UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ___________
Commission file number 0-21519
-------
International Telecommunication Data Systems, Inc.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1295986
- -------------------------------------------------------------------------- ----------------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. employer identification no.)
225 High Ridge Road, Stamford, CT 06905
- -------------------------------------------------------------------------- ----------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 329-3300
----------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-- --
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 24, 1997
- ---------------------------- -------------------------------------
Common Stock, $.01 par value 8,521,718
International Telecommunication Data Systems, Inc.
and Subsidiary
Form 10-Q
Index
Part I. Financial Information Page No.
Item 1. Financial Statements (unaudited)
Consolidated balance sheets--September 30, 1997 and December 31, 1996.................................................1
Consolidated statements of operations--three months and nine months
ended September 30, 1997 and 1996.................................................................................3
Consolidated statements of cash flows--nine months ended
September 30, 1997 and 1996.......................................................................................4
Notes to consolidated financial statements...........................................................................5
Item 2. Management's Discussion and Analysis of Financial Condition,
Results of Operations, and Certain Factors That May Affect Future Results...............................................7
Part II. Other Information
Item 1. Legal Proceedings.............................................................................................10
Item 2. Changes in Securities.........................................................................................10
Item 3. Defaults Upon Senior Securities...............................................................................10
Item 4. Submission of Matters to a Vote of Security Holders...........................................................10
Item 5. Other Information.............................................................................................10
Item 6. Exhibits and Reports on Form 8-K..............................................................................10
Signatures....................................................................................................11
Part I. Financial Information
Item 1. Financial Statements
International Telecommunication Data Systems, Inc. and Subsidiary
Consolidated Balance Sheets
September 30 December 31
1997 1996
---------------------------------------
(Unaudited) (See Note)
Assets
Current assets:
Cash and cash equivalents $ 3,715,309 $ 4,138,575
Accounts receivable, net of allowances for doubtful accounts of $136,422 and
$52,370 respectively 5,389,401 3,232,967
Securities available for sale, at estimated market value 25,499,540 25,023,454
Prepaid expenses, and other current assets 515,441 1,503,209
Deferred income taxes 122,238 44,000
---------------------------------------
Total current assets 35,241,929 33,942,205
Property and equipment
Computers, including leased property under capital leases of $1,217,050 and
$1,863,103, respectively 4,649,798 2,986,056
Furniture and fixtures, including leased property under capital leases of $33,119
in 1997 and 1996 446,535 446,535
Trade booth 214,390 98,854
Equipment, including leased property under capital leases of $53,508 in 1997 and
1996 152,996 152,996
Leasehold improvements 589,479 589,479
---------------------------------------
6,053,198 4,273,920
Less: accumulated depreciation and amortization 2,089,003 1,328,228
---------------------------------------
3,964,195 2,945,692
Other assets:
Product development costs-at cost, net of accumulated amortization of $979,768 and
$586,215, respectively 2,337,671 1,343,727
Other 422,085 165,913
---------------------------------------
2,759,756 1,509,640
---------------------------------------
Total assets $41,965,880 $38,397,537
=======================================
1
September 30 December 31
1997 1996
---------------------------------------
(Unaudited) (See Note)
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 608,277 $ 685,739
Accrued expenses and income taxes payable 692,811 765,713
Accrued compensation 493,963 272,059
Current portion of accrued rent liability 41,059 41,059
Current maturities of capital lease obligations 316,998 538,238
---------------------------------------
Total current liabilities 2,153,108 2,302,808
Accrued rent liability 39,845 70,639
Capital lease obligations 134,633 878,432
Deferred income taxes 991,734 407,000
Other - 21,240
Stockholders' equity
Preferred stock, $.01 par value; 2,000,000 shares authorized, none issued - -
Common Stock, $.01 par value; 40,000,000 shares authorized, 8,504,800 and
8,436,504 shares issued and outstanding at September 30, 1997 and
December 31, 1996, respectively 85,048 84,365
Additional paid-in capital 44,258,281 43,472,324
Retained deficit (5,421,606) (8,802,298)
Unearned compensation (272,760) -
Unrealized loss on securities available for sale (2,403) (36,973)
---------------------------------------
Total stockholders' equity 38,646,560 34,717,418
---------------------------------------
Total liabilities and stockholders' equity $41,965,880 $38,397,537
=======================================
Note: The balance sheet at December 31, 1996 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to financial statements.
