SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
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 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
incorporation or organization) Identification No.)
2155 Chenault, Suite 410, Carrollton, Texas 75006-5023
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 416-0022
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value New York Stock Exchange
(Title of Class) (Name of each exchange
on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
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, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10- K. [ ]
The aggregate market value of the voting stock (which consists solely
of shares of Common Stock) held by non-affiliates of the registrant as of March
20, 1996, computed by reference to the closing sales price of the registrant's
Common Stock on the New York Stock Exchange on such date, was approximately
$31,350,000.
Number of shares of the registrant's Common Stock outstanding as of March
20, 1996: 7,684,010
Documents Incorporated By Reference:
The information required by Part III of this Form 10-K Annual Report is
incorporated by reference from the registrant's definitive proxy statement to be
filed not later than 120 days after the end of the 1995 fiscal year.
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PART I
ITEM 1. BUSINESS.
I. GENERAL
Intellicall(R), Inc. ("Intellicall" or the "Company") is a diversified
telecommunications services and equipment company. The Company provides three
primary service products: (i) operator services for the private pay telephone,
hospitality, and inmate services industries, (ii) resale of direct dial long
distance services to the private payphone industry, and (iii) prepaid calling
services through various distribution channels. The Company provides automated
operator services through its own patented, licensed technology and live
operator services through its wholly owned subsidiary, Intellicall Operator
Services, Inc. ("IOS").
The Company's primary telecommunications equipment product offerings are: (i)
pay telephones, network equipment, and software for the United States market
which incorporate advanced technology for internally performing the functions
associated with placing a pay telephone call, including the completion of
automated operator assisted calls, (ii) network products and software for
regulated phone companies in the United States ("Local Exchange Carrier" or
"LEC"), (iii) pay telephones and network management systems compatible with
international telecommunications standards, and (iv) call processing systems for
hotels, inmate facilities and other multi-unit users.
The Company is a Delaware corporation with its principal executive offices
located at 2155 Chenault, Suite 410, Carrollton, Texas 75006-5023. The Company's
telephone number at that address is (214) 416-0022.
The discussion of the Company's business in Sections II, III and IV of this
Item 1. Business addresses the Company's telecommunications service offerings,
telecommunications equipment products, and various matters which impact the
Company generally.
RECENT DEVELOPMENTS
The Company historically provided its customers a proprietary network-based
validation service called VICS(R). VICS provided an interface to a network of
subscriber calling card and credit card information databases maintained by the
regulated telephone companies and by financial institutions issuing credit
cards. Access to the network permitted the VICS subscriber to validate the
billed number on non-coin calls (calling card, credit card and collect calls)
and to screen calls that cannot be billed. VICS also provided a system that
allowed the subscriber to limit the number of calls that could be billed to a
card or telephone number during a specified interval of time.
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On June 30, 1995 the Company sold its call validating assets to Transaction
Network Services, Inc. ("TNS") in Herndon, Virginia. The Company also entered
into a long-term agreement under which it will provide billing services to TNS
related to call validations made by subscribers to the validation service.
The Company received $1.7 million of proceeds from the sale of its call
validating assets and $2.8 million for future services to be provided by the
Company and a covenant not to compete. The Company recorded a $1.6 million gain
on the sale with the balance recorded as deferred revenue. Out of the total
proceeds, $3.5 million were used to permanently reduce a portion of the
Company's debt to Nomura Holding America, Inc. ("Nomura").
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. 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. As specified in the agreement, the conversion price will be fixed on
March 29, 1996 at the lowest of: (a) $4.75 per share, (b) the average of the
closing prices of Intellicall stock during the period from March 14 to March 29,
1996, or (c) $4.20 per share which is 120% of the average of the closing prices
of the Company's Common Stock during the period from December 19 to December 29,
1995.
In connection with the issuance of the Notes the Company issued an
additional Warrant to purchase 200,000 shares of Common Stock (the "Additional
Warrant"). The exercise price for the Additional Warrant is the same price as
for the Gottardo Warrants.
The Company used the proceeds (net of placement fees of $500,000) to prepay
the remaining $4.5 million of its 12.5% Series B Notes due to Nomura, and for
general working capital purposes. The new debt effectively extended the maturity
of the Company's mezzanine debt by approximately four years. The Nomura Series B
Notes were otherwise due in August 1996. In addition, the Company reduced the
interest rate on mezzanine debt from 12.5% to 8.0% per annum.
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II. TELECOMMUNICATIONS SERVICES
Principal Service Products
Automated Operator Services. Over 74% of the Company's 1995 service
revenues are generated by the provision of automated operator services. The
predominant proportion of these revenues is generated by the Company's own
proprietary automated operator technologies, Intelli*Star(R), Intelli*Max(R),
and Intelli*Serv(R).
An automated operator system is a combination of hardware and software that
performs, without human intervention, all of the functions necessary for
completing an operator assisted telephone call (i.e.,collect, calling card, and
credit card calls) and a range of other pay telephone services and features.
Each system performs the functions previously performed by live operators. The
pay telephone, or multi-line system, provides callers with appropriate
instructions in a digitized human voice for entering billing information (i.e.,
a calling card number, or a terminating phone number for a collect call) and
completes the calls. For example, in the case of a collect call, a synthesized
voice directs the caller to speak his name into the pay telephone handset and
the caller's response is digitally recorded and played back when the call is
answered at its destination. The called party is instructed to press "1" on his
telephone, or, if the system is configured with voice recognition capability, to
say "yes", if he wishes to accept the call. The automated operator system
records all the appropriate call and billing information for later retrieval by
the telephone owner, all without human operator assistance. Calls requiring
human operator assistance, such as person-to-person calls, emergency calls and
calls billed to a third party, are routed to live operators selected by the pay
telephone or call processing system owner.
By performing most operator functions, Intellicall's systems substantially
reduce the need for (i) an operator-assisted call to be routed first to a live
operator service and then routed to the final destination, a process known as
"backhauling," and (ii) centralized switching equipment. As a result, these
systems generally allow the owner of a pay telephone to provide operator
services more efficiently and profitably than a centralized operator service
provider, and at a lower cost to the consumer.
The Company provides billing and collection services to owners of pay
telephones who use its automated operator technology. Billing and collection is
the process whereby owners of pay telephones, or multi-line call processing
systems, receive payment for the non-coin calls processed by the Company's
automated operator systems. The billing and collection process includes the
accumulation of phone call billing information, editing and formatting of that
data, and processing the data for billing through LECs. Call data is accumulated
by both the periodic receipt of computer disks and by electronic data
transmission.
Intellicall's principal automated operator technology is the Intelli*Star system
which is designed to operate in pay telephones. The Company also markets two
other automated operator systems, Intelli*Max and Intelli*Serv. Intelli*Max and
Intelli*Serv are multi-line systems designed to
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operate principally in hotels and inmate facilities. The Company does not
sell its automated operator system, but licenses the technology to owners of pay
telephones, or multi-line call processing systems through long-term license
agreements.
Under its most common Intelli*Star license agreement, Intellicall owns and
has the exclusive right to process the stored call and billing information and
to bill and collect the related call revenues. The Company pays commissions to
its customers under two basic billing and collection programs to companies who
license its technologies. These programs are the "Easy" programs and the
"Unbundled" program. A description of each program is set forth below.
"Easy" Programs. The automated operator system (i.e. the Intelli*Star
equipped pay telephone or the Intelli*Max or Intelli*Serv system) records
all pertinent call and billing information for all calls made from it. The
information is stored in the memory of the pay telephone, or multi-line
system, for retrieval by the owner, utilizing Company designed hardware and
software, and a personal computer. The owner transfers the information from
the system to his personal computer and stores it on a diskette. The call
information is forwarded to Intellicall via the diskette or alternatively,
transmitted electronically to Intellicall. Intellicall edits the billing
information, rejects certain unbillable call records, reformats the
information and bills and collects the related call revenues through
third-party billing agents and ultimately through the regulated telephone
companies. Intellicall pays the owner a flat commission rate based on
historic traffic. The owner pays no validation or billing and collection
charges but must maintain traffic consistent with their historic activity.
Intellicall assumes responsibility for uncollected call revenues under the
Easy programs. These programs, known as "Easy*Star", "Easy*Max" and
"Jail*Star", were initially introduced in 1993.
"Unbundled" Program. Intellicall has adopted a marketing program to provide
incentives in the form of reduced fees to owners of pay telephones or
systems who contract directly with third parties for billing and collection
services. Generally under these unbundling arrangements, the owner sends
the diskettes containing the call and billing information to the Company,
which reformats the information and submits it to an agreed-upon
third-party billing agent. The third-party billing agent then bills and
collects the revenues and, depending on the particular agreement, pays
amounts owed the Company by its customer directly or pays the pay telephone
or system owner, who then pays the Company amounts owed. The Company's
compensation includes a processing fee and a percentage of the call
revenues. Under this arrangement, Intellicall assumes no responsibility for
any uncollected telephone calls.
As of December 31, 1995 the Company's customers were operating approximately
53,000 pay telephones equipped with Intelli*Star, 140 Intelli*Max systems, and
121 Intelli*Serv systems.
Live Operator Services. IOS provides live operator services for pay
telephones, hotels, and inmate facilities in competition with the regulated
telephone companies and other operator service providers. The
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Company delivers its service through a third-party contract with another
operator service provider. The Company's operator services are accessed when
calls requiring operator assistance and/or alternate billing options are placed
from customer locations. Such services involve the use of live operators to
receive, validate, and complete the calls. The calls handled by IOS are billed
according to the instructions of the caller with charges for such calls
appearing on the billed party's monthly credit card statement or regulated
telephone company bill.
The Company pays fees based on the call traffic processed pursuant to the
third-party contract. In turn, the Company pays to owners of pay telephones and
call processing systems who subscribe to its operator services a commission
based upon each completed call. By programming the pay telephones and multi-line
systems utilizing this service to automatically connect the caller to a Company
operator for operator assisted calls, owners of pay telephones are able to
obtain revenue from operator-assisted non-coin calls.
IOS provides intrastate, interstate and international long distance services. As
of March 29, 1996, IOS was certified as a provider of operator services in 34
states and provides services in four other states where certification is not now
required. In addition, IOS provides interstate-only operator services in 12
states where it is not certified to provide intrastate services.
IOS has filed informational tariffs and periodic reports as required by the FCC
and complies with all requirements imposed by the Telephone Operator Consumer
Services Improvement Act of 1990. The Company is certified by the FCC to provide
the international services it offers under a Section 214 Authority.
Prepaid Calling Services. The Company entered the prepaid
telecommunications services market in the second quarter of 1994. The prepaid
services market has experienced rapid growth and is expected to exceed $1.0
billion in annual revenues within the next two or three years. The long term use
of prepaid services is expected to be a competitive and convenient alternative
to traditional away-from-home calling methods such as payment by coin, billed
collect or billed to a calling card. As a result, prepaid calling cards are
increasingly sold in retail environments, and used by corporations as premiums
in a variety of marketing and promotional programs. Prepaid cards are also used
as fund raising vehicles by youth sports groups, non-profit organizations,
affinity groups and charitable foundations.
The Company's prepaid services are provided through a proprietary service
delivery platform implemented with the Company's internally developed
Intelligent Network Platform ("INP") technology. Calls may be originated and
terminated in all 50 states, Puerto Rico and the U.S. Virgin Islands. Calls may
also be terminated in over 200 foreign countries. Callers access the facility by
dialing an "800" number from any touch-tone telephone. Through a digitized
voice, the system requests that the caller enter a personal identification
number ("PIN"), and the destination telephone number before completing the call.
Each PIN is allocated a certain number of minutes for placing telephone calls.
The Company's system monitors the amount of time used and notifies users when
their allotted time is expiring. The principal advantages to users
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of prepaid calling services are: (i) the cost of these telephone calls
compared to the cost of placing calling card, credit card, or collect calls, is
generally lower, (ii) the cards are easy to use, and (iii) no credit history is
required of the customer before they use the service.
Since 1994 Intellicall has continued to refine its prepaid technology and
network to meet high volume market requirements, identify reliable sources for
volume production of a diversified range of both plastic and paper cards and
enhance and expand its customer service network. The Company has also focused
its marketing efforts on developing a strong base of retail customers and
expanding its base of corporate customers who use phonecards as
premiums/incentives for a variety of marketing programs. Management believes the
Company's technology and marketing strategy have positioned it to continue to
compete effectively with other providers of prepaid services with unique and
customized product offerings.
Long-Distance Resale. The Company offers switched and dedicated 1+ services
under a reseller agreement with Sprint. The Company buys such services in bulk
and resells them to its customers at rates which are negotiated. The Company
provides its customers with periodic reporting of telephone call detail in a
form that assists customers in controlling and monitoring telecommunications
costs.
Sales and Marketing
All of the Company's services, except for Prepaid Calling services, are sold
primarily to customers who purchase its telecommunications equipment. Operator
services and resale of long distance service are an integral part of the
operation of pay telephones and multi-line call processing systems. All of the
Company's sales and marketing personnel for the private pay telephone industry
are trained in the operation of the ancillary services which the Company offers
its customers. The Company markets itself as "The Full Service Public
Communications Company," which it believes is a competitive advantage over other
manufacturer's of pay telephone and related equipment in the U.S. Private
Payphone Industry.
The Company has assembled a separate and independent marketing team of six
individuals to pursue the prepaid calling services market. The Company generally
markets its prepaid calling services by responding to requests for proposal from
potential customers, and by identifying potential distribution sources who may
not have considered the benefits of selling prepaid calling services, or using
such services as a promotional or fund raising tool.
Competition
The Company competes with a large number of long-distance and operator service
companies for the provision of automated and live operator services, prepaid
calling and long-distance services. AT&T, MCI, and Sprint dominate the operator
services market and long-distance
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industry in general. Competition is based upon commission programs, quality
of service, customer reporting and customer service.
In 1991 AT&T intensified an aggressive marketing campaign designed to recapture
market share from its major competitors, including MCI and Sprint, and from the
operator services industry, including automated and live operator services such
as those provided by the Company. The marketing campaign included increased
emphasis on brand awareness, encouraging consumers to use AT&T's proprietary
calling card, which currently cannot be billed by other operator service
providers, and encouraging consumers to access AT&T when using another carrier's
system. This competition continues today with new "dial around" offerings such
as 1-800 COLLECT, 1-800-CALLATT and the emerging prepaid calling industry. Since
their introduction, these factors have had a materially adverse effect on the
Company's and its customers' call revenues.
