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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, 1997
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 10,1997
Common Stock $.01 par value 9,435,736
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<PAGE>
INDEX
INTELLICALL, INC.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 1997
(Unaudited) and December 31, 1996....................................1
Consolidated Statements of Operations for each of the three
month periods ended September 30, 1997 and 1996
(Unaudited)..........................................................2
Consolidated Statements of Operations for each of the nine
month periods ended September 30, 1997 and 1996
(Unaudited)..........................................................3
Consolidated Statements of Cash Flows for each of the nine
month periods ended September 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...............................................15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K....................................21
Signatures...................................................................21
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
INTELLICALL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<S> <C> <C>
September 30, 1997 December 31, 1996
------------------ -----------------
ASSETS (unaudited)
Current assets:
Restricted cash $ 18 $ 15
Cash and cash equivalents 241 2,271
Receivables, net 26,167 22,499
Inventories, net 3,345 7,902
Other current assets 1,307 1,684
-------- --------
Total current assets 31,078 34,371
Fixed assets, net 7,534 1,964
Notes receivable, net 1,219 992
Intangible assets, net 17,849 928
Capitalized software costs, net 3,083 4,904
Other assets, net 2,817 2,095
-------- --------
$ 63,580 $45,254
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,727 $ 6,064
Dealer payable 4,425 3,737
Deferred debit card revenue 689 1,028
Accrued liabilities 2,539 1,451
Current portion of long-term debt 1,450 85
-------- ---------
Total current liabilities 18,830 12,365
Long-term debt 20,867 19,312
Deferred revenue -- 595
Other liabilities 465 200
Minority interest 3,991 113
--------- --------
Total liabilities 44,153 32,585
-------- -------
Redeemable preferred stock, $100 par value,111,960 and
zero shares issued and outstanding, respectively 11,196 --
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000
shares authorized; 4,000 and zero issued and
oustanding, respectively 1 --
Common stock, $.01 par value; 20,000,000
shares authorized; 9,460,644 and 8,646,278
shares issued and outstanding, respectively 95 87
Additional paid-in capital 57,436 51,602
Less common stock in treasury, at cost; 24,908 shares (258) (258)
Accumulated deficit (49,043) (38,762)
-------- --------
Total stockholders' equity 8,231 12,669
--------- --------
$ 63,580 $ 45,254
======== =========
</TABLE>
See notes to consolidated financial statements.
- 1 -
<PAGE>
<TABLE>
<CAPTION>
INTELLICALL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
Three Months Ended
September 30,
1997 1996
---- ----
<S> <C> <C>
Revenues and Sales:
Service revenues $ 24,991 $ 23,373
Equipment sales 5,770 2,899
-------- --------
30,761 26,272
-------- --------
Cost of revenues and sales:
Service revenues 22,750 20,898
Equipment sales 10,410 5,956
-------- --------
33,160 26,854
-------- --------
Gross profit (loss)
Service revenues 2,241 2,475
Equipment sales (4,640) (3,057)
-------- --------
(2,399) (582)
Selling, general and administrative expenses 3,572 2,896
Research and development expenses 257 87
Provision for doubtful accounts 273 80
-------- --------
Operating loss (6,501) (3,645)
Interest income 216 365
Interest expense (619) (768)
Minority interest (83) (70)
--------- ---------
Loss before income taxes (6,987) (4,118)
Income tax refund -- 1,303
Income tax expense (142) --
-------- ---------
Net loss (7,129) (2,815)
Preferred stock dividend (55) --
--------- ---------
Net loss available to common shareholders $ (7,184) $ (2,815)
========= =========
Net loss per share $ (.77) $ (.35)
========= =========
Weighted average number of common and common
equivalent shares outstanding 9,334 8,102
========= =========
</TABLE>
See notes to consolidated financial statements.
