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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 (I.R.S. Employer
incorporation or organization) Identification number)
2155 Chenault, Suite 410
Carrollton, TX 75006
(Address of Principal Executive Offices)
(972) 416-0022
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class August 11,1998
Common Stock $.01 par value 9,919,161
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<PAGE>
INDEX
INTELLICALL, INC.
Part I. Financial Information
Item 1. Financial Statements
Balance Sheets at June 30, 1998
(Unaudited) and December 31, 1997............................1
Statements of Operations for each of the
three month periods ended June 30, 1998 and 1997
(Unaudited) ...........................................3
Statements of Operations for each of the
six month periods ended June 30, 1998 and 1997
(Unaudited) ...........................................4
Statements of Cash Flows for each of the
six month periods ended June 30, 1998 and 1997
(Unaudited) ...........................................5
Notes to Financial Statements...............................16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................15
Part II. Other Information
Item 1. Litigation ..........................................19
Item 6. Exhibits and Reports on Form 8-K............................19
Signatures....................................................................20
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
INTELLICALL, INC.
BALANCE SHEETS
ASSETS
(in thousands)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
(unaudited)
<S> <C> <C>
Current assets
Restricted cash .................................................. $ 17 $ 2,488
Cash and cash equivalents ........................................ 2,000 66
Receivables............................................................ 15,669 34,881
Less allowance for doubtful accounts......................... 5,059 6,211
--------- ---------
10,610 28,670
Inventories, net.................................................. 5,669 5,002
Related party, net................................................ 1,071 --
Other current assets.............................................. 366 1,908
--------- ---------
Total current assets......................................... 19,733 38,134
Fixed assets, net...................................................... 1,563 8,387
Capitalized software costs, net........................................ 2,272 2,968
Notes receivable, net.................................................. 1,068 1,125
Intangible assets, net................................................. 794 31,802
Investment in unconsolidated investee.................................. 2,012 --
Other assets, net...................................................... 1,432 2,373
--------- ---------
$ 28,874 $ 84,789
======== ========
</TABLE>
See notes to financial statements.
- 1 -
<PAGE>
INTELLICALL, INC.
BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
(in thousands, except share information)
<TABLE>
<CAPTION>
June 30,1998 December 31, 1997
(Unaudited)
<S> <C> <C>
Current liabilities
Accounts payable.......................................... $ 2,758 $11,320
Accrued transmission, customer commissions and billing
charges............................................... 2,071 12,222
Deferred revenue.......................................... 84 1,262
Accrued liabilities....................................... 875 4,456
Capital lease obligation, current......................... -- 157
Current portion of long-term debt ........................ 1,000 4,928
-------- ------------
Total current liabilities................................. 6,788 34,345
Long-term debt ................................................ 9,587 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 17,593 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; 2,840 and 4,000 shares issued
and outstanding, respectively......................... 1 1
Common stock, $.01 par value; 20,000,000 shares
authorized; 9,887,163 and 9,471,944 shares issued,
respectively......................................... 98 95
Additional paid-in capital................................ 57,834 57,486
Less common stock in treasury, at cost;
24,908 shares........................................ (258) (258)
Accumulated deficit....................................... (46,394) (49,853)
--------- -------
Total stockholders' equity........................... 11,281 7,471
---------- -------
$ 28,874 $ 84,789
======== ========
</TABLE>
See notes to financial statements.
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<PAGE>
INTELLICALL, INC.
STATEMENTS OF OPERATIONS(UNAUDITED)
(in thousands, except share information)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
June 30,
1998 1997
---- ----
<S> <C> <C>
Revenues and sales:
Service revenues $ 7,528 $ 20,403
Equipment sales 3,321 4,679
------ ------
10,849 25,082
------ ------
Cost of revenues and sales:
Service revenues 7,012 18,565
Equipment sales 2,557 4,481
------ ------
9,569 23,046
------ -------
Gross profit:
Service revenues 516 1,838
Equipment sales 764 198
------ -------
1,280 2,036
Selling, general and administrative expenses 2,198 2,677
Provision for doubtful accounts 59 147
Research and development expenses 262 77
------ -------
Operating loss (1,239) (865)
Interest income 79 133
Interest expense (390) (612)
Gain on sale of assets 493 --
Equity in loss of investee (111) --
Minority interest -- (27)
--------- -------
Net loss $ (1,168) $ (1,371)
========= =========
Basic net loss per share $ (.12) $ (.15)
========= =========
Weighted average number of shares outstanding 9,762 9,293
========= =========
Fully diluted net loss per share $ (.12) $ (.15)
========= =========
Shares used in fully diluted net loss per share calculation 9,762 9,293
========= =========
</TABLE>
See notes to financial statements.