The combination of the above factors reduced the number of operator assisted
telephone calls which the Company could bill through its automated and live
operator service products, and from which the Company derives most of its
revenue and income.
In response to these conditions, in 1993, as described above, the Company
expanded the marketing programs under which owners of its automated operator
systems can operate. The intent of these programs was to increase profitability
for the system owner and the Company's competitive standing. The Company also
began pursuing live operator services contracts to a greater extent. As a
result, the number of pay telephones and multi-line systems using the Company's
technology and services has increased through most of 1994 and 1995 which has
partially offset the competitive factors previously mentioned. The Company
expects continued rigorous competition in this market, but feels its technology
and flexible license programs will allow it to compete effectively.
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III. TELECOMMUNICATIONS EQUIPMENT
Industry Overview
The U.S. Public Telecommunications Industry. On June 15, 1984 the FCC
authorized competition in the operation of pay telephones and allowed pay
telephones to be regulated by the states. Since that date, substantially all
states have authorized the installation and operation of private pay telephones.
Subject to state and federal regulation, pay telephones may be placed in public
areas and commercial establishments such as airports, convenience stores,
supermarkets, hotels, hospitals, service stations and restaurants. Pay
telephones may also be placed in confinement facilities to provide collect-only
services to inmate populations. Owners of pay telephones collect all monies
deposited in the telephones, pay applicable telephone line charges and site
commissions and are responsible for telephone installation, maintenance, repair
and compliance with applicable regulations.
The largest networks of pay telephones in the United States are operated by
Local Exchange Carriers. Many of these public telecommunications networks are
not equipped with advanced technology pay telephones. The local telephone
companies are recognizing the need to improve productivity and profitability in
their pay telephone operations, and that new services are being demanded by
users of public communications networks. As a result, many of these companies
have recognized the need for intelligent products and are seeking technology
that would enable the development of new service offerings. Many local telephone
companies have begun to install intelligent payphone technology and to issue
requests for information to equipment vendors for proposals to upgrade the
functionality of their networks.
The International Public Telecommunications Industry. Many foreign countries are
expanding their telecommunications infrastructure. These countries realize that
the installation of modern technology is integral to their continued economic
development and ability to attract foreign investment. Accordingly, many foreign
governments, particularly in newly industrialized countries, are privatizing and
deregulating their telecommunications operations.
The Company's management believes that one of the first areas of
development for many countries will be their public telecommunications
infrastructure. Faced with enormous investment requirements and limited
financial resources, the developing countries must select telecommunications
technologies and strategies that are easily deployed, cost effective, and
operationally efficient. In April 1993, the Company introduced a new family of
products, including pay telephones, and INP's to address this new international
market.
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Products
Pay Telephones. The Company designs, manufactures and markets pay telephones
which incorporate advanced technology that internally performs the functions
associated with placing a pay telephone call. The Company's two principal phones
are the UltraTel(R) and the line-powered AstraTel(R). The UltraTel phone is a
coin-operated intelligent pay telephone sold in a number of housings familiar to
users of pay telephones and requires electrical power at the site of
installation. The AstraTel is an intelligent pay telephone introduced by the
Company in 1994, which is powered by the electrical current provided by the
telephone line itself.
The Company's telephones operate by means of advanced microprocessor technology
located within the housing. When a call is initiated, the microprocessor
automatically performs a series of functions that include determining the
applicable rate for the call, communicating the charge to the caller, and
determining whether the call has been answered. The Company's pay telephones
communicate with a caller by voice messages digitally synthesized and stored in
memory chips located in the pay telephone.
Among the most important features of the Company's pay telephones is the ability
to reliably and accurately detect whether the call has been answered. This
answer detection capability is not dependent upon an electronic signal from the
central office of the regulated telephone company. Accurate answer detection is
important to the successful operation of a private pay telephone in order to
ensure that all completed calls are properly billed and that incomplete calls
are not billed.
All programmable features of the Company's pay telephones may be altered from a
remote location by means of proprietary software of the Company using a personal
computer. These programmable features include the rate tables and certain
management information capabilities that enable the owner to determine if the
pay telephone requires service or coin collection. These management information
and diagnostic capabilities eliminate unnecessary coin collection and service
trips to the location of the pay telephone. In addition, certain enhancements
may be added to the Company's pay telephones from a remote location. The Company
believes that this feature reduces the risk that its pay telephones will become
obsolete due to technological advances made after the pay telephones are
installed and permits rapid response to regulatory changes.
The Company's pay telephones are available in either a Western Electric or GTE
style housing, or in a stainless steel panel mount housing. Some models are coin
operated, some are additionally equipped with a credit card reader and some
accept credit cards only.
The Company also sells retrofit kits that give the Company's early models of pay
telephones or competitive private pay telephones the same capability as the
Company's more advanced models. The retrofit kit consists of an electronic
circuit board that allows a pay telephone to be compatible with Intelli*Star and
its enhancements.
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Intelli*Star. The Intelli*Star system is an automated operator product
licensed to owners of pay telephones. The Company's UltraTel line of pay
telephones requires the addition of a separate integrated circuit board,
commonly called the I*Star board, to complete the system. This separate
integrated circuit board is attached to the pay telephone's operating circuitry.
In the Company's AstraTel line of pay telephones, Intelli*Star is activated by
means of a software enhancement, and requires no additional integrated
circuitry. Intelli*Star is available on every pay telephone model intended for
sale in the United States.
Intelli*Max and Intelli*Serv. Intelli*Max and Intelli*Serv are multi-line call
processing systems targeted for large, multi-line institutions, primarily hotels
and inmate facilities. These multi-line call processing systems offer many
features similar to Intelli*Star, including automated calling card and collect
calling and answer detection. The Company's multi-line call processing systems
enable the owner to control all forms of call rating and provide consolidated
reporting on all call activity.
International and Regulated Market Products. In April 1993, the Company
announced a new family of products designed to provide advanced intelligent
network features to public communications networks in the United States and
internationally. These products include intelligent pay telephones and call
processing, network control and business management systems designed to
facilitate the deployment of intelligent public access telecommunications
systems in developing countries. Alternatively, these products can be utilized
by local telephone companies in the United States to upgrade the systems
management capability of existing pay telephone networks.
The telephones designed for these markets each contain a single integrated
circuit board. A significant advantage of these integrated circuit boards is
that they contain a common architecture for products utilized in all market
segments. As a result, the pay telephones can be configured for virtually any
environment principally by the implementation of software changes only. The
telephones allow use of a variety of payment systems including U.S. and
international coinage, credit cards and several types of pre-payment cards,
including cards based on PINs, magnetic stripe cards and integrated circuit
cards ("chip cards"). Additionally, the telephones can be operated with
auxiliary power sources or power supplied by telephone lines. The products can
be utilized in a wireless, including cellular, environment and can operate using
solar power.
Sales and Marketing
U.S. Private Payphone Market Sales. Through its own direct sales force,
consisting of six persons, the Company sells, and licenses technology for, pay
telephones, multi-line systems and related services to its customers, who in
turn either sell the products to third parties or own and operate the products
on leased sites. Owners of the Company's products lease sites for the
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installation of their equipment, operate and maintain the equipment, and pay
site commissions based upon the revenues generated from the equipment.
The private pay telephone market is largely based upon the ability of the
Company's customers to secure sites for telephones. Competition for sites
(either for locations having no pay telephone or call processing system or for
sites that are held by other providers, which may include, in the case of pay
telephones, the local telephone companies and in the case of call processing
systems, AT&T) is primarily based upon commissions offered to site owners.
International and U.S. Regulated Market Sales. In late 1992 the Company
embarked on a program to market its products internationally and to U.S.
regulated telephone companies. The Company currently employs a sales and sales
support staff of nine persons charged with sales to these markets.
The Company augments its sales staff by contracting with international
distributors and marketing representatives. Distributors and/or agents are
subject to the requirements of the Company's distributor/agent agreements, and
must agree to comply with all applicable United States and international laws
regarding the sale of products outside the United States of America.
The market defined by local telephone companies will depend on the ability of
the Company to demonstrate its advanced intelligent network technology, and
provide products to upgrade existing public communications networks. The Company
believes that its experience as a leader in the public communications market
since 1985 is an important factor in the evaluation of its products for use by
local telephone companies.
Manufacturing and Assembly
The Company's products are assembled at the Company's manufacturing facility in
McAllen, Texas. After the products are assembled at the Company's manufacturing
facility, they are tested before shipment to the purchaser. Once a product is
shipped to a U.S. private payphone industry customer by the Company, the Company
is not responsible for ensuring that the product is properly installed,
maintained or operated in accordance with applicable federal and state
regulations. The Company has agreed to assist in the installation of pay
telephones and network management systems with respect to certain international
and regulated market customers.
The Company purchases certain components from single-source suppliers. The
Company believes that alternative sources are available and that an interruption
in supply would not have a significant impact on its results of operations. As
a result of market factors, suppliers of certain components used in the
Company's equipment may occasionally place the Company on allocation for those
parts. The Company is actively working to secure alternate sources for
single-source components. As part of its effort to reduce its working capital
requirements, the Company intends to reduce its inventory of excess parts and
components. The Company's
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reduction of excess inventory may be offset by requirements to provide for
anticipated international shipments.
Warranty, Maintenance and Service
The Company provides free repair service on all Intelli*Star boards
(subject to license provisions requiring the customer to protect the boards from
the elements and abuse) which are contained in Intelli*Star three-board sets
licensed to its customers. The Company provides the original purchaser of its
other products a limited one-year warranty on all electronic components, and a
limited 90-day warranty on all other parts and equipment. The Company offers a
five year warranty on AstraTel electronic components. The Company's technical
support staff at its corporate offices currently provide support services over
the telephone to customers who have installation or operational questions. The
Company does not currently offer a maintenance agreement for its products but
does provide non-warranty service. Most warranty and non-warranty service is
provided by the Company at its manufacturing facility in McAllen, Texas.
The Company holds training classes for its customers on how to install,
operate and maintain the Company's products.
Competition
The Company competes against other private pay telephone manufacturers,
call processing system manufacturers, software manufacturers and providers of
operator services. The Company's principal competitors in the U.S. private
payphone market are Elcotel, Inc. and Protel, Inc. (a subsidiary of Inductotherm
Industries, Inc.).
In 1993 the Company introduced and began actively marketing its line of products
for the U.S regulated and international markets. Numerous companies compete in
the international public communications markets, including many larger and
better capitalized companies with greater experience in the marketing of
products internationally. The Company has adopted a strategy of focusing its
marketing efforts on countries with a low ratio of public communication lines to
total population, where the greatest growth in sales of public communications
equipment is projected. Many of the Company's competitors have adopted a similar
strategy. The Company also may participate in the ownership of privately owned
networks of pay telephones in those countries where equity participation is
possible and economically attractive. The implementation of this strategy is
highly dependent on the identification of suitable opportunities and the
availability of sufficient capital resources to consummate the investments.
Although the Company is encountering and expects to continue to encounter
intense competition, the Company believes that its products are competitive in
its markets based upon equipment capabilities and quality. Since the telephone
industry is subject to rapid technological change,
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the Company believes that it will continue to be required to develop improved or
additional products and to continue to reduce the cost of existing products in
the future in order to remain competitive. The Company's ability to develop
additional products will depend in the foreseeable future on its ability to
generate working capital internally.
The market for international public communications is highly competitive, and
numerous competitors are larger, better capitalized and have greater experience
in marketing their products internationally. In addition, the Company's
international marketing efforts are subject to the risks of doing business
abroad. Consequently, there can be no assurances that the Company's efforts in
international markets will be successful.
- 13 -
<PAGE>
IV. OTHER BUSINESS FACTORS
Research and Product Development
The Company's research and development programs are currently focused on
developing new products and product enhancements, improving product reliability
and reducing the manufacturing costs of the Company's products. For the fiscal
years ended December 31, 1995, 1994, and 1993, research and development
expenditures were approximately $4.9 million ($2.5 million of which were
capitalized software costs), $5.6 million ($2.6 million of which were
capitalized software costs), and $4.1 million (no such costs were capitalized),
respectively. The Company believes that new products and product enhancements
will increase its market opportunities and are essential to its long-term
growth. The Company's ability to fund future research and development costs will
be dependent on its ability to generate cash in excess of its operating
needs.
Patents, Trademarks and Licenses
Patents
The Company holds 20 United States patents and has numerous United States and
foreign pending patent applications relating to the Company's Intelli*Star and
other technology. These patents cover the ability to complete automated collect
telephone calls, perform certain validity checks and internally store and
retrieve data files from telephones, as well as many other features and
structures of pay telephones. The Company considers its patents important to its
business.
Prior to 1993 the Company had never granted to third parties a license to
manufacture or market competing pay telephones or call processing equipment that
performs the critical public telephone and automated operator functions patented
by the Company. During 1993, however, certain other manufacturers began to
market pay telephones and call processing equipment that perform functions the
Company believes are covered by its patents.
In 1994, as a result of litigation commenced by two of such manufacturers
seeking a declaratory judgment that their products did not infringe on the
Company's products, the Company licensed certain of its patents for its store
and forward technology for an initial licensing fee and various ongoing fees.
Trademarks
The Company has registered in the United States its trademarks
"Intellicall," "AstraTel," "UltraTel," "Intelli*Serv," "Intelli*Max," "VICS,"
"Intelli-Pro," "Intelli-Pro Plus," "Jail*Star," and "Intelli*Star". The Company
also owns the trademarks "Intelli*Mate," "E*Z Collect," "Relay,"
- 14 -
<PAGE>
"Check*Mate," "Star*Message" and "Turbo*Star." The Company considers its
trademarks important to its business.
Licenses
In April 1993 the Company obtained an exclusive patent license from Gateway
Technologies, Inc. ("Gateway") under which the Company received rights to use
and sub-license certain call processing technology. The license arrangements
with Gateway were modified in June 1994. Under the modified arrangements, the
Company licensed certain of its patents to Gateway, the Company received a
license from Gateway to use certain of its patents, and Gateway is obliged to
share revenues received from sub-licensing certain of Gateway's and the
Company's patents. The license is effective until June 1997 subject to renewal
rights.