- 2 -
<PAGE>
<TABLE>
<CAPTION>
INTELLICALL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
Nine Months Ended
September 30,
1997 1996
---- ----
<S> <C> <C>
Revenues and sales:
Service revenues $ 65,276 $ 56,144
Equipment sales 13,721 10,878
------- -------
78,997 67,022
------- -------
Costs of revenues and sales:
Service revenues 59,202 49,610
Equipment sales 18,508 13,312
------- -------
77,710 62,922
------- -------
Gross profit (loss)
Service revenues 6,074 6,534
Equipment sales (4,787) (2,434)
------- -------
1,287 4,100
Selling, general and administrative expenses 8,876 8,247
Research and development expenses 455 282
Provision for doubtful accounts 525 242
-------- -------
Operating loss (8,569) (4,671)
Gain on sale of assets -- 572
Interest income 445 607
Interest expense (1,831) (2,294)
Minority interest (129) (99)
-------- --------
Loss before income taxes (10,084) (5,885)
Income tax refund -- 1,303
Income tax expense (142) --
-------- ---------
Net loss (10,226) (4,582)
Preferred stock dividend (55) --
--------- ---------
Net loss available to common shareholders $ (10,281) $ (4,582)
========= =========
Net loss per common and common equivalent share $ (1.12) $ (.58)
--------- ---------
Weighted average number of common and common
equivalent shares outstanding 9,211 7,877
======== =======
</TABLE>
See notes to consolidated financial statements.
- 3 -
<PAGE>
<TABLE>
<CAPTION>
INTELLICALL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Nine Months Ended
September 30,
1997 1996
---- ----
<S> <C> <C>
Operating Activities:
Net loss $ (10,226) $ (4,582)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization 4,667 2,865
Provision for doubtful accounts 934 242
Provision for inventory 4,382 2,754
Minority interest in income of subsidiary 129 99
Changes in operating assets and liabilities:
Restricted cash (3) 481
Receivables (5,379) (2,687)
Inventories 175 975
Other current assets 314 (900)
License fee receivable 152 584
Investment in sales type leases 142 498
Notes receivable 8 1,425
Accounts payable 4,351 3,126
Accrued liabilities (223) (480)
Deferred revenues (595) (379)
Other (748) (890)
-------- --------
Net cash (used in) provided by operating activities $ (1,920) $ 3,131
-------- --------
Continued on next page
- 4 -
<PAGE>
INTELLICALL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued
(in thousands)
Nine Months Ended
September 30,
1997 1996
---- ----
Investing activities:
Purchase of equipment (807) (554)
Capitalized software (1,162) (1,650)
Acquisition of Worldcom assets (10,021) --
------- --------
Net cash used in investing activities (11,990) (2,204)
------- --------
Financing activities:
Net borrowings on lines of credit 4,028 (17)
Issuance of warrant -- 100
Proceeds from issuance of common stock in ILD 3,250 --
Proceeds from issuance of stock in Intellicall 4,602 378
------- --------
Net cash provided by financing activities 11,880 461
------- --------
Net (decrease) increase in cash and cash equivalents (2,030) 1,388
Cash and cash equivalents at beginning of period 2,271 613
------- --------
Cash and cash equivalents at end of period $ 241 $ 2,001
========= =========
Supplemental cash flow information:
Interest paid $ 1,281 $ 1,691
========= ========
Supplemental schedule of noncash investing and financing activities:
Conversion of long-term debt to common stock $ 1,320 $ 1,200
========= ========
Stock issued in acquisition of WorldCom assets $ 11,696 $ --
======== ========
Preferred stock dividend declared $ 55 $ --
========= ========
</TABLE>
See notes to consolidated financial statements.
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<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 nine months ended September 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 reclassi-
fied 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 third
quarter of 1997 and 1996 were $271,000 and $550,000, respectively. The Company
recorded $397,000 and $388,000 of software amortization expense for the three
months ended September 30, 1997 and 1996, respectively.
For the nine months ended September 30, 1997 and 1996, the Company
capitalized $1,162,000 and $1,650,000, respectively. The software amortization
expense recorded was $1,400,000 and $1,154,000 for the nine months ended
September 30, 1997 and 1996, respectively. Also in the third quarter of 1997,
the Company wrote down capitalized software costs to its net realizable value,
taking a charge of $1,584,000.
Cash and Cash Equivalents. Cash and cash equivalents include short-term
liquid investments purchased with remaining maturities of three months or less.
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
- 6 -
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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
nine months ended September 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 $4.5 million at
September 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 September 30, 1997 and December 31, 1996, the Company's debt
consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Intellicall, Inc.
