-process research and development ("in-process R&D") for
projects that did not have future alternative uses were $20.8 million. This
allocation represents the estimated fair market value based on risk-adjusted
cash flows related to the in-process R&D projects. At the date of acquisition,
the development of these projects had not yet reached technological feasibility,
and the in-process R&D had no alternative future uses. Accordingly, these costs
were written off in the quarter ended March 31, 1998.
On the date of its acquisition, Intelicom's in-process R&D value was comprised
of three primary R&D programs that were expected to reach completion between
late 1998 and 2000. These projects included the introduction of new technology
aimed at customer care and billing technology. At the acquisition date,
Intelicom's R&D programs ranged in completion from 35% to 80%, and total
continuing R&D commitments to complete the projects were expected to be
approximately $5.5 million. On the acquisition date, expenditures to complete
the Intelicom's projects were expected to be approximately $3 million, $2
million and $500,000 in 1998 through 2000, respectively. These estimates are
subject to change, given the uncertainties of the development process, and no
assurance can be given that deviations from these estimates will not occur.
Additionally, these projects will require maintenance expenditures when and if
they reach a state of technological and commercial feasibility. Based on the
activities during 1998, the Company believes that the assumptions used in the
valuation are reasonable.
-36-
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. ACQUISITION (continued)
Management believes the Company is positioned to complete each of the major R&D
programs. However, there is risk associated with the completion of the projects,
and there is no assurance that any project will meet with either technological
or commercial success. The substantial delay or outright failure of the
Intelicom R&D could adversely impact the Company's financial condition.
The value assigned to purchased in-process R&D was determined by estimating the
costs to develop Intelicom's purchased in-process R&D into commercially viable
products, estimating the resulting net cash flows from the projects and
discounting the net cash flows to their present value. The revenue estimates
used to value the in-process R&D were based on estimates of relevant market
sizes and growth factors, expected trends in technology and the nature and
expected timing of new product introductions by the Company and its competitors.
The valuation anticipates revenues beginning in 1998.
The rates utilized to discount the net cash flows to their present value are
based on Intelicom's weighted average cost of capital. Given the nature of the
risks associated with the estimated growth, profitability and developmental
projects, Intelicom's weighted average cost of capital was adjusted. A discount
rate of 30% was deemed appropriate for Intelicom's business enterprise. This
discount rate is intended to be commensurate with Intelicom's maturity and the
uncertainties in the economic estimates described above.
The estimates used by the Company in valuing in-process R&D were based upon
assumptions the Company believes to be reasonable but which are inherently
uncertain and unpredictable. The Company's assumptions may be incomplete or
inaccurate, and no assurance can be given that unanticipated events and
circumstances will not occur. Accordingly, actual results may vary from the
projected results. Any such variance may result in a material adverse effect on
the financial condition and results of operations of the Company.
3. LINE OF CREDIT
The Amended Credit Agreement (see Note 2) provides for a $30 million line of
credit which contains normal covenants including meeting certain financial
ratios. This agreement requires the Company to pay interest at LIBOR plus up to
two and one quarter percent and expires on December 31, 2002. As of December 31,
1998, no amounts were drawn on the line of credit.
4. 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.
-37-
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. CAPITAL STOCK (Continued)
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.
Follow-on Offerings
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.
In June 1998, the Company successfully completed a follow-on offering of
3,662,750 shares of Common Stock resulting in net proceeds to the Company of
approximately $83.1 million, after deducting expenses of $579,834. 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 for 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 year ended December 31,
1998.
Earnings Per Share
In February 1997, the FASB issued Statement of Financial Accounting Standards
SFAS No. 128, "Earnings Per Share" ("SFAS 128"), which revises the methodology
of calculating earnings per share. The Company adopted SFAS 128 in the fourth
quarter of 1997. All earnings per share amounts for all prior periods have been
presented in accordance with and where appropriate, restated to conform to the
SFAS 128 requirements. In accordance with SFAS 128, all common stock equivalents
that have a dilutive effect on earnings per share are included in the
calculation for diluted income per share.
