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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-10588
INTELLICALL, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-1993841
(State or other jurisdiction of (I.R.S. Employer
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 August 12 ,1997
- ----------------------- ---------------
Common Stock $.01 par value 9,339,201
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<PAGE>
INDEX
INTELLICALL, INC.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1997
(Unaudited) and December 31, 1996...................................1
Consolidated Statements of Operations for each of the three
month periods ended June 30, 1997 and 1996
(Unaudited).........................................................2
Consolidated Statements of Operations for each of the
six month periods ended June 30, 1997 and 1996
(Unaudited).........................................................3
Consolidated Statements of Cash Flows for each of the six
month periods ended June 30, 1997 and 1996
(Unaudited).........................................................4
Notes to Consolidated Financial Statements..........................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................14
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K...................................18
Signatures...................................................................19
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
INTELLICALL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
June 30, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Restricted cash $ 16 $ 15
Cash and cash equivalents 2,649 2,271
Receivables, net 21,024 22,499
Inventories 7,440 7,902
Other current assets 1,406 1,684
-------- --------
Total current assets 32,535 34,371
Fixed assets, net 2,134 1,964
Notes receivable, net 1,422 992
Intangible assets, net 883 928
Capitalized software costs, net 4,794 4,904
Other assets, net 2,318 2,095
-------- --------
$44,086 $ 45,254
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,813 $ 6,064
Dealer payable 4,129 3,737
Deferred debit card revenue 626 1,028
Accrued liabilities 1,410 1,451
Current portion of long-term debt 71 85
-------- -------
Total current liabilities 14,049 12,365
Long-term debt 18,219 19,312
Deferred revenue 278 595
Other liabilities 200 200
Minority interest 159 113
-------- -------
Total liabilities 32,905 32,585
------- -------
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000
shares authorized; none issued -- --
Common stock, $.01 par value; 20,000,000
shares authorized; 9,319,339 and 8,646,278
shares issued, respectively 93 87
Additional paid-in capital 53,205 51,602
Less common stock in treasury, at cost;
24,908 shares (258) (258)
Accumulated deficit (41,859) (38,762)
-------- --------
Total stockholders' equity 11,181 12,669
-------- --------
$ 44,086 $ 45,254
======== =========
</TABLE>
See notes to consolidated financial statements.
- 1 -
<PAGE>
INTELLICALL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1997 1996
---- ----
<S> <C> <C>
Revenues and sales:
Service revenues $ 20,403 $ 19,792
Equipment sales 4,679 3,728
------- -------
25,082 23,520
------- -------
Costs of revenues and sales:
Service revenues 18,565 17,581
Equipment sales 4,481 3,687
------- -------
23,046 21,268
------- -------
Gross profit (loss)
Service revenues 1,838 2,211
Equipment sales 198 41
------- -------
2,036 2,252
Selling, general and administrative expenses 2,677 2,688
Research and development expenses 77 182
Provision for doubtful accounts 147 81
------- -------
Operating loss (865) (699)
Gain on sale of assets -- 572
Interest income 133 142
Interest expense (612) (755)
Minority interest (27) (29)
------- -------
Net loss $ (1,371) $ (769)
======== =======
Net loss per common and common equivalent share $ (.15) $ (.10)
------- -------
Weighted average number of common and common
equivalent shares outstanding 9,293 7,843
======= =======
</TABLE>
See notes to consolidated financial statements.
- 2 -
<PAGE>
INTELLICALL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
---- ----
<S> <C> <C>
Revenues and sales:
Service revenues $ 40,285 $ 32,771
Equipment sales 7,951 7,979
------- -------
48,236 40,750
------- -------
Costs of revenues and sales:
Service revenues 36,452 28,712
Equipment sales 8,098 7,356
------- -------
44,550 36,068
------- -------
Gross profit (loss)
Service revenues 3,833 4,059
Equipment sales (147) 623
------- -------
3,686 4,682
Selling, general and administrative expenses 5,306 5,224
Research and development expenses 196 322
Provision for doubtful accounts 252 162
------- -------
Operating loss (2,068) (1,026)
Gain on sale of assets -- 572
Interest income 229 242
Interest expense (1,212) (1,526)
Minority interest (46) (29)
-------- -------
Net loss $ (3,097) $ (1,767)
========= ========
Net loss per common and common equivalent share $ (.34) $ (.23)
-------- --------
Weighted average number of common and common
equivalent shares outstanding 9,071 7,720
======== =======
</TABLE>
See notes to consolidated financial statements.