8% Convertible subordinated notes, due 2000 $ 2,840 $ 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 5,398 6,862
Installment note, due 1998 50 113
---------- ----------
14,288 17,135
Less unamortized debt discount (481) (660)
--------- ----------
13,807 16,475
--------- ----------
ILD Teleservices, Inc.
Senior secured debt, due 2001 2,000 2,000
Convertible subordinated notes, due 2001 1,000 1,000
Revolving credit facility due 2001 563 --
Term loan facility due 2001 5,000 --
--------- ---------
8,563 3,000
Less unamortized debt discount (53) (78)
--------- --------
8,510 2,922
--------- ---------
Total debt 22,317 19,397
Less: Current portion of long-term debt (1,450) (85)
--------- ---------
Total long-term debt $ 20,867 $ 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 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, 1997, $4,660,000 of the Banca Del
- 8 -
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Gottardo Notes has been converted to 1,109,517 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.
The Loan is evidenced by a Secured Revolving Credit Note (the "Note")
payable to the order of Finova. Borrowings 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
- 9 -
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(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 September 30, 1997 Finova waived the company's non-compliance with certain
covenants.
On August 29, 1997 ILD entered into a Loan and Security Agreement with
Nationsbank, N.A. ("Nations") pursuant to which Nations agreed to loan ILD up to
$20,000,000 (the "Revolving Credit Loan") based on an available borrowing base
comprised primarily of ILD's receivables, inventory, contract rights, general
intangibles, equipment, and deposit accounts. Borrowing under the revolving
credit loan bears interest at the current rate of 9% and is calculated (a) in
the case of Prime Rate Advances and LIBOR Advances made prior to December 30,
1998, to the sum of the Prime Rate plus .50% per annum and LIBOR plus 2.75% per
annum, respectively, (b) in the case of Prime Rate Advances and LIBOR Advances
made on or after December 31, 1998, to the sum of the Prime Rate plus an amount
dependent on the calculation of (Senior Funded Debt/EBITDA) and is payable
monthly. ILD borrowed $1,221,000 on the Revolver Credit Loan to pay for assets
acquired from WorldCom. The revolving credit loan has an unused line fee of
one-quarter of one percent (0.25%) per annum of the difference between
$20,000,000 and the average daily outstanding balances of the revolving credit
loans during the period for which the unused line fee is due. ILD further paid a
closing fee of $300,000 to Nations and an annual administrative fee of $25,000.
The revolving credit loan's initial term ends February 13, 2001.
On August 27, 1997 Nations also agreed to loan ILD $5.0 million in a term
loan due February 13, 2001 with an interest rate of 11.5% per annum or prime
plus 2.5% per annum payable quarterly beginning March 31, 1998. The term loan
requires a mandatory reduction in the amount of $500,000 payable on or before
March 31, 1998. The principal balance is due and payable in (i) eight (8)
consecutive quarterly installments in an amount equal to $300,000 each,
commencing on the last day of the first (1st) fiscal quarter of 1998 and
continuing on the
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<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
last day of each and every fiscal quarter thereafter through and including
the last fiscal quarter in 1999, and (ii) four (4) consecutive quarterly
installments in an amount equal to $420,000 each, commencing on the last day of
the first (1st) fiscal quarter of 2000 through and including the last fiscal
quarter of 2000 and (iii) one (1) final installment in an amount equal to
$420,000 on the earlier to occur of (A) the Termination Date or (B) the last day
of the first (1st) fiscal quarter of 2001. Any portion of the Term Loan repaid
may not be reborrowed.
The Nations 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 fixed charge coverage and net worth requirements).
NOTE 3 - INVENTORY
As of September 30, 1997 and December 31, 1996, the Company's inventory
consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Raw materials $ 1,557 $ 4,850
Work-in-process 286 511
Finished goods 1,502 2,541
-------- --------
Total inventory $ 3,345 $ 7,902
=========== ===========
</TABLE>
Inventories in 1997 were written down $4.4 million to its estimated net
realizable value.
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.
- 11 -
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 5 - ILD TELESERVICES PURCHASE OF WORLDCOM OPERATOR SERVICES
BUSINESS
On September 2, 1997 the Company announced that its majority owned
subsidiary, ILD Teleservices, Inc. (ILD), purchased the operator services
business and related assets from WorldCom, Inc. ("WorldCom"). 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 also entered into a long-term operator
services agreement with WorldCom to handle the international and domestic
operator services requirements of WorldCom. In addition, ILD entered into a
network services contract with WorldCom.
