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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-10588
INTELLICALL, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-1993841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2155 Chenault, Suite 410
Carrollton, TX 75006
(Address of principal executive offices)
(972) 416-0022
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class November 7,1996
Common Stock $.01 par value 8,611,443
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<PAGE>
INDEX
INTELLICALL, INC.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 1996
(Unaudited) and December 31, 1995..................................1
Consolidated Statements of Operations for each of the three
month periods ended September 30, 1996 and 1995
(Unaudited)........................................................2
Consolidated Statements of Operations for each of the nine
month periods ended September 30, 1996 and 1995
(Unaudited)........................................................3
Consolidated Statements of Cash Flows for each of the nine
month periods ended September 30, 1996 and 1995
(Unaudited)........................................................4
Notes to Consolidated Financial Statements.........................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................10
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K..................................13
Signatures..................................................................14
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
INTELLICALL, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share information)
September 30, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Restricted cash $ 11 $ 492
Cash and cash equivalents 2,001 613
Receivables, net 23,987 23,008
Receivables from related party 272 272
Inventories 8,210 11,939
Other current assets 1,363 587
-------- --------
Total current assets 35,844 36,911
Fixed assets, net 1,942 2,089
License fees receivable -- 253
Investment in sales-type leases -- 96
Notes receivable, net 1,589 2,695
Intangible assets, net 951 1,018
Capitalized software costs, net 4,848 4,352
Other assets 1,727 1,230
-------- --------
$ 46,901 $ 48,644
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,533 $ 6,406
Other liabilities 2,245 2,725
Current portion of long-term debt 12,675 15,474
------- -------
Total current liabilities 24,453 24,605
Long-term debt 10,214 8,620
Deferred revenue 1,597 1,976
Other liabilities 200 200
Minority interest 99 --
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000
shares authorized; none issued -- --
Common stock, $.01 par value; 20,000,000
shares authorized; 8,126,828 and 7,702,951
shares issued, respectively 81 77
Additional capital 48,864 47,191
Less common stock in treasury, at cost;
24,908 shares (258) (258)
Accumulated deficit (38,349) (33,767)
-------- --------
Total stockholders' equity 10,338 13,243
-------- --------
$ 46,901 $ 48,644
========= =========
See notes to consolidated financial statements.
</TABLE>
- 1 -
<PAGE>
<TABLE>
<CAPTION>
INTELLICALL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
Three Months Ended
September 30,
1996 1995
---- ----
<S> <C> <C>
Revenues and Sales:
Service revenues $ 23,373 $ 15,126
Equipment sales 2,899 4,105
--------- ---------
26,272 19,231
Cost of revenues and sales:
Service revenues 20,898 12,553
Equipment sales 5,956 4,518
--------- ---------
26,854 17,071
Gross profit
Service revenues 2,475 2,573
Equipment sales (3,057) (413)
--------- ---------
(582) 2,160
Selling, general and administrative expenses 2,832 2,407
Research and development expenses 151 793
Provision for doubtful accounts 80 196
---------- ---------
3,063 3,396
Operating loss (3,645) (1,236)
Interest income 365 112
Interest expense (768) (734)
Minority interest (70) --
--------- ---------
Loss before income taxes (4,118) (1,858)
Income tax refund 1,303 --
--------- ---------
Net loss $ (2,815) $ (1,858)
========= =========
Net loss per share $ (.35) $ (.24)
========= =========
Weighted average number of common and common
equivalent shares outstanding 8,102 7,677
========= ==========
See notes to consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
INTELLICALL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
Nine Months Ended
September 30,
1996 1995
---- ----
<S> <C> <C>
Revenues and Sales:
Service revenues $ 56,144 $ 42,541
Equipment sales 10,878 16,135
-------- --------
67,022 58,676
Cost of revenues and sales:
Service revenues 49,610 35,270
Equipment sales 13,312 15,416
-------- --------
62,922 50,686
Gross profit
Service revenues 6,534 7,271
Equipment sales (2,434) 719
-------- --------
4,100 7,990
Selling, general and administrative expenses 8,056 6,966
Research and development expenses 473 1,850
Provision for doubtful accounts 242 582
-------- --------
8,771 9,398
Operating loss (4,671) (1,408)
Gain on sale of assets 572 1,607
Interest income 607 364
Interest expense (2,294) (2,563)
Minority interest (99) --
-------- --------
Loss before income taxes (5,885) (2,000)
Income tax refund 1,303 --
-------- --------
Net loss $ (4,582) $ (2,000)
========= ========
Net loss per share $ (.58) $ (.26)
--------- --------
Weighted average number of common and common
equivalent shares outstanding 7,877 7,669
======== ========
See notes to consolidated financial statements.