- 3 -
<PAGE>
INTELLICALL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
---- ----
<S> <C> <C>
Operating Activities:
Net loss $ (3,097) $ (1,767)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization 1,876 1,955
Provision for doubtful accounts 252 162
Provision for inventory 18 36
Minority interest in income of subsidiary 46 29
Changes in operating assets and liabilities:
Restricted cash (1) 483
Receivables 563 (2,308)
Inventories 444 483
Other current assets 236 (807)
License fee receivable 77 397
Investment in sales type leases 150 188
Notes receivable (27)
Accounts payable 2,140 3,066
Accrued liabilities (443) (44)
Deferred revenues (317) (194)
Other 31 (947)
-------- --------
Net cash provided by operating activities $ 1,948 $ 1,917
-------- --------
</TABLE>
Continued on next page
- 4 -
<PAGE>
INTELLICALL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
---- ----
<S> <C> <C>
Investing activities:
Purchase of equipment (606) (324)
Capitalized software (891) (1,100)
------- -------
Net cash used in investing activities (1,497) (1,424)
------- -------
Financing activities:
Proceeds from borrowing on long-term debt -- 2,900
Issuance of warrant -- 100
Principal payments on long-term debt (312) (2,119)
Proceeds from issuance of stock 239 166
------- -------
Net cash (used in) provided by financing activities (73) 1,047
------- -------
Net increase in cash and cash equivalents 378 1,540
Cash and cash equivalents at beginning of period 2,271 613
------- -------
Cash and cash equivalents at end of period $ 2,649 $ 2,153
======= =======
Supplemental cash flow information:
Interest paid $ 958 $ 863
======= =======
Supplemental schedule of noncash investing and financing activities:
Conversion of long-term debt to common stock $ 945 $ 1,150
======= =======
</TABLE>
See notes to consolidated financial statements.
- 5 -
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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, however, 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 six months ended June 30, 1997 are not
necessarily indicative of the results of operations for the full year 1997. 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, 1996.
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 five years.
The amounts of software development costs capitalized in the second quarter
of 1997 and 1996 were $416,000 and $600,000. The Company recorded $446,000 and
$387,000 of software amortization expense for the three months ended June 30,
1997 and 1996, respectively.
For the six months ended June 30, 1997 and 1996, respectively, the Company
capitalized $891,000 and $1.1 million. The software amortization expense
recorded was $1.0 million and $767,000 for the six months ended June 30, 1997
and 1996.
Cash and Cash Equivalents. Cash and cash equivalents include short-term
liquid investments purchased with remaining maturities of three months or less.
- 6 -
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Earnings per Share. In February 1997, the Financial Accounting Standards
Board issued FAS No. 128, Earnings per Share ("FAS 128"), which is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. Effective December 31, 1997, the Company will adopt
FAS 128, which establishes standards for computing and presenting earnings per
share (EPS). The statement requires dual presentation of basic and diluted EPS
on the face of the income statement for entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
Basic EPS excludes the effect of potentially dilutive securities while diluted
EPS reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised, converted into or resulted in
the issuance of common stock that then shared in the earnings of the entity. For
the three and six months ended June 30, 1997 and 1996, calculated basic and
diluted earnings per share equal earnings per share shown on the face of the
consolidated statements of operations.
Disclosures about Segments of an Enterprise and Related Information. In
June 1997, FASB issued Financial Accounting Standard No. 131, Disclosures about
Segments of an Enterprise and Related Information ("FAS 131"), which is
effective for fiscal years beginning after December 15, 1997. Effective January
1, 1998, the Company will adopt FAS 131.
Other. The allowance for doubtful accounts was $3.3 million at June 30,
1997, and $3.2 million at December 31, 1996.
- 7 -
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2 - LONG-TERM DEBT AND LINE OF CREDIT
As of June 30, 1997 and December 31, 1996, the Company's debt consisted of
the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Intellicall, Inc.
8% Convertible subordinated notes, due 2000 $ 3,215 $ 4,160
8% Convertible subordinated notes, due 2001 5,000 5,000
Convertible subordinated note, due 1999 1,000 1,000
Asset-based note collateralized by certain assets, due 1999 6,598 6,862
Installment note, due 1998 71 113
--------- ---------
15,884 17,135
Less unamortized debt discount (533) (660)
--------- ---------
15,351 16,475
--------- ---------
ILD Communications, Inc.