The acquisition has been accounted for under the purchase method as
prescribed by Accounting Principles Board Number 16 "Business Combinations". The
results of operations of the acquired business are included in the consolidated
financial statements from the date of acquisition. The purchase price was $21.4
million net of $1.2 million of liabilities assumed. ILD paid $550,000 in cash,
issued 111,960 shares of redeemable preferred stock at $100 per share, issued
34,403.67 shares of common stock for $3,750,000, and entered into loan
agreements with Nationsbank in the amount of $6.2 million (including
$325,000 of debt costs - see Note 2).
Approximately $14.5 million has been assigned to the excess of purchase
price over the fair value of net assets of the business acquired. The asset is
amortized using the straight-line method over 25 years. Also $2.5 million was
assigned to contracts acquired and are being amortized over 6 years.
The following unaudited proforma consolidated results of operations for
the nine months ended September 30, 1997 and 1996 are presented as if the
WorldCom acquisition had been made at the beginning of each period presented.
The unaudited proforma information is not necessarily indicative of either the
results of operations that would have occurred had the purchase been made during
the periods presented or the future results of the combined operations.
- 12 -
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
(in thousands, except per share)
1997 1996
----------- ---------
<S> <C> <C>
Net sales $ 130,873 $ 139,169
Net loss (10,217) (6,191)
Net loss per common share and
common share equivalent (1.11) (.79)
</TABLE>
NOTE 6 - EQUITY FINANCING
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 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.
- 13 -
<PAGE>
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 filed a registration statement on the common stock
underlying the conversion of the preferred stock on September 5, 1997.
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.
Dividends declared and accrued for the quarter ended September 30, 1997
were $55,000.
- 14 -
<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 nine months of 1997, the Company used $114,000 of cash in
operations and invested $1,806,000 of cash in operating assets and liabilities.
In addition, the Company invested $807,000 in capital equipment, $1,162,000 in
capitalized software and $10,021,000 of cash to purchase the operator service
business, customer contracts and certain related assets from WorldCom. The
WorldCom purchase, and the related financing of the purchase are more fully
described in Note 5 to the unaudited Consolidated Financial Statements.
In addition to financing obtained by the Company in connection with the
WorldCom asset purchase, the Company raised $3.8 million from the sale of $4.0
million of its 7% Series A Convertible Preferred Stock to four institutional
investors in July 1997, as more fully described in Note 6 to the unaudited
Consolidated Financial Statements. For the nine months
- 15 -
<PAGE>
ended September 30, 1997, $1,320,000 principal amount of the Company's 8%
convertible subordinated notes, due in 2000, was converted by the holders into
Intellicall common stock. The conversion had no effect on the cash position of
the Company, although it eliminated future interest otherwise payable on the
converted notes.
The Company's future liquidity will depend principally on its ability
to become profitable (before non-cash charges to income), on amounts invested in
non-current assets and on amounts required for principal payments on debt.
Management has no current plans for investing in non-current assets for which it
believes externally or internally generated funds will be unavailable. Except
for principal payments required from time to time under Intellicall's and ILD's
working capital lines of credit (which amounts can be re-borrowed depending on
the level of eligible assets), there are no principal payments required of
Intellicall (parent company) in 1998. There are, however, $300,000 quarterly
principal payments commencing March 31, 1998 and the $500,000 mandatory
reduction due March 31, 1998 to NationsBank, N.A. by ILD.
There can be no assurance that the Company's efforts to maintain
adequate liquidity will be successful. Although Intellicall's and ILD's lines of
credit are believed by management to be adequate to fund near-term working
capital growth, they can not be relied upon to fund losses from operations of
the magnitude recently incurred by the Company. 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 deemed necessary
under the circumstances to maintain adequate liquidity.
