----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-10588
INTELLICALL, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-1993841
(State or other jurisdiction of (I.R.S. Employer Identification number)
incorporation or organization)
2155 Chenault, Suite 410
Carrollton, TX 75006
(Address of Principal Executive Offices)
(214) 416-0022
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports 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.
Outstanding at
Class May 6,1996
Common Stock $.01 par value 7,709,010
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<PAGE>
INDEX
INTELLICALL, INC.
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 1996
(Unaudited) and December 31, 1995...................................1
Condensed Consolidated Statements of Operations for each of
the three month periods ended March 31, 1996 and 1995
(Unaudited).........................................................2
Condensed Consolidated Statements of Cash Flows for each of
the three month periods ended March 31, 1996 and 1995
(Unaudited).........................................................3
Notes to Condensed Consolidated Financial Statements................4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K...................................10
Signatures...................................................................11
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
INTELLICALL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
March 31, 1996 December 31, 1995
-------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Restricted cash $ 10 $ 492
Cash and cash equivalents 348 613
Receivables, net 22,704 23,008
Receivables from related party 272 272
Inventories 12,218 11,939
Other current assets 1,032 587
-------- --------
Total current assets 36,584 36,911
Fixed assets, net 2,035 2,089
License fees receivable 157 253
Investment in sales-type leases 73 96
Notes receivable, net 1,895 2,695
Intangible assets, net 996 1,018
Capitalized software costs, net 4,472 4,352
Other assets 1,835 1,230
-------- --------
$48,047 $48,644
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,151 $ 6,406
Other liabilities 2,580 2,725
Current portion of long-term debt 15,441 15,474
------- -------
Total current liabilities 25,172 24,605
Long-term debt 8,524 8,620
Deferred revenue 1,889 1,976
Other liabilities 200 200
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000
shares authorized; none issued -- --
Common stock, $.01 par value; 20,000,000
shares authorized; 7,708,918 and 7,702,951
shares issued, respectively 77 77
Additional capital 47,208 47,191
Less common stock in treasury, at cost;
24,908 shares (258) (258)
Accumulated deficit (34,765) (33,767)
-------- --------
Total stockholders' equity 12,262 13,243
-------- --------
$ 48,047 $ 48,644
========= =========
See notes to condensed consolidated financial statements.
</TABLE>
- 1 -
<PAGE>
<TABLE>
<CAPTION>
INTELLICALL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
THREE MONTHS ENDED
MARCH 31,
1996 1995
---- ----
<S> <C> <C>
Revenues and sales:
Service revenues $ 12,979 $ 12,625
Equipment sales 4,251 7,537
------- -------
17,230 20,162
------- -------
Cost of revenues and sales:
Service revenues 11,131 10,382
Equipment sales 3,669 6,426
------- -------
14,800 16,808
------- -------
Gross profit
Service revenues 1,848 2,243
Equipment sales 582 1,111
------- -------
2,430 3,354
Selling, general and administrative expenses 2,536 2,259
Research and development expenses 140 465
Provision for doubtful accounts 81 139
------- -------
Operating income (loss) (327) 491
Interest income 101 124
Interest expense (772) (864)
------- -------
Net loss $ (998) $ (249)
========= =========
Net loss per common and common equivalent share $ (.13) $ (.03)
--------- ---------
Weighted average number of common and common
equivalent shares outstanding 7,684 7,662
========= =========
See notes to condensed consolidated financial statements.
</TABLE>
- 2 -
<PAGE>
<TABLE>
<CAPTION>
INTELLICALL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
THREE MONTHS ENDED
MARCH 31,
1996 1995
---- ----
<S> <C> <C>
Operating Activities:
Net loss $ (998) $ (249)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization 966 886
Provision for doubtful accounts 81 139
Provision for inventory 18 18
Changes in operating assets and liabilities:
Decrease in restricted cash 482 633
(Increase) in receivables (189) (1,750)
(Increase) decrease in inventories (297) 160
(Increase) in other current assets (536) (286)
Decrease in license fee receivable 218 707
Decrease in investment in sales type leases 353 1,338
Decrease in related party receivable -- 265
Decrease in notes receivable 635 568
Increase in accounts payable 745 19
(Decrease) in accrued liabilities (145) (926)
(Decrease) in deferred revenues (87) --
Decrease (increase) in other (719) 163
------- -------
Net cash provided by operating activities 527 1,685
Investing activities:
Purchase of equipment (180) (216)
Capitalized software (500) (700)
------- -------
Net cash used in investing activities (680) (916)
Financing activities:
Proceeds from borrowings on long-term debt -- 13
Principal payments on long-term debt (129) (758)
Proceeds from issuance of stock under stock
option plans 17 --
------- -------
Net cash used in financing activities (112) (745)
Net (decrease) increase in cash and cash equivalents (265) 24
Cash and cash equivalents at beginning of period 613 808
-------- -------
Cash and cash equivalents at end of period $ 348 $ 832
======== ========
Supplemental cash flow information:
Interest paid $ 507 $ 1,419
======== ========
See notes to condensed consolidated financial statements.