Senior secured debt, due 2001 2,000 2,000
Convertible subordinated notes, due 2001 1,000 1,000
--------- ---------
3,000 3,000
Less unamortized debt discount (61) (78)
--------- ---------
2,939 2,922
--------- ---------
Total debt 18,290 19,397
Less: Current portion of long-term debt (71) (85)
--------- ---------
Total long-term debt $ 18,219 $ 19,312
========= ==========
</TABLE>
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 Nomura Series B Notes
and for working capital purposes. The notes were issued with warrants to
purchase 300,000 shares of the Company's
- 8 -
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 June 30, 1997, $4.3 million of
the Banca Del Gottardo Notes has been converted to 1,020,232 shares of the
Company's common stock. Interest is payable semi-annually and commenced June 30,
1996.
On May 10, 1996 a majority owned subsidiary of the Company, ILD
Teleservices, 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.
Also issued with the notes was a warrant to purchase 6,000 shares at $90.00 per
share. Interest is paid quarterly.
On May 10, 1996 ILD issued Secured Promissory Notes in the aggregate
principal amount of $2,000,000 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 $1,500,000 with a warrant
to purchase 5,429 shares of common stock at a price of $0.01 per share 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 May 10, 2001 and bear interest at
13.5% annually. Interest is paid monthly.
On November 22, 1996 the Company completed the sale of $5.0 million of 8.0%
convertible subordinated notes, due November 22, 2001, to Banca Del Gottardo in
Lugano, Switzerland. The notes were issued with warrants to purchase 200,000
shares of the Company's common stock at $5.00 per share. The notes are
convertible into one million shares of the Company's common stock at a price of
$5.00 per share. Interest is payable semi-annually beginning May 1997.
On November 22, 1996 the Company entered into a Loan and Security Agreement
(the "Loan Agreement") with Finova Capital Corporation ("Finova") pursuant to
which Finova agreed to loan the Company up to $12,000,000 (the "Loan") based on
an available borrowing base. The borrowing base consists primarily of call
traffic and trade equipment receivables, and inventory, subject to eligibility
requirements determined by Finova. Amounts loaned subject to the borrowing base
are determined by percentages established in the Loan Agreement, but are within
the discretion of Finova. Such percentages are subject to change based on
experience and Finova's expectations regarding future collectibility of
receivables and usage of inventory.
- 9 -
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Loan is evidenced by a Secured Revolving Credit Note (the "Note")
payable to the order of Finova. Borrowing under the Loan bear interest at the
rate of prime plus 1.75%. The interest rate may be decreased prospectively by up
to 0.5% based on future profitability of the Company. The Company used the
proceeds from the Finova Loan and Gottardo Notes (net of placement fees of
$509,406) to repay the remaining balance of its Series A Notes due to Nomura
Holding America, Inc in the amount of $12.7 million. Also the Loan has an unused
line fee equal to one quarter of one percent (0.25%) per annum of the unused
portion of the Total Facility and a facility fee equal to one-half of one
percent (0.50%) per annum of the amount of the Total Facility payable on the
first anniversary of the Agreement and annually thereafter.
The initial term of the Loan Agreement is three years at which time, unless
extended, all amounts then outstanding must be repaid. The Loan Agreement
contains prepayment penalties in the event it is terminated prior to expiration
of its initial term. The Loan is secured by first and prior liens and security
interests encumbering substantially all of the assets of the Company, including
inventory, equipment, accounts receivable, general intangibles, trademarks and
tradenames. The Loan Agreement contains various restrictions (including a
prohibition against the payment of dividends, limitations on capital
expenditures, and restrictions on investments) and financial ratio maintenance
requirements (including minimum working capital and net worth requirements). As
of June 30, 1997 the Company was in compliance with all required covenants.
NOTE 3 - INVENTORY
As of June 30, 1997 and December 31, 1996, the Company's inventory
consisted of the following (in thousands):
June 30, December 31,
1997 1996
---- ----
Raw materials $ 4,422 $ 4,850
Work-in-process 253 511
Finished goods 2,765 2,541
-------- --------
Total inventory $ 7,440 $ 7,902
=========== ===========
- 10 -
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 4 - LITIGATION
In April 1997, U.S. Long Distance, Inc. ("USLDI") filed a Second Amended
Complaint against the Company. The case is pending in the United States District
Court for the Western District in San Antonio, Texas. The complaint seeks actual
damages of $4.0 million, exemplary damages, attorney's fees and interest for the
Company's alleged tortious interference of USLDI's existing and prospective
contractual relationships with PhoneTel Technologies, Inc. ("PhoneTel"). The
Second Amended Complaint alleges the Company and its then subsidiary,
Intellicall Operator Services, Inc. interfered with USLDI's existing contractual
relationship with PhoneTel, another defendant, when PhoneTel executed an
operator services agreement with the Company and its subsidiary. The Company
intends to vigorously contest the allegations contained in the Second Amended
Complaint.
