SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission file number 1-10588
INTELLICALL(R), 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 No.)
2155 Chenault, Suite 410, Carrollton, Texas 75006-5023
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 416-0022
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value New York Stock Exchange
(Title of Class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[ X ]
The aggregate market value of the voting stock (which consists solely
of shares of Common Stock) held by non-affiliates of the registrant as of March
20, 1998, computed by reference to the closing sales price of the registrant's
Common Stock on the New York Stock Exchange on such date, was approximately
$55,536,780
Number of shares of the registrant's Common Stock outstanding as of
March 20, 1998: 9,471,312
Documents Incorporated By Reference:
The information required by Part III of this Form 10-K Annual Report
is incorporated by reference from the registrant's definitive proxy statement to
be filed not later than 120 days after the end of the 1997 fiscal year.
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PART I
ITEM 1. BUSINESS.
I. GENERAL
Intellicall, Inc. ("Intellicall" or the "Company") designs, manufactures and
sells public access telecommunications equipment, and provides, directly or
through a subsidiary, local, long distance and operator services ("Services"),
principally to payphone owners and telephone companies in the United States and
in developing countries.
The Company's line of products consists of payphone products and accessories,
network equipment and software (the "Products"). In various configurations, the
Products permit their owners to provide traditional payphone services to users
of the Products and live or automated operator services for operator-assisted
calls. In addition, the Products may be used in international gateway
applications and to render prepaid or other long distance service to callers
using prepaid or other calling cards. The Company has historically sold most of
its Products to the U.S. private pay telephone industry. In recent years, a
portion of the Products has been sold in developing countries and in the United
States to regulated telephone companies.
The Company provides automated operator services to payphone users utilizing
patented microprocessor technology incorporated into the payphone. These
services enable callers to make collect, calling card and credit card calls from
the Company's payphones without requiring the assistance of live operators.
Through its majority owned subsidiary, ILD Teleservices, Inc. ("ILD"), the
Company provides local and long distance services principally to payphone owners
and to individuals utilizing prepaid or other calling cards. In addition, ILD
offers live operator services to payphone owners and to operators of hotels and
inmate calling systems. As described more fully in SERVICES: Services Provided
by ILD Teleservices, Inc., ILD's rapid growth since its formation in 1996 has
been fueled by purchases of related businesses. As a consequence of issuing ILD
equity securities to sellers of these businesses, the Company's percentage
interest in ILD has been reduced. As ILD plans to continue its acquisition
strategy, the Company's percentage interest in ILD's equity will likely fall
below 50%. In that event, the Company would no longer consolidate ILD's
operating results. In lieu of consolidation, the Company would use the equity
method of accounting (so long as the Company continued to significantly
influence ILD's business), whereby the Company's prorata portion of ILD's net
income would be included in the Company's income statement as a line item below
pretax income and the Company's share of ILD's net assets would be carried as an
investment. Thus ILD's revenues and associated costs, and ILD's individual
assets and liabilities, would not be shown in the Company's consolidated
statement of operations and balance sheet.
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The Company is a Delaware corporation with its principal executive offices
located at 2155 Chenault, Suite 410, Carrollton, Texas 75006-5023. The Company's
telephone number at that address is (972) 416-0022.
II. PRODUCTS.
Industry Background. Prior to its breakup in 1984, payphone service in the
United States was provided solely by AT&T. In 1984, the Federal Communications
Commission ("FCC") authorized competition in the operation of payphones subject
to state and federal regulation. Since 1984 an industry comprised of independent
payphone providers ("IPPs") has emerged to compete with payphone networks owned
and operated by local exchange carriers ("LECs"). The principal difference
between payphone equipment utilized by IPPs and LECs can be found in the
location of the payphone system's intelligence. Since IPPs lacked the
intelligence provided to LEC phones by the LEC central office, IPPs moved to
incorporate system intelligence in the payphone itself. As a result, call
rating, answer detection, operator service and equipment status reporting were
among the features designed into IPP payphones. The IPP payphones in turn
utilized telephone lines to provide little more than "dial-tone" from the LEC
central office. The "smart phone", as it came to be called, was the product of
choice of the IPP. The Company originated, and has extensively developed, smart
phone technology.
Domestic Payphones. The Company's principal payphone product (available in
multiple configurations) offered for sale in the United States is the ASTRATEL
2(R). This phone can be used to provide automated operator service and to
perform all functions customarily available in payphones. As opposed to needing
an external electric connection to operate, the ASTRATEL 2 utilizes current
provided through the telephone line. Because of its unique design, functionality
of the ASTRATEL 2 is principally provided through software. Most older payphones
(including those manufactured by the Company) utilize a product design which
incorporates a far greater number of electronic components and circuitry.
The "brain" of the ASTRATEL 2 payphone is an integrated circuit board located in
the payphone housing (the "Boardset"). From its inception, the ASTRATEL 2
Boardset was designed to sell at attractive prices and to easily fit most
payphone housings, including those sold by the Company's competitors. As a
result, the Boardset accounted for an increasing percentage of the Company's
equipment sales during 1997. The Boardset is not manufactured by the Company,
but a number of companies exist that possess the ready ability to manufacture
the Boardset in accordance with the Company's specifications. The Boardset's
software intensity and flexibility provide the Company's customers with
considerable protection against obsolescence.
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The Company's payphones operate by means of advanced microprocessor technology
located in the Boardset. When a call is initiated, the microprocessor
automatically performs a series of functions including, in the case of coin
generated phone calls, determining the applicable rate for the call and whether
the call has been answered. The Company's payphones communicate with a caller by
voice messages digitally synthesized and stored in memory chips located in the
Boardset.
Among the most important features of an Intellicall payphone is the ability to
reliably and accurately detect whether a call has been answered. This answer
detection capability is not dependent upon an electronic signal from the LEC
central office. Accurate answer detection is critical to the successful
operation of a private payphone in order to ensure that all completed calls are
properly billed and that incomplete calls are not billed.
The ASTRATEL 2 possesses many programmable features that may be altered from a
remote location by means of the Company's proprietary software using a personal
computer. These programmable features include rate tables and various management
reporting capabilities that enable the owner to determine if and when a payphone
requires service or coin collection. In addition, a number of enhancements may
be added to the Company's payphones from a remote location. Management believes
the ASTRATEL 2 uses the highest speed modem in the payphone industry (14.4 Kps)
to communicate with a remote location and that such high-speed modem constitutes
a current competitive advantage.
International Payphones. Since 1993 the Company has produced payphones targeted
for sale in developing countries. These phones accommodate use of a variety of
payment systems including U.S. and international coinage, credit cards and
several types of prepayment cards, including cards based on personal
identification numbers, magnetic stripe cards and integrated circuit cards.
Additionally, these telephones can be operated with auxiliary power sources,
including solar power or power supplied by telephone lines. These payphones can
be utilized in wireless systems as well.
In 1997, the Company modified the ASTRATEL 2 for sale in the Mexican market and
is working on further modifications required for sale in other countries.
Because of its software reliance, the ASTRATEL 2 can be economically modified to
accommodate the different calling patterns, coinage denominations, rating
systems and languages of numerous countries.