</TABLE>
- 3 -
<PAGE>
<TABLE>
<CAPTION>
INTELLICALL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Nine Months Ended
September 30,
1996 1995
---- ----
<S> <C> <C>
Operating Activities:
Net loss $ (4,582) $ (2,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 2,865 2,837
Provision for doubtful accounts 242 582
Provision for inventory 2,754 54
Minority interest in income of subsidiary 99 --
Changes in operating assets and liabilities:
Decrease (increase) in restricted cash 481 (764)
(Increase) in receivables (2,687) (156)
Decrease (increase) in inventories 975 (945)
(Increase) in other current assets (900) (226)
Decrease in license fee receivable 584 1,974
Decrease in investment in sales type leases 498 1,897
Decrease in related party receivable -- 526
Decrease in notes receivable 1,425 829
Increase in accounts payable 3,126 479
(Decrease) in accrued liabilities (480) (26)
(Decrease) increase in deferred revenues (379) 2,136
(Decrease) increase in other (890) 306
-------- --------
Net cash provided by operating activities $ 3,131 $ 7,503
Continued on next page
</TABLE>
- 4 -
<PAGE>
<TABLE>
<CAPTION>
INTELLICALL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued
(in thousands)
Nine Months Ended
September 30,
1996 1995
---- ----
<S> <C> <C>
Investing activities:
Purchase of equipment (554) (798)
Capitalized software (1,650) (1,850)
-------- -------
Net cash used in investing activities (2,204) (2,648)
Financing activities:
Proceeds from borrowings on long-term debt 3,400 1,660
Issuance of warrant 100 --
Principal payments on long-term debt (3,417) (6,600)
Proceeds from issuance of stock 378 60
-------- -------
Net cash provided by (used in) financing activities 461 (4,880)
Net increase (decrease) in cash and cash equivalents 1,388 (25)
Cash and cash equivalents at beginning of period 613 808
-------- -------
Cash and cash equivalents at end of period $ 2,001 $ 783
======== =======
Supplemental cash flow information:
Interest paid $ 1,691 $ 2,277
======== =======
Supplemental schedule of noncash investing and financing activities:
Conversion of long-term debt to common stock $ 1,200 $ --
======== ======
See notes to consolidated financial statements.
</TABLE>
- 5 -
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
0
NOTE 1 - CERTAIN ACCOUNTING POLICIES
Basis of Presentation. The accompanying consolidated financial statements
of Intellicall, Inc. (the "Company") have been prepared in accordance with the
requirements of Form 10-Q and do not include all disclosures normally required
by generally accepted accounting principles or those normally made in annual
reports on Form 10-K. In management's opinion, all adjustments necessary for a
fair presentation of the results of operations for the periods shown have been
made and are of a normal and recurring nature.
The results of operations for the nine months ended September 30, 1996 are
not necessarily indicative of the results of operations for the full year 1996.
The consolidated financial statements herein should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
Statement Presentation. Certain prior year amounts have been reclassified
to conform to the current year presentation.
Software Development Costs. The Company capitalizes costs related to the
development of certain software products. In accordance with Statement of
Financial Accounting Standards No. 86, capitalization of costs begins when
technological feasibility has been established and ends when the product is
available for general release to customers. Amortization is computed on an
individual product basis based on the products' estimated economic life using
the straight line method, not to exceed three years.
The amounts of software development costs capitalized in the third quarter
of both 1996 and 1995 were $550,000. The Company recorded $388,000 and $217,000
of software amortization expense for the three months ended September 30, 1996
and 1995, respectively.