Results of Operations
Service Revenues. For the three and nine months ended September 30, 1997,
service revenues rose, when compared with the same periods in 1996, by
$1,618,000 (6.9%) and $9,132,000 (16.3%) to $24,991,000 and $65,276,000,
respectively. The change in service revenues, set forth by type of revenue, is
shown in the following table:
<TABLE>
<CAPTION>
Three Months Ended Nine months ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Call Traffic Revenue $8,707 $13,945 $30,376 $33,944
Operator Services and
Long-distance Resale 14,603 8,578 30,350 19,577
Prepaid Calling Services 1,681 850 4,550 2,623
-------- -------- -------- --------
Total Service Revenues $24,991 $23,373 $65,276 $56,144
======= ======= ======= =======
</TABLE>
- 16 -
<PAGE>
During both the three and nine month periods in 1997, call traffic
revenues declined $5,238,000 (37.6%) and $3,568,000 (10.5%), respectively,
compared with their corresponding periods in 1996, because of the
discontinuation in June 1997 of the Company's Jail*Star inmate services program,
and the continuing effects of the practice known as "dial-around" in which
payphone users use calling cards and numbers which the Company is unable to
bill. The portion of the decline from 1996 in call traffic revenue attributable
to the discontinuance of the Jail*Star program was $4,240,000 in the three
months ended September 30, 1997, and $548,000 in the nine month period. The
proportionately smaller decline in Jail*Star revenues in the nine-month
comparison is a function of a large inmate services contract obtained by the
Company in the fourth quarter of 1996. The remainder of the decline in call
traffic revenues is principally attributable to "dial-around".
Compared with 1996, prepaid calling card revenues increased by $831,000
(98%) to $1,681,000 in the quarter ended September 30, 1997. For the nine-month
comparison with 1996, the gain in prepaid calling card revenues was $1,927,000
(73%) to $4,550,000. During both periods, the growth reflects the Company's
increased sales of prepaid calling cards through retail distributions channels.
Operator service and long distance resale revenues registered gains in
1997 of $6,025,000 (70%) and $10,773,000 (55%), when compared to the three and
nine-month periods ended September 30, 1996. Accounting for slightly more than
$5 million of the three-month and nine-month gains were revenues resulting from
the acquisition on September 2, 1997 of the operator service business and
certain other assets from WorldCom. The remaining portions of operator service
revenue growth were generated internally.
Equipment Sales. The Company's equipment sales were $5.8 million and
$13.7 million for the three and nine months ended September 30, 1997 compared to
$2.9 million and $10.9 million for the three and nine months ended September 30,
1996. The following table presents an analysis of sales to the Company's primary
markets (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Independent payphone $4,833 $2,752 $11,955 $8,485
providers
International & regulated 937 147 1,766 2,393
------- ------- --------- --------
Total equipment sales $5,770 $2,899 $13,721 $10,878
====== ====== ======= =======
</TABLE>
Third quarter equipment sales rose 99% from $2,899,000 in 1996 to
$5,770,000 in 1997. The growth in third quarter sales resulted from increased
demand for AstraTel 2 payphones, kits and accessories, and for INP systems used
to render prepaid calling card services. In the third quarter of 1997, sales of
AstraTel 2 phones and kits were $3.8 million,
- 17 -
<PAGE>
which compares with $1.9 million in sales of prior-generation phones and kits in
the third quarter of 1996. Third quarter sales of INP systems rose from $147,000
in 1996 to $937,000 in 1997.
Equipment sales increased $2,843,000 or 26%, in the nine months ended
September 30, 1997 compared to such sales in the nine months ended September 30,
1996. As in the quarterly comparison, increased sales of AstraTel 2 payphones,
kits and accessories accounted for most of the gain. INP system sales rose
during the nine months ended September 30, 1997 and sales of international
payphones declined.
Changes in Gross Profit and Gross Margin. Gross profit and gross margin
on service revenues decreased from $2,475,000 (10.6%) in the 1996 third quarter
to $2,241,000 (9.0%) in the 1997 third quarter. For the nine month comparison,
gross profit and gross margin on service revenues declined from $6,534,000
(11.6%) in the 1996 period to $6,074,000 (9.3%) in 1997. Both the quarterly and
nine month changes are due primarily to a favorable change in the mix of service
revenues, the effect of which was more than fully offset by increased bad debt
expense and a writedown of certain intangible assets related to call traffic
revenues. The favorable mix of service revenues resulted from greater growth in
the more profitable operator service and prepaid calling card revenues than
decline in the less profitable Jail*Star revenues.