</TABLE>
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<PAGE>
INTELLICALL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - CERTAIN ACCOUNTING POLICIES
Basis of Presentation. The accompanying condensed consolidated
financial statements of Intellicall, Inc. (the "Company") have been prepared in
accordance with the requirements of Form 10-Q and do not include all disclosures
normally required by generally accepted accounting principles or those normally
made in annual reports on Form 10-K. In management's opinion, all adjustments
necessary for a fair presentation of the results of operations for the periods
shown have been made and are of a normal and recurring nature.
The results of operations for the three months ended March 31, 1996, are not
necessarily indicative of the results of operations for the full year 1996. The
condensed consolidated financial statements herein should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
Statement Presentation. Certain prior year amounts have been reclass-
ified to conform to current year presentation.
Software Development Costs. The Company capitalizes costs related to
the development of certain software products. In accordance with Statement of
Financial Accounting Standards No. 86, capitalization of costs begins when
technological feasibility has been established and ends when the product is
available for general release to customers. Amortization is computed on an
individual product basis based on the products' estimated economic life using
the straight line method, not to exceed three years.
The amounts of software development costs capitalized in the first quarter of
1996 and 1995 were $500,000 and $700,000, respectively. The Company recorded
$380,000 and $156,000 of software amortization expense for the three months
ended March 31, 1996 and 1995, respectively.
Restricted Cash. Certain cash accounts serve as collateral under the
Company's Series A Notes as discussed in Note 2 of the Consolidated Financial
Statements and, accordingly, are shown as restricted.
Cash and Cash Equivalents. For purposes of the statements of cash
flows, cash and cash equivalents include short-term liquid investments purchased
with remaining maturities of twelve months or less.
- 4 -
<PAGE>
INTELLICALL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Other. The allowance for doubtful accounts was $3.3 million at March
31, 1996, and $3.3 million at December 31, 1995.
NOTE 2 - LONG-TERM DEBT AND LINE OF CREDIT
As of March 31, 1996 and December 31, 1995, the Company's debt
consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---- ----
<S> <C> <C>
Variable rate senior bridge notes Due 1996, Series A $ 15,375 $ 15,375
Convertible subordinated note, Due 2000 7,500 7,500
Collateralized note 90 219
Convertible subordinated note, Due 1999 1,000 1,000
--------- --------
Total debt 23,965 24,094
Less: Current portion of long-term debt (15,441) (15,474)
-------- --------
Total long-term debt $ 8,524 $ 8,620
========= ========
</TABLE>
On August 11, 1994 the Company issued its Variable Rate Senior Bridge
Notes Due 1996, Series A ("Series A Notes") and 12.5% Senior Bridge Notes Due
1996, Series B ("Series B Notes") to Nomura Holding America Inc. ("Nomura"). The
Company issued a warrant which entitles Nomura to purchase 551,954 shares of the
Company's common stock. The notes are secured by collateral comprising
substantially all the assets of the Company.
Interest on the Series A Notes accrued monthly at a rate of prime plus
2.0% through December 31, 1995 (10.75% at December 31, 1995), and accrues at
prime plus 3.0% thereafter. Interest on the Series A Notes is payable quarterly.
The Series A Notes may be issued from time to time provided the aggregate amount
outstanding does not exceed $16.0 million. The Series B Notes were repaid in
full in 1995 and may not be re-issued.
The note agreement with Nomura requires the Company to comply with
certain debt covenants. Such covenants require the Company to maintain certain
financial ratios and prohibit the paying of dividends. As of March 31, 1996,
Nomura waived the Company's non-compliance with certain covenants.
The Company is obligated to repay or refinance the Series A Notes by their
maturity on August 11, 1996. Cash flow from operations in 1996 will be
insufficient to repay the Series A Notes at their maturity. Therefore,
management intends to pursue one or more of the following four refinancing
options:
- 5 -
<PAGE>
INTELLICALL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
a) obtain a loan from an asset-based lender collateralized by the
Company's assets,
b) sell additional subordinated debt,
c) sell additional equity in a private or public offering, or
d) sell certain operating assets of the Company.
Management believes that the Company will qualify for an asset-based loan in an
amount which will depend primarily on: (i) the amount and composition of
collateral to support the loan, (ii) projected cash flow from operations, (iii)
historical operating results and future operating plans, and (iv) the quality of
management. By repaying the Nomura Series B Notes in 1995, the Company enhanced
the value of its overall collateral to a secured lender by increasing the ratio
of assets to secured debt.