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<PAGE>
INTELLICALL, INC.
STATEMENTS OF OPERATIONS(UNAUDITED)
(in thousands, except share information)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
June 30,
1998 1997
---- ----
<S> <C> <C>
Revenues and sales:
Service revenues $ 13,147 $ 40,285
Equipment sales 7,583 7,951
------ ------
20,730 48,236
-------- ---------
Cost of revenues and sales:
Service revenues 12,282 36,452
Equipment sales 6,069 8,098
------- ------
18,351 44,550
-------- --------
Gross profit:
Service revenues 865 3,833
Equipment sales 1,514 (147)
------- -------
2,379 3,686
Selling, general and administrative expenses 4,266 5,306
Provision for doubtful accounts 144 252
Research and development expenses 557 196
------ ------
Operating loss (2,588) (2,068)
Interest income 158 229
Interest expense (782) (1,212)
Gain on sale of assets 6,892 --
Equity in loss of investee (330) --
Minority interest -- (46)
------- -------
Net income (loss) $ 3,350 $ (3,097)
======= =========
Basic net income (loss) per share $ .35 $ (.34)
======= =========
Weighted average number of shares outstanding 9,616 9,071
======= =========
Fully diluted net income (loss) per share $ .30 $ (.34)
======= =========
Shares used in fully diluted net income (loss) per share calculation 12.499 9,071
======= =========
</TABLE>
See notes to financial statements.
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<PAGE>
INTELLICALL, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
(in thousands) SIX MONTHS ENDED
June 30,
1998 1997
---- ----
<S> <C> <C>
Operating Activities:
Net income (loss) $ 3,350 $ (3,097)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 995 1,876
Provision for doubtful accounts 144 252
Provision for inventory 150 18
Equity in loss of investee 330 --
Minority interest in income of ILD -- 46
Changes in operating assets and liabilities (See Note 1):
Restricted cash (5) (1)
Receivables 4,337 563
Inventories (847) 444
Related party (941) --
Other current assets 285 236
Notes receivable 20 (27)
Accounts payable (3,226) 1,006
Accrued transmissions, commissions and billing charges (573) 732
Accrued liabilities (242) (41)
Deferred revenue -- (317)
Deferred gain on sale to unconsolidated investee 968 --
Other 1,603 258
-------- ---------
Net cash provided by operating activities 6,348 1,948
Investing activities:
Purchase of equipment (296) (606)
Capitalized software (500) (891)
-------- ---------
Net cash used in investing activities (796) (1,497)
Financing activities:
Net repayments on line of credit (3,946) (312)
Proceeds from issuance of stock 394 239
-------- ---------
Net cash used in by financing activities (3,552) (73)
Net increase in cash and cash equivalents 2,000 378
Cash and cash equivalents at beginning of period -- 2,271
-------- ---------
Cash and cash equivalents at end of period $ 2,000 $ 2,649
======== =========
Supplemental cash flow information:
Interest paid $ 573 $ 958
======== =========
Supplemental non cash information:
Conversion of debt to equity $ 210 $ 945
========= =========
Conversion of preferred stock to common stock $ 1,160 $ --
========= =========
</TABLE>
See notes to financial statements.
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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 June 30, 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 54% at December 31, 1997 to
42%. At June 30, 1998, the Company's ownership in ILD remained at 42%. (See Note
6 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 six months ended June 30, 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
reclassified 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 second quarter of
1998 and 1997 were $250,000 and $416,000, respectively. The Company recorded
$135,000 and $446,000 of software amortization expense for the three months
ended June 30, 1998 and 1997.
For the six months ended June 30, 1998 and 1997, the Company capitalized
$500,000 and $891,000, respectively. The software amortization expense recorded
was $254,000 and $1.0 million for the six months ended June 30, 1998 and 1997.
- 6 -
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
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.