The following table set forth the computation of basic and diluted earnings
(loss) per share (in thousands, except per share amounts):
Year ended December 31,
1998 1997 1996
---------------------------------
Numerator:
Numerator for basic and diluted earnings (loss) per share -
earnings (loss) before extraordinary item................... $ (3,100) $ 4,801 $ 1,502
=================================
Denominator:
Denominator for basic earnings (loss) per share -
weighted-average shares..................................... 15,607 12,728 9,890
Effect of dilutive securities:
Employee stock options...................................... - 465 219
---------------------------------
Denominator for diluted earnings (loss) per share - adjusted
weighted-average shares and assumed conversions............. 15,607 13,193 10,109
=================================
Basic income (loss) per common share before extraordinary item... $ (.20) $ .38 $ .15
=================================
Diluted income (loss) per common share before extraordinary item. $ (.20) $ .36 $ .15
=================================
-38-
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. CAPITAL STOCK (Continued)
Income per common share for the year ended December 31, 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.
5. STOCK PLANS
The Company's 1998, 1997 and 1996 Stock Plans authorize the grant of options to
employees, directors and consultants for up to 1,125,000, 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 service. 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. The 1998 and 1996 plans are incentive plans, the 1997 is a
non-qualified 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 fair market value of such Common Stock, during an offering period.
A summary of the Company's activity in the stock option plans, and related
information for the years ended December 31, 1998, 1997 and 1996 follows:
Weighted-Average
Options Exercise Price
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........................................... 47,906 7.77
Cancelled........................................... 534,754 10.52
Forfeited........................................... 124,184 7.88
------- ----
Outstanding at December 31, 1997.................... 2,489,099 12.33
Granted............................................. 1,037,800 25.69
Exercised........................................... 232,768 8.12
Forfeited........................................... 344,286 15.11
------- -----
Outstanding at December 31, 1998.................... 2,949,845 $17.21
========= ======
Options exercisable at December 31, 1998............ 682,521 $11.69
Options exercisable at December 31, 1997............ 111,583 $ 9.19
Options exercisable at December 31, 1996............ 24,093 $12.24
-39-
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. STOCK PLANS (Continued)
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 repriced options were included in the number of shares
granted and cancelled for 1997.
Options Outstanding
-------------------
Weighted-Average
Range of Outstanding Remaining Weighted-Average
Exercise Prices as of 12/31/98 Contractual Life Exercise Price
--------------- -------------- ---------------- ----------------
$7.50--$10.00................ 612,997 8.0 $7.75
$10.00--$12.50............... 176,000 8.4 11.50
$12.50--$15.00............... 0 0 0
$15.00--$17.50............... 1,127,548 8.9 15.47
$22.50--$25.00............... 450,600 9.4 24.17
$25.00--$27.50............... 559,000 9.3 26.70
$27.50--$30.00............... 6,200 9.5 28.16
$30.00--$32.50............... 16,500 9.5 32.16
$32.50--$35.00............... 1,000 9.5 34.75
----- --- -----
2,949,845 8.8 $17.21
========= === ======
Exercise prices for options outstanding as of December 31, 1998 ranged from
$7.75 to $34.75 per share. The weighted average remaining contractual life of
those options is 8.8 years.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, 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:
1998 1997 1996
---- ---- -----
Risk-free interest rate............................................ 5.5% 5.0% 5.0%
Dividend yield..................................................... 0.0 0.0 0.0
Expected volatility of market price of company's
common stock...................................................... .72 .63 .71
Expected option life............................................... 5 years 5 years 5 years
Weighted average fair value per share of options granted
during year....................................................... $16.47 $7.31 $4.86
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.