During all periods being compared, the Company recorded gross losses
and negative gross margins on equipment sales due to, in 1996 periods, a $2.7
million provision for inventory losses, and in the 1997 periods, a $5.9 million
provision for inventory losses and for the impairment in value of certain
capitalized software development costs. In both years, these provisions were
recorded in recognition of the Company's limited success in moving older
generations of payphone and INP products at prices above their inventory
carrying values.
Throughout 1997, the Company has conducted numerous reviews of its
opportunities to sell old and slow-moving inventories at various price levels.
Upon completion of these reviews and exhaustion of certain efforts to dispose of
these inventories, management of the Company recorded the $5.9 million provision
for inventory losses and for the impairment in value of certain previously
capitalized software development costs. The reasons for this decision are set
forth in the following paragraph.
The rate of acceptance of the AstraTel 2 and the strength of customer
preference for the AstraTel 2 product line will require far steeper price
reductions on older payphone products than had earlier been believed to be
necessary. In some cases, the AstraTel 2 has obsoleted the Company's older
payphone products. In international markets, the Company has made repeated
efforts to sell earlier generations of international payphones at successively
lower prices and on increasingly attractive terms, but the Company's attempts
have been less successful than formerly expected. Because of the disappointing
market potential of the Company's existing line of international payphone
products, the related software development costs of this line, as well as
related inventories, were written down to their estimated net
- 18 -
<PAGE>
realizable value. Because of customer preference, and the higher margins,
technical superiority and field stability of the AstraTel 2, the Company intends
to incorporate the features and capability of the AstraTel 2 in its future
international product offerings. Since its commercial introduction in 1994,
sales of the INP have been sporadic and have generally fallen short of
expectations. Although INP sales are projected to continue to occur into the
foreseeable future, the level of such sales is currently believed to be
inadequate to permit the full recovery of some INP inventory and certain related
software development costs. Consequently, the Company has written down the
carrying value of excess and slow moving INP inventory and the related software
development cost as well.
Without the $2.7 million and $5.9 million provisions for losses in 1996
and 1997, the Company's gross profit and gross margin on equipment sales in the
third quarter would have been $357,000 (12.3%) in 1996 and $1,306,000 (22.6%) in
1997. Similarly, in the nine months ended September 30, gross profit and gross
margin on equipment sales would have been $266,000 (2.4%) in 1996 and $1,159,000
(8.4%) in 1997. The quarter-to-quarter improvements in gross profit and gross
margin on equipment sales are attributable to the 99% growth in equipment sales,
and to a favorable mix of sales. Compared to the third quarter of 1996,
equipment sales in the 1997 quarter included proportionately higher sales of
application software, INP systems and AstraTel 2 payphones and kits, which carry
higher margins than other domestic and international payphone products. The
nine-month improvement in gross profit and gross margin was less than the
quarterly improvement, due to lower (i.e. 26%) growth in equipment sales from
1996 to 1997. However, gross profit and gross margin from equipment sales also
benefited from the favorable sales mix noted in the third quarter comparison.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $676,000, or 23%, in the quarter ended
September 30, 1997, when compared to the quarter ended September 30, 1996.
Primarily responsible for the rise in such expenses was the September 1997
purchase of the operator service business and related assets from WorldCom. Due
to the WorldCom asset purchase, selling, general and administrative expenses of
ILD increased by approximately $700,000 in the third quarter of 1997 compared to
the third quarter of 1996. Other changes affecting the quarterly comparison were
overall reductions in sales and customer support costs, as well as in corporate
administrative expenses. Notwithstanding the overall decline in sales costs,
sales commissions and advertising costs were higher in the 1997 quarter than in
the comparable 1996 quarter.
Compared to the nine months ended September 30, 1996, selling, general and
administrative expenses increased $629,000, or 7%, to $8,876,000 in the nine
months ended September 30, 1997. The smaller percentage rise in these costs than
that noted in the quarterly comparison occurred since the increased expenses
arising from the WorldCom asset purchase affected only one month of the nine
months ended September 30, 1997. The same factors that account for quarterly
changes in selling, general and administrative expenses account as well for
changes in the nine month comparison.