Effective January 1, 1992 the Company entered into an amended and restated
patent license agreement with MessagePhone, Inc. ("MPI") pursuant to which the
Company licenses MPI's automated voice messaging patents. The license allows the
Company to offer voice messaging services to its Intelli*Star and call
processing customers. Pursuant to this agreement, the Company makes quarterly
payments to MPI. The license currently expires on July 30, 2008; however, it is
effective until the expiration of the MPI patents, including any continuations
of such patents.
The Company licenses voice recognition products used in Intelli*Max and in
certain pay telephone locations, pursuant to a license agreement with Voice
Control Systems. The Company pays monthly license fees to Voice Control Systems
on voice recognition products manufactured and sold as part of its automated
operator technology. The license currently expires March 31, 1996 and may be
renewed for up to seven additional one-year terms.
Regulation
Telecommunications services and equipment offered by the Company are subject to
varying degrees of regulation at both the federal and state levels. There can be
no assurances that changes in such regulation, if proposed and adopted, would
not have an adverse impact on the operations of the Company and its customers.
Federal. The Communications Act of 1934 (the "1934 Act"), as amended,
governs the provisions of interstate services offered by the Company and its
customers. The Federal Communications Commission (the "FCC") has enacted rules
governing the provision of interstate operator services that include, among
other things, filing informational tariffs, providing notices to end-users of
the identity of the service provider in the form of postings and verbal
announcements, and providing rate quotes upon request of the calling party. A
verbal announcement identifying the service provider also must be given to
recipients of collect calls from pay telephones, and rate quotes must be
provided to them upon request. Other requirements include a prohibition on
blocking
- 15 -
<PAGE>
access to alternative telecommunications carriers via certain access codes. The
FCC has recently declined to impose such requirements on operator services
offered in connection with pay telephones in confinement facilities.
The Company is also required under the 1934 Act to file tariffs for its
provision of interstate prepaid services, and the FCC has the authority to
reject or prescribe rates if it concludes the rates charged are not just and
reasonable. All of the rates for prepaid services filed with the FCC have gone
into effect without opposition.
The Company complies with the FCC's regulations governing the provision of
operator and prepaid services and has obtained Section 214 authority from the
FCC to provide its international services.
The Company's private pay telephones and call processing systems must comply
with technical requirements contained in Parts 15 and 68 of the FCC's rules in
order to operate and/or be connected to the public telephone network. The
Company has performed those tests necessary to assure compliance with these
technical and operational requirements and has obtained the proper registrations
and/or certifications from the FCC for all its products. The Company updates
these registrations and/or certifications periodically and the Company believes
that such registrations and/or certifications will be routinely granted.
The Company's private pay telephone owner customers earn revenues from calls
placed from their telephones, and at present receive compensation from end-users
on a per-call basis for coin-sent-paid calls, and from long distance carriers
for certain non-sent-paid calls. The FCC has concluded that private pay
telephone owners are also entitled to $6.00 per phone per month from major long
distance carriers as compensation for calls made by end-users dialing access
codes to reach their presubscribed long distance carriers from private pay
telephones. The FCC has approved requests by Sprint and AT&T to compensate
private pay telephone owners on a per-call basis at a rate of $0.25 per
interstate call in lieu of their share of the per-phone per-month plan currently
in effect. Compensation payments are made for calls billed to calling cards as
well as those billed collect from private pay telephones.
Other carriers, including MCI, are still paying their pro rata share of the
$6.00 per-phone per-month compensation. However, the recently enacted
Telecommunications Act of 1996 (the "1996 Act") instructs the FCC to prescribe
regulations establishing a per-call compensation plan for all pay telephone
owners, including the local telephone operating company providers, by November
1996. When adopted, this presumably would replace the current $6.00 per-phone
per-month compensation plan for private pay telephone owners, as well as the
access charge recovery mechanism through which most local telephone operating
companies recover costs associated with their own pay telephone operations. The
Company does not participate in revenues derived from any of the existing
compensation plans.
It is anticipated that the interconnection arrangements and regulations under
which the local telephone operating companies and private pay telephone owners
have provided pay telephone
- 16 -
<PAGE>
services will be modified somewhat in the coming months, as the 1996 Act
expressly precludes the local telephone operating companies from discriminating
between their pay telephones and private pay telephones. The manner in which the
local telephone companies provide pay telephone services to confinement
facilities will also change, as they are now required by the FCC to offer their
confinement facility pay telephones on an unbundled basis. A petition to stay
the effective date of that decision has recently been filed with the FCC by Bell
Atlantic and other RBOCs. The Company expects these changes to benefit its
private pay telephone owner customers.
The FCC has under consideration for several years proposals that would require
most interstate long distance calls initiated by dialing "0" from pay telephones
to be completed using one or more predetermined long distance carriers rather
than through the automated pay telephone or operator service provider to whom
the private pay telephones are presubscribed ("Billed Party Preference"). Some
proposals would also extend Billed Party Preference to most intrastate calls
initiated by dialing 0 as well as 0+ calls initiated from confinement
facilities. The Company, AT&T, certain other interexchange carriers, certain
local exchange operating companies, and certain penal institutions, among
others, are opposing this proposal. Although the Company believes it is unlikely
that such a proposal will ultimately be implemented, if it were to be adopted
and implemented as currently proposed, it could have an adverse impact on the
Company's business. Although the basic proposal has been pending since 1987, the
Company now believes that such a proposal, with some variation, is likely to be
considered by the FCC sometime in late 1996.
On March 13, 1995 the FCC solicited comment on a proposal made by various
carriers that a cap or ceiling on 0+ calls be adopted in lieu of Billed Party
Preference. The FCC also has indicated that the issue of rate caps for inmate
phones may be considered in this proceeding. The Company cannot predict whether
the FCC will adopt any rate cap proposal, or if adopted, whether the rate cap
will be reasonable, and thus have no material adverse impact on the Company.
However, the Company, in principle, is in favor of rate caps as an alternative
to Billed Party Preference, and has been advocating that the FCC adopt a
reasonable ceiling on rates for 0+ calls since 1993.
State. State regulatory commissions in all but four states have established
rules and regulations governing the provision of private pay telephone services.
Such rules typically include certification or registration; notice to end users
of the identity of the service provider in the form of postings and verbal
announcements; requirements for rate quotes on request; call routing
restrictions; and maximum rates. While not necessarily uniform, these rules and
regulations generally establish minimum technical and operational requirements
to assure that public interest considerations are addressed. Most states
regulate rates for local and intrastate toll calls placed from pay telephones.
Initially established to regulate only services paid for by coin, such
regulations have been modified in a number of states to include the provision of
automated operator services and thus also apply to pay telephone providers using
the Company's Intelli*Star technology. Other states have chosen to regulate the
provision of automated operator services
- 17 -
<PAGE>
through rules established for operator service providers rather than those
established for pay telephone owners.
The Commonwealth of Pennsylvania has adopted rules which, if determined to be
applicable to private pay telephones, would require modification to the
Company's products if currently installed or offered for sale in the
Commonwealth. The modification would permit users of private pay telephones to
enter a code that signals the local telephone operating company to block
transmission of the originating telephone number to called parties who have
subscribed to Caller ID from their local telephone operating company. In
response to the Company's petition seeking clarification from the Pennsylvania
Public Utility Commission on the extent to which such rules apply to non-local
telephone operating company pay telephones, the Commission rescinded the rules
with respect to such phones pending further consideration. The Company can
comply with such rules if ultimately determined to be applicable.
Although many state regulatory commissions regulate the provision of inmate
telecommunications services by private providers through waivers of applicable
portions of their pay telephone rules, a growing number of states have adopted
separate regulations governing the provision of such services. In some
instances, states that do not otherwise permit private pay telephone owners to
compete with regulated telephone companies have authorized such competition with
respect to confinement facilities.
The Company is currently certified to provide intrastate prepaid services in 35
states and is seeking certification in eight other states. Seven states in which
the Company provides intrastate prepaid services do not require the prior
approval of the respective state regulatory commissions in order to provide
services. Most states in which the Company provides intrastate prepaid services
appear to have concluded that providers of prepaid services are subject to the
same types of regulations, including that of entry and rates, to which
traditional long distance carriers are subject. Additionally, several states
have required prepaid service providers to post bonds, and in some cases, pay
local access charges. The Company knows of no existing requirement with which it
could not comply if adopted in any state in which it is not currently certified.
There can be no assurances, however, that the Company can obtain the appropriate
authorizations, or that states will not adopt regulations with which the Company
either cannot or may choose not to comply, and thus preclude the Company's
ability to offer certain or all intrastate prepaid services in those states. A
petition before the FCC requesting that it preempt state regulation of certain
prepaid services has been denied, thus permitting the states to continue to
regulate certain prepaid services to the extent permitted under their own
enabling statutes.
The Company has obtained, where necessary, the proper intrastate operator
services authorizations including, where applicable, certificates of public
convenience and necessity (or similar certificates), and approval and acceptance
of its tariffs, in those states in which it provides operator services. The
Company complies with applicable state regulations governing the provision of
operator services.
- 18 -
<PAGE>
Although most states now allow the competitive provision of operator services,
prepaid services, and private pay telephones, there can be no assurances that
states will continue to allow competition in these areas or that states will not
adopt regulations that make competitive entry uneconomic.
Employees
As of December 31, 1995 the Company had 247 employees, of which 193 were
employed in operations and 54 were employed in executive and administrative
capacities. The Company believes its employee relations to be good.
Major Customers
No single customer accounted for more than 10% of the Company's consolidated
revenues during 1995, 1994 and 1993.
Seasonality
The Company believes that its call revenues are affected by seasonal weather
conditions throughout the United States, which tend to reduce the number and
duration of pay telephone calls made in the winter months, because a significant
number of pay telephones are located outdoors. The effect of seasonality on the
Company's business has been reduced as the Company has provided less call
revenue financing to its customers.
ITEM 2. PROPERTIES.
The Company leases approximately 56,000 square feet of space at 2155 Chenault,
Carrollton, Texas, where its principal executive, sales and product development
offices are located. The lease expires July 31, 1997. The Company leases
approximately 42,000 square feet of manufacturing space in McAllen, Texas. The
manufacturing facility lease expires July 31, 1998.
The Company also leases certain telephone and computer equipment.
- 19 -
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to various legal proceedings arising in the ordinary
course 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 position on results from operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
- 20 -
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Stock Prices
The Common Stock currently trades on the New York Stock Exchange ("NYSE")
under the symbol ICL. The following table sets forth, for each of the periods
indicated, the reported high and low sales price per share on the NYSE of the
Common Stock.
<TABLE>
<CAPTION>
Common Stock
------------
High Low
---- ---
<S> <C> <C>
1995
First Quarter ............... $4 5/8 $3
Second Quarter .............. 6 7/8 3 7/8
Third Quarter ............... 7 1/4 3 3/4
Fourth Quarter .............. 4 5/8 3 1/4
1994
First Quarter ............... $9 5/8 $7
Second Quarter .............. 7 5/8 4 1/4
Third Quarter ............... 5 3/4 3 3/4
Fourth Quarter .............. 5 1/2 3 3/4
</TABLE>
On December 31, 1995, the Company had approximately 1,367
stockholders of record.
Dividend Policy
The Company has never paid cash dividends on its Common Stock. The
Company currently intends to retain any future earnings for use in its business
and therefore does not expect to pay any cash dividends in the foreseeable
future. Any future determination to pay cash dividends will depend upon the
earnings and financial position of the Company and such other factors as the
Board of Directors of the Company may deem appropriate at that time. The
Company's agreement with its senior secured note holder prohibits the Company
from paying dividends. See Note 2 to the Consolidated Financial Statements.
- 21 -
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial information for each of the
five years in the period ended December 31, 1995, is derived from the Company's
Consolidated Financial Statements. The information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the notes thereto
included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Year Ended December 31,(1)
--------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues and Sales:
Service revenues..................... $54,558 $60,059 $ 69,187 $135,249 $185,483
Equipment sales ..................... 19,944 23,322 15,939 19,268 30,058
------ ------ ------ ------ ------
74,502 83,381 85,126 154,517 215,541
------ ------ ------ ------- -------
Cost of Revenues and Sales:
Service revenues..................... 45,318 49,692 54,457 112,991 158,595
Equipment sales ..................... 21,454 27,221 13,068 16,043 21,475
------ ------ ------ ------ -------
66,772 76,913 67,525 129,034 180,070
------ ------ ------ ------- -------
Gross profit......................... 7,730 6,468 17,601 25,483 35,471
Selling, general and
administrative expenses............. (9,436) (12,473) (13,932) (24,484) (25,571)
Provision for doubtful accounts...... (820) (3,517) (1,853) (18,472) (13,799)
Research and development expenses.... (2,350) (2,965) (4,118) (3,568) (3,159)
Gain on sale of call processing assets -- -- 1,051 -- --
Gain on sale of call validating assets 1,607 -- -- -- --
----- ----- ----- ----- -----
Operating loss........................ (3,269) (12,487) (1,251) (21,041) (7,058)
Other income.......................... 440 1,100 2,295 3,745 4,271
Interest expense...................... (3,310) (3,079) (2,338) (4,029) (4,207)
Litigation settlement................. -- -- -- (8,300) --
----- ------ ----- ----- -----
Loss before income taxes.............. (6,139) (14,466) (1,294) (29,625) (6,994)
Income tax benefit.................... -- -- -- 4,733 2,301
----- ----- ----- ----- -----
Net loss............................ $(6,139) $(14,466) $ (1,294) $(24,892) $ (4,693)
======= ======== ======== ======== ========
Net loss per common and common
equivalent share................... $ (0.80) $ (1.91) $ (0.17) $ (3.71) $ (0.70)
======= ======= ======== ======== ========
Shares used in computing per share
amount............................. 7,672 7,571 7,660 6,717 6,703
Balance Sheet Data:
Total assets........................ $48,644 $58,799 $ 72,851 $ 77,142 $ 126,523
Total long term obligations......... $10,796 $25,894 $ 2,346 $ 13,594 $ 41,571
Stockholders' equity (2)............ $13,243 $19,322 $ 33,435 $ 34,418 $ 52,810
<FN>
(1) Certain prior year amounts have been reclassified to conform to current
year presentation.