Intelligent Network Platform. The Company's Intelligent Network Platform ("INP")
technology enables network operators in the United States and abroad to provide
enhanced, switched, public access services. Public access services are of
special importance to network operators in developing countries where demand for
publicly accessible telephone service is high due to the expense of, and lengthy
delays often involved in obtaining residential phone service.
INP applications permit network and payphone system operators to offer prepaid
calling services over wireline or cellular networks. In addition, the INP can
be used as a switched international gateway that is transparent to the
communications protocols that differ among countries. Finally,
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the INP enhances the public phone management capability of network and payphone
system operators. Among its other features, the INP can provide automated credit
card validation, calling card validation or voice recognition validation, and
protection against telephone fraud.
Intelli*Star. The Intelli*Star(R) system is an automated operator product
licensed to owners of the Company's payphones. The Company's older UltraTel(R)
line of payphones required the addition of a separate integrated circuit board,
commonly called the I*Star board, to complete the system. This separate
integrated circuit board was attached to the payphone's operating circuitry. In
the ASTRATEL line of payphones, Intelli*Star is activated by means of a software
enhancement and requires no additional circuit board. Intelli*Star is available
on every payphone offered for sale by the Company in the United States.
Sales and Marketing. The Company's U.S. sales of Products are made through a
combination of distributors and a direct sales force comprised of six employees.
International sales are generally made through in-country agents and
distributors supported by sales, engineering and technical support personnel at
the Company's Carrollton, Texas office.
The markets for the Company's Products consist of public access
telecommunications providers, principally providers of payphone services.
Included in this grouping are the payphone operations of IPPs and LECs in the
United States. Service revenues of this market segment are estimated to
approximate $3.0 billion annually. Annual sales of hardware and software to this
segment are estimated to exceed $300 million. The potential size of
international markets for the Company's Products is believed to appreciably
exceed the size of the U.S. market, since international markets in which the
Company sells its Products have far lower per-capita investments in telephone
products than in the U.S..
Receivables arising from domestic product sales are generally payable within 60
days and may be offset, on a customer-by-customer basis, against amounts the
Company may owe for Intelli*Star commissions to payphone owners. Discounts are
provided for prepayment or prompt payment. International Product sales are
generally made pursuant to confirmed letters of credit or payments prior to
shipment.
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Manufacturing and Assembly
Payphones and INPs are principally assembled at the Company's manufacturing
facility in McAllen, Texas. Boardsets are currently assembled for the Company by
an electronics manufacturer in McAllen, Texas. After Products are assembled at
the Company's manufacturing facility, they are thoroughly tested before shipment
to the purchaser. Once a payphone or Boardset is shipped to a U.S. private
payphone industry customer by the Company, the Company is not responsible for
ensuring that the Product is properly installed, maintained or operated in
accordance with applicable federal and state regulations. The Company assists in
the installation of INPs, principally with respect to certain international
customers and LECs.
The Company purchases certain components from single-source suppliers. The
Company believes that alternative sources are available and that an interruption
in supply would not have an enduring impact on its results of operations. As a
result of market factors, suppliers of certain components used in the Company's
equipment may occasionally place the Company on allocation for those parts. The
Company continues working to secure alternate sources for single-source
components and components subject to allocation.
Warranty, Maintenance and Service
The Company repairs Intelli*Star boards without charge when the boards are
properly licensed and used in older UltraTel payphones. The Company provides the
original purchaser of products (not including ASTRATEL electronic components) a
limited 90-day or one-year warranty, depending on the kind of equipment
involved. The Company offers a two-year limited warranty on ASTRATEL 2
electronic components. The Company's technical support staff at its corporate
offices currently provide support services over the telephone to customers who
have installation or operational questions. The Company does not currently offer
a maintenance agreement for its products but does provide non-warranty service.
Most warranty and non-warranty service is provided by the Company at its
manufacturing facility in McAllen, Texas.
The Company holds classes to train its customers in the proper installation,
operation and maintenance of the Company's products.
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Competition
The Company competes directly with other payphone and switching equipment
manufacturers, and indirectly with providers of wireless portable telephony,
many of whom are larger and better capitalized than the Company. The Company's
principal direct competitors in the U.S. private payphone market are Elcotel,
Inc. and Protel, Inc. (a subsidiary of Inductotherm Industries, Inc.). Its
indirect competitors include numerous service businesses providing cellular,
paging and personal communications services ("Wireless Telecommunications")
throughout the Company's markets. In certain instances, Wireless
Telecommunications compete successfully with telecommunications services offered
through payphones to callers away from home. However, for callers with limited
needs to make calls while away-from-home, payphones offer a convenient and an
economical alternative to Wireless Telecommunications devices.
The Telecommunications Act of 1996 (the "1996 Act") requires, among other
things, that LECs end subsidies to their own payphone services and provide
services to IPPs on the same rates, terms and conditions as they are made
available to their own payphone service operations. By equalizing the basis for
competition between LECs and IPPs, the 1996 Act may create additional
opportunities for existing payphone providers, or for new entrants, to compete
with the LECs. The demand for payphones may be affected by the interconnection
arrangements offered by the local telephone operating companies to IPPs.
Effective April 15, 1997, local telephone companies reclassified their payphone
service from regulated to non-regulated status, substantially changing many of
the rates and terms upon which payphone lines are available. These changes were
required by the 1996 Act's explicit prohibition against the local telephone
companies discriminating between their own payphone operations and those of
IPPs. Local telephone companies generally must receive service under the same
tariffs available to IPPs of payphones.
The Company expects these changes to benefit its IPP customers.
The key provisions of the 1996 Act have been implemented through a number of
separate proceedings before the Federal Communications Commission ("FCC") and
the courts, many of which are ongoing at this time. On July 18, 1997, the U.S.
Court of Appeals for the Eighth Circuit issued a decision vacating many aspects
of the FCC's rules requiring incumbent local exchange carriers ("ILECs") to open
their networks and to permit interconnection and access to unbundled network
elements on nondiscriminatory terms and conditions. The Eighth Circuit Court
determined, inter alia, that the issue of the prices at which interconnection
and access must be provided is beyond the jurisdiction of the FCC and that the
states have exclusive jurisdiction to determine appropriate prices consistent
with the 1996 Act's standards. The Supreme Court has recently agreed to review
the Eighth Circuit's decision.
The 1996 Act contains provisions which, if not successfully challenged, would
permit Bell Operating Companies ("BOCs"), under certain circumstances, to
manufacture telecommunications equipment, including payphones and switched
network products. Entry by the BOCs into the telecommunications equipment
manufacturing market could occur through acquisition of existing manufacturers
or through direct market entry. In either case, entry by one or more BOCs could
have a material adverse effect on the Company's equipment manufacturing
business.
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Numerous entities compete with the Company in the international public
communications markets, including many larger and better capitalized companies
with experience in the marketing of products internationally. The Company has
adopted a strategy of focusing its marketing efforts on countries with a low
ratio of public communication lines to total population, where rapid growth in
sales of public communications equipment is projected. Many of the Company's
competitors have adopted a similar strategy. The market for international public
communications is highly competitive and subject to the risks of doing business
abroad. Consequently, there can be no assurances that the Company's efforts in
international markets will be successful.
