UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the QUARTERLY PERIOD ENDED JUNE 30, 1999
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
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INTERNATIONAL TELECOMMUNICATION DATA SYSTEMS, INC.
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 329-3300
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 4, 1999
- ------------------------------------------ -----------------------------------------
Common Stock, $.01 par value 17,457,996
International Telecommunication Data Systems, Inc.
and Subsidiaries
Form 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements (unaudited)
Consolidated balance sheets--June 30, 1999 and December 31, 1998 1
Consolidated statements of operations--three months and six months ended
June 30, 1999 and 1998 3
Consolidated statements of cash flows--six months ended
June 30, 1999 and 1998 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 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
International Telecommunication Data Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share amounts)
JUNE 30, December 31,
1999 1998
------------------------------------
(UNAUDITED) (SEE NOTE)
ASSETS
Current assets:
Cash and cash equivalents $ 39,617 $ 40,735
Accounts receivable, net of allowances for doubtful accounts of $2,133 and
$2,362, respectively 36,034 34,713
Prepaid expenses and other current assets 4,611 1,843
Deferred income taxes 884 840
------------------------------------
Total current assets 81,146 78,131
Property and equipment
Computers, including leased property under capital leases of $1,150 in 1999
and 1998 11,011 9,506
Furniture and fixtures 2,423 2,005
Equipment, including leased property under capital leases of $54 in 1999 and
1998 618 706
Leasehold improvements 1,750 970
------------------------------------
15,802 13,187
Less: accumulated depreciation and amortization 7,108 5,450
------------------------------------
8,694 7,737
Other assets:
Goodwill - net of accumulated amortization of $4,741 and $3,010, respectively 46,526 42,249
Product development costs-at cost, net of accumulated amortization of $8,747
and $5,810 respectively 23,120 22,511
Deferred income taxes 2,779 4,138
Other 2,276 390
------------------------------------
74,701 69,288
------------------------------------
Total assets $164,541 $155,156
------------------------------------
------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
Page 1
International Telecommunication Data Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share amounts)
JUNE 30, December 31,
1999 1998
------------------------------------
(UNAUDITED) (SEE NOTE)
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 11,164 $ 10,921
Accrued expenses and income taxes payable 3,289 2,919
Accrued compensation 2,469 3,026
Customer advances and deferred revenue 5,171 3,862
Current maturities of capital lease obligations 20 74
Other 298 504
------------------------------------
Total current liabilities 22,411 21,306
Capital lease obligations 21 25
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value; 40,000,000 shares authorized, 17,378,995 and
17,313,231 shares issued and outstanding at June 30, 1999 and December 31,
1998, respectively 174 173
Treasury stock, 91,500 shares at June 30, 1999, at cost (1,180) -
Additional paid-in capital 142,386 141,662
Retained earnings (deficit) 762 (7,952)
Unearned compensation (33) (58)
------------------------------------
Total stockholders' equity 142,109 133,825
------------------------------------
Total liabilities and stockholders' equity $ 164,541 $155,156
------------------------------------
------------------------------------
Note: The balance sheet at December 31, 1998 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.
Page 2
International Telecommunication Data Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
----------------------------------------------------------------------
Revenue $ 35,222 $ 27,360 $ 68,623 $ 53,366
Costs and expenses:
Operating expenses 13,507 10,521 26,100 20,782
General, administrative and selling expenses 5,540 4,936 11,423 9,961
Depreciation and amortization 3,331 2,461 6,443 5,108
Systems development and programming costs 5,770 3,847 10,888 7,318
Personnel and indirect acquisition costs - 527 - 4,713
In-process research and development - - - 20,800
----------------------------------------------------------------------
28,148 22,292 54,854 68,682
----------------------------------------------------------------------
Operating income (loss) 7,074 5,068 13,769 (15,316)
Foreign currency loss (4) - (300) -
Other income 462 204 913 429
Interest expense (10) (1,144) (53) (2,649)
----------------------------------------------------------------------
Income (loss) before income tax expense (benefit) and 7,522 4,128 14,329 (17,536)
extraordinary item
Income tax expense (benefit) 3,024 1,695 5,615 (6,464)
----------------------------------------------------------------------
Income (loss) before extraordinary item 4,498 2,433 8,714 (11,072)
Extraordinary loss (net of $562 tax benefit) - 826 - 826
----------------------------------------------------------------------
Net Income (loss) $ 4,498 $ 1,607 $ 8,714 $ (11,898)
----------------------------------------------------------------------
----------------------------------------------------------------------
Income (loss) per common share - basic:
Income (loss) before extraordinary item $ 0.26 $ 0.17 $ 0.50 $ (0.80)
Extraordinary loss - (0.06) - (0.06)
----------------------------------------------------------------------
Net Income (loss) $ 0.26 $ 0.11 $ 0.50 $ (0.86)
----------------------------------------------------------------------
----------------------------------------------------------------------
Shares used in computing basic income (loss) per 17,299 14,414 17,315 13,913
common share
Income (loss) per common share - diluted:
Income (loss) before extraordinary item $ 0.26 $ 0.16 $ 0.49 $ (0.80)
Extraordinary loss - (0.05) - (0.06)
----------------------------------------------------------------------
Net Income (loss) $ 0.26 $ 0.11 $ 0.49 $ (0.86)
----------------------------------------------------------------------
----------------------------------------------------------------------
Shares used in computing diluted income (loss) per 17,631 15,282 17,683 13,913
common share
SEE NOTES TO FINANCIAL STATEMENTS.