- 19 -
<PAGE>
Research and Development Expenses. Research and development expenses
increased $170,000 and $173,000 in the three and nine month periods ended
September 30, 1997 compared to the three and nine month periods ended September
30, 1996. The increases in such expenses occurred as a result of reductions in
capitalized software development costs. For the three month comparison, the
reduction in capitalized software development costs was $279,000, for the nine
month comparison the reduction was $488,000. Before capitalization of software
development costs, research and development spending declined $109,000 from the
1996 to the 1997 third quarter, and $315,000 from the 1996 to the 1997 nine
month period. These spending reductions reflect reduced staffing levels and
reassignment of certain engineering personnel to other engineering activities.
Provision for Doubtful Accounts. The provision for doubtful accounts
increased $193,000 for the quarter ended September 30, 1997 compared to the
quarter ended September 30, 1996, and $283,000 for the nine months ended
September 30, 1997 compared to the same period in 1996. These increases reflect
higher expected levels of collection losses, principally on equipment
receivables.
Non-operating Expenses. In May 1996, the Company recorded a $572,000
gain from the sale of an ownership interest in ILD Teleservices. Interest income
declined $149,000 and $162,000, respectively, during the comparative three and
nine month periods ended September 30, 1997. These reduced levels of interest
income resulted from reductions in leases receivable and license fees
receivable. Interest expense in the quarter ended September 30, 1997 was
$149,000 lower than in the comparable 1996 quarter, and $463,000 lower in the
1997 nine month period than in the 1996 nine month period. There reductions in
interest expense resulted from (a) lower interest rates on debt payable to
Finova Capital Corporation than on debt payable to Nomura Holding America Inc.
(the Nomura debt was refinanced in the fourth quarter of 1996), and (b)
reductions in average debt balances due to (i) conversions in late 1996 and
during 1997 of $3,460,000 principal amount of the Company's 8% convertible
subordinated debentures into Intellicall common stock and (ii) the use of a
portion of proceeds to pay down debt from the issuance in July 1997 of
Intellicall's 7% Series A convertible preferred stock. Partially offsetting the
above factors is additional interest expense resulting from debt issued in
September 1997 by ILD in connection with its purchase of the operator service
business and related assets from WorldCom (see Note 5 to the unaudited
Consolidated Financial Statements).
In September 1996, the Company received a federal income tax refund in
the amount of $1.3 million from the carryback of certain losses to years beyond
the normal statutory carryback period. In the third quarter of 1997, the Company
recorded $142,000 of income tax expense related to taxable income of ILD
Teleservices arising after exhaustion of ILD Teleservices operating loss
carryforward.
- 20 -
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The following exhibit is filed as a part of this Quarterly
Report on Form 10-Q.
Third Amendment to Loan and Security Agreement dated September
16, 1997 by and between Finova Capital Corporation and the
Company, filed herewith.
(b) Reports on Form 8-K.
The following Form 8-K's were filed during the third quarter
ended September 30, 1997:
(i) Form 8-K (Date of earliest event reported July 21,
1997) reporting on Items 5 and 7.
(ii) Form 8-K (Date of current event reported September 2,
1997) reporting on Items 2 and 7.
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
dated 11/13/97 -------------------
Chairman of the Board and
Chief Executive Officer
/s/ John M. Carradine
dated 11/13/97 ---------------------
Vice President Finance
and Chief Financial Officer
(principal financial officer)
Date: November 14, 1997
- 21 -
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000818674
<NAME> INTELLICALL, INC.
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 259
<SECURITIES> 0
<RECEIVABLES> 30,686
<ALLOWANCES> (4,519)
<INVENTORY> 3,345
<CURRENT-ASSETS> 1,307
<PP&E> 17,003
<DEPRECIATION> (9,469)
<TOTAL-ASSETS> 63,580
<CURRENT-LIABILITIES> 18,830
<BONDS> 0
11,196
1
<COMMON> 95
<OTHER-SE> 8,135
<TOTAL-LIABILITY-AND-EQUITY> 63,580
<SALES> 5,770
<TOTAL-REVENUES> 30,761
<CGS> 10,410
<TOTAL-COSTS> 33,160
<OTHER-EXPENSES> 3,829
<LOSS-PROVISION> 273
<INTEREST-EXPENSE> (619)
<INCOME-PRETAX> (6,987)
<INCOME-TAX> (142)
<INCOME-CONTINUING> (7,129)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,184)
<EPS-PRIMARY> (.77)
<EPS-DILUTED> 0
</TABLE>
THIRD AMENDMENT TO
LOAN AND SECURITY AGREEMENT
This Third Amendment to Loan and Security Agreement ("Third Amendment")
dated as of the 16th day of September, 1997 is by and between INTELLICALL, INC.,
a Delaware corporation ("Borrower") and FINOVA CAPITAL CORPORATION ("FINOVA")
BACKGROUND
A. On November 13, 1996, Borrower and FINOVA entered into a certain Loan and
Security Agreement ("Loan Agreement") and certain related agreements and
instruments (collectively with the Loan Agreement, the "Loan Documents") to
reflect certain loan arrangements among the parties.