On November 30, 1993 the Company sold certain lease receivables,
subject to recourse under certain conditions to a third party for $3.0 million,
all of which was used to reduce outstanding debt. The leases mature at various
dates through 1996 and carry an interest rate of 15.0%. Due to the recourse
provisions, these receivables are included in investment in sales type leases
and the related collateralized note is included in long-term debt.
On February 15, 1994 the Company issued a $1.0 million, 10.0%,
convertible, subordinated note to T.J. Berthel Investments, L.P., whose
ownership also controls 8.9% of the Company's outstanding common stock. Interest
is payable quarterly and commenced March 31, 1994. The entire principal amount
matures on March 31, 1999. The note may be converted by the holder into 160,000
shares of the Company's common stock at any time.
On December 29, 1995 the Company completed the sale of $7.5 million of 8.0%
convertible subordinated notes, due December 31, 2000, to Banca Del Gottardo in
Lugano, Switzerland with the proceeds used to repay the Series B Notes and for
working capital purposes. The notes were issued with warrants to purchase
300,000 shares of the Company's Common Stock $.01 par value (the "Common
Stock"). The notes are convertible into a minimum of 1,578,947 shares of the
Company's Common Stock at the maximum conversion price and warrant exercise
price per the agreement. The conversion price, fixed on March 29, 1996 was $4.20
per share.
- 6 -
<PAGE>
INTELLICALL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVENTORY
As of March 31, 1996 and December 31, 1995, the Company's inventory
consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---- ----
<S> <C> <C>
Raw materials $ 5,447 $ 6,083
Work-in-process 1,712 898
Finished goods 5,059 4,958
-------- --------
Total inventory $ 12,218 $ 11,939
=========== ===========
</TABLE>
NOTE 4 - LITIGATION
The Company is subject to various legal proceedings arising out of the
conduct of its business. It is the opinion of the management of the Company that
the ultimate disposition of these proceedings will not have a material adverse
effect on the Company's financial condition and results of operations.
NOTE 5 - SUBSEQUENT EVENTS
On May 10, 1996, the Company entered into an agreement with certain
investor groups to create a new long-distance re-sale and operator services
company. The new company will be called ILD Communications Inc. ("ILD"). The
Company transferred ownership in its wholly owned subsidiary Intellicall
Operator Services, Inc. (IOS) to ILD in exchange for cash in the amount of
$2,000,000, a $1,000,000 subordinated convertible note, and preferred stock
representing approximately 72.5% of the voting stock of ILD. The other investor
groups collectively purchased $2,000,000, or 27.5% of the voting stock of ILD,
and $1,000,000 of ILD's subordinated convertible notes. ILD also has a secured
loan in the amount of $2,000,000.
The transaction required the approval of Nomura Holding America, Inc. The
Company has received such approval and has agreed to reduce the maximum
commitment under its Series A Notes from $16,000,000 to $14,700,000 immediately,
and to further reduce the maximum commitment to $14,300,000 on July 31, 1996.
- 7 -
<PAGE>
INTELLICALL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition
Liquidity and Capital Resources
During the first quarter of 1996 the Company generated $527,000 of cash
from operations and invested $180,000 in capital equipment and $500,000 in
software development. Long term debt of $129,000 was repaid and the Company's
available cash balances were reduced by $265,000.
Most cash inflows resulted from collection of long term receivables
(license fees, equipment leases and notes receivable) totalling $1.2 million.
The Company anticipates that, except for the refinancing described below,
its 1996 operations will be self-sustaining. In 1996, as part of its new product
strategies, the Company plans to invest in capitalized software costs and in
various capital expenditures at levels similar to those in 1995. Additionally,
the Company intends to continue investing in new product development and
marketing at levels similar to those in 1995. The Company expects that its
sources and uses of working capital will generally improve throughout 1996,
except for seasonal growth in call traffic receivables which generally occurs in
the second and third quarters.
The Company's future liquidity will depend on working capital turnover,
spending levels, the volume and timing of equipment sales combined and product
gross margins. There can be no assurance that the Company's efforts to maintain
or enhance liquidity will be successful, and, under certain circumstances, the
Company may be required to limit its operations, dispose of certain assets,
consider the sale of additional equity, or take other actions as considered
necessary.
The Company is obligated to repay or refinance the Series A Notes by their
maturity on August 11, 1996. Cash flow from operations in 1996 will be
insufficient to repay the Series A Notes at their maturity. Therefore,
management intends to pursue one or more of the following four refinancing
options:
a) obtain a loan from an asset-based lender collateralized by the
Company's assets,
b) sell additional subordinated debt,
c) sell additional equity in a private or public offering, or
-8-
<PAGE>
d) sell certain operating assets of the Company.