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 and six
month periods ended June 30, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
Net income (loss) $ (1,168) $ (1,371) $ 3,350 $ (3,097)
Basic:
Weighted average number of shares outstanding 9,762 9,293 9,616 9,071
===== ===== ===== =====
Diluted:
Weighted average number of shares outstanding used
in the basic net income (loss) per share calculation 9,762 9,293 9,616 9,071
Weighted average shares from assumed exercise of
dilutive stock options and warrants, net of shares
assumed to be repurchased with exercise proceeds -- -- 310 --
Assumed conversion of Series A Preferred Stock
at beginning of period -- -- 787 --
Assumed conversion of convertible debt -- -- 1,786 --
----- ------- ----- ------
Weighted average number of shares outstanding used
in the fully diluted net income (loss) per share
calculation 9,762 9,293 12,499 9,071
===== ===== ====== =====
</TABLE>
In accordance with FAS 128, options and warrants to purchase 2,945,205
and 2,802,740 shares respectively, of Common Stock were excluded in the diluted
EPS calculation because they were antidilutive, for the three months ended June
30, 1998 and 1997, respectively. Conversion of debt and preferred stock were
antidilutive and therefore were excluded for both of the three month periods
calculations. For the six month periods ended June 30, 1998 and 1997, options
and warrants to purchase 1,262,180 and 2,802,740 shares respectively, of Common
Stock were excluded in the diluted
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<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
EPS calculation when they were antidilutive, as applicable, for the six month
periods presented. Conversion of debt and preferred stock was excluded for the
six month period ended June 30, 1997 calculation because they were antidilutive.
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.
Disclosures about Accounting for Derivative Instruments and Hedging
Activities: On June 15, 1998, the Financial Accounting Standards Boards (FASB)
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 is effective
for all fiscal quarters of all fiscal years beginning after June 15, 1999
(January 1, 2000 for the Company). FAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. Management of
the Company anticipates that, due to its limited use of derivative instruments,
the adoption of FAS 133 will not have a significant effect on the Company's
results of operations or its financial position.
- 8 -
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
Year 2000 Discussion. The Company has conducted an initial review of
Year 2000 issues as they may relate to the Company, its customers and certain of
its suppliers who provide critical services to the Company.
The Company has installed a new accounting system integrating all accounting
aspects of the Company's manufacturing operations. The Company is currently
evaluating all internal operations including hardware and software for
compliance.
Certain of the software included in the Company's Products sold to its customers
or used to process call records received from customers through the Company's
billing system, will require some modifications to address Year 2000 issues.
During 1997 the Company commenced a program pursuant to which all software
utilized in the Company's Products is to be evaluated for Year 2000 problems.
All evaluations are actively being evaluated by management.
Finally the Company utilizes an industry standard format, EMI, for the billing
and collection of call records submitted to it by its customers. Upon
publication of the new format for Year 2000 compliance, the Company will adopt
such format and forward such format to its customers for their use in the year
2000 and thereafter.
- 9 -
<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>
June 30, 1998 December 31, 1997
<S> <C> <C>
Intellicall, Inc.
8% Convertible subordinated notes, due 2000 $ 2,630 $ 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 2,336 4,114
Installment note, due 1998 -- 28
----------- ---------
10,966 12,982
Less unamortized debt discount (379) (450)
--------- --------
10,587 12,532
--------- --------
ILD Telecommunications, Inc. related debt -- 13,613
--------- ---------
Total debt 10,587 26,145
Less: Current portion of long-term debt (1,000) (4,928)
--------- ---------
Total long-term debt $ 9,587 $ 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 June 30, 1998, $4.87 million of the Banca Del Gottardo Notes were
converted to 1,159,517 shares of the Company's Common Stock. Interest is payable
semi-annually and commenced June 30, 1996.
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<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 June 30, 1998 the Company was in compliance with all covenants.
At December 31, 1997 ILD Telecommunications, Inc. (ILD) had $13.6
million of long term
- 11 -
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
debt due from 1998 through 2001 at interest rates ranging from 9% to 13.5%.
NOTE 3 - INVENTORY
As of June 30, 1998 and December 31, 1997, the Company's net
inventories consisted of the following (in thousands):
June 30, December 31,
1998 1997
------------ ------------
Raw materials $ 4,075 $ 2,491
Work-in-process 397 378
Finished goods 1,197 2,133
------------ ----------
Total inventories, net $ 5,669 $ 5,002
============= ==========
NOTE 4 - LITIGATION AND CONTINGENCIES
In April 1997, U.S. Long Distance, Inc., ("USLDI") filed a Second
Amended Complaint against the Company, the ("Lawsuit"). The complaint sought
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 alleged 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. On
July 24, 1998, the Company, Intellicall Operator Services and ILD settled the
Lawsuit with USLDI through the collective payment of $225,000 and execution of a
mutual release of all claims.