Although the Company is encountering and expects to continue to encounter
intense competition, the Company believes that its products are competitive in
its markets based upon price, equipment capabilities and quality. Since the
telephone industry is subject to rapid technological change, the Company
believes that it will continue to be required to develop improved or additional
Products and to continue to reduce the cost of existing Products in order to
remain competitive. The Company's ability to develop additional Products will
depend generally in the foreseeable future on its ability to generate working
capital internally.
Regulations Affecting Telecommunications Equipment Manufacturers. The Company's
domestic payphones and call processing systems must comply with technical
requirements contained in Parts 15 and 68 of rules promulgated by the FCC in
order to operate and/or be connected to the public telephone network. The
Company has performed those tests necessary to assure compliance with these
technical and operational requirements and has obtained the proper registrations
and certifications from the FCC for all its products. The Company updates these
registrations and certifications periodically and the Company believes that such
registrations and certifications will be routinely granted.
On January 29, 1998, the FCC adopted a Report and Order in its long-standing
docket considering various proposals that would have required most interstate
long distance calls initiated by dialing "0" from pay telephones to be completed
using one or more predetermined long distance carriers rather than through the
automated pay telephone or operator service provider to whom the private pay
telephones are pre-subscribed ("Billed Party Preference"). The Commission's
order concludes that the Billed Party Preference proposal was cost prohibitive
and that the same measure of consumer protection could be provided with price
disclosure and at far lower cost.
As an alternative to Billed Party Preference the FCC adopted a rule that all
operator service providers, including owners of the Company's payphones using
Intelli*Star, must audibly disclose during the call-setup that rates are
available on request, but need not provide an exact rate quote unless the caller
specifically requests it. Although the Order gives operator service providers
until July 1, 1998 to comply with this new rule, the Company's payphones,
including those sold after July 1, 1998, need not be compliant with the rule
until October 1, 1999.
The rule will require additional development by the Company to modify the
ASTRATEL 2 software to comply and will require the Company's payphone customers
using Intelli*Star to
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retrofit non-compliant payphones or cease using Intelli*Star technology after
October 1, 1999. The Company believes that any new software required can be
developed and incorporated into its ASTRATEL products within the time frame
established by the FCC and that the embedded base of UltraTel payphones can be
replaced with ASTRATEL technology in the same time frame.
Product Sales. In 1997, the Company's sales of Products amounted to $19.3
million, constituting 16% of its consolidated sales and revenues. Compared with
1996, sales of Products increased by $3.4 million or 22%.
III. SERVICES.
Services Provided by the Company. Approximately 38% of consolidated 1997 service
revenues were generated by the provision of automated operator services. The
predominant portion of these revenues was generated by the Company's own
proprietary automated operator technology, Intelli*Star.
The Company's automated operator system is a combination of hardware and
software that performs, without human intervention, all of the functions
necessary for completing an operator assisted payphone call (i.e., collect,
calling card, and credit card calls) and a range of other payphone services and
features. Each system performs the functions previously performed by live
operators. The payphone provides callers with appropriate instructions in a
digitized human voice for entering billing information (i.e., a calling card
number or a terminating phone number for a collect call) and completes the
calls. For example, in the case of a collect call, a synthesized voice directs
the caller to speak his name into the pay-phone handset and the caller's
response is digitally recorded and played back when the call is answered at its
destination. The called party is instructed to press "1" on his telephone, or,
if the system is configured with voice recognition capability, to say "yes", if
he wishes to accept the call. The automated operator system records call and
billing information for later retrieval by the telephone owner, all without
human operator assistance. Calls requiring human operator assistance, such as
person-to-person calls, emergency calls and calls billed to a third party, are
routed to live operators selected by the payphone owner.
By performing most operator functions, Intelli*Star technology substantially
reduces the need for (i) an operator-assisted call to be routed first to a live
operator service and then routed to the final destination, a process known as
"backhauling," and (ii) centralized switching equipment. As a result, these
systems generally allow the owner of a payphone to provide operator services
more efficiently and profitably than a centralized operator service provider,
and at a lower cost to the consumer.
The Company provides billing and collection services to owners of payphones who
use the Company's automated operator technology, and, until May 1997, provided
such services to certain customers that generated call traffic from public
access communications systems utilized by correctional institutions. Billing and
collection is the process whereby owners receive payment
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for the non-coin calls processed by their systems. The billing and collection
process includes the collection of phone call billing information, editing and
formatting of that data, and processing the data for billing through LECs. Call
data is accumulated by both the periodic receipt of computer disks and by
electronic data transmission.
The Company does not sell Intelli*Star technology, but licenses it to payphone
owners under long-term license agreements. Under its most common Intelli*Star
license agreement, Intellicall owns and has the exclusive right to process
stored call and billing information generated by the Intelli*Star technology. By
virtue of its ownership, the Company typically retains the right under an
Intelli*Star license agreement to bill, collect and record related call
revenues, subject to its obligation to pay commissions to payphone owners.
The "Easy*Star" Program. The Easy*Star program is the Company's primary
program for editing, billing, collecting and recording Intelli*Star
generated revenues, and determining the amount of commissions payable to
payphone owners related to their submitted call traffic. Pursuant to this
program, the Company edits, reformats and bills call traffic which is
typically submitted to the Company by payphone owners in machine-readable
form. The Company then computes the commission payable to each payphone
owner (based on the edited value of the processed call traffic) and
transmits the edited and reformatted call traffic media to billing agents,
who sort it for submission to, and billing by, LECs.
Not more than 15 days after the end of the month in which the Company
receives call traffic, the Company pays related commissions to payphone
owners. Commissions are based upon each customer's historical bad debt
experience and call traffic demographics. The Company generally assumes
responsibility for uncollectible call traffic, as well as the costs of
credit validation and billing. Approximately 60 days, on average, after
payment of commissions to the Company's payphone customers, the Company
receives payment from LECs for the related call traffic, less certain fees
and other amounts deducted by the LECs prior to remittance.
"Unbundled" Program. Under certain circumstances, the Company charges
reduced fees to owners of payphones or systems who contract directly with
third parties for credit validation, billing and collection services.
Generally under these unbundling arrangements, the Company receives and
records as revenue a processing fee for editing and reformatting call
traffic media, while the payphone owner receives call traffic proceeds and
is responsible for costs of validation, billing, collection and bad debts.
As of December 31, 1997, the Company's customers were operating approximately
60,000 payphones utilizing the Intelli*Star technology.
Sales and Marketing. The Company's automated operator services are sold to
customers who purchase its payphones with Intelli*Star technology. The Company,
in conjunction with ILD Teleservices, Inc. (see Services Provided by ILD
Teleservices, Inc.), markets itself as a full
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service public communications company, which it believes is a competitive
advantage over other manufacturers of payphones in the U.S. Private Payphone
Industry.
Competition. In the provision of automated operator services, the Company
competes with a large number of operator service companies, many of which have
more technical support personnel and greater financial resources. AT&T, MCI and
Sprint dominate the operator services market and long distance industry in
general. In order to successfully compete with other providers of operator
assisted long distance calling services, the Company must pay competitive
compensation to payphone owners for submitted call traffic. In addition, only
long distance operator assisted calls which are billable to certain credit or
LEC calling cards may be originated through use of the Company's Intelli*Star
technology. If long distance payphone calls are billable to AT&T, or other
non-LEC proprietary calling cards, or 800 numbers, the calls by-pass the
Company's Intelli*Star technology, thereby depriving the Company of the
opportunity to capture, bill and collect the related long distance call.