2
International Telecommunication Data Systems, Inc.
Consolidated Statements of Operations
(Unaudited)
Three months ended Nine months ended
September 30 September 30
1997 1996 1997 1996
-------------------------------------------------------------------
Revenue $6,038,577 $4,139,061 $16,670,950 $12,003,702
Costs and expenses:
Operating expenses 1,309,159 1,227,419 3,993,543 3,075,137
General, administrative and selling expenses 1,735,956 2,327,144 4,819,557 5,010,163
Depreciation and amortization 427,941 304,934 1,162,279 742,642
Systems development and programming costs 906,123 552,172 2,176,920 1,516,562
-------------------------------------------------------------------
Total costs and expenses 4,379,179 4,411,669 12,152,299 10,344,504
-------------------------------------------------------------------
Operating income (loss) 1,659,398 (272,608) 4,518,651 1,659,198
Other income 464,382 9,160 1,305,645 21,975
Interest expense (23,873) (118,169) (101,100) (336,585)
-------------------------------------------------------------------
Income (loss) before income tax expense 2,099,907 (381,617) 5,723,196 1,344,588
Income tax expense (benefit) 859,492 (141,838) 2,342,504 590,162
-------------------------------------------------------------------
Net income (loss) $1,240,415 $ (239,779) $ 3,380,692 $ 754,426
===================================================================
Income (loss) per common share:
Net income (loss) $ .15 $ (.04) $ .40 $ .12
===================================================================
Shares used in computing income (loss) per common share
8,498,383 6,194,171 8,472,889 6,194,171
===================================================================
See notes to financial statements.
3
International Telecommunication Data Systems, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended September 30
1997 1996
------------------------------------
Operating activities
Net income before extraordinary loss $ 3,380,692 $ 754,426
Adjustments to reconcile net income before extraordinary loss to net cash provided by
operating activities:
Depreciation and amortization 1,162,279 742,642
Gain on disposal of equipment - (400)
Deferred taxes 506,496 157,079
Compensation paid in common stock - 634,548
Change in operating assets and liabilities:
Accounts receivable (2,156,434) (1,355,862)
Prepaid expenses 639,573 (404,599)
Deferred revenue - 160,000
Accounts payable, accrued expenses and accrued compensation 71,541 (24,603)
Other assets and liabilities, net (304,852) (63,070)
------------------------------------
Net cash provided by operating activities 3,299,295 600,161
Investing activities
Capital expenditures (2,425,331) (64,388)
Proceeds from sale of equipment - 400
Purchase of securities available for sale (27,779,681) -
Purchase of investments (1,805) (349,347)
Proceeds from maturities of investments 350,000 300,000
Proceeds from securities available for sale 27,338,165 -
Product development costs (1,377,562) (600,920)
------------------------------------
Net cash used for investing activities (3,896,214) (714,255)
Financing activities
Unearned compensation 63,000 -
Principal payments on long-term debt and notes payable - (92,773)
Principal payments on capital lease obligations (318,987) (304,155)
Proceeds from sale of Common Stock 429,640 -
Dividends paid - (36,000)
------------------------------------
Net cash provided (used) for financing activities 173,653 (432,928)
------------------------------------
Net decrease in cash and cash equivalents (423,266) (547,022)
Cash and cash equivalents at beginning of period 4,138,575 1,172,692
------------------------------------
Cash and cash equivalents at end of period $ 3,715,309 $ 625,670
====================================
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 101,100 $ 336,585
Cash paid during the period for taxes 1,659,205 825,882
See notes to financial statements.
4
International Telecommunication Data Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1997. For further information, refer to
the financial statements and footnotes thereto included in the International
Telecommunication Data Systems, Inc. (the "Company" or "ITDS") Annual Report on
Form 10K for the year ended December 31, 1996.