Page 3
International Telecommunication Data Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
1999 1998
-----------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 8,714 $ (11,898)
Adjustments to reconcile net income (loss) before extraordinary loss to net cash
provided (used) by operating activities:
Write off of in-process research and development - 20,800
Depreciation and amortization 6,443 5,208
Deferred income taxes 1,315 (7,446)
Amortization of unearned compensation 25 138
Change in operating assets and liabilities:
Accounts receivable (1,321) (15,141)
Prepaid expenses (2,753) 147
Customer advances and deferred revenue 1,309 95
Accounts payable, accrued expenses and accrued compensation (148) 5,428
Other assets and liabilities, net 191 1,543
-----------------------------------
Net cash provided (used) by operating activities 13,775 (1,126)
INVESTING ACTIVITIES
Capital expenditures (2,615) (1,758)
Investment in software/business alliance (2,036) -
Purchase of Intelicom (6,000) (73,832)
Product development costs (3,727) (3,693)
-----------------------------------
Net cash used for investing activities (14,378) (79,283)
FINANCING ACTIVITIES
Principal payment of long-term debt (59) (70,118)
Proceeds from long term debt - 70,000
Treasury stock (1,180) -
Proceeds from sale of common stock 724 84,510
Financing fee related to acquisition - (1,483)
-----------------------------------
Net cash (used for) provided by financing activities (515) 82,909
-----------------------------------
Net (decrease) increase in cash and cash equivalents (1,118) 2,500
Cash and cash equivalents at beginning of period 40,735 28,967
-----------------------------------
Cash and cash equivalents at end of period $ 39,617 $ 31,467
-----------------------------------
-----------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 53 $ 2,554
Cash paid during the period for taxes $ 3,240 $ 695
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCIAL ACTIVITIES:
In 1998, the Company issued 606,673 shares of its common stock, valued at $10
million, to CSC as partial financing of the acquisition of ITDS Intelicom
Services, Inc.
SEE NOTES TO FINANCIAL STATEMENTS.
Page 4
International Telecommunication Data Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three month and six month periods ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the year ended December
31, 1999. 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, 1998.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
On January 2, 1998, the Company acquired a subsidiary of Computer Sciences
Corporation ("CSC"), a provider of billing and customer care software, by
acquiring all of the outstanding Capital Stock of CSC Intelicom Inc. (now
known as ITDS Intelicom Services, Inc.) ("Intelicom"). This acquisition was
accounted for using the purchase method of accounting. The purchase price,
after working capital adjustments of 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. The additional $6 million payment is being amortized over the
remaining life of the original goodwill, 14 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, and personnel and
indirect acquisition costs of $4.2 million, (principally hiring and temporary
staff of $1.3 million, special bonuses paid to 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.
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.
COMPREHENSIVE INCOME
For the three and six months ended June 30, 1999 and 1998, the Company had no
other comprehensive income.
Page 5
2. STRATEGIC BUSINESS ALLIANCE
On February 9, 1999, the Company announced it has formed a strategic business
alliance with Novazen, Inc. to include Novazen's Internet - based billing and
customer care software in ITDS' proprietary suite of products and services.