For the nine months ended September 30, 1996 and 1995, respectively, the
Company capitalized $1,650,000 and $1,850,000. The software amortization expense
recorded was $1,154,000 and $529,000 for the nine months ended September 30,
1996 and 1995, respectively.
Restricted Cash. Certain cash accounts serve as collateral under the
Company's Series A Notes as discussed in Note 2 to the Consolidated Financial
Statements and, accordingly, are shown as restricted.
Cash and Cash Equivalents. Cash and cash equivalents include short-term
liquid investments purchased with remaining maturities of twelve months or less.
Other. The allowance for doubtful accounts was $3.8 million at September
30, 1996, and $3.3 million at December 31, 1995.
- 6 -
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - LONG-TERM DEBT AND LINE OF CREDIT
As of September 30, 1996 and December 31, 1995, the Company's debt
consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Intellicall, Inc.
Variable rate senior bridge notes due 1996, Series A $ 12,675 $ 15,375
8% Convertible subordinated notes, due 2000 6,300 7,500
Note collateralized by certain leases -- 219
Convertible subordinated note, due 1999 1,000 1,000
-------- --------
19,975 24,094
ILD Communications, Inc.
Senior secured debt, due 1999 2,000 --
Convertible subordinated notes, due 2001 1,000 --
Debt discount (86) --
-------- --------
2,914 --
Total debt 22,889 24,094
Less: Current portion of long-term debt (12,675) (15,474)
-------- --------
Total long-term debt $ 10,214 $ 8,620
======== ========
</TABLE>
On August 11, 1994 the Company issued its Variable Rate Senior Bridge Notes
Due 1996, Series A ("Series A Notes") and 12.5% Senior Bridge Notes Due 1996,
Series B ("Series B Notes") to Nomura Holding America Inc. ("Nomura"). The
Series B Notes were repaid in full in 1995 and may not be re-issued. The Company
issued a warrant which entitles Nomura to purchase 551,954 shares of the
Company's common stock, $.01 par value at $3.50 per share (the "Common Stock").
The notes are secured by collateral comprising substantially all the assets of
the Company.
Interest on the Series A Notes accrued monthly at a rate of prime plus 2.0%
through December 31, 1995 (10.75% at December 31, 1995), and accrued at prime
plus 3.0% through August 11, 1996. Subsequent to August 11, 1996, the Series A
Notes accrue interest at a rate of prime plus 5.0%. The Series A Notes were
scheduled to mature on August 11, 1996. Nomura has extended the maturity date to
December 11, 1996. Interest on the Series A Notes is payable quarterly. The
Series A Notes may be issued from time to time provided the aggregate amount
outstanding does not exceed $12.73 million.
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 payment of dividends. As of September 30, 1996, Nomura
waived the Company's non-compliance with certain covenants.
- 7 -
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is obligated to repay or refinance the Series A Notes by their
extended maturity on December 11, 1996. Management is currently completing a
loan from an asset-based lender collateralized by certain of the Company's
assets. As of the date of this report, documentation is in preparation for a
loan and security agreement and revolving credit note with a total commitment of
up to $12.0 million. Availability under the revolving credit note will be
limited to a formula amount based generally upon the level of the Company's
eligible accounts receivable and inventory. The loan and security agreement will
contain provisions that prohibit the payment of dividends and require the
Company to maintain minimum levels of financial ratios.
The Company has also received a commitment from Banca del Gottardo in
Lugano, Switzerland to sell $5.0 million of 8.0% convertible subordinated notes,
due November 22, 2001 with the proceeds to be used to repay a portion of the
Nomura Series A Notes, and for working capital purposes. The notes will be
issued with warrants to purchase 200,000 shares of the Company's Common Stock.
The conversion price of the notes, and the exercise price of the warrants will
be fixed on December 18, 1996 at a price equivalent to the average of the
closing prices of the Company's Common Stock on the New York Stock Exchange
during the period from November 4 to December 18, 1996 but shall in any event
not be higher than $5.00 per share.
