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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 March 31, 1998
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 incorporation or organization) (I.R.S. Employer 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 May 12,1998
Common Stock $.01 par value 9,850,133
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<PAGE>
INDEX
INTELLICALL, INC.
Part I. Financial Information
Item 1. Financial Statements
Balance Sheets at March 31, 1998
(Unaudited) and December 31, 1997..........................1
Statements of Operations for each of the
three month periods ended March 31, 1998 and 1997
(Unaudited) .........................................3
Statements of Cash Flows for each of the three month periods
ended March 31, 1998 and 1997
(Unaudited) .........................................4
Notes to Financial Statements..............................5
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...........................18
Signatures...................................................................19
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
INTELLICALL, INC.
BALANCE SHEETS
ASSETS
(in thousands)
March 31, 1998 December 31, 1997
-------------- -----------------
(unaudited)
<S> <C> <C>
Current assets
Restricted cash .................................................. $ 17 $ 2,488
Cash and cash equivalents ........................................ -- 66
Amount due on sale of ILD stock .................................. 5,963 --
Receivables....................................................... 15,821 34,881
Less allowance for doubtful accounts......................... 4,576 6,211
--------- ---------
11,245 28,670
Inventories, net.................................................. 4,730 5,002
Related party, net................................................ 581 --
Other current assets.............................................. 448 1,908
--------- ---------
Total current assets.............................................. 22,984 38,134
Fixed assets, net................................................. 1,666 8,387
Capitalized software costs, net................................... 2,157 2,968
Notes receivable, net............................................. 1,125 1,125
Intangible assets, net............................................ 816 31,802
Investment in unconsolidated investee............................. 2,134 --
Other assets, net................................................. 1,506 2,373
--------- ---------
$ 32,388 $ 84,789
======== ========
See notes to financial statements.
</TABLE>
- 1 -
<PAGE>
<TABLE>
<CAPTION>
INTELLICALL, INC.
BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
(in thousands, except share information)
March 31,1998 December 31, 1997
------------- -----------------
(Unaudited)
<S> <C> <C>
Current liabilities
Accounts payable.......................................... $ 4,861 $11,320
Accrued transmission, customer commissions and billing
charges............................................... 1,360 12,222
Deferred revenue.......................................... 84 1,262
Accrued liabilities....................................... 966 4,456
Capital lease obligation, current......................... -- 157
Current portion of long-term debt ........................ 1,007 4,928
-------- ------------
Total current liabilities................................. 8,278 34,345
Long-term debt ................................................ 10,745 21,217
Deferred gain on sale to unconsolidated investee............... 968 --
Capital lease obligation ...................................... -- 843
Other liabilities.............................................. 250 948
Minority interest.............................................. -- 6,769
Commitments and contingent liabilities......................... -- --
---------- -------------
Total liabilities 20,241 64,122
Redeemable preferred stock Series B-2, $100 par value;
zero and 111,960 shares issued and outstanding,
respectively.............................................. -- 11,196
Redeemable preferred stock Series B-3, $300 par value; zero
and 6,667 shares issued and outstanding,
respectively.............................................. -- 2,000
Stockholders' equity
Preferred stock, $.01 par value; 1,000,000 shares
authorized; 3,740 and 4,000 shares issued
and outstanding, respectively......................... 1 1
Common stock, $.01 par value; 20,000,000 shares
authorized; 9,582,980 and 9,471,944 shares issued,
respectively......................................... 96 95
Additional paid-in capital................................ 57,534 57,486
Less common stock in treasury, at cost;
24,908 shares........................................ (258) (258)
Accumulated deficit....................................... (45,226) (49,853)
--------- -------
Total stockholders' equity........................... 12,147 7,471
---------- -------
$ 32,388 $ 84,789
======== ========
See notes to financial statements.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
INTELLICALL, INC.