Consolidation:
The consolidated financial statement include the accounts of the Company and its
wholly-owned subsidiary. All significant intercompany accounts and transactions
have been eliminated.
On February 28, 1997, the Company announced it signed a five year contract with
MCOMCAST to provide service bureau billing services from ITDS' data processing
facility to be located in Sao Paulo, Brazil. Under the term of the agreement
ITDS LTDA, a Brazilian limited liability corporation and wholly owned subsidiary
of ITDS, will install the 10X billing and customer care management information
systems at MCOMCAST's facility in Sao Paulo, Brazil. The ITDS data center,
staffed with ITDS LTDA employees, will be responsible for the production and
execution of all message processing and billing functions for MCOMCAST.
The operating results of this entity have not been significant.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
2. Public Offering
The Company completed an initial public offering ("IPO") of its common stock in
October 1996. The Company sold 2 million shares at an initial public offering
price of $16 per share, resulting in proceeds to the Company of approximately
$29.8 million, after deducting underwriting commissions and discounts. In
addition, on November 18, 1996 the Company received approximately $3.0 million,
net of underwriting commissions and discounts, upon the exercise of the
underwriters' over-allotment option to purchase 200,000 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. Pursuant to a recapitalization the Company was
reincorporated in the State of Delaware and an 800-for-1 split of its Common
Stock was effected.
5
International Telecommunication Data Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
2. Public Offering (continued)
A portion of the proceeds from the sale of the Company's Common Stock sold in
the IPO was 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 852,812 post-split shares of
the Company's Common Stock and paid an aggregate amount of $825,000. The
distribution of the 852,812 shares of the Company's Common Stock valued at $12
per share, for an aggregate of $10,233,744, 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 334,524
post-split shares of the Company's Common Stock at an aggregate purchase price
of $822,959. In addition, upon the closing of the IPO all of the outstanding
shares of Series C Preferred Stock of the Company (all of which were held by
CII) converted into an aggregate of 103,200 shares of Common Stock.
The Company completed an offering of 1,000,000 shares of its common stock in
April 1997. Of the 1,000,000 shares of common stock, par value $.01 per share,
the Company offered 50,000 shares and 950,000 were offered by selling
stockholders. The Company received $172,593 after deducting offering expenses.
ITDS did not receive any proceeds from the sale of shares by the selling
stockholders.
For further details see the Company's Registration Statement on Form S-1
(Registration No. 333-22567) declared effective by the SEC on March 27, 1997.
3. Income Tax
Income tax provisions for interim periods are based on estimated effective
annual income tax rates. The Company recognizes deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between tax bases and financial reporting bases of assets and liabilities.
The differences between the effective tax rate and the federal statutory rate is
primarily a result of state income taxes.
4. Earnings Per Share
Earnings per share are based on the weighted average number of shares
outstanding and common stock equivalents during the respective periods,
including the assumed net shares issuable upon exercise of stock options when
dilutive. Common and common equivalent shares issued during the year prior to
the IPO at prices below the IPO price are included in the calculations, using
the treasury stock method, as if they were outstanding for all periods
presented.
The weighted average shares for the three and nine-month periods ended September
30, 1996 were based on the equivalent weighted average shares as though the
recapitalization discussed in Note 2 occurred prior to that date.
6
Item 2. Management's Discussion and Analysis of Financial Condition, Results of
Operations, and Certain Factors that May Affect Future Results
ITDS provides comprehensive transactional billing and management information
solutions to providers of wireless, long distance and satellite
telecommunications services. The Company, founded in 1990, uses its robust and
flexible proprietary software technology to develop billing solutions which
address customer requirements as they evolve, regardless of the market segment,
geographic area or mix of network features and billing options. The Company
provides its services to customers under exclusive contracts with terms
typically ranging from three to five years and bills customers monthly,
typically on a per-subscriber basis. As a result, substantially all of the
Company's revenue is recurring in nature, and increases as a provider's
subscriber base grows.
In recent years, the telecommunications services industry has experienced rapid
growth and dramatic change, ranging from the introduction of such new
technologies as cellular, PCS and satellite communications, to new features and
services, in a wide variety of combinations and at a great diversity of prices.