In recent years, AT&T has intensified an aggressive marketing campaign designed
to capture market share from its major competitors and from the operator
services industry. The marketing campaign encourages callers to dial 1-800
COLLECT, or 1-800 CALLATT or to use AT&T proprietary calling cards when making
long distance calls away from home. In addition, prepaid and other calling
cards, which the Company cannot bill, have become increasingly popular in the
public access communications marketplace in recent years. The expanded use of
proprietary and prepaid calling cards, and of other "dial-around" practices by
payphone callers, has had a material adverse effect on the Company's and its
customers' revenues from automated and live operator assisted calls.
Automated Operator Service Revenues. In 1997, the Company's revenues from
automated operator services and billing and collection services amounted to
$37.2 million. Of this total, $7.2 million of revenue was derived from the
Jail*Star program, through which the Company provided billing and collection
services to the corrections industry. The Jail*Star program was terminated by
the Company in May 1997 due to unacceptably low profitability.
Services Provided by ILD Teleservices, Inc. In May 1996, the Company formed a
subsidiary to which it transferred ownership of its wholly-owned subsidiary,
Intellicall Operator Services, Inc. ("IOS"), and received, in exchange, cash in
the amount of $2.0 million, a $1.0 million note and 72.5% of the voting stock of
the newly formed subsidiary. Other investors purchased the remaining voting
stock. The newly formed subsidiary, ILD Teleservices, Inc. ("ILD"), has
continued to conduct the live operator service business of IOS and to conduct
the long distance resale business previously conducted by the Company. Since its
formation, ILD has grown its business rapidly through a combination of
acquisitions and internal growth. During 1997, ILD expanded the number and kind
of customers served, and expanded its service offerings to include prepaid local
and long distance service, as well as billing and collection services. This
diversification of customers and service offerings was driven by acquisitions.
On September 2, 1997, ILD purchased the operator service business and related
assets from
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WorldCom, Inc. ("WorldCom"). The acquired assets included: (a) operator services
and related long distance customer contracts, (b) operator service centers
located in San Antonio, Texas and Las Vegas, Nevada, (c) switching centers
located in Dallas, Texas and Los Angeles, California, and (d) billing and
collection operations in Boca Raton, Florida. Additionally, ILD entered into a
network services contract with WorldCom and an exclusive long-term operator
services agreement pursuant to which ILD would handle WorldCom's international
and domestic operator services requirements.
The purchase price of the WorldCom assets, including $1.2 million of assumed
liabilities, was $22.6 million. In addition to the assumed liabilities, ILD paid
$6.45 million in cash, issued $11,196,000 of its redeemable preferred stock, and
issued $3.75 million of its common stock. The cash portion of the purchase price
was paid from available cash balances of ILD and from funds borrowed from ILD's
secured lender (see Note 7 to the Consolidated Financial Statements).
On December 15, 1997, ILD merged with Interlink Telecommunications, Inc.
("Interlink"), an Atlanta-based company providing (a) operator services to LECs,
and to correctional and hospitality markets, (b) prepaid long distance calling
services to retailers and the transportation industry, and (c) prepaid local
dial-tone services to residents of Georgia, Tennessee, Florida, Alabama and
Kentucky. At the time of the acquisition, Interlink's annualized revenues were
approximately $10 million.
The Interlink purchase price was $11.4 million, paid as follows: $2.0 million
cash, two ILD promissory notes totalling $3.7 million, 16,117 shares of ILD
common stock valued at $175.00 per share, or $2.8 million, and 6,666.67 shares
of ILD Redeemable Preferred, Series B-3, stock valued at $300.00 per share or
$2.0 million.
After giving effect to its 1997 acquisitions, ILD offers a full range of live
operator services to more than 100,000 LEC and IPP payphones, 96,000 hospitality
guest rooms, 12,000 condominium units, 19,000 hospital rooms and 120 inmate
facilities through a combination of bundled and private-label unbundled service
offerings. ILD processes over 6.9 million calls per month to these customers
through its call centers.
In addition to operator services, ILD offers switched and dedicated 1+ services
under a reseller agreement executed by the Company with Sprint. The Company buys
such services in bulk for its own use and for resale by ILD to its customers at
negotiated rates. The Company and ILD provide customers with periodic reporting
of telephone call detail in a form that assists customers in controlling and
monitoring telecommunications costs.
On February 2, 1998, but effective January 1, 1998, the Company transferred its
prepaid services business to ILD, in exchange for $2.0 million of cash, a $1.0
million note from ILD due by April 1998, and forgiveness of a $2.0 million note
due from the Company to ILD. As of the effective date of the transfer,
annualized revenues from Intellicall's prepaid services business approximated
$6.4 million.
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ILD markets its prepaid services with a dedicated marketing team focused on
retail and premium/incentive applications. Potential customers are identified
and qualified through referrals from existing customers, personal contacts,
trade shows and advertisements. The marketing staff provides in-depth proposals
to major customers that illustrate how such customers can achieve their
financial and marketing objectives by using ILD's services and after-sales
support.
In 1997, ILD's revenues were $54 million, and its annualized revenues based on
the seasonally low fourth quarter were slightly in excess of $100 million. Of
the annualized total, operator service revenue accounted for approximately 80%
and other revenue for approximately 20%.
IV. OTHER BUSINESS FACTORS.
Research and Development. The Company's research and development programs are
focused on development of new products and product enhancements for payphone
systems operated by IPPs, regulated telephone companies and international
customers. The Company's focus in 1997 was on the development of (a) lower cost
payphone equipment, (b) additional application software to expand the utility of
prepaid PIN systems, and (c) modifications of ASTRATEL 2 payphones which expand
their functionality and the number of countries in which they can be used.
In 1998, the Company intends to modify the ASTRATEL 2 for use in new markets and
applications. In addition, the Company intends to enhance its payphone
management software, and expand the reporting capabilities principally of
payphone systems used in the U.S.
The Company considers research and development to be important to the
continuation and enhancement of its competitive position. The Company's ability
to adequately fund future research and development costs will depend on its
ability to generate sufficient funds from operations.
Patents and Licenses. The Company holds 23 United States patents and has
numerous United States and foreign pending patent applications relating to the
Company's Intelli*Star and other technology. These patents cover the ability to
complete automated collect telephone calls, perform certain validity checks and
internally store and retrieve data files from telephones, as well as many other
features and structures of payphones. The Company considers its patents
important to its business.
Under an exclusive patent license agreement between Gateway Technologies, Inc.
("Gateway") and the Company, the Company licensed certain of its patents to
Gateway and received certain rights to use and sub-license certain call
processing technology from Gateway. The license arrangements with Gateway
commenced in 1993, were modified in 1994 and will expire in 2002 unless extended
by the parties. The license agreements provide that Gateway is obliged to share
revenues received from sub-licensing certain of Gateway's and the Company's
patents. The Company and Gateway have entered into sublicensing arrangements
with certain manufacturers and users of call processing equipment.