STATEMENTS OF OPERATIONS(UNAUDITED)
(in thousands, except share information)
THREE MONTHS ENDED
MARCH 31,
1998 1997
---- ----
<S> <C> <C>
Revenues and sales:
Service revenues $ 5,619 $ 19,882
Equipment sales 4,262 3,272
-------- ------
9,881 23,154
-------- --------
Cost of revenues and sales:
Service revenues 5,270 17,887
Equipment sales 3,512 3,617
------- -------
8,782 21,504
------- -------
Gross profit:
Service revenues 349 1,995
Equipment sales 750 (345)
------ -------
1,099 1,650
Selling, general and administrative expenses 2,068 2,630
Provision for doubtful accounts 85 104
Research and development expenses 295 119
------ ------
Operating loss (1,349) (1,203)
Interest income 80 96
Interest expense (393) (600)
Gain on sale of assets 6,399 --
Equity in loss of investee (219) --
Minority interest -- (19)
------- -------
Net income (loss) $ 4,518 $ (1,726)
======== =========
Basic net income (loss) per share $ .48 $ (.19)
======== =========
Weighted average number of shares outstanding 9,468 9,001
======== =========
Fully diluted net income (loss) per share $ .37 $ (0.19)
======== =========
Shares used in fully diluted net income (loss) per share calculation 12.610 9,001
======= =========
See notes to financial statements.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
INTELLICALL, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands) THREE MONTHS ENDED
MARCH 31,
1998 1997
---- ----
<S> <C> <C>
Operating Activities:
Net income (loss) $ 4,518 $ 1,726)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 495 992
Provision for doubtful accounts 85 104
Provision for inventory 75 --
Equity in loss of investee 219 --
Minority interest in income of ILD -- 19
Changes in operating assets and liabilities (See Note 1):
Restricted cash (5) (2)
Amount due on sale of stock (5,963) --
Receivables 3,749 1,279
Inventories 167 (492)
Related party (451) --
Other current assets 203 125
Notes receivable (23) (263)
Accounts payable (1,125) 1,202
Transmissions, commissions and billing charges (1,284) (357)
Accrued liabilities (150) (55)
Deferred revenue -- (351)
Deferred gain on sale to unconsolidated investee 968 --
Other 1,671 121
--------- -------
Net cash provided by operating activities 3,149 596
Investing activities:
Purchase of equipment (211) (250)
Capitalized software (250) (475)
Net cash used in investing activities (461) (725)
Financing activities:
Net proceeds from (repayments on) line of credit (2,781) 45
Proceeds from issuance of stock under stock option plans 93 234
-------- -------
Net cash (used in) provided by financing activities (2,688) 279
Net increase in cash and cash equivalents -- 150
Cash and cash equivalents at beginning of period -- 2,271
-------- -------
Cash and cash equivalents at end of period $ -- $ 2,421
======== =======
Supplemental cash flow information:
Interest paid $ 141 $ 323
======== =======
Supplemental non cash information:
Conversion of debt to equity $ -- $ 945
======== =======
Conversion of preferred stock to common stock $ 260 $ --
=========== =======
See notes to financial statements.
</TABLE>
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<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - CERTAIN ACCOUNTING POLICIES
Basis of Presentation. The accompanying 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. The financial statements as of December 31, 1997 and
results of operations for the quarter ended March 31, 1997 include the financial
position and results of operations of the Company's majority-owned subsidiary
ILD Telecommunications, Inc. ("ILD"). In the quarter ended March 31, 1998, the
Company's ownership percentage of ILD decreased from 53.66% at December 31, 1997
to 42.91% at March 31, 1998 (See Note 7 herein). Accordingly, effective January
1, 1998, the Company accounted for its investment in ILD under the equity method
of accounting retroactively to January 1, 1998. In management's opinion, all
adjustments necessary for a fair presentation of the results of operations for
the periods shown have been made and are of a normal and recurring nature.