In addition to other distribution rights, the alliance gives ITDS the
exclusive right to provide its clients with Novazen's advanced Internet -
based billing and customer communication software. This software will
function with all of ITDS' proprietary service bureau products and services,
which already offer wireless service providers with customer acquisition,
billing, customer care and process control.
As part of the transaction, a payment of $2 million was made principally to
secure certain software rights. An ownership interest in Novazen was also
received. The software rights, including all enhancement and modification to
the software, are being amortized over a four year period. The Company's
ownership interest in Novazen is being accounted for under the cost method.
3. INCOME TAX
Income tax provisions for interim periods, other than unusual items, are
based on estimated effective annual income tax rates. The Company recognizes
deferred tax assets and liabilities for the expected future tax consequences
of temporary differences between the tax bases, projected state tax rates and
financial reporting bases of assets and liabilities.
The differences between the effective tax rate and the federal statutory rate
is primarily a result of state income taxes and in 1998 the tax benefit
anticipated from the nonrecurring costs associated with the Intelicom
acquisition.
4. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, EARNINGS PER
SHARE "SFAS 128", which revises the methodology of calculating earnings per
share. The Company adopted SFAS 128 in the fourth quarter of 1997. In
accordance with SFAS 128, all common stock equivalents that have a dilutive
effect on earnings per share are included in the calculation for dilutive
income per share.
The following table sets forth the computation of basic and diluted earnings
per share for the periods indicated.
Three Months Ended Six Months Ended
June 30 June 30
------------------------------------ ------------------------------------
1999 1998 1999 1998
------------------ ----------------- ------------------- ----------------
In thousands, except per share data In thousands, except per share data
BASIC:
Net income (loss) $ 4,498 $ 1,607 $ 8,714 $ (11,898)
------------------ ----------------- ------------------- ----------------
------------------ ----------------- ------------------- ----------------
Average shares outstanding 17,299 14,414 17,315 13,913
------------------ ----------------- ------------------- ----------------
------------------ ----------------- ------------------- ----------------
Income (loss) before extraordinary item $ 0.26 $ 0.17 $ 0.50 $ (0.80)
Extraordinary loss - (0.06) - (0.06)
------------------ ----------------- ------------------- ----------------
------------------ ----------------- ------------------- ----------------
Net Income (loss) $ 0.26 $ 0.11 $ 0.50 $ (0.86)
------------------ ----------------- ------------------- ----------------
------------------ ----------------- ------------------- ----------------
DILUTED:
Net income (loss) $ 4,498 $ 1,607 $ 8,714 $ (11,898)
------------------ ----------------- ------------------- ----------------
------------------ ----------------- ------------------- ----------------
Average shares outstanding 17,299 14,414 17,315 13,913
Net effect of dilutive stock options-based on 332 868 368 -
the treasury stock method
------------------ ----------------- ------------------- ----------------
------------------ ----------------- ------------------- ----------------
Totals 17,631 15,282 17,683 13,913
------------------ ----------------- ------------------- ----------------
------------------ ----------------- ------------------- ----------------
Income (loss) before extraordinary item $ 0.26 $ 0.16 $ 0.49 $ (0.80)
Extraordinary loss - (0.05) - (0.06)
------------------ ----------------- ------------------- ----------------
------------------ ----------------- ------------------- ----------------
Net Income (loss) $ 0.26 $ 0.11 $ 0.49 $ (0.86)
------------------ ----------------- ------------------- ----------------
------------------ ----------------- ------------------- ----------------
Page 6
International Telecommunication Data Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
5. OFFICER, DIRECTOR AND EMPLOYEE LOANS
As of June 30, 1999, prepaid expenses and other current assets and other
long-term assets include approximately $491,000 of loans and advances to
certain officers, directors and employees of the Company.
6. 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 Mr. Alan K. Greene, the Company's former Chief
Financial Officer, and breached other obligations to Mr. Greene. 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. On August 2, 1999 the parties executed a
settlement agreement which included the mutual release of any and all
outstanding claims/obligations. The effect of the settlement was not material
to the financial position or results of operations of the Company.
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.
Page 7
Item 2. Management's Discussion and Analysis of Financial Condition, Results
of Operations, and Certain Factors that May Affect Future Results
OVERVIEW
The Company is a leading provider of comprehensive transactional billing and
management information 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. The
remaining revenues are largely comprised of the development of new software,
the enhancement of existing installed systems and the provision of related
customer maintenance and training which is largely billed on time and
material basis.