-12-
<PAGE>
In 1992, the Company entered into an agreement with MessagePhone, Inc. ("MPI"),
pursuant to which the Company licenses MPI's automated voice messaging patents.
The license permits the Company to offer voice messaging services to its
Intelli*Star and call processing customers. The MPI agreement expires in 2008,
however, it is effective until the expiration of the MPI patents, including any
continuations of such patents.
The Company licenses certain voice recognition technology from Voice Control
Systems. The Company pays monthly fees to Voice Control Systems on products
manufactured by the Company which utilize the licensed technology.
Trademarks. The Company has registered in the United States its trademarks
"Intellicall," "ASTRATEL," "UltraTel," "Intelli*Serv," "Intelli*Max," "VICS,"
"Intelli-Pro," "Intelli-Pro Plus," "Jail*Star," and "Intelli*Star". The Company
also owns the trademarks "Intelli*Mate," "E*Z Collect," "Relay," "Check*Mate,"
"Star*Message," "Turbo*Star", "Easy*Star" and "Easy*Max".
The Company considers its trademarks important to its business.
Regulation. Telecommunications services and equipment offered by the Company and
ILD are subject to varying degrees of regulation at both federal and state
levels. There can be no assurances that changes in such regulation, if proposed
and adopted, would not have an adverse impact on the operations of the Company,
ILD and their customers.
Federal. The Communications Act of 1934 (the "1934 Act"), as amended, governs
the provision of interstate services offered by the Company, ILD and their
customers. The FCC has enacted rules governing the provision of interstate
operator services that include, among other things, filing informational
tariffs, providing notices to end-users of the identity of the service provider
in the form of postings and verbal announcements, and providing rate quotes upon
request of the calling party. A verbal announcement identifying the service
provider also must be given to recipients of collect calls from pay telephones
and other aggregator locations, and rate quotes must be provided to them upon
request. Other requirements include a prohibition on blocking access to
alternative telecommunications carriers via certain access codes. The FCC has,
in the past, declined to impose such requirements on operator services offered
in connection with pay telephones in confinement facilities. However, in Docket
92-77, adopted January 29, 1998, the FCC required operator service providers
("OSPs") to orally notify callers of their right to obtain rate quotes prior to
the imposition of any charges for interstate calls. With certain exceptions (see
PRODUCTS: Regulation of Telecommunications Equipment Manufacturers), this
requirement applies to all OSPs that provide service at public phones and phones
in inmate facilities beginning July 1, 1998.
Intellicall Operator Services, Inc. ("IOS"), a subsidiary of ILD, issues and
relies upon tariffs filed pursuant to the 1934 Act to govern its provision of
interstate long distance services. The FCC has the authority to review these
tariffs and may reject or prescribe rates or terms if it concludes the tariffed
rates and provisions are not just and reasonable. All of the tariffs for long
distance services filed with the FCC have gone into effect without opposition.
However, in 1996, the FCC concluded that non-dominant providers of interstate
interexchange services (which includes
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<PAGE>
IOS ) must withdraw their tariffs on file at the FCC and rely instead on
contracts or other arrangements with their customers in the future. This
decision is under review in the United States Court of Appeals for the D.C.
Circuit. The court has stayed the effectiveness of the FCC's rule pending the
completion of its review, which is not expected until the middle of 1998. At
this time, it is unclear whether the Company will be required to withdraw its
tariffs for interstate interexchange services.
IOS complies with the FCC's regulations governing the provision of operator and
prepaid services to international destinations and has obtained Section 214
authority from the FCC to provide its international services. The Company has
filed tariffs for its provision of long distance services to international
destinations. The FCC's decision requiring non-dominant carriers to withdraw
tariffs does not apply to tariffs for international services, and the Company
expects tariffing for international services will continue for the foreseeable
future.
Regulation of the Company's customers who own pay telephones may impact the
products and services provided by the Company and IOS. Section 276 of the 1996
Act mandates that owners of pay telephones receive "fair compensation" for each
completed call placed from their payphones. In response to the 1996 Act, the FCC
issued orders in September and November 1996 which established a compensation
program substantially increasing the revenue pay telephone owners will receive
from their payphones. The FCC also concluded that, effective in October 1997,
pay telephone owners will be permitted to set whatever rates they select for
local calls placed from their pay telephones.
The compensation program adopted by the FCC in the September and November 1996
orders required telecommunications carriers carrying access code calls (such as
10ATT or 1 800- CALLATT) and calls to toll-free 800/888 numbers to pay
compensation to the payphone owner when such calls originate from pay
telephones. For an initial period between November 1996 and October 1997, the
FCC set an interim, flat-rate compensation amount of $45.85 per month per phone,
which was apportioned among the largest interexchange carriers only. After that,
the FCC orders required carriers to compensate pay telephone owners on a
per-call basis at $.35 per completed call. On July 1, 1997, the U.S. Court of
Appeals for the D.C. Circuit upheld the FCC's decision to deregulate the rate
for local calls placed from payphones, but vacated and remanded the FCC's
interim and per-call compensation schemes.
On October 9, 1997, the FCC adopted a revised compensation plan on remand from
the D.C. Circuit. The revised plan sets compensation at a rate of $.284 per
completed call, beginning with calls placed on or after October 7, 1997. After
October 7, 1999, the compensation rate will vary from payphone to payphone, with
compensation equal to the local coin rate minus 6.6 cents. Multiple petitions
for reconsideration of this order are pending before the FCC, which seek both to
increase and to decrease the compensation amount, and to change the compensation
amount from a flat-rate per call to a variable rate depending upon the time
elapsed. In addition, some parties have petitioned the U.S. Court of Appeals for
the D.C. Circuit to review the FCC order.
A decision from the court could come as early as May 1998.
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<PAGE>
In order to be eligible to receive compensation, the FCC ruled that payphone
service providers ("PSP"s ) must transmit unique coding digits provided by LECs
to carriers as identification. However, in a Waiver Order issued October 7, 1997
on its own motion, the FCC waived the requirement that LECs and PSPs provide the
unique coding digits in order to receive compensation. The Bureau's waiver
expires March 9, 1998. As a result, between October 7, 1997 and March 9, 1998, a
PSP is eligible for per-call compensation even though it does not transmit the
coding digits. The FCC has received comments on whether to modify the Waiver
Order. These comments included proposals that compensation be assessed on a
per-phone rather than a per-call basis for any payphone not transmitting the
coding digits. The Company cannot predict whether or how the FCC will revisit
its Waiver Order or the impact such action might have on the Company or IOS.
Neither the Company nor ILD participates in revenues derived from any of these
compensation plans, and either the Company or ILD may be required to pay all or
a portion of these amounts for completed calls placed at pay telephones by users
of their prepaid calling cards. The Company anticipates that the FCC's
compensation plan will increase the costs of providing prepaid calling service
from payphones, although the precise impact cannot be determined until (1) the
court or the FCC finally determines the compensation amount, (2) the court or
the FCC decides whether and how compensation will be applied retroactively to
the November 1996 to October 1997 period, (3) the number of payphone-originated
calls is known, (4) ILD determines the feasibility of implementing a system to
track and, if necessary, block payphone calls on a real-time basis, and (5) the
FCC resolves issues arising from its Waiver Order.