The results of operations for the three months ended March 31, 1998, are not
necessarily indicative of the results of operations expected for the full year
1998. The 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, 1997.
Statement Presentation. Certain prior year amounts have been reclassi-
fied to conform to current year presentation.
Software Development Costs. The Company capitalizes costs related to
the development of certain software products. In accordance with Statement of
Financial Accounting Standards No. 86, capitalization of costs begins when
technological feasibility has been established and ends when the product is
available for general release to customers. Amortization is computed on an
individual product basis based on the products' estimated economic life using
the straight line method, not to exceed five years.
The amounts of software development costs capitalized in the first quarter of
1998 and 1997 were $250,000 and $475,000, respectively. The Company recorded
$119,000 and $555,000 of software amortization expense for the three months
ended March 31, 1998 and 1997, respectively.
Cash and Cash Equivalents. For purposes of the balance sheets and
statements of cash flows, cash and cash equivalents include short-term liquid
investments purchased with remaining maturities of three months or less.
- 5 -
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
Earnings per Share: Basic net income (loss) per share has been
computed in accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share", ("FAS 128") using the weighted average number of common
shares outstanding. The provision and disclosure requirements for FAS 128 were
required to be adopted for interim and annual periods ending after December 15,
1997, with restatement of EPS for all prior periods.
The following table sets forth a reconciliation of the numerator and
denominator used in the basic and diluted EPS computation for the three month
periods ended March 31, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
Three months Three months
ended ended
March 31, March 31,
1998 1997
----------- ------------
<S> <C> <C>
Net income (loss) $ 4,518 $ (1,726)
Basic:
Weighted average number of shares outstanding 9,468 9,001
========== =========
Diluted:
Weighted average number of shares outstanding used
in the basic net income (loss) per share calculation 9,468 9,001
Weighted average shares from assumed exercise of
dilutive stock options and warrants, net of shares
assumed to be repurchased with exercise proceeds 325 --
Assumed conversion of Series A Preferred Stock
at beginning of period 980 --
Assumed conversion of convertible debt 1,837 --
--------- --------
Weighted average number of shares outstanding used
in the fully diluted net income (loss) per share
calculation 12,610 9,001
========= ========
</TABLE>
In accordance with FAS 128, options and warrants to purchase 1,135,250
and 2,907,505 shares respectively, of Common Stock were excluded in the diluted
EPS calculation when they were antidilutive, as applicable, for the periods
presented. Conversion of debt and preferred stock was excluded for the December
31, 1997 calculation because they were antidilutive.
- 6 -
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
Disclosures about Reporting Comprehensive Income: In June 1997,
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("FAS 130") was issued. FAS 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general-purpose financial statements. It requires
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. FAS 130 is
effective for fiscal years beginning after December 15, 1997. The Company will
adopt this Statement in the year ending December 31, 1998. Reclassification of
financial statements for earlier periods provided for comparative purposes is
required upon adoption. The Company has no components of comprehensive income
not already included in net income.
Disclosures about Segments of an Enterprise and Related Information: In
June 1997, Statement of Financial Accounting Standards No. 131 "Disclosures
About Segments of an Enterprise and Related Information" ("FAS 131") was issued.
FAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. FAS 131 is
effective for financial statements for periods beginning after December 15,
1997. The Company will adopt FAS 131 in the year ending December 31, 1998.
- 7 -
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - LONG-TERM DEBT AND LINE OF CREDIT
The Company's debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
<S> <C> <C>
Intellicall, Inc.
8% Convertible subordinated notes, due 2000 $ 2,840 $ 2,840
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 3,323 4,114
Installment note, due 1998 7 28
---------- ---------
12,170 12,982
Less unamortized debt discount (418) (450)
---------- ---------
11,752 12,532
---------- ---------
ILD Telecommunications, Inc. related debt -- 13,613
---------- ---------
Total debt 11,752 26,145
Less: Current portion of long-term debt (1,007) (4,928)
----------- ----------
Total long-term debt $ 10,745 $ 21,217
=========== ==========
</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 7.2% 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 previous
lender 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 March 31, 1998, $4.66 million of the Banca Del Gottardo Notes were
converted to 1,109,517 shares of the Company's Common Stock. Interest is payable
semi-annually and commenced June 30, 1996.