On February 15, 1994 the Company issued a $1.0 million, 10.0%, convertible,
subordinated note to T.J. Berthel Investments, L.P., whose ownership also
controls 8.9% of the Company's outstanding common stock. Interest is payable
quarterly and commenced March 31, 1994. The entire principal amount matures on
March 31, 1999. The note may be converted by the holder into 160,000 shares of
the Company's Common Stock at any time.
On December 29, 1995 the Company completed the sale of $7.5 million of 8.0%
convertible subordinated notes, due December 31, 2000, to Banca Del Gottardo in
Lugano, Switzerland with the proceeds used to repay the Series B Notes and for
working capital purposes. The notes were issued with warrants to purchase
300,000 shares of the Company's Common Stock. The notes are convertible into
1,785,714 shares of the Company's Common Stock at a price of $4.20 per share. As
of September 30, 1996, $1.2 million of the Banca Del Gottardo Notes were
converted to 285,710 shares of the Company's Common Stock. On October 28, 1996
an additional $2.1 million of the Notes were converted into 500,000 shares of
the Company's common stock and on November 7, 1996 $40,000 of the Notes were
converted to 9,523 shares.
On May 10, 1996 a majority-owned subsidiary of the Company, ILD
Communications, Inc. ("ILD") completed the sale of $1.0 million of 10.0%
convertible subordinated notes, due May 10, 2001, to Triad-ILD Partners, L.P.
and Morris Telecommunications, LLC in the amounts of $666,666.67 and
$333,333.33, respectively. The notes can be converted at the rate of one (1)
share of common stock of ILD for each $90.00 of principal then due the holder.
- 8 -
<PAGE>
On May 10, 1996, ILD issued Secured Promissory Notes in the aggregate
principal amount of $2.0 million with warrants to purchase an aggregate of 7,239
shares of ILD common stock at a price of $0.01 per share. Sirrom Capital
Corporation purchased a note in the original amount of $1.5 million with a
warrant to purchase 5,429 shares of common stock and Reedy River Ventures
Limited Partnership purchased a note in the original amount of $500,000 with a
warrant to purchase 1,810 shares of common stock at a price of $0.01 per share.
The notes are payable on April 31, 1999 and bear interest at 13.5% annually.
NOTE 3 - INVENTORY
As of September 30, 1996 and December 31, 1995, the Company's inventory
consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Raw materials $ 3,978 $ 6,083
Work-in-process 800 898
Finished goods 3,432 4,958
-------- --------
Total inventory $ 8,210 $ 11,939
========= =========
</TABLE>
NOTE 4 - LITIGATION
The Company is subject to various legal proceedings arising out of the
conduct of its business. It is the opinion of the management of the Company that
the ultimate disposition of these proceedings will not have a material adverse
effect on the Company's financial condition, cash flows, and results of
operations.
NOTE 5 - CREATION OF ILD COMMUNICATIONS, INC.
On May 10, 1996, the Company entered into an agreement with certain
investor groups to create ILD, a new long-distance re-sale and operator services
company. The Company transferred ownership in its wholly owned subsidiary,
Intellicall Operator Services, Inc. ("IOS"), to ILD in exchange for cash in the
amount of $2.0 million, a $1.0 million subordinated convertible note, and
preferred and common stock representing approximately 72.5% of the voting stock
of ILD. The other investor groups collectively purchased $2.0 million, or 27.5%
of the voting stock of ILD, and $1.0 million of ILD's subordinated convertible
notes. ILD also has a secured loan in the amount of $2.0 million. The Company
recorded a $572,000 gain from the transaction.
- 9 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Creation of ILD Communications, Inc.
See Note 2 and Note 5 to the Consolidated Financial Statements.
Financial Condition
Liquidity and Capital Resources.
During the nine months ended September 30, 1996, the Company generated
$3,131,000 of cash from operations and invested $554,000 in capital equipment
and $1,650,000 in software development. The Company repaid long term debt to
Nomura of $3.2 million and $219,000 to Norwest. In connection with the creation
of ILD Communications, ILD received $2.0 million for 27.5% of its common stock,
borrowed $2.0 million from a secured lender, and issued notes totaling $1.0
million to the 27.5% shareholders of ILD. Cash accounts of the Company and ILD
are segregated and neither company may use the other's cash balances for any
purposes. The Company believes that the refinancing of its long-term debt, more
fully described in Note 2 and Note 6 to the Consolidated Financial Statements,
combined with cash flow from operations, will enable the Company to maintain its
level of operations for the foreseeable future.