Operating expenses are comprised primarily of the salaries and benefits of
technical service representatives, operations personnel, quality assurance
representatives and consultants as well as costs to produce and distribute
invoices for customers.
General, administrative and selling expenses consist mainly of the salaries
and benefits of management and administrative personnel in addition to
general office administration expenses (rent and occupancy, telephone and
other office supply costs) of the Company.
The Company capitalizes software development costs incurred in the
development of software used in its product and service line only after
establishing commercial and technical viability and ceases capitalizing such
costs when the product is available for general release. The capitalized
costs include salaries and related payroll costs incurred in the development
activities. Software development costs are carried at cost less accumulated
amortization. Amortization is computed by using the greater of the amount
that results from applying the ratio of current revenue for the product over
total revenue for the product or the straight-line method over the remaining
useful life of the product. Generally, such deferred costs are amortized over
five years.
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 of 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. The additional $6 million payment is being amortized over the
remaining life of the original goodwill, 14 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, and personnel and
indirect acquisition costs of $4.2 million, (principally hiring and temporary
staff of $1.3 million, special bonuses paid to 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.
On February 9, 1999 the Company announced that it has formed a strategic
business alliance with Novazen, Inc. to include Novazen's Internet-based
billing and customer care software in ITDS' proprietary suite of products and
services. In addition to other distribution rights, the alliance gives ITDS
the exclusive right to provide its clients with Novazen's advanced
Internet-based billing and
Page 8
customer communication software. This software will function with all of
ITDS' proprietary service bureau products and services, which already offer
wireless service providers with customer acquisition, billing, customer care
and process control. As part of the transaction, a payment of $2 million was
made principally to secure certain software rights. An ownership interest in
Novazen was also received.
RESULTS OF OPERATIONS
REVENUE
The Company reported that revenue for the quarter ended June 30,
1999 increased 28.7% from $27.4 million in 1998 to a record $35.2 million in
1999. For the six month period, revenue increased 28.6% from $53.4 million in
1998 to $68.6 million in 1999. This increase is due primarily to the growth
of recurring revenue from existing customers. The subscriber base of our
customers increased by approximately 2.8 million subscribers from 5.9 million
in the second quarter 1998 to 8.7 million at June 30, 1999.
OPERATING EXPENSES
Operating expenses for the three months ended June 30, 1999
increased 28.4% from $10.5 million in 1998 to $13.5 million in 1999. For the
six month period, operating expenses increased 25.6% from $20.8 million in
1998 to $26.1 million in 1999. These increases are primarily due to an
increase in the fixed cost structure relating to additional mainframe
capacity.
GENERAL, ADMINISTRATIVE AND SELLING EXPENSES
General, administrative and selling expenses for the three months
ended June 30, 1999 increased 12.2% from $4.9 million in 1998 to $5.5 million
in 1999. As a percentage of revenue, general, administrative and selling
expenses decreased from 18.0% for the three months ended June 30, 1998 to
15.7% for the comparable period in 1999. While revenues increased
approximately $7.9 million during the three month period ended June 30, 1999
as compared to the three month period ended June 30, 1998, general,
administrative and selling expense increased at a lower percentage. These
increases are primarily due to increases in salaries and employee related
expenses resulting from staff increases.
General, administrative and selling expenses for the six months
ended June 30, 1999 increased 14.7% from $10 million in 1998 to $11.4 million
in 1999. As a percentage of revenue, general, administrative and selling
expenses decreased from 18.7% for the six months ended June 30, 1998 to 16.6%
for the comparable period in 1999. While revenues increased approximately
$15.3 million during the six month period ended June 30, 1999 as compared to
the six month period ended June 30, 1998, general, administrative and selling
expense increased at a lower percentage. These increases are primarily due to
increases in salaries and employee related expenses resulting from staff
increases.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the three months ended
June 30, 1999 increased 35.4% from $2.5 million in 1998 to $3.3 million in
1999. For the six month period, depreciation and amortization increased 26.1%
from $5.1 million in 1998 to $6.4 million in 1999. These increases are
primarily because of the amortization of the additional cash payment of $6
million in connection with the acquisition of Intelicom and the purchase of
Novazen software license.