-40-
INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. STOCK PLANS (Continued)
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 (in thousands, except per share amounts):
1998 1997 1996
---- ---- ----
Pro forma net income (loss).............................. $(7,381) $3,441 $1,190
======= ====== ======
Pro forma earnings per share:
Pro forma basic earnings (loss) per share................ $(.47) $.27 $.12
Pro forma diluted earnings (loss) per share.............. $(.47) $.26 $.12
6. 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.
7. 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, 1998
(in thousands):
1999............................................. $ 81
2000............................................. 13
2001............................................. 13
2002............................................. 2
---
Total lease obligations.......................... 109
Less: amount representing interest............... (10)
---
Present value of minimum lease payments.......... $ 99
====
8. COMMITMENTS
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.
In conjunction with the Intelicom acquisition of January 2, 1998, ITDS acquired
from CSC two noncancelable leases expiring in August 2003 for 60,400 square feet
of office space in Champaign, Illinois. 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 $1.6 million, $738,582 and $591,729 for the years
ended December 31, 1998, 1997 and 1996, respectively.
-41-
International Telecommunication Data Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
8. COMMITMENTS (continued)
Minimum future rental payments due under such leases as of December 31, 1998 are
as follows (in thousands):
1999............................. $2,002
2000............................. 1,734
2001............................. 1,218
2002............................. 1,218
2003............................. 812
-------
6,984
Less: sublease income............ (65)
---------
$6,919
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, 1998, the Company has loans
and advances to officers aggregating $374,750 (including $29,324 in interest),
which is included in Accounts Receivable.
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 $10,000 for 1998 and 1997 calendar years. The
Company does not contribute to the plan.
9. EXTRAORDINARY ITEM
On June 8, 1998, as a result of the follow-on offering described in Note 4, the
Company retired the $70 million term loan and terminated the Hedge Agreement
obtained in conjunction with the Intelicom acquisition (see Note 2). In
connection with repaying the $70 million term loan and canceling the Hedge
Agreement, the Company recorded an after tax extraordinary charge of $826,198.
10. INCOME TAXES
Significant components of income tax expense (benefit) before extraordinary item
are as follows (in thousands):
Year ended December 31,
1998 1997 1996
-----------------------------
Current:
Federal................... $ 4,661 $1,667 $ 382
State..................... 669 575 118
-----------------------------
5,330 2,242 500
-----------------------------
Deferred:
Federal................... (6,007) 806 437
State..................... (418) 278 175
-----------------------------
(6,425) 1,084 612
-----------------------------
Total tax expense (benefit).. $(1,095) $3,326 $1,112
=============================
-42-
International Telecommunication Data Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
10. INCOME TAXES (Continued)
A reconciliation of the applicable federal statutory rate to the Company's
effective tax (benefit) rate from income before income tax expense and
extraordinary item follows:
1998 1997 1996
----------------- ----------------- ----------------
Statutory rate................................................ (35.0)% 34.0% 34.0%
State income taxes, net of federal income tax benefit......... 3.9 6.9 7.4
Meals and entertainment....................................... 1.9 - -
Other, net.................................................... 3.1 - 1.1
----------------- ----------------- ----------------
(26.1)% 40.9% 42.5%
================= ================= ================
Significant components of the Company's deferred tax assets and liabilities are
as follows (in thousands):
December 31
1998 1997
----------------------------------------
Deferred tax assets:
Deferred charges........................................ $ 13 $ 29
Depreciation and amortization........................... 1,623 820
Accrued compensation.................................... 74 4
Reserve for doubtful accounts........................... 748 199
Interest................................................ 4 4
Purchased software development costs.................... 845 -
In process research and development..................... 7,435 -
----------------------------------------
Total deferred tax assets................................. 10,742 1,056
----------------------------------------
Deferred tax liabilities:
Software development costs.............................. 5,051 1,966
Capitalized leases...................................... 713 537
----------------------------------------
Total deferred tax liabilities............................ 5,764 2,503
----------------------------------------
Net deferred tax asset (liability)........................ $ 4,978 $ (1,447)
========================================
-43-
International Telecommunication Data Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
11. 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 contact with Alan K. Greene, the Company's former Chief Financial
Officer, and breached other obligations to 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 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.