State. State regulatory commissions in all states have established rules and
regulations governing the provision of private payphone services. Such rules
typically require certification or registration; notice to end users of the
identity of the service provider in the form of postings and verbal
announcements; rate quotes on request; call routing restrictions; and maximum
rates. While not necessarily uniform, these rules and regulations generally
establish minimum technical and operational requirements to assure that public
interest considerations are addressed. Most states regulate rates for local and
intrastate toll calls placed from payphones. Initially established to regulate
only services paid for by coin, such regulations have been modified in a number
of states to include the provision of automated operator services and thus also
apply to payphone providers using Intelli*Star technology. Other states have
chosen to regulate the provision of automated operator services through rules
established for operator service providers rather than those established for
payphone owners. Effective October 1997, the FCC ordered states to eliminate any
barriers to competition in pay telephone services and pre-empted state
regulations limiting the rates charged for local coin calls.
Although many state regulatory commissions regulate the provision of inmate
telecommunications services by private providers through waivers of applicable
portions of their payphone rules, a growing number of states have adopted
separate regulations governing the provision of such services. In some
instances, states that do not otherwise permit private payphone owners to
compete with regulated telephone companies have authorized such competition with
respect to confinement facilities.
-15-
<PAGE>
IOS is currently certified to provide intrastate prepaid services in 43 states
and is seeking certification in one other state. Six states in which IOS
provides intrastate prepaid services do not require the prior approval of the
respective state regulatory commissions in order to provide services. Most
states in which IOS provides intrastate prepaid services appear to have
concluded that providers of prepaid services are subject to the same types of
regulations, including that of entry and rates, to which traditional long
distance carriers are subject. Additionally, several states have required
prepaid service providers to post bonds, and in some cases, pay local access
charges. Several other states have instituted hearings or proceedings to
consider what, if any, regulations should be adopted to assure proper disclosure
of terms, rates and conditions for consumer protection. The Company knows of no
proposed requirement with which IOS could not comply if adopted in any state in
which IOS is not currently certified. A petition before the FCC requesting that
it preempt state regulation of certain prepaid services has been denied, thus
permitting the states to continue to regulate certain prepaid services to the
extent permitted under their own enabling statutes.
IOS has obtained, where necessary, the proper intrastate operator services
authorizations including, where applicable, certificates of public convenience
and necessity (or similar certificates), and approval and acceptance of its
tariffs, in those states in which it provides operator services. IOS complies
with applicable state regulations governing the provision of operator services.
Employees. As of February 28, 1998, the Company, not including ILD, had 166
employees, of which 116 were employed in operations and 50 were employed in
executive and administrative capacities. At February 28, 1998, ILD employed 320
persons, of whom 267 were in operations and 53 were in executive and
administrative positions. The Company believes its and ILD's employee relations
are good.
Major Customers. One customer accounted for 10.5% or $9.7 million of the
Company's consolidated revenues in 1996. No single customer accounted for more
than 10% of the Company's consolidated revenues during 1997 and 1995.
Seasonality. The Company's call revenues and domestic equipment sales are
affected by seasonal weather conditions throughout the United States, which tend
to reduce the number and duration of pay telephone calls made in the winter
months, and which similarly reduces the number of outdoor payphone
installations.
ITEM 2. PROPERTIES.
The Company leases approximately 32,000 square feet of space at 2155 Chenault,
Carrollton, Texas, where its principal executive, sales and product development
offices are located. The lease expires December 31, 2001. The Company leases
approximately 26,500 square feet of manufacturing space on a month-to-month
basis in McAllen, Texas. The Company considers that
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<PAGE>
its properties are generally in good condition and are well maintained and are
generally suitable and adequate to carry on the Company's business.
ILD leases approximately 34,000 square feet of office space in 10 locations, and
39,000 square feet of space used in switching centers and network call centers
in 5 locations.
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to various legal proceedings arising in the normal course
of its business. It is the opinion of the management of the Company that the
ultimate disposition of these proceedings will not have a material adverse
effect on the Company's financial position or results of operations.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Stock Prices
The Common Stock currently trades on the New York Stock Exchange ("NYSE") under
the symbol ICL. The following table sets forth, for each of the periods
indicated, the reported high and low sales price per share on the NYSE of the
Common Stock.
<TABLE>
<CAPTION>
Common Stock
High Low
<S> <C> <C>
1997
First Quarter............................................................. $ 6 5/8 $ 4 3/4
Second Quarter............................................................ 5 3/8 4 1/8
Third Quarter............................................................. 6 1/4 3 3/8
Fourth Quarter ........................................................... 6 4 11/16
1996
First Quarter............................................................. $ 5 3/4 $ 3 1/4
Second Quarter............................................................ 8 1/4 4 1/2
Third Quarter............................................................. 5 1/2 2 7/8
Fourth Quarter............................................................ 6 3 7/8
</TABLE>
On February 28, 1998, the Company had approximately 1,139 stockholders of
record.
Dividend Policy on Intellicall's Common Stock
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain any future earnings for use in its business and
therefore does not expect to pay any cash dividends on Common Stock in the
foreseeable future. Any future determination to pay cash dividends will depend
upon the earnings and financial position of the Company and such other factors
as the Board of Directors of the Company may deem appropriate at that time. The
Company's agreement with its secured lender prohibits the Company from paying
dividends. See Note 2 to the Consolidated Financial Statements.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial information for each of the five
years in the period ended December 31, 1997, is derived from the Company's
Consolidated Financial Statements. The information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the notes thereto
included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Year Ended December 31,(1)
1997 1996 1995 1994 1993
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues and Sales:
Service revenues........................................... $ 97.673 $ 76,905 $ 54,558 $ 60,059 $ 69,187
Equipment sales ........................................... 19,313 15,884 19,944 23,322 15,939
---------- ---------- ----------
116,986 92,789 74,502 83,381 85,126
Cost of Revenues and Sales:
Service revenues........................................... 87,830 68,078 45,318 49,692 54,457
Equipment sales ........................................... 21,929 17,690 21.454 27,221 13,068
----------- ---------- ---------- ---------- ----------
109,759 85,768 66,772 76,913 67,525
Gross profit............................................... 7,227 7,021 7,730 6,468 17,601
Selling, general and administrative expenses............... (13,947) (10,598) (9,436) (12,473) (13,932)
Provision for doubtful accounts............................ (1,006) (364) (820) (3,517) (1,853)
Research and development expenses.......................... (741) (608) (2,350) (2,965) (4,118)
------------ ------- --------- --------- ----------
Operating loss............................................. (8,467) (4,549) (4,876) (12,487) (2,302)
Gain on sale of assets..................................... -- 572 1,607 -- 1,051
Other income............................................... 695 710 440 1,100 2,295
Interest expense........................................... (2,660) (2,918) (3,310) (3,079) (2,338)
Minority interest.......................................... (196) (113) -- -- --
----------- ---------- ---------- --------- -----------
Loss before income taxes................................... (10,628) (6,298) (6,139) (14,466) (1,294)
Income tax benefit......................................... -- 1,303 -- -- --
Income tax expense......................................... (277) -- -- -- --
------------ ---------- --------- --------- -----------
Net loss................................................... $ (10,905) $ (4,995) $ (6,139) $ (14,466) $ (1,294)
Redeemable preferred stock dividend........................ (186) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net loss available to common shareholders.................. $ (11,091) $ (4,995) $ (6,139) $ (14,466) $ (1,294)
========== =========== ========== ========== =========
Basic and diluted net loss per share....................... $ (1.20) $ (0.62) $ (0.80) $ (1.91) $ (0.17)
========== =========== ========= ========= =========
Weighted average number of basic and
diluted shares outstanding................................ 9,268 8,024 7,672 7,571 7,660
Balance Sheet Data:
Total assets............................................... $ 84,789 $ 45,254 $ 48,644 $ 58,799 $ 72,851
Total long term obligations................................ $ 22,165 $ 20,107 $ 10,796 $ 25,894 $ 2,346
Redeemable preferred stock................................. $ 13,196 $ -- $ -- $ -- $ --
Stockholders' equity (2)................................... $ 7,471 $ 12,669 $ 13,243 $ 19,322 $ 33,435
<FN>
(1) Certain prior year amounts have been reclassified to conform to current
year presentation.