SYSTEMS DEVELOPMENT AND PROGRAMMING COSTS
Systems development and programming costs for the three months ended
June 30, 1999 increased 50.0% from $3.8 million in 1998 to $5.8 million in
1999. For the six month period, systems development and programming costs
increased 48.8% from $7.3 million in 1998 to $10.9 million in 1999. As a
percentage of revenue, system development and programming costs increased
from 14.1% for the three month period ended 1998 to 16.4% for the comparable
period in 1999 and for the six month period, system development and
programming costs increased from 13.7% in 1998 to 15.9% for the comparable
period in 1999. These increases are due to headcount increases in both
employees and consultants due to increased programming support required for
the increase in our customers' growth and additional expenses incurred as a
result of further development of new products.
OTHER INCOME
Page 9
Other income for the three months ended June 30, 1999 increased 126.5%
from $204,000 in 1998 to $462,000 in 1999. For the six month period, other
income increased 112.8% from $429,000 in 1998 to $913,000 in 1999. The increase
is mainly due to an increase in investment income caused by a higher level of
cash and cash equivalents in 1999 as compared to 1998. The higher levels of cash
were the result of the June 3, 1998 follow-on offering.
INTEREST EXPENSE
Interest expense for the three months ended June 30, 1999 decreased
99.1% from $1.1 million in 1998 to $10,000 in 1998. For the six month period,
interest income decreased 98% from $2.6 million in 1998 to $53,000 in 1999.
The decrease is primarily a result of the $70 million term loan, which was
retired on June 8, 1998.
INCOME TAX EXPENSE
Income tax expense for the six months ended June 30, 1999 increased
from a tax benefit of $6.5 million in 1998 to a tax expense of $5.6 million
in 1999. The Company's effective tax rate increased to a charge of 39.2% from
a benefit of 36.9% in 1998 primarily due to the tax benefit anticipated from
nonrecurring costs associated with the acquisition of Intelicom in the six
month period ended June 30, 1998.
EARNINGS PER SHARE
Net earnings for the second quarter of 1999 were $4.5 million, or
$.26 per diluted share, compared to income before nonrecurring personnel and
indirect costs and extraordinary item for the second quarter of 1998 of $2.7
million, or $.18 per diluted share. For the three month period ended June
1998 special charges were $.5 million ($.3 million after tax) in personnel
and indirect acquisition costs associated with the Intelicom Acquisition. The
diluted weighed average number of shares outstanding for the three month
period ended in 1999 and 1998 were 17.6 million and 15.3 million,
respectively. Net earnings for the six months ended June 30, 1999 were $8.7
million, or $.49 per diluted share. For the six months ended June 30, 1998
special charges were $25.5 million ($15.8 million after tax) in nonrecurring,
in-process R&D and indirect acquisition costs associated with the Intelicom
Acquisition. Earnings for the six months ended June 30, 1998 before
non-recurring and extraordinary items were $4.75 million or $.32 per pro
forma diluted share. The diluted weighted average number of common shares
outstanding for the six month period ended in 1999 and 1998 were 17.7 million
and 13.9 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through placements of debt
and equity securities, cash generated from operations and equipment financing
leases.
As of June 30, 1999, the Company had $39.6 million in cash and cash
equivalents, $36.0 million in net trade accounts receivable and $58.7 million
in working capital.
For the six months ended June 30, 1999, the Company generated $13.8 million
in cash from operating activities and had net uses of cash of $.5 million
from financing activities primarily from the purchase of treasury stock
offset to some extent by cash generated from the sale of common stock through
the exercise of stock options. Investing activities used approximately $14.4
in funds by spending $2 million for the investment in Novazen and the related
software license, $2.6 million for capital expenditures, $6 million in
connection with the Intelicom purchase and applying $3.7 million to product
development costs.
For the period ended June 30, 1998, the Company used cash of $1.1 million
from operating activities principally due to the increase of accounts
receivable. 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 $12.9 million and cash used for
investing activities would have been $93.3 million for the period ended June
30, 1998.
The Company has a $30 million unused line of credit available to fund future
operations. The credit agreement contains normal covenants including meeting
certain financial ratios. This agreement requires
Page 10
the Company to pay interest at LIBOR plus up to two and one quarter percent
and expires on December 31, 2002.
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. As of August 4, 1999 the Company had repurchased 169,000 shares of
its common stock.
The Company believes that its existing capital resources are adequate to meet
its cash requirements for the foreseeable future. There can be no assurance,
however, that changes in the Company's plans or other events affecting the
Company's operations will not result in accelerated or unexpected
expenditures.