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.
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of the unaudited quarterly results of operations
for the two years ended December 31, 1998 (in thousands, except per-share data):
Three Months Ended
12/31/98 9/30/98 6/30/98 3/31/98
------------- ------------- ------------- -------------
Revenue.................................................. $ 33,262 $28,832 $27,360 $26,006
Operating income (loss).................................. 6,308 6,003 5,068 (20,384)
Income before extraordinary loss......................... 4,095 3,877 2,433 13,505
Net income (loss)........................................ 4,095 3,877 1,607 (13,505)
Basic income (loss) per share before extraordinary loss.. .24 .22 .11 (1.01)
Diluted income (loss) per share before extraordinary loss .23 .21 .11 (1.01)
Three Months Ended
12/31/97 9/30/97 6/30/97 3/31/97
------------- ------------- ------------- -------------
Revenue.................................................. $6,758 $6,039 $5,362 $5,270
Operating income......................................... 2,027 1,659 1,421 1,439
Net income............................................... 1,420 1,240 1,078 1,062
Basic net income per share............................... .11 .10 .08 .08
Diluted net income per share............................. .11 .09 .08 .08
The sum of the quarters' net income per share do not equal the full year
per-share amounts due to differences resulting from changes in the number of
shares of Common Stock outstanding.
Excluding non-recurring in-process research and development and personnel and
indirect acquisition costs associated with the Company's January 2, 1998
acquisition of Intelicom and the extraordinary loss, earnings for the quarter
ended March 31, 1998 were $2 million or $.14 per pro forma diluted share.
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International Telecommunication Data Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
13. SUBSEQUENT EVENTS (UNAUDITED)
On February 8, 1999, the Company announced that it had formed a strategic
alliance with Novazen Inc. to include internet-based billing and customer care
software in the Company's proprietary suits or products and services.
On March 24, 1999, the Board of Directors approved a stock buy-back program of
up to $10 million. The purchased shares will be used for the Company's stock
incentive plans, employee stock purchase plan and other corporate purposes.
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Item 9--Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10--Directors and Officers of the Registrant
The response to this item is contained in part under the caption "Executive
Officers of the Company" in Part I of this Annual Report on Form 10-K and in the
Company's proxy statement for the annual meeting of stockholders to be held on
May 19, 1999 (the "1999 Proxy Statement") in the section entitled "Election of
Directors," which section is incorporated herein by reference.
In addition, in February 1999, Paul K. Kothari resigned as the Company's
Chief Financial Officer.
Item 11--Executive Compensation
The response to this item is contained in the 1999 Proxy Statement in the
section entitled "Election of Directors--Director Compensation" and
"--Compensation of Executive Officers" which sections are incorporated herein by
reference.
Item 12--Security Ownership of Certain Beneficial Owners and Management
The response to this item is contained in the 1999 Proxy Statement in the
section entitled "Security Ownership of Certain Beneficial Owners and
Management," which section is incorporated herein by reference.
Item 13--Certain Relationships and Related Transactions
The response to this item is contained in the 1999 Proxy Statement in the
section entitled "Election of Directors--Certain Transactions," which section is
incorporated herein by reference.
PART IV
Item 14--Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as a part of this Report on Form 10-K:
1. The following documents are included as part of this Annual Report on
Form 10-K:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996
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Consolidated Statements of Stockholders' Equity (Deficiency) for the
years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
Notes to the Consolidated Financial Statements
2. Financial Statement Schedules
All schedules have been omitted because they are not required or because
the required information is given in the Consolidated Financial
Statements or Notes thereto.
3. Exhibits
The exhibits filed as part of this Annual Report on Form 10-K are as
follows:
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
*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.
**+10.1 Form of 1996 Equity Incentive Plan.
**+10.2 1996 Employee Stock Purchase Plan.
***+10.3 1997 Stock Incentive Plan, as amended.
+10.5 1999 Stock Incentive Plan.