(2) The Company has never paid cash dividends on its Common Stock. Under
its agreements with Nomura regarding its Series A Notes, the Company is
prohibited from paying dividends.
</FN>
</TABLE>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Results of Operations
The following table sets forth certain items in the Company's
Consolidated Statements of Operations as a percentage of total revenues
and sales and as a percentage of related sales for the years indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues and Sales:
Service Revenues 73.2% 72.0% 81.3% 87.5% 86.1%
Equipment Sales 26.8% 28.0% 18.7% 12.5% 13.9%
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
Gross Profit Percentage:
Service Revenues 16.9% 17.3% 21.3% 16.5% 14.5%
==== ==== ==== ==== ====
Equipment Sales (7.6)% (16.7)% 18.0% 16.7% 28.6%
==== ===== ==== ==== ====
</TABLE>
1995 Compared to 1994
Service Revenues. The Company's service revenues were $54.6 million for the year
ended December 31, 1995, compared to $60.1 million for the year ended December
31, 1994. The table below provides a detailed analysis of service revenues
by type for the years ended December 31, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Call Traffic Revenue........................ $40,417 $46,738
Long-distance Resale........................ 3,567 4,433
Validation Services......................... 2,567 4,101
Operator Services........................... 6,722 4,668
Prepaid Calling Services.................... 1,285 119
----- ---
$54,558 $60,059
======= =======
</TABLE>
The lower service revenues for the year ended December 31, 1995 as compared to
the year ended December 31, 1994 are attributable to several factors. The most
significant impact resulted from a decline in the average number of calls made
per payphone using the Company's automated operator technologies. The decline in
telephone calls caused a combined decrease in bundled, unbundled, and
long-distance resale revenues of $7.2 million when compared to the year ended
December 31, 1994. Call volumes per pay telephone have declined each year since
1991, primarily as a result of increased competition from AT&T, MCI, and Sprint.
Each of these companies,
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<PAGE>
through mass market advertising and direct marketing to its customers, has
encouraged consumers to use their own proprietary calling cards, which cannot be
billed by the Company. In addition, marketing programs such as "1-800-COLLECT",
and "1-800-CALLATT" have further adversely impacted the average number of
billable calls per pay telephone. Partially offsetting this decline was an
increase in the number of phones using the technology.
The Company sold its call validating assets in June of 1995. The sale of these
assets was the principal reason that revenues from validation services declined
approximately $1.5 million in 1995.
Operator service revenues increased approximately $2.0 million in 1995 compared
to 1994. The increase resulted from an expansion in the number of customers
utilizing the Company's services.
Revenues from prepaid calling services increased $1.2 million for the year
ended December 31, 1995. The increase is due to growth in the number of
customers, and the Company's entry, in the fourth quarter of 1995, into the
retail market segment for prepaid card sales. The Company expects future growth
will be principally in retail programs offered to general merchandise, grocery,
and convenience store chains. Accordingly, the Company has increased its
marketing staff in the retail segment, and is developing marketing programs
specifically for such retail applications.
Gross profit from services revenues was $9.2 million or 16.9% of revenue,
compared to $10.4 million or 17.3% of revenue for the years ended December 31,
1995 and 1994, respectively. The $1.2 million decline in gross profit was due
principally to the decline in call traffic revenues and the sale of the
Company's call validating assets. The lower gross profit percentage is due to a
change in the mix of service revenues with less unbundled revenue in 1995 than
1994. Gross profits from unbundled programs approximate the amounts recorded as
revenues.
Equipment Sales. Telephone and related sales were $19.9 million for the year
ended December 31, 1995 as compared to $23.3 million for the year ended December
31, 1994.
The $3.4 million or 14.5% decrease in 1995 equipment sales from the year ended
December 31, 1994 was principally the result of a $3.3 million decline in
international shipments. Equipment sales to private payphone companies declined
$382,000 in 1995 compared to 1994. Sales to regulated telephone companies
increased approximately $260,000 in 1995 compared to 1994. International sales
were lower in 1995 because of the fulfillment, early in 1995, of the Company's
order to supply payphones to Argentina. The Company did not replace the order in
sufficient volume to replace the lost sales.
Gross loss from equipment sales was $1.5 million (7.6% of related sales)
for the year ended December 31, 1995, compared to a loss of $3.9 million (16.7%
of related sales) for the year ended December 31, 1994. Results in 1995 included
$1.7 million of additional pretax charges to establish inventory reserves.
Results in 1994 included $3.4 million of inventory provisions. During both 1995
and 1994, the Company established reserves to adjust the carrying value of
inventories to their estimated net realizable value. The gross loss in each year
is principally attributable to these adjustments. In addition, however, the
losses have resulted from manufacturing inefficiencies and product design
deficiencies. During 1995, the Company took several steps to correct such
- 24 -
<PAGE>
problems. The Company has completed cost reductions on many of its
international products, and is in the process of cost reducing its line powered
phone (Astratel) sold in the United States. The Company expects that in 1996,
such cost reductions will be substantially complete.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses declined $3.0 million for the year ended December 31,
1995 as compared to the year ended December 31, 1994. This decline consisted
primarily of a $1.6 million decrease in compensation related expenses.
Consulting and legal expenditures were $939,000 lower in 1995 than in 1994, and
operational improvements accounted for $461,000 of lower costs.
Research and Development Expenses. Gross spending for research and
development decreased $600,000 in 1995 from 1994. In 1995, the Company
capitalized $2.5 million of software development costs, as compared to $2.6
million in 1994. The principal development efforts in 1995 were for (i) the
Company's line powered pay telephones, including development of an enhanced
version for the private payphone market, and (ii) continued development of
international and U.S. regulated market products.
Provision for Doubtful Accounts. The provision for doubtful accounts was
$820,000 and $3.5 million for the years ended December 31, 1995 and 1994,
respectively. The lower expenses in 1995 compared to 1994 were due to provisions
of $800,000 and $1.6 million recorded in the third and fourth quarters of 1994,
respectively. Such provisions for losses were recorded on accounts receivable
from certain customers whose collective financial condition deteriorated
significantly late in 1994. Exclusive of the $2.4 million of loss provisions in
1994, the provision for doubtful accounts decreased $297,000 from 1994 to 1995.
The decrease correlates to the overall decline in revenue levels.
Gain on Sale of Call Validating Assets. In June 1995, the Company recorded
a gain of $1.6 million in connection with the sale of certain call validating
assets. The Company sold its validating business to TNS. The Company also
entered into a long term agreement under which it provides billing services to
TNS related to Intellicall's customers that use the TNS validation service.
- 25 -
<PAGE>
1994 Compared to 1993
Service Revenues. The Company recognized service revenues of $60.1 million for
the year ended December 31, 1994, compared to $69.2 million for the year ended
December 31, 1993. The following table provides the detailed breakdown of
service revenue by type for the comparative years December 31, 1995 and 1994.
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Call Traffic Revenue ....................... $46,738 $58,919
Long-distance Resale ....................... 4,433 2,411
Validation Services ........................ 4,101 5,129
Operator Services .......................... 4,668 2,728
Prepaid Calling Services ................... 119 --
------- -------
$60,059 $69,187
======= =======
</TABLE>
The $11.2 million decline in call traffic revenue, long distance resale and
validation services for the year ended December 31, 1994 from the comparable
period in 1993 reflects several factors. Approximately $4.4 million of the
decline related to termination or substantial revision of services for several
major customers in the second half of 1993. The August 4, 1993 sale of the route
of the Company's owned call processing systems to a customer resulted in $3.9
million of revenues recorded in 1993 with no such revenue recorded in 1994. The
remainder of the decline resulted from the adverse impact of unusually harsh
weather in the first half of 1994 and the effects of intensified competitive
factors.
Gross profit derived from call revenue was $9.3 million (16.7% of related
revenues) for the year ended December 31, 1994, compared to gross profit of
$14.2 million (21.3% of the related revenues) for the year ended December 31,
1993. The decline in the dollar amount was due to several factors. First, 1994
results reflected gross profits and revenues from unbundled programs which were
approximately $1.2 million lower for the year ended December 31, 1994 compared
to 1993. The reduction arose primarily because several major customers elected
to terminate their existing unbundled programs in 1993 and to elect certain new
programs as discussed below. Gross profits from unbundled programs approximate
the amounts recorded as revenues. Second, the Company initiated new programs in
the second quarter of 1993 which enabled customers to purchase rights to use the
Company's technology in return for lump-sum payments under certain licensing
agreements (the "Lone Star Program"). Under the new programs, $827,000 of
lump-sum payments were received in the year ended December 31, 1993. Gross
profits for such lump sum payments approximate the amount recorded as revenue.
There were no similar payments received in 1994.
Revenues from operator services were $4.7 million for the year ended December
31, 1994, compared to $2.8 million for the year ended December 31, 1993. Gross
profit was $1.1 million (23.7% of related revenues) for the year ended December
31, 1994, compared to $522,000 (19.3% of related revenues) for the year ended
December 31, 1993.
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<PAGE>
The increase in revenues and gross profits reflects an expanded customer base in
1994 due to concerted marketing and service enhancement efforts by the Company's
management during the latter half of 1993. The number of payphones reporting at
December 31, 1994 was 41% higher than at December 31, 1993. Total gross profit
increased proportionately to sales volume and gross profit percentage increased
in 1994 as a result of various cost control efforts.
Equipment Sales. Revenues from telephone and related sales were $23.3 million
for the year ended December 31, 1994, compared to $15.9 million for the year
ended December 31, 1993. The increase is primarily attributable to $6.7 million
of product shipments to international customers and $555,000 of sales to
regulated telephone companies in the year ended December 31, 1994. There were no
such shipments in 1993.
Gross loss from telephone and related sales was $3.9 million (16.7% of related
sales) for the year ended December 31, 1994, compared to $2.9 million gross
profit (18.0% of related sales) for the year ended December 31, 1993. Gross
margin for the year ended December 31, 1994 was reduced by a $3.4 million
provision in the third and fourth quarters for slow moving and obsolete
inventory.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased approximately $1.5 million from the year ended
December 31, 1993 to the year ended December 31, 1994. The net decline in
expenses in 1994 resulted from several factors. The Company sold its call
processing assets in 1993 and, accordingly, depreciation expense related to such
assets decreased $1.2 million in 1994. In addition, 1994 corporate travel and
facilities costs declined by $788,000. Offsetting these decreases were increases
in consulting and benefits.
Provision for Doubtful Accounts. The provision for doubtful accounts
increased $1.7 million from the year ended December 31, 1993, to the year ended
December 31, 1994. The increase is attributed primarily to provisions of
$800,000 and $1.6 million recorded in the third and fourth quarters of 1994,
respectively, for losses on accounts receivable from certain domestic customers
whose collective financial condition had deteriorated significantly in 1994.
Exclusive of the $2.4 million third and fourth quarter provisions discussed
above, the 1994 provision for doubtful accounts decreased $736,000 from 1993 to
1994. The Company sold its call processing assets in 1993 and, as a result, bad
debt provisions related to those operations decreased by $375,000 in 1994. The
remainder of the decrease correlated to the overall decline in revenue levels.
Research and Development Expenses. Gross research and development spending
increased from $4.1 million in 1993 to $5.6 million in 1994 as a result of the
Company's emphasis on developing and supporting its new family of domestic and
international products. In 1994, the Company capitalized $2.6 million of 1994
software development costs due to the establishment of technological feasibility
on certain product lines. The 1994 gross research and development gross spending
increase of $1.5 million was offset by the $2.6 million increase in capitalized
software. Accordingly, research and development expense decreased from 1993 to
1994 by a net amount of $1.1 million.
- 27 -
<PAGE>
Gain on Sale of Call Processing Assets. On August 4, 1993 the Company sold its
call processing assets to a customer for $3.6 million in cash and $2.6 million
in notes and other consideration which resulted in a pretax gain of $1.05
million.
Interest Expense. Interest expense increased $741,000 from the year ended
December 31, 1993, to the year ended December 31, 1994. The increase was
principally the result of higher debt levels and higher interest rates in 1994.
Liquidity and Capital Resources
The Company generated approximately $4.4 million of cash from operations
(including $1.7 million from the sale of call validating assets) and changes in
working capital and long term financial assets.
Most cash inflows resulted from (i) collection of long term receivables (license
fees, equipment leases and notes receivable) totalling $5.8 million, (ii)
reduction in trade receivables by $1.3 million, and (iii) $2.8 million from TNS
as prepayment for the VICS services agreement.
Cash was used to: (i) reduce trade accounts payable by $3.7 million, (ii) invest
$3.4 million in capital equipment and capitalized software, (iii) reduce
long-term debt by $2.6 million, and (iv) increase other working capital
accounts, principally inventory, by $1.1 million.
The net effect of cash flow from operations, investing activities, and financing
activities in 1995 was to reduce available cash balances by $1.7 million.
On August 11, 1994 the Company issued its Series A Variable Rate Senior
Bridge Notes Due August 11, 1996 ("Series A Notes"), and its Series B, 12.5%
Senior Bridge Notes Due August 11, 1996 ("Series B Notes") to Nomura Holding
America Inc. ("Nomura"). The notes are secured by collateral comprising
substantially all the assets of the Company. In June 1995 the Company repaid
$3.5 million of the Series B Notes, using proceeds from the sale of call
validating assets (See Item 1. Business, Recent Developments). On December 31,
1995 the Company repaid the remaining balance of the Series B Notes with
proceeds from the issuance of its 8.0% subordinated convertible notes with
warrants. The balance of the Series A Notes at December 31, 1995 was $15.3
million.
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
- 28 -
<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 reducing the ratio of
assets to secured debt.
In December 1995 the Company successfully placed $7.5 million of 8.0%
subordinated convertible debt with warrants. Management believes that the
Company, if necessary, could place additional debt of a similar nature, or could
sell equity or assets to supplement any amount by which a new asset-based loan
might be insufficient to repay the then outstanding balance due to Nomura.