NOTE 5 - ILD COMMUNICATIONS AGREEMENT TO PURCHASE WORLDCOM
OPERATOR SERVICES BUSINESS
On March 5, 1997 the Company announced that its majority owned subsidiary,
ILD Teleservices, Inc. (ILD), entered into a definitive agreement to purchase
the operator services business and related assets from WorldCom, Inc. The assets
acquired by ILD include the operator services and related long distance customer
contracts, operator service centers in San Antonio, Texas, Las Vegas, Nevada and
Boca Raton, Florida and switching facilities in Dallas, Texas and Los Angeles,
California as well as Worldcom's billing and collection operations, and inmate
operator services businesses. ILD will also enter into a long-term operator
services agreement with WorldCom to handle the international and domestic
operator services requirements of WorldCom. In addition, ILD will enter into a
network services contract with WorldCom.
NOTE 6 - SUBSEQUENT EVENT
On July 21, 1997 (the "Closing Date") the Company entered into a Securities
Purchase Agreement (the "Purchase Agreement") with four institutional investors
(the "Investors") pursuant to which the Investors purchased $4,000,000 of the
Company's 7% Series A Convertible preferred stock (the "preferred stock"). The
Company utilized the net proceeds from the sale of the preferred stock
(approximately $3,800,000) to pay down indebtedness to Finova.
Commencing 90 days after the Closing Date, the preferred stock, plus all
accrued dividends, is convertible into common stock of the Company at the option
of each Investor at
- 11 -
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
a conversion price equal to the lower of $5.05 per share (the "Fixed Conversion
Price") or eighty percent (80%) of the average fifteen day trading price
preceding the date of conversion (the "Variable Conversion Price"). However, in
the event any Investor acquires common stock upon conversion of the preferred
stock and the conversion price is based on the Variable Conversion Price, such
Investor must pay a fee to the Company as follows:
a) in the event the issuance of such common stock occurs from 91 to 180
days after the Closing Date, the fee payable to the Company is 25% times the
Variable Conversion Price times the number of such shares of common stock; and
b) in the event the issuance of such common stock occurs from 181 to 365
days after the Closing Date, the fee payable to the Company is 6.25% times the
Variable Conversion Price times the number of such shares of common stock.
Any shares of preferred stock outstanding two years after the Closing Date
will automatically convert into common stock.
The Investors may require the Company to redeem certain shares of preferred
stock (i) in the event the number of shares of common stock issuable upon
conversion (based on the conversion price in existence from time to time)
multiplied by 1.25 would exceed the maximum number of shares of common stock
which the Company can issue without shareholder approval pursuant to applicable
New York Stock Exchange Guidelines, unless shareholder approval is so obtained
within 120 days of such occurrence, (ii) in the event the Company fails to
reserve an adequate number of shares of common stock as contemplated by the
designation of preferred stock creating the preferred stock (the "Designation"),
unless such failure is cured by board of directors and/or shareholder approvals
as required, (iii) in the event the Company fails to honor a conversion notice
and (iv) in other events as more fully set forth in the Designation. Any
redemptions, however, are limited to the Company's borrowing availability under
its loan agreement with Finova, as further described below.
The Designation grants to the Company the option, under certain
circumstances, to redeem for cash any shares of preferred stock submitted for
conversion if the Variable Conversion Price is less than $4.00 per share and
funds are available under the Company's loan agreement with Finova.
The Company also agreed with the Investors to file a registration statement
on the common stock underlying the conversion of the preferred stock and to have
such registration statement declared effective by the SEC within ninety days of
the Closing Date.
- 12 -
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In conjunction with the issuance of the preferred stock, the Company
entered into a Second Amendment to the Loan and Security Agreement with Finova
(the "Second Amendment"). The Second Amendment modified one financial covenant
and allowed the Company to redeem the preferred stock as contemplated in the
Designation if (i) following and giving effect to such redemption the Company
shall have excess borrowing availability under its borrowing base of not less
than $500,000, and shall have paid in full or made provision for payment in full
of all of Company's accounts payable in excess of $500,000 which are outstanding
beyond their due date and are not contested in good faith by the Company and all
book overdrafts and (ii) at the time of such redemption no event of Monetary
Default, as defined in the loan agreement with Finova, and no event which, with
notice or passage of time or both, would constitute an event of Monetary Default
under the loan agreement with Finova has occurred and is continuing, or would
result from such redemption.