(2) The Company has never paid cash dividends on its Common Stock.
</FN>
</TABLE>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Forward-Looking Statements - Cautionary Statements
This Annual Report 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, one-time events
and other factors described herein ("cautionary statements"). 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. The Company's future operating results and
financial condition are subject to a number of risks and uncertainties. Those
believed by management of the Company to be the most troublesome if they were to
occur are set forth below in Risk Factors.
Analysis and Discussion of Results of Operations
The following is a discussion of the consolidated financial condition and
results of operations of the Company for 1997, 1996 and 1995. The discussion
should be read in conjunction with the Consolidated Financial Statements of the
Company, the Notes thereto and the other financial information included
elsewhere in this report. For purposes of the following discussion, references
to annual periods refer to the Company's years ended December 31. For purposes
of the following discussion, references to quarterly periods refer to the
Company's fiscal quarters ended March 31, June 30, September 30, and December
31.
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<PAGE>
Results of Operations. The following table sets forth certain items in the
Company's Consolidated Statements of Operations as a percentage of total
revenues and sales and as a percentage of related sales for the years indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues and Sales:
Service Revenues 83.5% 82.9% 73.2% 72.0% 81.3%
Equipment Sales 16.5% 17.1% 26.8% 28.0% 18.7%
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
Gross Profit Percentage:
Service Revenues 10.1% 11.5% 16.9% 17.3% 21.3%
===== ===== ===== ===== =====
Equipment Sales (13.5)% (11.4)% (7.6)% (16.7)% 18.0%
======= ======= ====== ======= =====
</TABLE>
1997 Compared to 1996
Service Revenues. Service revenues were $97.7 million for the year ended
December 31, 1997, compared to $76.9 million for the year ended December 31,
1996. The table below provides a detailed analysis of service revenues by type
for the years ended December 31, 1997 and 1996 (in thousands).
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Call Traffic Revenue .................. $37,223 $46,581
Long-distance Resale ....................... 6,927 5,068
Operator Services........................... 47,108 21,609
Prepaid Calling Services.................... 6,415 3,647
-------- --------
$97,673 $76,905
======= =======
</TABLE>
During 1997, call traffic revenues declined $9.4 million (20.1%) compared with
the corresponding period in 1996. The decline principally resulted from 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 $5.6 million and a loss of
4,057 phones reporting under this program. Partially offsetting this decline was
an increase in the number of phones reporting through other programs from 57,671
phones reporting in 1996 to 60,029 phones reporting in 1997. The remainder of
the decline in call traffic revenues is principally attributable to
"dial-around".
Gross profit derived from call traffic revenues was $1.9 million, or 5.2%, of
related sales for the year ended December 31, 1997, compared to $5.2 million, or
11.3%, of related sales for the same period ended 1996. The primary reason for
the decline in gross margin percentage was an increase in true-up experience
relating to prior periods and an increase in bad debt reserves on current
traffic. The Company believes that its current reserves are adequate for future
true-ups which the Company may experience. Also, unbundled revenues which have a
100% margin declined $238,000 from 1996 to 1997.
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<PAGE>
Long-distance resale and operator service revenues rose $27,358,000, or 103%,
for the year ended December 31, 1997 compared to the same period in 1996. The
majority of the increase arose from the acquisitions by ILD of the operator
service business of WorldCom and Interlink and the long-distance services
business of Interlink. The remaining portions of operator service revenue growth
were generated internally.
Gross profit from long-distance resale and operator service revenues was
$6,060,000, or 11.2%, for the year ended 1997 compared to $2,131,000, or 8.0%,
for the year ended 1996.
Compared with 1996, prepaid calling card revenues increased by $2,768,000, or
75.9%, for the year ended December 31, 1997. The growth in revenues reflects the
Company's increased sales of prepaid calling cards through retail distribution
channels.
Gross profit from prepaid calling card revenues increased from $1,149,000, or
31.5%, for 1996 compared to $1,867,000, or 29.1%, for 1997.
Equipment Sales. The Company's equipment sales were $19.3 million and $15.9
million in the years ended December 31, 1997 and 1996, respectively. The
following table presents an analysis of sales to the Company's primary markets
(in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Independent Payphone Providers................ $16,726 $11,529
International................................. 2,577 3,933
Regulated .................................... 10 422
-------- ---------
Total equipment sales..................... $19,313 $15,884
======= =======
</TABLE>
Equipment sales for 1997 rose $3,429,000, or 21.6%, from the same time period in
1996. The growth in sales resulted from increased demand for AstraTel 2
payphones, kits and accessories, and for network systems used to render prepaid
calling card services. For the year ended December 31, 1997 sales of AstraTel 2
phones and kits were $10,328,000 compared to $1,017,000 for the year ended
December 31, 1996. International and Regulated sales for 1997 declined
$1,768,000 from 1996.
For both years being compared, the Company recorded gross losses and negative
margins on equipment sales due to, in 1996, a $2.7 million provision for
inventory losses, and in 1997, 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 values.
Throughout 1997, the Company has conducted numerous reviews of its opportunities
to sell old and
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<PAGE>
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 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 required far steeper price reductions on older
payphone products than had earlier been believed to be necessary. In some cases,
the AstraTel 2 obsoleted the Company's older payphone products. In international
markets, the Company has made repeated efforts to sell earlier generations of
international payphones at progressively lower prices and on increasingly
attractive terms, but the Company's attempts have been less successful than
expected. Because of disappointing market potential of the Company's existing
line of international payphone products, the related software development costs
of this line and its related inventories were written down to their estimated
net realizable value. Because of customer preference, higher profit 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.
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 for the
year ended 1996 would have been $900,000, or 5.6%, and for the year ended 1997
would have been $3.3 million, or 17.0%. The year to year improvement in gross
profit and gross margin on equipment sales is attributable to a growth in
equipment sales and a favorable mix of sales. Compared to 1996, the increase in
AstraTel 2 payphones and kits created higher margins due to their much lower
costs than previous generation payphones and accessories.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $3.3 million for the year ended December 31,
1997 over the year ended December 31, 1996. Primarily responsible for the rise
in such expenses was the growth in ILD through its acquisitions from $713,000
for the year ended 1996 compared to $4.3 million for the year ended 1997. Other
changes affecting the yearly 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 1997 than in 1996.