The Company's systems are designed to respond to the dynamic requirements of
this market for cost-effective transactional billing solutions by drawing on the
Company's core technology, which does not require significant reconfiguration or
customization to be applied across market segments, geographic areas and
customer types. The Company's software currently supports both of the two
predominant cellular telecommunications protocols, Advanced Mobil Phone Systems
("AMPS"), an analog service predominant in the U.S., and the Global System for
Mobile Communications ("GSM"), an international digital service, as well as
other emerging digital standards.
The Company's advanced billing and management information system, ITDS 10X,
forms the foundation for its integrated suite of applications that provide not
only subscriber billing and service support, but also the means to automate
subscriber activation, remittance processing, collections, data retrieval and
reporting, electronic funds transfer, credit management, inventory management
and data archiving. Its modular system architecture permits providers to draw on
those features and functions most appropriate to their specific requirements in
a fully-integrated software solution. The Company's software and services allow
its customers to address the demands of a rapidly evolving marketplace by
enabling them to develop and support innovative rate and feature offerings
without the delay and cost associated with reconfiguring their billing and
information systems; to identify and respond to subscriber demands through
analysis of billing and subscriber databases; to reduce costs with accurate and
timely receivables information; and to manage the subscriber relationship in a
comprehensive and cost-effective manner.
Revenue. Revenue increased by 45.9% to $6,038,577 in the third quarter of 1997
from $4,139,061 in the third quarter of 1996. For the nine months ended
September 30, 1997 revenue increased by 38.9% to $16,670,950 from $12,003,702 in
the comparable period in 1996. The increases were due primarily to the addition
of new customers and the growth of revenue from existing customers due to the
growth in their subscriber base.
Operating Expenses. Operating expenses increased 6.7% from $1,227,419 in the
third quarter of 1996 to $1,309,159 for the three months ended September 30,
1997. Operating expenses increased 29.9% from $3,075,137 to $3,993,543 for the
September year to date periods of 1996 and 1997, respectively. These increases
were primarily due to increased service and support necessary for the growing
client base.
7
General, Administrative and Selling Expenses. General, administrative and
selling expenses decreased 25.4% from $2,327,144 to $1,735,956 in the third
quarters of 1996 and 1997, respectively. This decrease was primarily due to a
decrease in stock option expense of $888,548, and salaries and bonuses paid to
senior management of $245,331. These decreases were partially offset by
increases in rent expense of $80,337, insurance expense of $108,527, marketing
expenses of $51,911, outside programming consultants of $149,695 and various
miscellaneous expenses. During the first nine months of 1997, general,
administrative and selling expenses decreased 3.8% or $190,606 from $5,010,163
to $4,819,557 over the comparable period in 1996. The decreases were in salaries
and bonuses paid to senior management of $930,992 and stock option expense of
$846,548. These expenses were partially offset by increases in employee
compensation and benefits of $531,310, outside programming consultants of
$434,391, rent expense of $205,479, marketing expenses of $133,373 and office
expense of $131,033.
The Company expects that its general, administrative and selling expenses will
increase as it continues to expand its direct sales force and its marketing
activities.
Depreciation and Amortization. Depreciation and amortization increased 40.3%
from $304,934 in the third quarter of 1996 to $427,941 in the third quarter of
1997. For the nine month period of 1997 depreciation and amortization increased
56.5% over the comparable period in 1996. These increases were primarily due to
the purchase of computer equipment and the increased spending on product
development related to the enhancement of the Company's ITDS 10X system to
support Unix based file servers and the further development of its integrated
billing and management information system.
Systems Development and Programming Costs. Systems development and programming
costs increased 64.1% from $552,172 for the three months ended September 30,
1996 to $906,123 in the respective 1997 period and 43.5% for the first nine
months of 1996 from $1,516,562 to $2,176,920 for the same period in 1997, due
primarily to increased programming support required by customers. As a
percentage of revenue, systems development and programming costs increased from
13.3% for the three months ended September 30, 1996 to 15.0% for the same period
in 1997, on a year to date basis the percentage increased from 12.6% to 13.1%
for comparable periods. The increases were due to additional software features
offered and under development by the Company.