The Company may seek additional funding through public or private financing.
There can be no assurance, however, that additional financing will be
available from any of these sources or will be available on terms acceptable
to the Company.
To date, inflation has not had a significant impact on the Company's
operations.
YEAR 2000 DISCLOSURE
The Company has established a Year 2000 task force (the "Task Force") which
includes employees with various functional and divisional responsibilities,
material third parties and outside consultants. The Task Force has identified
five phases in becoming Year 2000 ready:
(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's facilities. As of August 1, 1999,
the awareness, assessment and renovation phases of all of the Company's
systems were completed in their entirety. With respect to the front-end
portion of the systems, the Year 2000 Task Force expects to be completed with
all five phases of Year 2000 readiness by August 31, 1999. Upgrades and
replacements will have been ready provided to all 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 Company expects to be completed with
all five phases of Year 2000 readiness by August 31, 1999. As of August 1,
1999, approximately 95% of all validation and implementation activities were
complete.
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
upgrades of software deemed Year 2000 compliant to ensure continued readiness.
In addition to internally generated systems, the Company relies on third
parties for its infrastructure, operating systems, human resources,
financial, and supporting billing and customer care software, some of which
are not yet Year 2000 ready. The Company is in the process of obtaining
assurances from third parties that their systems are or will by Year 2000
ready in a timely manner.
While the Company does not anticipate delays or postponements in implementing
Year 2000 resolutions
Page 11
by the previous 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 ability 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
ready will be approximately $4.3 million. Through June 30, 1999, the Company
has incurred $3.5 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.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This quarterly report contains forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements. A number of
uncertainties exist that could affect the Company's future operating results,
including, without limitation, changes in the telecommunications market, the
Company's ability to successfully complete its Year 2000 efforts, the
Company's ability to retain existing customers and attract new customers, the
Company's continuing ability to develop products that are responsive to the
evolving needs of its customers, increased competition, changes in operating
expenses, changes in government regulation of the Company's clients and
general economic factors.
The Company's quarterly operating results may fluctuate from quarter to
quarter depending on various factors, including the impact of significant
start-up costs associated with initiating the delivery of contracted services
to new clients, the hiring of additional staff and consultants, new product
development and other expenses, introduction of new products by competitors,
pricing pressures, contract renewals/terminations, the evolving and
unpredictable nature of the markets in which the Company's products and
services are sold, the need to use independent consultants to supplement the
Company's staff to meet customers' deadlines 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 "Certain Factors That
May Affect Future Results" in the Company's Form 10-K for the period ended
December 31, 1998 filed with the Securities and Exchange Commission on March
31, 1999.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
At June 30, 1999, 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.
Page 12
PART II: OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
On April 2, 1998, the Company was served with a complaint in Connecticut
Superior Court alleging that the Company had breached the terms of its
employment contract with Alan K. Greene, the Company's former Chief Financial
Officer, and breached other obligations to Mr. Greene. The 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 (CCHRO) 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. On August 2, 1999 the parties executed a
settlement agreement which included the mutual release of any and all
outstanding claims/obligations. The effect of the settlement was not material
to the financial position or results of operations of the Company.
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
At the Company's Annual Meeting of Stockholders held on May 19, 1999, the
following proposals were adopted by the vote specified below:
Against or
Proposal For Withheld Abstain
1. Election of Class III
Directors:
Samuel L. Jacob 14,484,084 - -
Peter L. Masanotti 14,484,084 - -
2. Ratification of Ernst & 15,351,067 1,466 3,020
Young LLP as
independent auditors
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits are listed in the accompanying index to exhibits
immediately following the signature page.
(b) Reports on Form 8-K
None
Page 13
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 Michael P. Neuscheler
------------------------------------------------------
(Chief Financial Officer and Duly Authorized Officer)
Date August 11, 1999
------------------------------------------------------
Page 14
EXHIBITS
The exhibits filed as part of this report on Form 10-Q are as follows:
EXHIBIT
NUMBER DESCRIPTION
- ----------------------------------------------------------------------------
+10 Employment Agreement between the Registrant and Michael P. Neuscheler,
dated as of May 19, 1999
27.1 Financial Data Schedule
- ----------------------------------------------------------------------------
+ Management contract or compensatory plan.
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