Management believes that the Company will qualify for an asset-based loan
in an amount which will depend primarily on: (i) the amount and composition of
collateral to support the loan, (ii) projected cash flow from operations, (iii)
historical operating results and future operating plans, and (iv) the quality of
management. By repaying the Nomura Series B Notes in 1995, the Company enhanced
the value of its overall collateral to a secured lender by increasing the ratio
of assets to secured debt.
Results of Operations
Service Revenues. The Company had service revenues of $12.9 million for
the three months ended March 31, 1996, compared to $12.6 million for the three
months ended March 31, 1995, an increase of approximately $354,000 or 2.8% from
the three months ended March 31, 1995. The table below provides a detailed
analysis of service revenues by type for the quarters ended March 31, 1996 and
1995.
<TABLE>
<CAPTION>
First Quarter First Quarter
1996 1995
---- ----
<S> <C> <C>
Call Traffic Revenue........................ $ 8,939 $ 9,745
Long-distance Resale........................ 824 729
Validation Services......................... 83 811
Operator Services........................... 2,335 1,240
Prepaid Calling Services.................... 798 100
------- -------
$12,979 $12,625
======= =======
</TABLE>
The lower call traffic revenues in 1996 are attributable to a decline in
the average number of phone calls made using the Company's Intelli*Star
automated operator technology. The decline in average calls per phone was
partially offset by an increase in the number of phones using the Company's
Intelli*Star technology. Also in 1995, there was a Lone Star transaction (a
transaction by which a customer makes a one time payment for a paid-up license
to use the Intelli*Star technology) for $223,200 with no similar revenues in
1996. Offsetting this decline was an increase in was an increase in Operator
Service revenues of $1.1 million and an increase in prepaid calling services of
$698,000.
Gross profit derived from service revenues was $1.8 million (14.2% of
the related revenues) for the three months ended March 31, 1996, as compared to
gross profit of $2.2 million (17.8% of the related revenues) for the three
months ended March 31, 1995.
- 9 -
<PAGE>
Equipment Sales. Revenues from telephone and related sales were $4.3
million for the three months ended March 31, 1996 as compared to $7.5 million
for the three months ended March 31, 1995. The decline in sales is principally
attributable to lower shipments of payphones to the U.S. Private Payphone
Market. The Company attributed the lower demand for its products to unusually
harsh winter weather and uncertainty regarding the Telecommunications Act of
1996 enacted in February 1996, which it believes affected sales industry-wide.
First quarter 1995 sales also benefited from higher international shipments to
Thailand, Argentina and Sri Lanka.
Gross profit from equipment sales was $582,000 (13.7% of related sales)
for the three months ended March 31, 1996 as compared to $1.1 million (14.7% of
related sales) for the three months ended March 31, 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $277,000, for the three months
ended March 31, 1996 from the same period ended March 31, 1995. Compensation and
related expenditures accounted for $236,000 of the increase.
Research and Development Expenses. Gross spending for research and
development decreased $525,000 for the three months ended March 31, 1996, as
compared to the same period in 1995. In the first quarter of 1996, the Company
capitalized software development costs of $500,000 as compared to $700,000 in
the first quarter of 1995. Contributing to the reduction were $372,000 of lower
compensation and related expenditures and a decrease of $61,000 related to
travel expenses.
Provision for Doubtful Accounts. During the quarter ended March 31, 1996
the Company reserved $81,000 for doubtful accounts as compared to $139,000 in
the same quarter in 1995.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None.
-10-
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
INTELLICALL, INC.
5/15/96 /s/ William O. Hunt
Date -------------------
Chairman of the Board, President and
Chief Executive Officer
5/15/96 /s/ Michael H. Barnes
Date ---------------------
Senior Vice President Corporate Staff
and Chief Financial Officer
(principal financial officer)
Date: May 15, 1996
- 11 -
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000818674
<NAME> INTELLICALL, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 358
<SECURITIES> 0
<RECEIVABLES> 26,274
<ALLOWANCES> (3,298)
<INVENTORY> 12,218
<CURRENT-ASSETS> 36,584
<PP&E> 10,165
<DEPRECIATION> (8,130)
<TOTAL-ASSETS> 48,047
<CURRENT-LIABILITIES> 25,172
<BONDS> 0
0
0
<COMMON> 77
<OTHER-SE> 12,185
<TOTAL-LIABILITY-AND-EQUITY> 48,047
<SALES> 4,251
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<TOTAL-COSTS> 14,800
<OTHER-EXPENSES> 2,757
<LOSS-PROVISION> (327)
<INTEREST-EXPENSE> (772)
<INCOME-PRETAX> (998)
<INCOME-TAX> 0
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<EPS-DILUTED> 0
</TABLE>