Results of Operations
Service Revenues. Service revenues were $23.4 million for the third quarter
ended September 30, 1996 compared to $15.1 million for the third quarter in
1995. For the nine month period ended September 30, 1996, service revenues were
$56.1 million compared to $42.5 million for the nine months ended September 30,
1995. The table below provides a detailed analysis of service revenues by type
for the three and nine month periods ended September 30, 1996 and 1995.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------------------------------------------------------------------------
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Call Traffic Revenue $13,837 $11,144 $33,661 $31,819
Long-distance Resale 1,757 1,067 3,885 2,714
Validation Services 108 582 283 2,485
Operator Services 6,821 1,925 15,692 4,845
Prepaid Calling Services 850 408 2,623 678
-------- -------- -------- ---------
Total Service Revenues $23,373 $15,126 $56,144 $42,541
======= ======= ======= =======
</TABLE>
- 10 -
<PAGE>
Call traffic revenue increased $2.7 million and $1.8 million for the three
and nine months ended September 30, 1996 from their comparative periods in
1995. Revenues results reflect the overall increase in the number of phones
generating traffic, especially in the prison sector, offset by a decline in the
average number of telephone calls per phone. Also, 1996 traffic continues to be
impacted by the incidence of dial-around.
Long-distance revenues increased $690,000 and $1,171,000 for the three and
nine months ended September 30, 1996 as compared to the three and nine months
ended September 30, 1995. The higher revenues resulted from continued growth in
the number of customers buying long-distance services from the Company.
Prepaid calling revenues were $442,000 and $1,945,000 higher for the three
and nine months ended September 30, 1996 as compared to the same periods in
1995. The principal reasons for the increases for both time periods were the
additional sales of prepaid cards in retail environments, such as direct sales
by grocery store and convenience store chains.
Validation service revenues for the nine months ended September 30, 1996
were $2,202,000 lower than the comparative nine months in 1995. Such decline
resulted from the sale of the validation assets in June of 1995.
Operator services revenues reflect the largest increase from the
comparative three and nine month periods in 1995. Revenues increased $4,896,000
and $10,847,000, respectively for those periods. The addition of a new customer
in April of 1996 resulted in additional revenue of $2,475,000 and $4,889,000 for
the three and nine months ended September 30, 1996. On April 1, 1996, the
Company entered into a new operating arrangement with its third party operator
service provider. The new agreement gives the Company greater control of its
customer base, and contractually changes the methods by which the Company
receives payment for call traffic and services rendered. Historically, the
Company recorded revenue net of amounts withheld by the service provider as the
operating contract provided for the Company to receive a commission on call
traffic. Based on the terms of the new contract, beginning in April of 1996, the
Company began recording operator services call traffic at its gross amount, and
recording the costs for services provided as cost of sales. The Company believes
the new contractual arrangements warrant the presentation of revenues as a gross
amount. The revenue effect of the change on the three and nine months ended
September 30, 1996 was $1.5 million and $2.8 millon respectively.
Gross profit from service revenues was $2.5 million or 10.6% of related
sales and $6.5 million or 11.6% of related sales for the three and nine months
ended September 30, 1996 as compared to $2.6 million or 17.0% of related sales
and $7.3 million or 17.1% of related sales for the comparable 1995 periods. The
change in the arrangement for operator services accounts described above for the
decreased gross margin percentages.
- 11 -
<PAGE>
Equipment Sales. Revenues from equipment sales were $2.9 million and $10.9
million for the three and nine months ended September 30, 1996 as compared to
$4.1 million and $16.1 million for the three and nine months ended September 30,
1995. The decline in sales was attributable to several factors. The Company's
sales were adversely affected by unusually harsh winter weather in the first
quarter and continued to be depressed by uncertainty regarding pending
regulations to be issued by the Federal Communications Commission (FCC) which
would affect payphone owners. Late in the third quarter, the FCC released new
rules requiring increased payment by interexchange carriers to private payphone
owners of dial-around compensation at the rate of approximately $40 per phone
per month. These increased payment obligations begin to accrue in November 1996
with payments beginning in April 1997.