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
- 12 -
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
(approximately $3,800,000) to pay down indebtedness to Finova. As of June 30,
1998, $1,160,000 of the Company's preferred stock had been converted into
308,871 shares of the Company's Common Stock. During July 1998, 150 shares of
the Company's Preferred Stock were converted to 49,506 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.
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.
- 13 -
<PAGE>
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 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 $325.00 per share and recorded
a gain on the sale in the amount of $5.6 million. The transaction was
consummated on March 30, 1998.
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, resulting in a gain on sale
of assets of $493,000, net of legal fees.
- 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 (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
The Company accounts for its investment in ILD under the equity method
as consolidation is no longer appropriate due to, among other things, the
Company's ownership percentage in ILD Telecommunications, Inc. ("ILD") declined
to approximately 42% of the outstanding shares of ILD during the first quarter
of 1998. 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.
- 15 -
<PAGE>
Financial Condition
Liquidity and Capital Resources
During the six months ended June 30, 1998 the Company generated
$6.3 million of cash from operations including changes in operating assets and
liabilities. The Company invested $296,000 in capital equipment and $500,000 in
software and product development. Financing activities were comprised of
approximately $3.9 million of repayments on the Company's revolving line of
credit, and the conversion of stock options into Intellicall's Common Stock.
These activities resulted in a cash use of $3.6 million. The net result of all
such changes described above was an increase in cash and cash equivalents of
$2.0 million.
The net effects of changes in operating assets and liabilities
during the six months ended June 30, 1998, was an increase in cash of $1.4
million. The primary factors affecting these changes were a decrease in accounts
receivable of $4.3 million, a decrease in payables of $3.2 million, and the
disposition of assets and liabilities of the Company's prepaid services
operation which was sold to ILD.
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
6 to the financial statements, on March 30, 1998 and April 3, 1998 the Company
sold a portion of its interest in ILD to an unrelated third party. Proceeds from
the sales totaled $6.5 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 or
the mix of such sales is not favorable, 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.
- 16 -
<PAGE>
Results of Operations
Service Revenues. Service revenues for the second quarter ended June
30, 1998 were $7.5 million compared to $20.4 million for the same period in
1997. For the six month period ended June 30, 1998, service revenues were $13.1
million compared to $40.3 million for the six months ended June 30, 1997. The
table below provides a detailed analysis of service revenues by type for the
three and six month periods ended June 30, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
-------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Call Traffic Revenue $ 7,528 $ 10,611 $ 13,147 $ 21,668
Long-distance Resale -- 1,101 -- 2,209
Operator Services -- 7,208 -- 13,538
Prepaid Calling Services -- 1,483 -- 2,870
----------- --------- -------- --------
Total Service Revenues $ 7,528 $ 20,403 $ 13,147 $ 40,285
=========== ========= ======== ========
</TABLE>
Call traffic revenues declined $3.1 million in the second quarter of
1998 compared to the second quarter of 1997. Revenues decreased $8.5 million for
the first half of 1998 compared to the first half of 1997. The period to period
changes are principally the result of the discontinuation of the Company's
inmate services program eliminated during 1997 due to an unacceptably high
experience of uncollectible phone calls. Revenues from this program were $2.7
million and $7.2 million for the three and six months ended June 30, 1997,
respectively. Furthermore, the average calls per day per phone has declined from
.465 in June of 1997 compared to .346 in June of 1998 reflecting the negative
impact 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. Partially offsetting these declines are the number of
easy*star and bundled phones reporting in June of 1998 of 52,487 compared to
41,355 in June of 1997 caused by a significant customer's increased utilization
of the Intelli*Star technology. Long-distance resale and operator services
revenues relate to the operations of ILD, an unconsolidated investee beginning
January 1, 1998.
Gross profit from services revenues decreased $1.3 million and $3.0
million for the three and six months ended June 30, 1998, compared to the three
and six months ended June 30, 1997. Of this decline $1.1 million and $2.0
million relate to the ILD operations listed above for the three and six months
ended June 30, 1997, respectively. However on a comparable basis (i.e.,
excluding the gross profit contributed by the revenue streams of ILD) the
pro-forma Intellicall gross profit for the three and six months ended June 30,
1997 would have been $751,000 (or 7.1%) and $1.8 million (or 8.3%),
respectively. Absolute gross profit declined $235,000 and $941,000 for the three
and six month periods ended June 30, 1998 compared to the pro-forma June 30,
1997 amounts. This pro-forma decline is attributable to the loss of the inmate
services program, lower unbundled revenues in the 1998 period compared to the
1997 period, and the recognition in 1997 of deferred revenues from validation
services, which had no cost of goods sold associated with it.