- 13 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements - Cautionary Statements
This Form 10-Q contains certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Specifically, all statements other than statements
of historical facts included in this report regarding the Company's financial
position, business strategy and plans and objectives of management of the
Company for future operations are forward-looking statements. These
forward-looking statements are based on the beliefs of the Company's management,
as well as assumptions made by and information currently available to the
Company's management. When used in this report, the words "anticipate",
"believe", "estimate", "expect," and "intend" and words or phrases of similar
import, as they relate to the Company or Company management, are intended to
identify forward-looking statements. Such statements reflect the current view of
the Company with respect to future events and are subject to risks,
uncertainties and assumptions related to various factors including, without
limitation, competitive factors, general economic conditions, customer
relations, relationships with vendors, the interest rate environment,
governmental regulation and supervision, seasonality, product introductions and
acceptance, technological change, changes in industry practices described herein
"the "cautionary statements") and one-time events. Although the Company believes
that expectations are reasonable, it can give no assurance that such
expectations will prove to be correct. Based upon changing conditions, should
any one or more of these risks or uncertainties materialize, or should any
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the applicable cautionary statements.
Financial Condition
Liquidity and Capital Resources
During the first half of 1997 the Company generated $1,948,000 of cash from
operations and invested $606,000 in capital equipment and $891,000 in software
development. Borrowings under the Company's notes decreased $312,000 and cash
proceeds from the exercise of stock options totaled $239,000. The net result of
such changes described above was a $378,000 increase in cash and cash
equivalents.
An increase in cash of $2.8 million arose from the net effect of changes in
operating assets and liabilities. Most significantly was an increase in accounts
payable of $2.14 million during the first half of 1997. The equity offering
described in Note 6 resulted in a reduction of accounts payables and the
outstanding obligation to Finova Capital Corporation.
- 14 -
<PAGE>
The outstanding balance under the Company's 8% convertible subordinated
notes, due 2000 declined $945,000 in the first quarter of 1997 from the
conversion into common stock by the holders of such amount of the notes. Such
conversion had no effect on the cash position of the Company.
The Company's future liquidity will depend on spending levels, working
capital turnover and the volume and timing of equipment sales and gross margins.
There can be no assurances that the Company's efforts to maintain or enhance
liquidity will be successful, and, under certain circumstances, the Company may
be required to limit its operations, dispose of certain assets, consider the
sale of additional equity, or take other actions as considered necessary.
- 15 -
<PAGE>
Results of Operations
Service Revenues. Service revenues were $20.4 million for the second quarter
ended June 30, 1997 compared to $19.8 million for the second quarter in 1996.
For the six month period ended June 30, 1997, service revenues were $40.3
million compared to $32.8 million for the six months ended June 30, 1996. The
table below provides a detailed analysis of service revenues by type for the
three and six month periods ended June 30, 1997 and 1996.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Call Traffic Revenue $10,611 $10,977 $21,668 $19,999
Long-distance Resale 1,101 1,304 2,209 2,128
Operator Services 7,208 6,536 13,538 8,871
Prepaid Calling Services 1,483 975 2,870 1,773
---------- -------- -------- --------
Total Service Revenues $20,403 $19,792 $40,285 $32,771
======= ======= ======= =======
</TABLE>
Call traffic revenues declined $366,000 in the second quarter of 1997
compared to the second quarter of 1996. Revenues increased $1.7 million for the
first half of 1997 compared to the first half of 1996. The period to period
changes are principally the result of changes in the volume of call revenues
processed under the Company's Jail*Star inmate services program. The Jail*Star
program was implemented in late 1995, grew significantly in the last part of
1996 and was terminated in mid-June 1997. The growth pattern in Jail*Star
revenues primarily accounts for the increase in six month revenues in 1997
compared to 1996. However, revenues from call traffic continue to be negatively
impacted by dial-around activity. Such decline is reflected in revenues for the
second quarter of 1997 compared to the same period in 1996.