- 8 -
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
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 with the proceeds used to repay a portion of the
previous lender's debt and for working capital purposes. 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 (net of placement fees of
$509,406) to repay the remaining balance of its Series A Notes due to Nomura
Holding America, Inc., Intellicall's previous lender, 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 one
each subsequent anniversary thereof.
Interest is paid monthly.
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 March 31, 1998 the Company was in compliance with all covenants.
- 9 -
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
At December 31, 1997 ILD Telecommunications, Inc. (ILD) had $13.6
million of long term debt due from 1998 through 2001 at interest rates ranging
from 9% to 13.5%.
NOTE 3 - INVENTORY
As of March 31, 1998 and December 31, 1997, the Company's net
inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Raw materials $ 2,826 $ 2,491
Work-in-process 273 378
Finished goods 1,631 2,133
--------- -------
Total inventories $ 4,730 $ 5,002
========= =======
</TABLE>
NOTE 4 - LITIGATION AND CONTINGENCIES
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.
- 10 -
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - 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 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. As of March 31,
1998, $260,000 of the Company's preferred stock had been converted into 66,810
shares of the Company's Common Stock.
Commencing 90 days after the Closing Date, the preferred stock, plus
all accrued stock dividend premiums at 7% annually, 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 form 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.
- 11 -
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
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 the 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 bank 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.
NOTE 6 - SALE OF PREPAID SERVICES OPERATION
On January 1, 1998 the Company sold its prepaid services operation to
ILD Telecommunications, Inc. in exchange for (i) $2,000,000 in cash, (ii)
forgiveness of the Company's promissory note in the original principal amount of
$2,000,000 which had previously been executed and delivered to ILD to purchase
18,348.62 shares of ILD common stock valued at $109 a share, and (iii) a
$1,000,000 promissory note due at the earlier of the date of ILD's public
offering or December 31, 1998. The cash proceeds were used to further reduce the
Company's indebtedness to Finova. The Company recorded a $835,000 gain on the
sale of the prepaid services operation with the balance recorded as deferred
gain on sale of assets to an unconsolidated investee. As of March 31, 1998, the
Company had $968,000 of deferred gain.
- 12 -
<PAGE>
NOTE 7 - SALE OF STOCK OF ILD TELECOMMUNICATIONS, INC.
On March 30, 1998, the Company sold to SMCO, LLP 18,348.62 shares of
ILD Telecommunications, Inc. common stock. SMCO is an unrelated third party, the
negotiations for the sale transactions were at arm's length, and there were no
additional obligations or elements of financial consideration relating to the
sale transaction. The Company sold the shares for $325 per share and recorded
a gain on the sale in the amount of $5.6 million. The transaction was
consummated on March 30, 1998, however the proceeds were actually received by
the Company on April 3, 1998. Accordingly an amount due for $6.0 million is
reflected in the Company's balance sheet at March 31, 1998.
NOTE 8 - SUBSEQUENT EVENT
On April 3, 1998 the Company sold 1,539 shares of its Series A
preferred stock in ILD Telecommunications, Inc. to SMCO Investments, LLC. The
shares were sold for $325.00 per share, or $500,175.
- 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 (the "cautionary
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 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.
Recent Developments
During the first quarter of 1998 the Company's ownership percentage in
ILD Telecommunications, Inc. ("ILD") declined to approximately 42.91% of the
outstanding shares of ILD causing the Company to account for its investment in
ILD under the equity method as consolidation is no longer appropriate. Under the
equity method, an investment in common stock is generally shown in the balance
sheet of an investor as a single amount. Likewise, an investor's share of
earnings or losses from its investment is ordinarily shown in its income
statement as a single amount.