Interest Expense. Interest expense decreased 79.8% from $118,169 for the third
quarter of 1996 to $23,873 in the third quarter of 1997. Interest expense
decreased on a year to date basis 70.0% from $336,585 in 1996 to $101,100 in
1997. These decreases were due to the Company reducing outstanding debt and
capital leases in 1997.
Income Tax Expense. The Company's effective tax rate in 1997 is 40.9% as
compared to 43.9% in 1996. This reduction is partially a result of the
elimination of a non-deductible expense and reduced state income taxes.
Liquidity and Capital Resources
The Company has financed its operations to date primarily through private
placements of debt and equity securities, cash generated from operations,
equipment financing leases and the receipt of the proceeds from the IPO.
As of September 30, 1997, the Company had $3,715,309 of cash and cash
equivalents, $25,499,540 in securities available for sale, $5,389,401 in net
trade accounts receivable, and $33,088,821 of working capital.
Net cash decreased by $423,266 for the nine months ended September 30, 1997.
This decrease is principally a result of an increase in accounts receivable,
capital expenditures, product development cost and principal payments on capital
lease obligations. Offsetting these uses of funds were increases in depreciation
and amortization, decrease in prepaid expenses, and an increase in the deferred
tax asset.
8
The Company has an available line of credit, dated September 19, 1996, from
First Union Bank in the amount of $250,000 under which no amounts are currently
outstanding. In conjunction with such line of credit, the Company has granted to
First Union a security interest in substantially all of its assets other than
intellectual property.
The Company believes that its existing capital resources are adequate to meet
its cash requirements for the foreseeable future. There can be no assurance,
however, that changes in the Company's plans or other events affecting the
Company's operations will not result in accelerated or unexpected expenditures.
The Company may seek additional funding through public or private financing.
There can be no assurance, however, that additional financing will be available
from any of these sources or will be available on terms acceptable to the
Company.
To date, inflation has not had a significant impact on the Company's operations.
Certain Factors That May Affect Future Results
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which
changes the methodology of calculating earnings per share. SFAS No. 128 requires
disclosure of diluted earnings per share regardless of its difference from basic
earnings per share. The Company plans to adopt SFAS No. 128 in December 1997.
Early adoption is not permitted. The Company does not expect the adoption of
SFAS No. 128 to have a material effect on the financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." While the Company is studying the application of the disclosure
provisions, these statements will not affect its consolidated financial position
or results of operations.
This quarterly report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. A number of uncertainties
exist that could affect the Company's future operating results, including,
without limitation, changes in the telecommunication market, the Company's
ability to retain existing customers and attract new customers, the Company's
continuing ability to develop products that are responsive to the evolving needs
of its customers, increased competition, changes in operating expenses, changes
in government regulation of the Company's clients and general economic factors.
The Company's quarterly operating results may fluctuate from quarter to quarter
depending on various factors, including the impact of significant start-up costs
associated with initiating the delivery of contracted services to new clients,
the hiring of additional staff, new product development and other expenses,
introduction of new products by competitors, pricing pressures, the evolving and
unpredictable nature of the markets in which the Company's products and services
are sold and general economic conditions.
The market for the Company's products and services is highly competitive, and
competition is increasing as additional market opportunities arise.
Reference is made to the more detailed discussion of the risks associated with
the Company's business contained under the heading "Risk Factors" in the
Company's Registration Statement on Form S-1 (Registration No. 333-22567)
declared effective by the SEC on March 27, 1997.
9
Part II: Other Information
Item 1.
Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 2.
Changes in Securities
None
Item 3.
Defaults Upon Senior Securities
None.
Item 4.
Submission of Matters to a Vote of Security Holders
None.
Item 5.
Other Information
None.
Item 6.
Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.01 Financial Data Schedule
(b) Reports on Form 8-K
None.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
International Telecommunication
Data Systems, Inc.
----------------------------------------
(Registrant)
By /s/ Alan K. Greene
----------------------------------------
Alan K. Greene
Vice President
(Chief Financial Officer)
11