Sales of equipment to international and Regulated Telco customers in the
third quarter and nine month 1996 periods have been lower than in comparable
1995 periods due to reduced demand from a large international customer for
payphones and reduced demand from the Regulated Telco segment.
In the quarter ended September 30, 1996 and the nine months then ended, the
Company recorded a negative gross profit of $3.1 million and $2.4 million,
respectively. These losses are attributable in part to a $2.7 million provision
for slow moving and obsolete inventories recorded in the third quarter of 1996.
The Company has experienced weak demand for domestic phone products throughout
1996, and the lack of improved demand for its international and Regulated Telco
products. The pattern of weak demand in the context of the Company's relatively
high level of inventory, and the October 1996 introduction of a major new
product will make it necessary for the Company to reduce prices of certain
inventory items below their carrying value in order to sell them. Accordingly,
the Company increased inventory reserves by $2.7 million, the loss that is
estimated to result from such aggregate price reduction.
In 1996, the Company's variable costs and mix of products sold contributed
to an improvement in the Company's gross margins from equipment sales. However,
this improvement has been offset by decreased selling prices and a decline in
the volume of units sold. The reduction in volume of units sold requires the
Company to allocate fixed manufacturing costs over a fewer number of units.
These factors have led to an inability by the Company to achieve improvement in
gross margins on equipment sales. Even so, gross margins, before the
establishment of the $2.7 million inventory provision, showed only slight
deterioration in the third quarter comparison. Compared with the quarter ended
September 30, 1995, the Company's loss at the gross profit level had narrowed
from $413,000 in 1995 on $4.1 million in equipment sales to $357,000 in 1996 on
sales of $2.9 million.
In the nine month periods before the $2.7 million provision discussed
above, the Company's 1996 gross profit was $266,000 on equipment sales of $10.9
million compared with $719,000 on sales of $16.1 million for 1995. The principal
factors affecting the change in gross profit for the nine month periods were, in
order of significance, the decline in sales volume, change in mix of products
sold and the 1996 decline in variable costs of products sold.
- 12 -
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $309,000 and $1.1 million for the three and
nine months ended September 30, 1996 compared to the same periods in 1995. Due
to a reorganization of the Company's engineering department at the beginning of
1996, employees who were formally and principally engaged in new product
development were reassigned to application engineering and customer support
functions, giving rise to a reclassification of expenses associated with these
employees. The effect of this change increases selling expense and decreases
research and development expense by $476,000 and $1.2 million for the three and
nine months ended September 30, 1996, respectively, as compared to the amounts
that would have been reported had this reorganization of the engineering
department not taken place.
Research and Development Expenses. Gross spending for research and
development decreased $642,000 and $1.4 million for the three and nine months
ended September 30, 1996 as compared to the same period in 1995. During the
first nine months of 1996, the Company capitalized software development costs of
$1,650,000 as compared to $1,850,0900 in the first nine months of 1995. Also,
spending increased in travel and prototype development.
Provision for Doubtful Accounts. The provision for doubtful accounts was
$80,000 and $242,000 for the three and nine months ended September 30, 1996 as
compared to $196,000 and $582,000 for the three and nine months ended September
30, 1996.
Income Tax Refund. In September 1996, the Company received a federal income
tax refund in the amount of $1.3 million and approximately $259,000 of related
interest earned on the claim. The income tax refund related to years beyond the
statutory carryback period but were allowed due to special provisions of the
U.S. Internal Revenue Code. Amended income tax returns were originally filed in
August 1995. The Company did not record the income tax benefit and related
interest income until the refund was received.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None.
- 13 -
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
INTELLICALL, INC.
/s/ William O. Hunt
-------------------
Chairman of the Board, President and
Chief Executive Officer
/s/ Michael H. Barnes
---------------------
Senior Vice President Corporate Staff
and Chief Financial Officer
(principal financial officer)
Date: November 14, 1996
- 14 -
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