The Company's future liquidity will depend on management's success in
refinancing the Nomura Series A Notes, and on the imminence and extent of a
turnaround of historical operating results. 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 operating assets, sell additional equity at an
unattractive price, or take other actions as considered necessary.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Index to Consolidated Financial Statements located on page F-1 for
a listing of the financial statements included as a part of this Annual Report
on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
- 29 -
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Items 10, 11, 12 and 13 of this Annual
Report on Form 10-K is omitted pursuant to General Instruction G(3) and will be
included in the Registrant's Definitive Proxy Statement to be filed with the
Commission not later than 120 days after the end of the fiscal year covered by
this Annual Report on Form 10-K.
- 30 -
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) (1) Financial Statements.
The financial statements filed as a part of this
Annual Report on Form 10-K are listed in the "Index to
Financial Statements" on page F-1 hereof.
(2) Financial Statement Schedules.
The financial statement schedules filed as part of
this Annual Report on Form 10-K are listed in the "Index to
Financial Statements" on page F-1 hereof.
(3) Exhibits.
The following exhibits are filed as a part of this
Annual Report on Form 10-K.
(a)3.1 Certificate of Incorporation of the Company and
all amendments thereto through December 31, 1992.
(c)3.2 Amendment to Certificate of Incorporation
raising the authorized common stock from
10,000,000 shares to 50,000,000 shares.
++3.3 Amendment to Certificate of Incorporation
lowering the authorized common stock from
50,000,000 shares to 20,000,000 shares.
(b)3.4 By-laws of the Company, as amended.
(a)4.1 Specimen certificate for Common Stock of the
Company.
(f)10.1 Intellicall, Inc. 1991 Stock Option Plan, as
amended.
(b)10.2 Form of Incentive Stock Option Agreement.
(b)10.3 Form of Nonqualified Stock Option Agreement.
(b)10.4 Form of Director Stock Option Agreement.
(f)10.5 Form of 1995 Employee Stock Purchase Plan.
(b)10.6 Office Building Lease, dated October 31, 1991,
between the Company and National Realty
Advisors,Inc.
(b)10.7 ADREC Development and License Agreement, dated
as August 2, 1990, between VCS Industries, Inc.
d/b/a Voice Control Systems and the Company.
(b)10.8 Amended and Restated Patent License
Agreement dated as of January 1, 1992,
between the Company and MessagePhone, Inc.
(b)10.9 Registration Rights Agreement dated as of
July 31, 1992, between the Company and The
Prudential Insurance Company of America.
(b)10.10 Lease Agreement, dated March 2, 1990,
between Palmer Enterprises, Incorporated as
Landlord and the Company as Tenant.
- 31 -
<PAGE>
(d)10.11 Note Purchase Agreement dated as of August 11,
1994 between Nomura Holding America Inc. and the
Company.
(d)10.12 Form of Series A Note issued pursuant to Note
Purchase Agreement with Nomura Holding America
Inc.
(d)10.13 Form of Series B Note issued pursuant to Note
Purchase Agreement with Nomura Holding America
Inc.
(d)10.14 Pledge and Security Agreement dated August 11,
1994 between Nomura Holding America Inc. and the
Company.
(d)10.15 Intellectual Property Security Agreement dated
August 11, 1994 between Nomura Holding America
Inc. and the Company and the Subsidiaries.
(d)10.16 Warrant dated August 11, 1994 between Nomura
Holding America, Inc. and the Company.
(d)10.17 Amended and Restated 10% Convertible Subordinated
Note Due 1999 dated August 11, 1994 with T.J.
Berthel Investments, L.P.
(c)10.18 Registration Rights Agreement dated February 14,
1994, among between the Company and T.J. Berthel
Investments, L.P.
(e)10.19 Amendment, Limited Waiver and Consent dated as of
September 27, 1994 between Nomura Holding
America, Inc. and the Company.
(e)10.20 Amendment No. 2 to Note Purchase Agreement
entered into in December 1994 between Nomura
Holding America, Inc. and the Company.
(e)10.21 Third Amendment and Limited Waiver to Note
Purchase Agreement entered into in February 1995
between Nomura Holding America, Inc. and the
Company.
(f)10.22 Fourth Amendment, Limited Waiver and Consent
entered into as of March 17, 1995 by and between
Nomura Holding America, Inc. and the Company.
+10.23 Fifth Amendment to Note Purchase Agreement
entered into as of March 29, 1996 by and between
Nomura Holding America, Inc. and the Company.
(g)10.24 Note and Warrant Purchase, Paying and
Conversion/Exercise Agency Agreement
entered into on December 22, 1995 between
Banca Del Gottardo and the Company.
(g)10.25 Form of 8% Convertible Subordinated Note
executed by the Company to Banca Del
Gottardo dated December 22, 1995.
(g)10.26 Form of Banca Del Gottardo Warrants entered
into on December 22, 1995 between Banca Del
Gottardo and the Company.
++21.1 Subsidiaries of the Company.
++23.1 Consent of Independent Accountants.
++ Filed herewith.
(a) Incorporated by Reference from the Company's Form S-1 filed August
28, 1987, file no. 33-15723.
(b) Incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1991.
- 32 -
<PAGE>
(c) Incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993.
(d) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1994.
(e) Incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1994.
(f) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995.
(g) Incorporated by reference from the Company's Current Report on Form
8-K (Date of Earliest Event Reported - December 28, 1995).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last fiscal
quarter of 1995.
The following undertaking set forth herein relates to the Company's
Registration Statement on Form S-8 (No. 33-60235), and on Form S-8 (No.
33-64583):
"Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue."
- 33 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
March 29, 1996 INTELLICALL, INC.
3/29/96 /s/ William O. Hunt
Date By: William O. Hunt
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated, on March 29, 1996.
Name Office
/s/ William O. Hunt 3/29/96 Date
William O. Hunt Chairman of the Board, President
(Principal Executive Officer) and Chief Executive Officer
/s/ Michael H. Barnes 3/29/96 Date
Michael H. Barnes Chief Financial Officer
(Principal Financial Senior Vice President, Corporate
and Accounting Officer) Staff
B. Michael Adler Director
/s/ Lewis E. Brazelton III 3/29/96 Date
Lewis E. Brazelton III Director
/s/ Richard B. Curran 3/29/96 Date
Richard B. Curran Director
/s/ Hugh E. Humphrey, Jr. 3/29/96 Date
Hugh E. Humphrey, Jr. Director
/s/ Richard E. Hanlon 3/29/96 Date
Richard E. Hanlon Director
/s/ Thomas J. Berthel 3/29/96 Date
Thomas J. Berthel Director
- 34 -
<PAGE>
INTELLICALL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants........................................F-2
Consolidated Financial Statements:
Balance Sheets ........................................................F-3
Statements of Operations ..............................................F-5
Statements of Stockholders' Equity ....................................F-6
Statements of Cash Flows ..............................................F-7
Notes to Consolidated Financial Statements.............................F-8
Financial Statement Schedules (Note A):
Valuation and Qualifying Accounts.....................................F-24
Note A: All other schedules are omitted, since the required information is
not present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements and notes thereto.
F- 1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Intellicall, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index on page F-1 present fairly, in all material respects, the
financial position of Intellicall, Inc. and its subsidiaries at December 31,
1995 and 1994, and the results of their operations and their cash flows for each
of the three years ended December 31, 1995 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion expressed above.
PRICE WATERHOUSE LLP
Dallas, Texas
February 29, 1996
F- 2
<PAGE>
<TABLE>
<CAPTION>
INTELLICALL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(in thousands)
December 31,
1995 1994
---- ----
<S> <C> <C>
Current assets
Restricted cash - Note 1.......................................... $ 492 $ 2,018
Cash and cash equivalents - Note 1................................ 613 808
Receivables:
Trade - Note 1............................................... 23,763 27,511
License fees - Note 7........................................ 1,432 3,096
Investment in sales-type leases - Note 8..................... 1,073 2,290
Related party - Note 1....................................... 272 766
-------- --------
26,540 33,663
Less allowance for doubtful accounts......................... 3,260 5,120
-------- --------
23,280 28,543
Inventories - Note 1.............................................. 11,939 12,935
Other current assets.............................................. 587 424
-------- --------
Total current assets......................................... 36,911 44,728
Fixed assets, net - Note 1............................................. 2,089 2,415
License fees receivable, net - Note 7.................................. 253 1,140
Investment in sales-type leases, net - Note 8.......................... 96 1,154
Receivables from related party - Note 1................................ -- 32
Notes receivable, net - Note 1......................................... 2,695 4,035
Intangible assets, net - Note 1........................................ 1,018 1,108
Capitalized software costs, net - Note 1............................... 4,352 2,259
Other assets, net...................................................... 1,230 1,928
-------- --------
$ 48,644 $ 58,799
======== ========
</TABLE>
See notes to consolidated financial statements.
F- 3
<PAGE>
<TABLE>
<CAPTION>
INTELLICALL, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
(in thousands, except per share information)
December 31,
------------
1995 1994
---- ----
<S> <C> <C>
Current liabilities
Accounts payable.......................................... $ 6,406 $10,133
Accrued liabilities....................................... 2,725 2,505
Current portion of long-term debt - Note 2................ 15,474 945
------- -------
Total current liabilities............................ 24,605 13,583
Long-term debt - Note 2........................................ 8,620 25,694
Deferred revenue............................................... 1,976 --
Other liabilities.............................................. 200 200
Stockholders' equity - Note 3
Preferred stock, $.01 par; 1,000,000 shares authorized;
none issued.......................................... -- --
Common stock, $.01 par value; 20,000,000 shares
authorized; 7,702,951 and 7,686,451 shares issued,
respectively......................................... 77 77
Additional paid-in capital................................ 47,191 47,131
Less common stock in treasury, at cost;
24,908 shares........................................ (258) (258)
Accumulated deficit....................................... (33,767) (27,628)
------- -------
Total stockholders' equity........................... 13,243 19,322
------- -------
$ 48,644 $ 58,799
======== ========
</TABLE>
See notes to consolidated financial statements.
F- 4
<PAGE>
<TABLE>
<CAPTION>
INTELLICALL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues and sales:
Service revenues................................... $ 54,558 $ 60,059 $ 69,187
Equipment sales.................................... 19,944 23,322 15,939
------- -------- -------
74,502 83,381 85,126
------- -------- -------
Cost of revenues and sales:
Service revenues................................... 45,318 49,692 54,457
Equipment sales.................................... 21,454 27,221 13,068
------- -------- -------
66,772 76,913 67,525
------- -------- -------
Gross profit 7,730 6,468 17,601
Selling, general and administrative expenses............ (9,436) (12,473) (13,932)
Provision for doubtful accounts......................... (820) (3,517) (1,853)
Research and development expenses....................... (2,350) (2,965) (4,118)
Gain on sale of call processing assets.................. -- -- 1,051
Gain on sale of call validating assets.................. 1,607 -- --
------- -------- --------
Operating loss.......................................... (3,269) (12,487) (1,251)
Other income............................................ 440 1,100 2,295
Interest expense........................................ (3,310) (3,079) (2,338)
------- -------- -------
Net loss................................................ $(6,139) $(14,466) $ (1,294)
======= ======== ========
Net loss per common and common
equivalent share - Note 5.......................... $ (0.80) $ (1.91) $ (0.17)
======= ======== ========
Weighted average number of common and common
equivalent shares outstanding...................... 7,672 7,571 7,660
======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F- 5
<PAGE>
<TABLE>
<CAPTION>
INTELLICALL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Additional
Common Stock Paid-in Treasury Stock (Accumulated
Shares Amount Capital Shares Cost Deficit) Total
------ ------ ------- ------ ---- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1992 6,717 $ 67 $46,219 $(11,868) $34,418
Exercise of stock options- 103 1 568 -- -- -- 569
Note 3
Acquisitions for treasury -- -- -- (25) $(258) -- (258)
Litigation settlement 752 8 (8) -- -- -- --
Net loss -- -- -- -- -- (1,294) (1,294)
------ ------ ------ ------ ------ ------ ------
Balances at December 31, 1993 7,572 76 46,779 (25) (258) (13,162) 33,435
Exercise of stock options - 1 -- 5 -- -- -- 5
Note 3
Exercise of warrants 93 1 -- -- -- -- 1
Issuance of stock 20 -- 107 -- -- -- 107
Issuance of warrant - Note 2 -- -- 240 -- -- -- 240
Net loss -- -- -- -- -- (14,466) (14,466)
------ ------ ------ ------ ------ ------- -------
Balances at December 31, 1994 7,686 77 47,131 (25) (258) (27,628) 19,322
Exercise of stock options - 17 -- 60 -- -- -- 60
Note 3
Net loss -- -- -- -- -- (6,139) (6,139)
------ ------ ------ ------ ------ ------ ------
Balances at December 31, 1995 7,703 $ 77 $47,191 (25) $(258) $(33,767) $13,243
====== ====== ======= ====== ===== ======== =======
</TABLE>
See notes to consolidated financial statements.
F- 6
<PAGE>
<TABLE>
<CAPTION>
INTELLICALL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the 5 Years Ended December 31,
----------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................... $(6,139) $(14,466) $ 1,294)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization....................... 3,669 3,125 2,228
Gain on sale of call processing assets.............. -- -- (1,051)
Provision for doubtful accounts..................... 820 3,517 1,853
Provision for inventory............................. 1,772 3,169 144
Litigation settlement - Note 9...................... -- -- (2,200)
Changes in operating assets and liabilities:
Decrease (increase) in restricted cash.......... 1,526 (2,018) --
Decrease (increase) in trade receivables........ 761 (881) 5,565
(Increase) decrease in inventories.............. (776) 4,034 (12,273)
(Increase) decrease in other current assets..... (453) 11 (193)
Decrease in license fees receivable............. 2,551 5,911 4,826
Decrease in investment in sales-type leases..... 2,275 2,422 564
Decrease (increase) in related party receivable. 526 (506) 189
Decrease in notes receivable.................... 1,014 544 774
(Decrease) increase in accounts payable ........ (3,727) (5,327) 2,446
Increase (decrease) in accrued liabilities...... 220 409 (2,057)
Increase in deferred revenues................... 1,976 -- --
Decrease in other............................... (135) (1,146) (312)
------- ------- -------
Net cash provided by (used in) operating
activities................................ 5,880 (1,202) (791)
Cash flows from investing activities:
Purchases of equipment................................. (845) (721) (1,740)
Proceeds from sale of call processing assets........... -- -- 3,625
Capitalized software................................... (2,550) (2,621) --
------- ------- ------
Net cash (used in) provided by investing
activities.............................. (3,395) (3,342) 1,885
Cash flows from financing activities:
Proceeds from borrowings on long-term debt............. 9,160 73,086 97,495
Repayments on long-term debt........................... (11,900) (67,822) (99,386)
Proceeds from issuance of stock under
stock option plans.................................. 60 5 569
Acquisition of shares.................................. -- -- (258)
------- ------- -------
Net cash (used in) provided by financing
activities................................ (2,680) 5,269 (1,580)
------- ------- -------
Net (decrease) increase in cash and cash equivalents........ (195) 725 (486)
Cash and cash equivalents at beginning of period............ 808 83 569
------- ------- -------
Cash and cash equivalents at end of period.................. $ 613 $ 2,826 $ 83
======= ======= =======
Supplemental cash flow information:
Interest paid......................................... $ 3,521 $ 2,362 $ 2,433
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F- 7
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 1 - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business: The Company provides live and automated operator services for the
private pay telephone, hospitality, and inmate services industries, resale of
direct dial long distance services to the private pay telephone industry, and
prepaid calling services ("service revenues"). The Company designs, engineers,
manufactures and sells pay telephones and retrofit kits, parts and intelligent
network platforms in the United States and internationally ("equipment sales").