- 17 -
<PAGE>
Equipment Sales. Equipment sales were $3.3 million and $4.7 million in
the three months ended June 30, 1998 and 1997, respectively and $7.6 million and
$8.0 million for the six month periods ended June 30, 1998 and 1997. The
following table analyzes sales by market (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Independent payphone $2,628 $3,877 $5,342 $7,122
providers
International 175 802 1,723 819
Regulated 518 -- 518 10
------ -------- ------- -------
Total equipment sales $3,321 $4,679 $7,583 $7,951
====== ====== ====== ======
</TABLE>
The decrease in equipment sales is primarily attributable to lower
sales to independent payphone providers ("IPP's"). The Company believes that
sales to IPP's continue to be negatively impacted by unresolved issues
surrounding dial-around compensation. The IPP customers began receiving a
portion of their long overdue dial-around compensation in late July 1998
although the issues are not totally resolved. International sales for the three
month period comparison is lower in 1998 compared to 1997 due to lower sales
volumes while the six month period ended June 30, 1998 reflects an increase of
$904,000 compared to the six month period ended June 30, 1997. The higher
revenues reflect shipments in the first quarter to Indonesia and Mexico with
very low international revenues during the first quarter of 1997. Also, the
Company received $518,000 in the second quarter of 1998 from Ameritech related
to the unfulfillment of a contract with the Company.
The Company's gross profit on equipment sales for the quarter ended
June 30, 1998 was $764,000 ( or 23.0% of related sales) compared to $198,000 (
or 4.2% of related sales) for the quarter ended June 30, 1997. Gross profit for
the six month period ended June 30, 1998 on equipment sales was $1.5 million (or
20.0 % of related revenues) compared to a gross loss for the six month period
ended June 30, 1997 of $147,000 (or (1.8%) of related sales). The increase is
attributable to decreased material costs and improved efficiencies in the
Company's manufacturing facility. Also contributing was lower capitalized
software amortization of $135,000 for the three month period ended June 30, 1998
compared to $446,000 for the three month period ended June 30, 1997 and $254,000
compared to $1.0 million for the six months ended June 30, 1998 and 1997,
respectively. This improvement resulted from the September 1997 write down of
the carrying value of software development costs related to the Company's older
product lines.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $479,000 for the three months ended June 30,
1998 compared to the three months ended June 30, 1997 and decreased $1.0 million
for the six months ended June 30, 1998 compared to the six months ended June 30,
1997. Selling, general and administrative expense for the ILD operations
approximated $763,000 and $1.5 million for the three and six month periods ended
June 30, 1997. The increase in selling, general and administrative expenses for
the pro-forma periods were a result of the settlement of the USLD lawsuit,
higher sales and marketing expenditures through advertising and travel, and
higher investor relations expenditures.
- 18 -
<PAGE>
Provision for Doubtful Accounts. During the quarter ended June 30, 1998
the Company provided $59,000 for doubtful accounts related to equipment sales
compared to $147,000 provided for the quarter ended June 30, 1997. For the six
month period ended June 30, 1998, the Company provided $144,000 compared to
$252,000 for the six month period ended June 30, 1997.
Research and Development Expenses. Gross spending for research and
development increased $19,000 for the three months ended June 30, 1998 compared
to the three month period ended June 30, 1997 and decreased $30,000 for the six
month period ended June 30, 1998 from the six month period ended June 30, 1997.
Gain on Sale of Assets. During the second quarter ended June 30, 1998
the Company reported a gain on sale of assets of $493,000 from the sale of a
portion of the Company's ownership interest in ILD to an unrelated third party
(see Note 6).
During the three month period ended March 31, 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 the gain on the March 1998 sale of a portion of the
Company's ownership interest in the common stock of ILD to an unrelated third
party. The ILD common stock sold in March of 1998 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 ("Lawsuit"). The complaint sought
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 alleged 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. On
July 24, 1998, The Company, Intellicall Operator Services and ILD settled the
Lawsuit with USLDI through the collective payment of $225,000 and execution of a
mutual release of all claims.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None.
- 19 -
<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: August 14, 1998
- 20 -
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