Effective January 1, 1998, Intellicall's investment in ILD is accounted
for using the equity method. However, prior year comparative financial
information has not been restated to the equity method and is presented as
previously reported, as is required under SEC rules. In reviewing the financial
statements and discussion contained in this Form 10-Q, the reader must be aware
that much of the information is not directly comparable as the financial
information in 1997 includes the operating results and balance sheet information
of ILD. This information is principally not included in the 1998 information.
- 14 -
<PAGE>
Financial Condition
Liquidity and Capital Resources
During the three months ended March 31, 1998 the Company generated
$3,149,000 of cash from operations including changes in operating assets and
liabilities. The Company invested $211,000 in capital equipment and $250,000 in
software and product development. Borrowings under the Company's asset based
note agreement with Finova decreased $2,781,000. The net result of such changes
described resulted in no change in cash and cash equivalents.
The net effect of changes in operating assets and liabilities was a
decrease in cash of $2.2 million. The primary factors affecting these changes
were a decrease in accounts receivable of $3.7 million, a decrease in payables
of $2.4 million, and the disposition of assets and liabilities of the Company's
prepaid services operation which was sold to ILD. The reduction in accounts
receivable was principally the result of the seasonal decline in call traffic
revenues from the fourth quarter of 1997 to the first quarter of 1998.
In recent years, the Company has financed its net losses, capital
expenditures and research and development costs through a combination of asset
sales, reduction in working capital and external financing. As described
in Note 7 to the financial statements, on March 30, 1998 the Company sold a
portion of its interest in ILD to an unrelated third party. Proceeds from the
sale totaled $6.0 million. A portion of the proceeds were used for working
capital purposes. The remainder of the proceeds will be used to fund operations
and for working capital and capital expenditures. In the second half of 1998
and beyond, management of the Company believes that funds required for
capital spending, new product development, debt service and fixed expenses
will be generated from operations, provided that equipment sales increase by 25%
or more over comparable sales in 1997, and the mix of products sold continues
to shift toward sales of higher margin products. Should the anticipated growth
in demand for the Company's products be insufficient to generate the required
liquidity, the Company may be required to sell assets or seek further external
funding. If such a situation were to develop, the Company believes that it
has adequate opportunities to obtain, in a timely manner, the funds
required for its operations.
- 15 -
<PAGE>
Results of Operations
Service Revenues. Service revenues for the first quarter ended March
31, 1998 were $5.6 million compared to $19.9 million for the same period in
1997. The table below provides a detailed analysis of service revenues by type
for the quarters ended March 31, 1998 and 1997 (in thousands):.
Three Months Ended
March 31,
1998 1997
---- ----
Call traffic revenue .................. $ 5,619 $11,057
Long-distance resale........................ - 1,108
Operator services .......................... - 6,330
Prepaid calling services.................... - 1,387
------- -------
Total service revenues $ 5,619 $19,882
======= =======
Long-distance resale and operator services revenues relate to the
operations of ILD, an unconsolidated investee in 1998. Prepaid calling services
relate to a division of Intellicall sold to ILD on January 1, 1998 (see
discussion of gain on sale of assets below). The $5.4 million decline in call
traffic principally resulted from discontinuing the Company's inmate services
program, Jail*Star, in June 1997. Revenues from the Jail*Star program were $4.4
million in the March 31, 1997 quarter. The program was discontinued due to an
unacceptably high experience of uncollectible phone calls. The remainder of the
decline in call traffic is generally attributed to a lower volume of calls per
month on telephones using the Intelli*Star system. The lower per phone call
volumes reflect the continuing high incidence of the practice known as
"dial-around." This practice is the result of payphone patrons accessing
operator services systems other than those used by the payphone owner.
Gross profits from services were $349,000 or 6.2% of the related
revenues for the three months ended March 31, 1998 compared to $2.0 million or
10.0% of the related revenues for the three months ended March 31, 1997.