Operator service revenues were $672,000 and $4.7 million higher for the
three and six months ended June 30, 1997 compared to 1996. The differences
principally arise from the addition of a significant new customer in April 1996,
and a new operating arrangement between the Company and its third party operator
service provider entered into on April 1, 1996. The new agreement contractually
changed the methods by which the Company receives payment for call traffic and
pays for services rendered. Based on the terms of the new contract, beginning
April 1, 1996 the Company began recording operator services call traffic at its
gross amount, and recording the costs of services provided as cost of sales. The
effect of the change on the first quarter of 1997 was to increase reported
revenue approximately $2.5 million. Also in April of 1996 the Company began
providing services to a new customer accounting for a $2.0 million increase in
revenue from the 1996 to 1997 six month period.
Prepaid calling services increased $508,000 and $1.1 million for the second
quarter and six months ended June 30, 1997 as compared to the same time periods
in 1996 due to an
- 16 -
<PAGE>
expanded customer base and higher volume of sales transactions.
Gross profit from service revenues decreased $373,000 and $226,000 for the
three and six months ended June 30, 1997, compared to the three and six months
ended June 30, 1996 despite the higher revenues. Second quarter gross profits in
1997 were adversely affected by the following factors: (i) a change in the mix
of call traffic from high margin unbundled services to lower margin programs
including the Company's inmate services program, (ii) the implementation in
April 1996 of the new operator services agreement described above that had the
effect of increasing revenues but lowering gross margin percentages, and (iii)
higher than expected bad debt charges on automated operator services call
traffic.
Equipment Sales. The Company's equipment sales were $4.7 million and $8.0
million for the three and six months ended June 30, 1997 compared to $3.7
million and $8.0 million for the three and six months ended June 30, 1996. The
following table presents an analysis of sales to the Company's primary markets
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Independent payphone $3,877 $2,646 $7,122 $5,733
providers
International 802 975 819 1,842
Regulated -- 107 10 404
------- -------- ----- ------
Total equipment sales $4,679 $3,728 $7,951 $7,979
====== ====== ====== ======
</TABLE>
The $1.2 million increase in independent payphone sales for the three
months ended June 30, 1997 in comparison to the three months ended June 30, 1996
and the $1.4 million increase for the six month period ended June 30, 1997
compared to the same period in 1996 are a reflection of customer acceptance of
the Astra*Tel 2 product, the Company's line-powered phone introduced in October
1996.
Gross profit from equipment sales was $198,000 for the three month ended
June 30, 1997 compared to a gross profit of $41,000 for the three months ended
June 30, 1996. The slightly higher gross profit reflects higher per unit profits
earned on sales of the AstraTel 2 pay telephone compared to earlier products,
which was reduced by certain trade-in allowances, temporarily elevated material
costs and lower sales prices obtained by the Company upon sale of its older
product lines. Gross loss from equipment sales was $147,000 for the six months
ended June 30, 1997 in comparison to a gross profit of $623,000 for the six
months ended June 30, 1996. The negative gross margin is attributable to lower
international and regulated sales which carry a favorable margin, an increase in
software amortization expense and lower prices obtained from sales of the
Company's older product lines.
- 17 -
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $11,000 for the three months ended June 30,
1997 compared to the three months ended June 30, 1996 and increased $82,000 for
the six months ended June 30, 1997 compared to the six months ended June 30,
1996. The slight increase is attributable to higher spending at ILD; a
subsidiary of Intellicall. Such increases were offset in the second quarter of
1997 by lower expenses at Intellicall.
Research and Development Expenses. Gross spending for research and
development decreased $105,000 and $126,000 for the three and six month periods
ended June 30, 1997 to the three and six month periods ended June 30, 1996,
respectively. In the first half of 1997, the Company capitalized $891,000 as
compared to $1.1 million in the first half of 1996. With the introduction of the
new line-powered phone in the latter part of 1996, more time is spent supporting
the new products and less on the development of them.
Provision for Doubtful Accounts. During the quarter ended June 30, 1997 the
Company provided $147,000 for doubtful accounts compared to $81,000 in the same
quarter in 1996. For the six months ended June 30, 1997 the provision was
$252,000 compared to $162,000 for the six months ended June 30, 1996.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None as of June 30, 1997.
- 18 -
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Company has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
INTELLICALL, INC.
/s/ William O. Hunt
--------------------
William O. Hunt
Chairman of the Board and
Chief Executive Officer
/s/ John M. Carradine
---------------------
John M. Carradine
Chief Financial Officer
Date: August 15, 1997
- 19 -
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<NAME> INTELLICALL, INC.
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
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