Principles of Consolidation: The accompanying financial statements include
the accounts of the Company and its wholly-owned subsidiary. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain reclassifications have been made to prior year amounts to conform with
current year presentation.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition: Revenues from sales of telephones and related products
are recognized upon shipment to customers. Revenues relating to the licensing of
automated operator systems are recognized upon shipment of licensed technology
to licensees.
Customers may finance their license fees over a five year period, or pay a
one time fee at the onset of the license agreement. Fees which were paid at the
onset of license agreements were $863,000, $748,000 and $1.3 million in 1995,
1994 and 1993, respectively. Such amounts are included in service revenues. Also
included in service revenues are $199,000, $325,000 and $870,000 in 1995, 1994
and 1993, respectively, in interest income related to the five year financing of
license fees.
Call revenues are recognized at the time that calls are placed. Call
revenues from customer- licensed microautomated operator systems, human operator
services (prior to the contract with another operator service provider described
above) and Company-owned call processing systems are recognized based on the
amounts charged to billed parties for calls processed and billed by the Company.
Revenues associated with customer-owned call processing systems and customers
utilizing licensed microautomated operator systems who have agreed to submit
call traffic to a third party billing service, instead of the Company, for
processing consist of the fees charged to customers for use of the technology.
F- 8
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Restricted Cash: 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 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.
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, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed", 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 product's estimated economic life
using the straight line method, not to exceed three years.
The amounts of software development costs capitalized for the years ended
1995 and 1994 were $2.55 million and $2.6 million, respectively. The Company
recorded $745,332 and $341,000 of software amortization expense for the years
ended December 31, 1995 and 1994, respectively.
Receivables: Receivables (current and long-term) consist of amounts owed by
various telephone companies for processed call traffic and amounts owed by
customers relating to uncollected call traffic and equipment sales, leases and
license fees. Approximately 72.0% and 66.0% of trade receivables relate to call
traffic due from various telephone companies and customers as of December 31,
1995 and 1994, respectively. The Company advances cash to a majority of its
customers prior to the time such cash is collected from end users, and generally
bears the risk of collection and bad debt. Certain of the Company's license
agreements with its customers permit the Company to recover amounts previously
advanced but uncollected from end users. Such amounts previously advanced but
uncollected, represent significant portions of the call traffic receivables.
Equipment receivables are subject to right of offset against payments due to
customers related to call revenues. The Company believes it has provided
adequate reserves for potential uncollectible accounts.
Related party receivables consist of license fee receivables, trade
receivables and sales-type leases due from The Payphone Company, LTD. and Adtel
Communications, Inc., of which B. Michael Adler, a director of the Company, is a
director and shareholder.
Credit Concentrations: Certain financial instruments potentially subject
the Company to concentrations of credit risk. These financial instruments
consist primarily of accounts receivable. The Company's customers range from
individuals with small pay telephone routes to large corporations, and reflect a
large customer base with much geographic diversity. The Company believes it has
provided adequate reserves for potential uncollectible accounts.
F- 9
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Inventories: Inventories are stated at the lower of cost or market with
cost determined on a first-in, first-out method. Costs include acquisition costs
of purchased components, freight costs, labor and overhead.
<TABLE>
<CAPTION>
The components of inventories are (in thousands):
December 31,
1995 1994
---- ----
<S> <C> <C>
Raw materials....................................... $ 6,083 $ 7,192
Work in process..................................... 898 1,731
Finished goods...................................... 4,958 4,012
------- -------
$11,939 $12,935
======= =======
</TABLE>
Inventories in 1995 has been written down to estimated net realizable
value, and results of operations include a charge of $1.7 million which
represents the excess of cost over market. In 1994 the Company established $2.7
million of reserves for the excess of cost over the estimated realizable value
of slow moving and obsolete inventories.
Fixed Assets: Fixed assets are recorded at cost. Depreciation expense is
computed by the straight-line method over the estimated useful lives of the
related assets, where the useful lives range from three to five years.
<TABLE>
<CAPTION>
The components of fixed assets are (in thousands):
December 31,
1995 1994
---- ----
<S> <C> <C>
Office equipment.................................... $ 6,098 $ 6,492
Tooling and other equipment......................... 4,047 3,755
------- -------
10,145 10,247
Less accumulated depreciation....................... (8,056) (7,832)
------- -------
$ 2,089 $ 2,415
======== ========
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1994 and 1993
was $1,064,000, $1,142,000 and $1,977,000, respectively.
F- 10
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Intangible Assets: Intangible assets consist primarily of the cost in
excess of net assets of acquired businesses. The assets are amortized using the
straight-line method over 20 years.
Income Taxes: Income taxes are presented pursuant to Statement of Financial
Accounting Standards No. 109, "Accounting For Income Taxes" ("SFAS No. 109").
Disclosures about Fair Value of Financial Instruments: The following methods
and assumptions were used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value:
Restricted Cash and Cash equivalents. The carrying amount approximates
fair value because of the short maturity of those instruments.
Long-term debt. Based on the borrowing rates and terms of secured and
subordinated loans which the Company believes are currently available, the
fair value of long-term debt is $8.6 million ($25.7 million in 1994).
Accounting for Stock-based Compensation: In October 1995, Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation" (SFAS No. 123") was issued. This statement requires the fair value
of stock options and other stock-based compensation issued to employees to
either be included as compensation expense in the income statement or the
pro-forma effect on net income and earnings per share of such compensation
expense to be disclosed in the footnotes to the Company's financial statements
beginning in 1996. The Company expects to adopt SFAS No. 123 on a disclosure
basis only. As such, impelmentation of SFAS No. 123 is not expected to impact
the Company's consolidated balance sheet or results of operations.
F-11
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2 - LONG-TERM DEBT AND LINE OF CREDIT
<TABLE>
<CAPTION>
The Company's debt consisted of the following (in thousands):
December 31,
------------
1995 1994
---- ----
<S> <C> <C>
Variable Rate Senior Bridge Notes Due 1996, Series A................... $ 15,375 $ 16,000
12.5% Senior Bridge Notes Due 1996, Series B........................... -- 8,000
Series B Debt Discount................................................. -- (195)
Convertible subordinated note, Due 2000................................ 7,500 --
Collateralized note.................................................... 219 1,834
Convertible subordinated note, Due 1999................................ 1,000 1,000
------- -------
Total debt........................................................ 24,094 26,639
Less: current portion.................................................. (15,474) (945)
------- -------
Total long-term debt.............................................. $ 8,620 $ 25,694
======== ========
</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 accrues monthly at a rate of prime plus 2.0%
through December 31, 1995 (10.75% at December 31, 1995), and prime plus 3.0%
thereafter. Interest on the Series A Note 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 December 31, 1995, Nomura
waived the Company's non-compliance with certain covenants and amended various
covenants covering the remaining term of the note agreement.
F- 12
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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 collaterlized 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 8.7% 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 will be fixed on March 29, 1996 at
the lowest of: (a) $4.75 per share, (b) the average of the closing prices of the
Company's Common Stock during the period from March 14 to March 29, 1996, or (c)
$4.20 per share which is 120% of the average of the closing prices of the
Company's Common Stock during the period from December 19 to December 29, 1995.
F-13
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Aggregate maturities of long-term debt in the next five years are
$15,549,000, $45,000, $0, $1,000,000, and $7,500,000.
NOTE 3 - STOCKHOLDERS' EQUITY
Stock Option Plans: The Company maintains a Nonqualified Stock Option
("NSO") Plan, an Incentive Stock Option ("ISO") Plan and a Directors' Stock
Option ("DSO") Plan (adopted in 1991). The number of shares which may be granted
under the NSO and ISO Plans (as amended) and the DSO Plan may not exceed
600,000, 1,525,000, and 350,000, respectively. ISO's and NSO's are exercisable
at such times and in such installments as the Organization and Compensation
Committee of the Board of Directors (the "Committee") shall determine at the
time of grant. In the case of ISO's and DSO's, the option price of the shares
cannot be less than the fair market value of the underlying common stock at the
date of the grant. In the case of NSO's, the option price is determined by the
Committee and cannot be less than 85% of the fair market value of the underlying
common stock. Options expire at such time as the Committee shall determine at
the time of grant, but in the case of ISO's and DSO's no later than ten years
from the grant date.
NSO PLAN
Stock option activity under the NSO Plan was:
<TABLE>
<CAPTION>
Shares Option Price
------ ------------
<S> <C> <C>
Outstanding at December 31, 1992........................... 600,000 $3.63 to $7.75
Granted................................ ................... -- --
Canceled................................................... -- --
-------
Outstanding at December 31, 1993........................... 600,000 $3.63 to $7.75
Granted.................................................... -- --
Canceled................................................... -- --
-------
Outstanding at December 31, 1994........................... 600,000 $3.63 to $7.75
Granted.................................................... -- --
Canceled................................................... -- --
-------
Outstanding at December 31, 1995........................... 600,000 $3.63 to $7.75
=======
</TABLE>
F-14
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
ISO PLAN
Stock option activity under the ISO Plan was:
<TABLE>
<CAPTION>
Shares Option Price
------ ------------
<S> <C> <C>
Outstanding at December 31, 1992.......................... 664,980 $3.13 to $7.75
Granted................................................... 65,000 $5.38
Exercised................................................. (45,640) $3.63 to $7.00
Canceled.................................................. (30,000) $3.63 to $4.38
-------
Outstanding at December 31, 1993.......................... 654,340 $3.13 to $7.75
Granted................................................... 501,900 $4.50 to $11.50
Exercised................................................. (1,250) $4.38
Canceled.................................................. (128,675) $3.13 to $10.00
--------
Outstanding at December 31, 1994.......................... 1,026,315 $3.25 to $11.50
Granted................................................... 231,080 $3.38 to $4.50
Exercised................................................. (16,500) $3.25 to $4.50
Canceled.................................................. (67,575) $4.13 to $8.00
-------
Outstanding at December 31, 1995.......................... 1,173,320 $3.38 to $11.50
=========
</TABLE>
Options for 1,031,155 shares were exercisable at prices ranging from $3.38
to $11.50 at December 31, 1995. At December 31, 1995 and 1994, there were
115,180 and 34,685 shares, respectively, available under the ISO Plan.
EMPLOYEE STOCK PURCHASE PLAN
On November 16, 1995, the Company adopted the Intellicall Employee Stock
Purchase Plan (the "ESPP"). As of December 31, 1995 there remain authorized and
available for sale to employees an aggregate of 294,033 shares of the Company's
common stock. The maximum number of shares subject to each option under the ESPP
is determined ont he date of grant and equals the sum of the payroll deductions
authorized by each participating employee (up to 10.0% of regular pay) divided
by 85.0% of the lower of the fair market value of a share of common stock on
either the first or last trading day of each offering period. EAch offering
period is approximately six months in duration and commences on the first
trading day on or after January 1 and terminates on the last trading day ending
the following June 30, or commences on the first trading day on or after July 1
and terminates
F- 15
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
on the last trading day ending the following December 31. Under the ESPP, 5,967
shares were issued at $2.87 per share during 1995.
DSO PLAN
Stock option activity under the DSO Plan was:
<TABLE>
<CAPTION>
Shares Option Price
------ ------------
<S> <C> <C>
Outstanding at December 31, 1993.......................... 120,000 $5.75 to $6.63
Granted................................................... 20,000 $6.63
------
Outstanding at December 31, 1994.......................... 140,000 $5.75 to $6.63
Activity.................................................. --
-------
Outstanding at December 31, 1995.......................... 140,000 $5.75 to $6.63
=======
</TABLE>
These options expire ten years from the grant date. At December 31, 1995,
135,000 options were exercisable at a price ranging from $5.75 to $6.63. There
were 160,000 shares available at December 31, 1995 and 1994, under the DSO Plan.
OTHER DIRECTORS' OPTIONS
The Company issued to certain members of the Board of Directors options
prior to the establishment of the DSO Plan.
Stock option activity pursuant to these options was:
<TABLE>
<CAPTION>
Shares Option Price
------ ------------
<S> <C> <C>
Outstanding at December 31, 1993.......................... 82,500 $7.56 to $13.25
Canceled.................................................. (22,500) 11.00 to $13.25
------
Outstanding at December 31, 1994.......................... 60,000 $7.56 to $13.25
Activity.................................................. --
-------
Outstanding at December 31, 1995.......................... 60,000 $7.56 to $13.25
======
</TABLE>
These options expire ten years from the date of grant. At December 31, 1995,
60,000 options were exercisable at a price ranging from $7.56 to $13.25.
F- 16
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Common Stock: At December 31, 1995, there were 2,846,454 shares of common
stock reserved for options and a warrant.
Preferred Stock: There was no preferred stock outstanding at December 31,
1995 or 1994. Shares of preferred stock can be issued at any time upon
authorization by the Board of Directors, with preferences, rights, dividends and
voting powers to be determined by the Board of Directors.