B. On April 16, 1997, Borrower and FINOVA entered into a certain First Amendment
to Loan and Security Agreement (the "First Amendment") to reflect certain
amendments to the Loan Documents.
C. On July 21, 1997, Borrower and FINOVA entered into a certain Second Amendment
to Loan and Security Agreement (the "Second Amendment") to reflect certain
amendments to the Loan Documents.
D. Borrower has requested that FINOVA agree to certain further amendments of
the Loan Documents to reflect certain changes.
NOW THEREFORE, with the foregoing Background hereinafter deemed
incorporated by reference herein and made a part hereof, the parties hereto,
intending to be legally bound, hereby promise and agree as follows:
1. Execution of Non-Recourse Note. Notwithstanding the provisions of
Sections 14.2 or 14.11 of the Loan Agreement to the contrary, Borrower may
execute and deliver the Non-Recourse Secured Promissory Note and the Stock
Pledge and Security Agreement in the form attached hereto as Exhibit "A" and
Exhibit "B" collectively, and the execution thereof shall not cause an Event of
Default.
2. Reaffirmation of Agreement. Except as expressly modified herein,
Borrower hereby affirms all representations and warranties set forth in the Loan
Agreement again as of this date and warrants and represents that all such
representations and warranties are true, accurate and complete in all respects
as of this date and that such warranties and representations are hereby deemed
applicable to this Third Amendment and
<PAGE>
that no Event of Default exists under the Loan Agreement or would exist
with the passage of time, giving of notice or both.
3. Conditions Precedent. This Third Amendment shall not be
effective until the following conditions have been met to the sole satisfaction
of FINOVA:
(a) Borrower shall have executed and delivered to FINOVA this Third
Amendment; and
(b) Borrower shall deliver to FINOVA any other documents, instruments
or agreements required hereunder or requested by FINOVA.
4. Amendment Fee. Borrower shall, as a condition to the effectiveness of
this Third Amendment, pay to FINOVA a non-refundable Amendment Fee of $2,500.00
Such fee shall be due and payable at the closing of this Third Amendment.
5. Miscellaneous:
(a) Capitalized Terms. All capitalized terms not otherwise defined
herein shall have the meanings as set forth in the Loan Documents.
(b) Third Party Rights. No rights are intended to be created hereunder
for the benefit of any third party donee, creditor, or incidental
beneficiary.
(c) Headings. The headings of any paragraph of this Third Amendment
are for convenience only and shall not be used to interpret any provisions
hereof.
(d) Other Instruments. Borrower agrees to execute any other documents,
instruments and writings, in form satisfactory to FINOVA, as FINOVA may
reasonably request, to carry out the intentions of the parties hereunder.
(e) Modifications. No modification hereof or any agreement referred to
herein shall be binding or enforceable unless in writing and signed on
behalf of the party against whom enforcement is sought.
(f) Governing Law. The terms and conditions of this Third Amendment
shall be governed by the laws of the State of Arizona.
<PAGE>
IN WITNESS WHEREOF, the undersigned parties have executed this Third
Amendment to Loan and Security Agreement the day and year first above written.
INTELLICALL, INC.
By: /s/ William O. Hunt
-----------------------
Title: Chief Executive Officer
By: /s/ John M. Carradine
-------------------------
Title: Secretary
FINOVA CAPITAL CORPORATION
By: /s/ Patrick M. Cornell
- --------------------------
Title: Assistant Vice President
c:\ stark\loanagr2.723