However, on a comparable basis (i.e., excluding the revenue streams of ILD), the
pro-forma Intellicall gross profit for the three months ended March 31, 1997
would have been $1.0 million or 9.5% of the related revenues. Absolute gross
profit declined $706,000 for the three months ended March 31, 1998 compared to
the pro-forma March 31, 1997 amount. The decline is due principally to the
elimination of Jail*Star revenues. The gross margin percentage declined for the
1998 period compared to 1997 primarily due to lower unbundled revenues in 1998
and the recognition in 1997 of deferred revenues from validation services, both
of which carried a 100% profit margin.
- 16 -
<PAGE>
Equipment Sales. Equipment sales were $4.3 million and $3.3 million in
the three months ended March 31, 1998 and 1997, respectively. The following
table analyzes sales by market (in thousands):
Three Months Ended
March 31,
1998 1997
---- ----
Independent payphone providers................ $ 2,714 $ 3,245
International ........................... 1,548 17
Regulated ............................ - 10
------- -------
Total equipment sales ............ $ 4,262 $ 3,272
======= =======
The increase in total equipment sales is attributable to higher
international shipments in 1998, partially offset by lower sales to independent
payphone providers (IPP's). The Company believes that IPP sales have been, and
will continue to be, negatively impacted by unresolved regulatory issues
surrounding dial-around compensation. Resolution of the dial-around compensation
controversy is uncertain as to both the timing and extent of payments to be
received by payphone owners. It is believed that this uncertainty is causing an
industry-wide slowness in capital purchasing due to uncertain cash flows.
Gross profit from equipment sales was $750,000 (17.5% of related sales)
for the three months ended March 31, 1998 as compared to a loss of $345,000 or
(10.5% of related sales) for the three months ended March 31, 1997. Gross
margins improved in 1998 compared to 1997 for principally two reasons: lower
capitalized software amortization of a decrease of $436,000 and higher sales
network switching products which are generally more profitable than payphones.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $562,000 lower in the quarter ended March 31, 1998
compared to the quarter ended March 31, 1997. Approximately $276,000 of the
decline related to the fact ILD is now unconsolidated. The pro-forma March 31,
1997 general, selling and administrative expenses would have been $2.3 million
compared to $2.1 million for the three months ended March 31, 1998. This
improvement was primarily related to a decline in employee related expenses and
lower travel costs in 1998.
Research and Development Expenses. Gross spending for research and
development decreased $49,000 for the three months ended March 31, 1998, as
compared to the same period in 1997. In the first quarter of 1998, the Company
capitalized software development costs of $250,000 compared to $475,000 in the
first quarter of 1997. Capitalized costs in 1998 related primarily to the
AstraTel 2 and the Company's recently introduced N*Genius switch.
Provision for Doubtful Accounts. During the quarter ended March 31,
1998 the Company recorded an $85,000 provision for doubtful accounts compared to
$104,000 in the same quarter in 1997. The pro-forma provision for doubtful
accounts, without ILD, for the quarter ended March 31, 1997 was $92,000.
- 17 -
<PAGE>
Gain on Sale of Assets. During the first quarter of 1998 the Company
reported gains on sales of assets totaling $6.4 million. Such gains resulted
from partial gain recognition on the January 1998 sale of the Company's prepaid
services operation to ILD and from gain on the March 1998 sale of a portion of
the Company's ownership interest in ILD to an unrelated third party. The ILD
common stock sold by the Company was originally acquired in connection with the
disposition of the prepaid services operation.
Part II. Other Information
Item 1. Legal Proceedings
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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None.
- 18 -
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
INTELLICALL, INC.
/s/ John J. McDonald, Jr.
-----------------------------------------------
John J. McDonald, Jr.
President and
Chief Executive Officer
/s/ John M. Carradine
-----------------------------------------------
John M. Carradine
Vice President Finance
and Chief Financial Officer
Date: May 15, 1998
- 19 -
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