Common Stock Purchase Warrants: In July 1992, the Company issued to a
senior note lender a common stock purchase warrant entitling the holder to
purchase 93,023 shares of the Company's common stock, exercisable at $.01 per
share. On November 14, 1994, the senior note lender exercised the warrant to
purchase 93,023 shares of the Company's common stock. In connection with the
August 11, 1994 refinancing discussed in Note 2, the Company issued a warrant to
Nomura entitling the holder to purchase 551,954 shares of the Company's common
stock, exercisable at $4.50 per share.
In connection with the December 29, 1995 subordinated debt issuance
discussed in Note 2, the Company issued a Warrant to Banca Del Gottardo
("Gottardo") entitling the holder to purchase 300,000 shares of common stock.
The exercise price of the Gottardo Warrants will be established on March 29,
1996 and will be the lowest of: (a) $4.75 per share, (b) the average of the
closing prices of common stock during the period from March 14 to March 29,
1996, or (c) $4.20 per share which is 120% of the average of the closing prices
of the common stock during the period from December 19 to December 29, 1995. At
December 29, 1995 the value attributable to such warrants was not determinable
and therefore the Company recorded the debt at its full value. At such time the
warrant value is known, the Company will reclass such amount from long-term debt
to additional paid-in capital.
In connection with the issuance of the Notes the Company issued an
additional Warrant to purchase 200,000 shares of Common stock (the "Additional
Warrant"). The exercise p[rice for the Additional Warrant is the same price as
for the Gottardo Warrants.
F-17
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 4 - INCOME TAXES
Differences between the income tax benefit calculated using the statutory
federal income tax rate and the actual income tax benefit are (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income tax benefit at the statutory rate........... $(2,087) $(4,918) $ (440)
Amortization of cost in excess of net assets
of acquired businesses........................ 31 31 31
Operating loss not benefitted...................... 2,056 4,887 409
------- ------- -------
Income tax benefit................................. $ -- $ -- $ --
======= ======= =======
</TABLE>
The tax effect of temporary differences that give rise to a significant
portion of deferred tax assets and deferred tax liabilities consisted primarily
of timing differences in the recognition of license fee revenues and related
costs, provisions for doubtful accounts in excess of write-offs, warranty costs,
litigation settlement, legal fees, gain or loss on sale of assets, software
development and operator services costs, and excess tax depreciation.
At December 31, 1995 the Company has net operating loss carryforwards of
$35.7 million for federal income tax reporting purposes. Such carryforwards,
which may provide future tax benefits, do not expire before 2007. Additionally,
in conjunction with the Alternative Minimum Tax ("AMT") rules, the Company has
available minimum tax credit carryforwards for tax purposes of $600,000, which
may be used indefinitely to reduce regular Federal Income taxes.
The Company received no income tax refund in 1995 or 1994. The Company
received a tax refund of $985,000 in 1993.
F- 18
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Significant components of the Company's deferred tax assets and
deferred tax liabilities under SFAS 109 are (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets:
Deferred revenue.............................. $ -- $ 2,020
Other reserves and accruals................... 2,522 1,045
Net operating loss carryforwards.............. 11,524 10,210
Unused alternative minimum credits............ 575 575
------ ------
Total gross deferred tax assets.................... 14,621 13,850
Deferred tax liabilities:
Bad debt reserves............................. (307) (140)
Deferred revenue.............................. (320) --
Depreciation and amortization................. (1,263) (2,945)
------ ------
Total gross deferred tax liabilities.............. (1,890) (3,085)
------ ------
Less valuation allowance........................... (12,731) (10,765)
------- -------
Net deferred tax assets............................ $ -- $ --
======= =======
</TABLE>
The valuation allowance on deferred tax assets reflects the Company's
uncertainty regarding realization of such assets due to recent operating loss
trends.
F- 19
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 5 - NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE
Net loss per common and common equivalent share is based on the weighted
average number of common shares outstanding during 1995, 1994 and 1993. The
weighted average common and common equivalent shares outstanding were 7,672,000,
7,571,000 and 7,660,000 shares for the years ended December 31, 1995, 1994 and
1993, respectively.
Primary per share amounts have been computed by dividing net loss by the
weighted average number of common and common equivalent shares outstanding
during each period. Outstanding common stock options and warrants were
considered a common stock equivalent for purposes of computing weighted average
shares outstanding. In loss periods, common stock equivalents have been excluded
from the per share calculation since they are anti-dilutive. Although the total
number of common shares obtainable upon exercise of outstanding options and
warrants exceeds 20% of the number of common shares outstanding at December 31,
1995, the treasury stock method was not used for purposes of computing weighted
average shares outstanding since the effect was anti-dilutive.
NOTE 6 - COMMITMENTS
The Company leases its office space and manufacturing facility under
operating leases. The manufacturing facility lease contains a renewal option for
an additional 60 months at the market rental rate upon expiration of the initial
lease term.
Future minimum rental commitments under noncancelable operating leases are
(in thousands):
<TABLE>
<CAPTION>
<S> <C>
1996.............................................................. $ 780
1997.............................................................. 610
1998.............................................................. 236
1999.............................................................. 89
2000.............................................................. 73
----
$1,788
======
</TABLE>
Total operating lease expense was $765,000, $1,242,000 and $1,071,000 for
the years ended December 31, 1995, 1994 and 1993, respectively.
F- 20
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 7 - LICENSE FEES RECEIVABLE
License fees for automated operator systems are prepaid. Prior to 1994, the
Company generally financed lciense fees over five years and recorded such fees
upon shipment of systems at an amount discounted to reflect market rates of
interest ranging from 9.75% to 11.25%. Interest income is recognized using the
effective yield method.
Information pertaining to the license fees receivable is (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
---- ----
<S> <C> <C>
Gross license fees receivable................................ $2,397 $5,535
Less: Unearned income....................................... (298) (765)
Allowance for doubtful accounts, non-current.......... (414) (523)
----- -----
Net license fees receivable.................................. 1,685 4,247
Less: Current portion....................................... (1,432) (3,096)
Current portion - related............................. -- (11)
----- -----
Net license fees receivable, non-current..................... $ 253 $1,140
===== ======
</TABLE>
Scheduled future minimum license fees receivable are (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1996.............................................................. $1,638
1997.............................................................. 376
1998.............................................................. 215
1999.............................................................. 103
2000.............................................................. 65
-----
$2,397
======
</TABLE>
The decline in future minimum license fees receivable is due to the decline
in the licensing of microautomated operator systems since the initial peak
during 1989 and 1990, and efforts by the Company to accelerate the receipt of
license payments by establishing certain incentives to prepay license fees.
F- 21
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 8 - INVESTMENT IN SALES-TYPE LEASES
The Company has leased equipment and related retrofit kits to its customers
under various agreements with terms varying from one to five years and with
interest rates ranging from 11.0% to 18.0%. Such leases are accounted for as
sales-type leases. The lessees are responsible for taxes and insurance and are
required to provide for general maintenance.
Information pertaining to the Company's net investment in sales-type leases
is as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
---- ----
<S> <C> <C>
Future minimum lease payments receivable..................... $ 1,257 $ 3,952
Less: Unearned income....................................... (88) (369)
Allowance for doubtful accounts, noncurrent........... -- (14)
------ ------
Net investment in sales-type leases.......................... 1,169 3,569
Less: Current portion....................................... (1,073) 2,290)
Current portion - related party....................... -- (93)
Long-term portion - related party..................... -- (32)
------ -----
Net investment in sales-type leases, noncurrent.............. $ 96 $ 1,154
====== ======
</TABLE>
Scheduled future minimum lease payments receivable are (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1996................................................................ $ 970
1997................................................................ 141
1998................................................................ 91
1999................................................................ 37
2000................................................................ 18
-----
$1,257
======
</TABLE>
Future minimum lease payments receivable will gradually decline over time as
the weighted average lease term is approximately three years.
F- 22
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 9 - LITIGATION AND CONTINGENCIES
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.
F- 23
<PAGE>
<TABLE>
<CAPTION>
INTELLICALL, INC.
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Additions
-----------------------------
Balance at
Beginning Charged to Costs Charged to Other Deductions- Balance at End
Description of Period and Expenses Accounts - Describe Describe of Period
----------- --------- ------------ ------------------- -------- ---------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1995:
Allowance for doubtful
accounts - receivable........... $ 2,570 $ 714 $ -- $ 2,566(a) $ 718
======= ======= ========= ======== =======
Allowance for doubtful
accounts - license fees receivable
non-current..................... $ 523 $ 412 $ -- $ 521(a) $ 414
======= ======= ========= ======== =======
Allowance for doubtful
accounts - investment in sales-type
leases, non-current............. $ 14 $ -- $ -- $ 14(a) $ --
======= ======= ========= ======== =======
Allowance for doubtful accounts
call traffic.................... $ 2,550 $ 2,530 $ 231(c) $ 2,769(a) $ 2,542
======= ======== ========= ======== =======
Allowance for doubtful accounts
notes - receivable.............. $ 2,683 $ -- $ 1,190(f) $ 1,155(a)(c) $ 2,718
======= ======== ========= ======== =======
Year Ended December 31, 1994:
Allowance for doubtful
accounts - receivable......... $ 3,968 $ 3,171 $ -- $ 4,569(a) $ 2,570
======= ========= ========= ======== =======
Allowance for doubtful
accounts - license fees receivable
non-current................... $ 548 $ 645 $ -- $ 670(a) $ 523
======= ========= ========= ======== =======
Allowance for doubtful
accounts - investment in sales-type
leases, non-current........... $ 102 $ 17 $ -- $ 105(a) $ 14
======= ========= ========= ======== =======
Allowance for doubtful accounts
call traffic.................. $ 3,688 $ 3,146 $ -- $ 4,284(a) $ 2,550
======= ========= ========= ======== =======
Allowance for doubtful accounts
notes - receivable............ $ -- $ 1,500 $ 1,183(e) $ -- $ 2,683
======= ========= ========= ======== =======
Year Ended December 31, 1993:
Allowance for doubtful
accounts - receivable......... $ 9,593 $ 2,561 $ -- $ 8,186(a) $ 3,968
======= ========= ========= ======== =======
Allowance for doubtful
accounts - license fees receivable
non-current................... $ 434 $ 179 $ -- $ 65(a) $ 548
======= ========= ========= ======== =======
Allowance for doubtful
accounts - investment in sales-type
leases, non-current........... $ 105 $ 33 $ -- $ 36(a) $ 102
======= ========= ========= ======== =======
Allowance for doubtful accounts
call traffic.................. $ 9,659 $ 2,469 $ -- $ 8,440(a) $ 3,688(b)
======= ========= ========= ======== =======
F- 24
<PAGE>
<FN>
(a) Write-off of uncollectible accounts.
(b) Amounts combined with allowance for doubtful accounts receivable for
financial statement presentation.
(c) Includes $231,000 reclassified to allowance for doubtful accounts call
traffic.
(d) Includes approximately $2.1 million reclassified from allowance for
doubtful accounts-call traffic, $2.0 million from another liability account,
$1.5 million charged to cost of sales, and $1.1 million from allowance for
doubtful accounts-license fees receivable and non-current.
(e) Includes $924,000 charge to contra-asset and $259,000 charge from a
liability account.
(f) Includes $1.1 million reserved directly against another asset and $89,000
of interest payments used to build reserve instead of recognizing as
revenue.
</FN>
</TABLE>
F- 24
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995,
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 1-0588
INTELLICALL, INC.
(Exact name of registrant as specified in its charter)
EXHIBITS
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
(a)3.1 Certificate of Incorporation of the Company and all
amendments thereto through December 31, 1992.
(c)3.2 Amendment to Certificate of Incorporation raising the
authorized common stock from 10,000,000 shares to
50,000,000 shares.
++3.3 Amendment to Certificate of Incorporation lowering the
authorized common stock from 50,000,000 shares to
20,000,000 shares.
(b)3.4 By-laws of the Company, as amended.
(a)4.1 Specimen certificate for Common Stock of the Company.
(f)10.1 Intellicall, Inc. 1991 Stock Option Plan, as amended.
(b)10.2 Form of Incentive Stock Option Agreement.
(b)10.3 Form of Nonqualified Stock Option Agreement.
(b)10.4 Form of Director Stock Option Agreement.
(f)10.5 Form of 1995 Employee Stock Purchase Plan.
(b)10.6 Office Building Lease, dated October 31, 1991, between the
Company and National Realty Advisors, Inc.
(b)10.7 ADREC Development and License Agreement, dated as August
2, 1990, between VCS Industries, Inc. d/b/a Voice Control
Systems and the Company.
(b)10.8 Amended and Restated Patent License Agreement dated as of
January 1, 1992, between the Company and MessagePhone, Inc.
(b)10.9 Registration Rights Agreement dated as of July 31, 1992,
between the Company and The Prudential Insurance Company of
America.
(b)10.10 Lease Agreement, dated March 2, 1990, between Palmer
Enterprises, Incorporated as Landlord and the Company as
Tenant.
(d)10.11 Note Purchase Agreement dated as of August 11, 1994
between Nomura Holding America Inc. and the Company.
(d)10.12 Form of Series A Note issued pursuant to Note Purchase
Agreement with Nomura Holding America Inc.
(d)10.13 Form of Series B Note issued pursuant to Note Purchase
Agreement with Nomura Holding America Inc.
(d)10.14 Pledge and Security Agreement dated August 11, 1994 between
Nomura Holding America Inc. and the Company
(d)10.15 Intellectual Property Security Agreement dated August 11,
1994 between Nomura Holding America Inc. and the Company
and the Subsidiaries.
i
<PAGE>
Exhibit
Sequentially
Number Description of Exhibit
(d)10.16 Warrant dated August 11, 1994 between Nomura Holding America
Inc. and the Company.
(d)10.17 Amended and Restated 10% Convertible Subordinated Note Due
1999 dated August 11, 1994 with T.J. Berthel Investments, L.P.
(c)10.18 Registration Rights Agreement dated February 14, 1994, among
between the Company and T.J. Berthel Investments, L.P.
(e)10.19 Amendment, Limited Waiver and Consent dated as of September
27, 1994 between Nomura Holding America, Inc. and the Company.
(e)10.20 Amendment No. 2 to Note Purchase Agreement entered into in
December 1994 between Nomura Holding America, Inc. and the
Company.