***+10.6 Employment Agreement between the Registrant and Peter P. Bassermann,
dated as of September 3, 1997, and amendment thereto, dated as of
January 1, 1998.
***+10.7 Employment Agreement between the Registrant and Lewis D. Bakes, dated
as of January 1, 1998.
***+10.8 Employment Agreement between the Registrant and Peter L. Masanotti,
dated as of January 1, 1998.
***+10.9 Employment Agreement between the Registrant and Paul K. Kothari, dated
as of December 29, 1997.
+10.10 Employment Agreement between the Registrant and Susan Yezzi, dated as
of December 23, 1997, and amendment thereto effective May 1, 1998.
+10.11 Employment Agreement between the Registrant and Kevin M. Piltz, dated
as of July 20, 1998.
**10.12 Stock Purchase Agreement dated December 11, 1995, as amended, between
the Registrant and Connecticut Innovations, Incorporated relating to
Class C Convertible Preferred Stock.
**10.13 Form of Lease between the Registrant and 969 Associates, dated
December 1990.
**10.14 Sublease dated June 11, 1996 between the Registrant and Learning
International, relating to 225 High Ridge Road, Stamford, Connecticut
***10.15 Lease dated January 1996 between Par 3 Development, L.L.C. and CSC
Intelicom, Inc. (now known as ITDS Intelicom Services, Inc.).
***10.16 Lease dated September 19, 1996 between Par 3 Development, L.L.C. and
CSC Intelicom, Inc. (now known as ITDS Intelicom Services, Inc.)
10.17 Sublease dated November 15, 1998 between the Registrant and the
University of Connecticut relating to 2777 Summer Street, Stamford,
Connecticut.
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10.18 Lease dated February 25, 1999 between the Registrant and Par 3
Development, L.L.C. relating to 2215 Fox Drive, Champaign, Illinois.
***10.19 Credit Agreement dated as of January 2, 1998 among the Registrant, the
Subsidiary Guarantors Party thereto and Lehman Commercial Paper Inc.
***10.20 Security Agreement, dated as of January 2, 1998 among the Registrant,
each of the subsidiaries of the Registrant, and Lehman Commercial
Paper Inc.
***10.21 Guarantee Assumption Agreement, dated as of January 2, 1998 by ITDS
Intelicom Services, Inc. in favor of Lehman Commercial Paper Inc.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
- -----------------------
+ Management contract or compensatory plan.
* 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.
*** Incorporated by reference to the Registrant's Report on Form 10-K for the
year ended December 31, 1997, as filed with the Securities and Exchange
Commission on March 10, 1998.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the last quarter of the Company's
fiscal year ended December 31, 1998.
[Remainder of page intentionally left blank.]
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERNATIONAL TELECOMMUNICATION
DATA SYSTEMS, INC.
/s/ Peter P. Bassermann
------------------------------------
Peter P. Bassermann
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Peter P. Bassermann President, Chief Executive
- ---------------------------------------------- Officer and Director (Principal
Peter P. Bassermann Executive Officer) March 29, 1999
/s/ Peter L. Masanotti Acting Chief Financial Officer, March 29, 1999
- ---------------------------------------------- Executive Vice President,
Peter L. Masanotti General Counsel, Secretary and
Director (Principal Financial and
Accounting Officer)
/s/ Lewis D. Bakes Director March 29, 1999
- ----------------------------------------------
Lewis D. Bakes
/s/ Stuart L. Bell Director March 29, 1999
- ----------------------------------------------
Stuart L. Bell
/s/ Stephen J. Saft Director March 29, 1999
- ----------------------------------------------
Stephen J. Saft
/s/ Harvey M. Krueger Director March 30, 1999
- ----------------------------------------------
Harvey M. Krueger
/s/ Samuel L. Jacob Director March 29, 1999
- ----------------------------------------------
Samuel L. Jacob