(e)10.21 Third Amendment and Limited Waiver to Note Purchase Agreement
entered into in February 1995 between Nomura Holding America,
Inc. and the Company.
(f)10.22 Fourth Amendment, Limited Waiver and Consent entered into as
of March 17, 1995 by and between Nomura Holding America, Inc.
and the Company.
+ 10.23 Fifth Amendment to Note Purchase Agreement entered into as of
March 29, 1996 by and between Nomura Holding America, Inc.
and the Company.
(g)10.24 Note and Warrant Purchase, Paying and Conversion/Exercise
Agency Agreement entered into on December 22, 1995 between
Banca Del Gottardo and the Company.
(g)10.25 Form of 8% Convertible Subordinated Note executed by the
Company to Banca Del Gottardo dated December 22, 1995.
(g)10.26 Form of Banca Del Gottardo Warrants entered into on December
22, 1995 between Banca Del Gottardo and the Company.
++21.1 Subsidiaries of the Company.
++23.1 Consent of Independent Accountant.
++ Filed herewith.
(a) Incorporated by Reference from the Company's Form S-1 filed August 28,
1987, file no. 33-15723.
(b) Incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1991.
(c) Incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993.
(d) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1994.
(e) Incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1994.
(f) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995.
(g) Incorporated by reference from the Company's Current Report on Form
8-K (Date of Earliest Event Reported - December 28, 1995).
ii
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
TO THE CERTIFICATE OF INCORPORATION
OF
INTELLICALL, INC.
Pursuant to the provisions of Section 242 of the Delaware General
Corporation Law, the undersigned corporation hereby adopts the following
Certificate of Amendment to the Certificate of Incorporation:
ARTICLE ONE
The name of the corporation is Intellicall, Inc. (the "Corporation").
ARTICLE TWO
The following amendment to Article FOURTH of the Certificate of
Incorporation was adopted by the Board of Directors of the Corporation on
January 26, 1995 and by the stockholders of the Corporation on May 11, 1995.
"FOURTH: The total number of shares which the Corporation shall have
authority to issue is 21,000,000 shares, of which 20,000,000 shares shall
be common stock, par value $.01 per share ("Common Shares"), and 1,000,000
shares of preferred stock, par value $.01 per share ("Preferred Stock").
IN WITNESS WHEREOF, the undersigned corporation has executed this
Certificate of Amendment as of May 11, 1995.
INTELLICALL, INC.
By: /s/ William O. Hunt
Signed 5/11/95 -------------------
William O. Hunt, Chief Executive
Officer, President and Chairman
of the Board
ATTEST:
/s/ Michael H. Barnes
- ---------------------
Michael H. Barnes
Secretary
EXHIBIT 10.23
FIFTH AMENDMENT TO NOTE PURCHASE AGREEMENT
THIS FIFTH AMENDMENT TO NOTE PURCHASE AGREEMENT (this
"Amendment") is made as of March 29, 1996 by and between Intellicall, Inc., a
Delaware corporation (together with its successors, assigns and transferees, the
"Company"), and Nomura Holding America Inc., a Delaware corporation (together
with its successors, assigns and transferees, the "Purchaser"). Capitalized
terms used herein without definition shall have the respective meanings ascribed
to them in that certain Note Purchase Agreement, dated as of August 11, 1994, by
and between the Company and the Purchaser, as previously amended (the "Purchase
Agreement").
R E C I T A L S
A. Pursuant to the Purchase Agreement, the Purchaser on August 11, 1994
purchased certain secured promissory notes of the Company, consisting of its
Variable Rate Senior Bridge Notes Due 1996, Series A, in an aggregate principal
amount not to exceed $16,000,000 at any one time outstanding (the "Series A
Notes"), and its 12.5% Senior Bridge Notes Due 1996, Series B, in the aggregate
principal amount of $8,000,000 (the "Series B Notes", and, collectively,
together with the Series A Notes, the "Notes").
A. The Company has requested that the Purchaser enter into this
Amendment in order to amend certain financial covenants.
NOW THEREFORE, in consideration of the terms and conditions contained
herein and of other good and valuable consideration the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
1. Amendments to the Purchase Agreement. The Purchase Agreement
is hereby amended as follows:
A. Section 10.12 is deleted in its entirety and the
following is inserted in lieu thereof:
" Section 10.12. Research and Development
Expenditures. (a) Except as provided in subsection
(b) of this Section 10.12, the Company will not, and
will not permit any of its Subsidiaries to, make or
incur any Research and Development Expenditures or
any contractual commitment with respect to any
Research and Development Expenditure if, after giving
effect thereto, the aggregate amount of all Research
and Development Expenditures by the Company and its
Subsidiaries during any fiscal quarter of the Company
would exceed (i) $1,900,000, with respect to each of
the fiscal quarters ending September 30, 1994,
December 31, 1994, March 31, 1995, June 30, 1995,
September 30, 1995 and December 31, 1995 or (ii)
$2,000,000, with respect to any fiscal quarter ending
on or after March 31, 1996.
<PAGE>
(b) Notwithstanding the provisions of
subsection (a) of this Section 10.12, if Cumulative
New Business Profits for any of the periods
commencing on July 1, 1994 and ending on the last day
of the fiscal quarter of the Company immediately
preceding the fiscal quarter ended on any of the
dates set forth in the left most column in the table
below shall be less than the corresponding amount
shown opposite such date in the column entitled
"Cumulative New Business Profits," then during the
fiscal quarter ending on such date the Company will
not, and will not permit any of its Subsidiaries to,
make or incur any Research and Development
Expenditures or any contractual commitment with
respect to any Research and Development Expenditure
if, after giving effect thereto, the aggregate amount
of all Research and Development Expenditures by the
Company and its Subsidiaries during such fiscal
quarter would exceed the corresponding amount shown
opposite such date in the column entitled "Maximum R
& D Expenditure." Solely for purposes of this
subsection (b), the term "Cumulative New Business
Profits" for any period shall mean the excess, if
any, of revenues for such period derived from the
sales of New Business Products and Services over the
related material costs (in the case of revenues from
sales of equipment and other tangible products) or
direct costs (in the case of revenues from the
rendering of services, including, without limitation,
services referred to in clause (c) of the definition
of New Business Products and Services contained in
this Agreement) for such period incurred in
connection with such sales of New Business Products
and Services, in each case as determined for the
Company and its Subsidiaries on a consolidated basis
in accordance with GAAP.
<TABLE>
<CAPTION>
Fiscal Quarter Cumulative New Maximum
Ended: Business Profits R & D Expenditure
<S> <C> <C>
June 30, 1995 $7,500,000 $1,600,000
September 30, 1995 $9,500,000 $1,500,000
December 31, 1995 $13,000,000 $1,500,000
March 31, 1996 $16,000,000 $1,500,000
June 30, 1996 $19,500,000 $1,500,000
</TABLE>
B. Section 10.20 is deleted in its entirety
and the following is inserted in lieu thereof:
-2-
<PAGE>
" Section 10.20. Financial Covenants.
(a) Current Ratio. The Company shall not
permit the current Ratio, measured as at the end of
each fiscal quarter of the Company ending on any of
the dates set forth below, to be less than the
corresponding amount set forth opposite such date:
Measuring Date Ratio
December 31, 1994 1.50
March 31, 1995 1.35
June 30, 1995 1.35
September 30, 1995 1.45
December 31, 1995 1.50
March 31, 1996 1.50
June 30, 1996 1.50
(b) Liabilities-to-Net Worth Ratio. The
Company shall not permit the Liabilities-To-Net Worth
Ratio, measured as at the end of each fiscal quarter
of the Company ending on any of the dates set forth
below, to exceed the corresponding amount set forth
opposite such date:
Measuring Date Ratio
December 31, 1994 1.90
March 31, 1995 2.10
June 30, 1995 2.10
September 30, 1995 2.00
December 31, 1995 1.90
March 31, 1996 2.50
June 30, 1996 2.50
(c) Interest Expense Coverage Ratio. The
Company shall not permit the Interest Expense
Coverage Ratio, measured as of each date set forth
below for (i) in the case of each such date occurring
in 1995, that period commencing January 1, 1995 and
ending upon such date and (ii) in the case of each
such date occurring in 1996, that period commencing
January 1, 1996 and ending upon such date, to be less
than the corresponding amount set forth opposite each
such date:
-3-
<PAGE>
Measuring Date Ratio
March 31, 1995 1.35
June 30, 1995 1.25
September 30, 1995 2.25
December 31, 1995 2.50
March 31, 1996 1.25
June 30, 1996 1.50
(d) Fixed Charge Ratio. The Company shall
not permit the Fixed Charge Ratio, measured as of
each date set forth below for (i) in the case of each
such date occurring in 1995, that period commencing
January 1, 1995 and ending upon such date and (ii) in
the case of each such date occurring in 1996, that
period commencing January 1, 1996 and ending upon
such date, to be less than the corresponding amount
set forth opposite each such date:
Measuring Date Ratio
March 31, 1995 1.90
June 30, 1995 1.80
September 30, 1995 2.25
December 31, 1995 2.35
March 31, 1996 1.00
June 30, 1996 1.25
(e) EBIT. The Company shall not permit EBIT,
measured as of each date set forth below for (i) in
the case of each such date occurring in 1995, that
period commencing January 1, 1995 and ending upon
such date and (ii) in the case of each such date
occurring in 1996, that period commencing January 1,
1996 and ending upon such date, to be less than the
corresponding amount set forth opposite each such
date:
Measuring Date Amount
March 31, 1995 $125,000
June 30, 1995 $1,100,000
September 30, 1995 $3,250,000
December 31, 1995 $5,000,000
March 31, 1996 $150,000
June 30, 1996 $650,000
-4-
<PAGE>
(f) Consolidated Net Loss. The Company
shall not have a Consolidated Net Loss for any two
consecutive fiscal quarters, commencing with the
two fiscal quarters ending June 30, 1996."
2. Representations and Warranties of the Company. The Company
represents and warrants to the Purchaser that:
A. Representations in the Purchase Agreement; No Defaults. Each of the
representations and warranties made by the Company in the Purchase
Agreement is true and correct on and as of the date hereof to the same
extent as if made on and as of the date hereof except to the extent that
such representations and warranties specifically relate to an earlier date,
in which case they are true and correct as of such earlier date, and such
representations and warranties are hereby incorporated by reference as if
set forth herein in full (except that the representation contained in
Section 4.21 of the Purchase Agreement is subject to the potential
infringement claim of Aerotel U.S.A., Inc. contained in its letter to the
Company dated January 13, 1995). No event has occurred and is continuing or
will result from the transactions contemplated hereby which constitutes (or
with notice or the passage of time would constitute) an Event of Default
under the Purchase Agreement as it existed before this Amendment or as it
exists after the effectiveness of this Amendment, except such as are being
waived pursuant to this Amendment.
B. Corporate Authority. The execution, delivery and performance by
Company of this Amendment (i) is within its corporate powers, (ii) has been
duly authorized by all necessary corporate action on the part of its Board
of Directors and stockholders, and (iii) does not require the consent or
approval of, or any registration,filing or declaration with, any
Governmental Body or non-governmental Person.
C. Binding Effect. This Amendment is the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance
with its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, or other laws relative
to or affecting the enforcement of creditors' rights generally in effect
from time to time and by general principles of equity.
3. Effect of Amendment. It is hereby agreed that from and after the
date hereof all references to the Purchase Agreement in the Related Documents
shall be references to the Purchase Agreement as heretofore amended and as
further amended by this Amendment; provided that, except as specifically
provided herein, this Amendment does not in any way affect or impair the terms,
conditions and other provisions of the Purchase Agreement or any of the other
Related Documents, or the obligations of the Company thereunder, and all terms,
conditions and other provisions of the Purchase Agreement shall remain in full
force and effect except to the extend specifically amended, modified or waived
pursuant to the provisions of this Amendment.
-5-
<PAGE>
4. Payment of Fees. The Company agrees to pay all fees, costs and
expenses incurred by the Purchaser in connection with the negotiation,
preparation, execution and delivery of this Amendment and all other documents
executed pursuant to or in connection herewith, including, without limitation,
the fees and disbursements of Sonnenschein Nath & Rosenthal, special counsel to
the Purchaser, in connection herewith.
5. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, and all of which taken
together shall be deemed to constitute one and the same instrument.
6. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
7. Headings. Section headings are included herein for
convenience of reference only and shall not constitute a part of this Amendment
for any other purposes.
8. Amendments and Modifications. Any term, covenant, agreement or
condition of this Amendment may, with the consent of the parties hereto, be
amended, or compliance therewith may be waived (either generally or in a
particular instance and either retroactively or prospectively), by one or more
substantially concurrent written instruments signed by the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date and year first written above.
INTELLICALL, INC.
3/29/96 By: /s/ John M. Carradine
Date Name: John M. Carradine
Title: Vice President of Finance
and Controller
NOMURA HOLDING AMERICA INC.
3/39/96 By: /s/ Howard Gellis
Date Name: Howard Gellis
Title: Attorney-in-Fact
-6-
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Intellicall Operator Services, Inc.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 of Intellicall, Inc. of our report dated February 29, 1996
appearing on page F-2 of this Form 10-K.
/s/ Price Waterhouse LLP 3/28/96
Date
PRICE WATERHOUSE LLP
Dallas, Texas
March 28, 1996
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000818674
<NAME> INTELLICALL, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 12-MOS
<EXCHANGE RATE>
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,105
<SECURITIES> 0
<RECEIVABLES> 26,540
<ALLOWANCES> 3,260
<INVENTORY> 11,939
<CURRENT-ASSETS> 36,911
<PP&E> 10,144
<DEPRECIATION> 8,055
<TOTAL-ASSETS> 48,644
<CURRENT-LIABILITIES> 24,605
<BONDS> 0
0
0
<COMMON> 77
<OTHER-SE> 13,166
<TOTAL-LIABILITY-AND-EQUITY> 48,644
<SALES> 19,944
<TOTAL-REVENUES> 74,502
<CGS> 21,454
<TOTAL-COSTS> 66,772
<OTHER-EXPENSES> 12,606
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,310
<INCOME-PRETAX> (6,139)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,139)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,139)
<EPS-PRIMARY> (0.80)
<EPS-DILUTED> 0
</TABLE>