Provision for Doubtful Accounts. The provision for doubtful accounts increased
$642,000 for the year ended December 31, 1997 as compared to the year ended
December 31, 1996. This increase reflects higher expected levels of collection
losses, principally on equipment receivables.
Research and Development Expenses. Gross spending for research and development
decreased $727,000 for the twelve months ended December 31, 1997 as compared to
the same period in 1996. The Company capitalized $1.32 million in 1997 compared
to $2.18 million in 1996 of internally developed software costs as permitted by
generally accepted accounting principles.
Income Tax Refund. In September 1996, the Company received a net federal income
tax refund in the amount of $1.3 million and approximately $259,000 of related
interest earned on the claim.
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<PAGE>
The Company recorded the income tax benefit and related interest income when the
refund was received.
1996 Compared to 1995
Service Revenues. Service revenues were $76.9 million for the year ended
December 31, 1996, compared to $54.6 million for the year ended December 31,
1995. The table below provides a detailed analysis of service revenues by type
for the years ended December 31, 1996 and 1995 (in thousands).
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Call Traffic Revenue .................. $46,581 $40,417
Long-distance Resale........................ 5,068 3,567
Validation Services......................... -- 2,567
Operator Services........................... 21,609 6,722
Prepaid Calling Services.................... 3,647 1,285
-------- --------
$76,905 $54,558
======= =======
</TABLE>
Call traffic revenues increased $6.2 million for the year ended December 31,
1996 compared to the year ended December 31, 1995. The favorable revenue
variance reflects primarily (i) a 10.7% increase in the number of phones using
the Company's Intelli*Star technology from 55,755 phones at December 31, 1995 to
61,728 phones at December 31, 1996 and (ii) increased participation by the
Company's customers in the "Jail*Star" program resulting in significantly higher
revenues for inmate facilities providers. The Jail*Star program was first
introduced in November 1995. Because of the continuing effects of dial-around
competition, there was a deterioration in the average number of calls per day
per phone, partially offsetting the increased number of reporting boards. The
Company anticipates that the number of calls made per day per phone will
continue declining in the future at rates similar to prior years.
Gross profit from call traffic revenues was $5.2 million, or 11.3%, of related
sales for 1996, compared to $5.7 million, or 14.1%, for 1995. The absolute and
proportionate gross profit in 1996 was lower than in 1995 primarily because of a
change in the mix of call traffic revenue, most significantly the increase in
Jail*Star traffic processed. The Jail*Star program generally realizes a lower
gross margin than the Easy*Star and bundled programs. In 1996, 27.8% of call
traffic revenue resulted from Jail*Star compared to 1.1% in 1995. Other factors
affecting gross profit margins included: (i) a decline in customers entering
into so-called "Lone-Star transactions" (a transaction by which a customer makes
a one time payment for a paid-up license to use the Intelli*Star technology)
which caused a reduction of gross profit from $242,000 in 1995 to $33,000 in
1996, and (ii) a $418,000 reduction in unbundled revenues and gross profit in
1996 compared to 1995.
Long-distance resale revenues increased $1.5 million for the year ended December
31, 1996 over the year ended December 31, 1995. Higher revenues in 1996
principally resulted from an increase in
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<PAGE>
the number of customers buying long-distance services. Gross profit on
long-distance revenues for 1996 was $585,000, or 11.6%, of related sales as
compared to $378,000, or 10.6%, of related sales in 1995.
Lower validation service revenues compared to 1995 resulted from the sale of the
Company's call validating assets in June of 1995.
Operator service revenues increased approximately $14.9 million for the year
ended December 31, 1996 compared to the year ended December 31, 1995. The higher
revenue resulted primarily from the addition of new customers in 1996. In
addition, on April 1, 1996, the Company entered into a new operating arrangement
with its third-party operator service provider. The new agreement gives the
Company greater control of its customer base, and contractually changes the
methods by which the Company receives payment for call traffic and by which it
pays for services rendered. Historically, the Company recorded revenue net of
amounts withheld by the service provider as the operating contract provided for
the Company receiving a commission on call traffic. Based on the terms of the
new contract, beginning April 1, 1996, the Company began recording operator
services call traffic at its gross amount, and recording the costs for services
provided as cost of sales. The Company believes the new contractual arrangements
warrant the gross presentation of revenues. The effect of the change on the year
ended 1996 was to increase reported revenue approximately $4.1 million.
Gross profit derived from operator service revenues was $1.5 million, or 7.2%,
of related sales for the year ended December 31, 1996 as compared to $1.5
million, or 21.6%, of related sales for the year ended December 31, 1995. The
contractual change with the third party operator service provider described
above and lower gross profit margins from new customers account for the
decreased gross profit percentages.
Prepaid calling revenues were $2.4 million higher in 1996 as compared to 1995.
Revenues increased primarily because of growth in the number of retail outlets
from which the Company's prepaid calling card services sold, and from higher
revenues in the Company's private label calling card program. At the end of
1996, the Company's customers sold cards in 641 grocery and convenience stores
compared to 179 stores at the end of 1995. A significant proportion of the 179
outlets selling cards in 1995 were added late in that year.
Gross profit for the year ended December 31, 1996 for prepaid calling revenues
was $1.2 million, or 31.5%, of related sales as compared to $320,000, or 21.5%,
of related sales in the same period in 1995. The proportionate gross profit for
1996 was higher than 1995 because, near the end of 1995, the Company began
marketing directly to retailers rather than through distributors, and due to a
higher volume of calls processed in 1996.
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<PAGE>
Equipment Sales. The Company's equipment sales were $15.9 million and $19.9
million in the years ended December 31, 1996 and 1995, respectively. The
following table presents an analysis of sales to the Company's primary markets
(in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Independent Payphone Providers................ $11,529 $15,623
International................................. 3,933 3,506
Regulated .................................... 422 815
-------- --------
Total equipment sales..................... $15,884 $19,944
======= =======
</TABLE>
In 1996, the continued negative effects of dial-around on operations of the
Company's independent payphone customers reduced the cash flow of such customers
available for expansion of their operations and the economic returns available
from expansion locations. When coupled with unusually harsh winter weather in
the first quarter of 1996, and the fact that the Company did not introduce a
commercially successful line-powered payphone to the independent payphone
provider market until the fourth quarter of 1996, these factors are believed to
account for reduced demand for the Company's family of payphone products.
In 1995 and 1996, the Company provided $1.7 million and $2.7 million,
respectively, for inventory losses which represents excess of cost over market.
Were it not for these loss provisions, the Company would have recorded gross
profit on equipment sales of $200,000 in 1995 and $900,000 in 1996. This
improvement in gross margin from 1995 to 1996 occurred, even though the volume
of equipment sales declined by 20% from year to year, as a result of an improved
sales mix and reductions in certain variable product costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.2 million for the year ended December 31,
1996 over the year ended December 31, 1995. Due to a reorganization of the
Company's engineering department at the beginning of 1996, employees who were
formally and principally engaged in new product development were reassigned to
application engineering and customer support functions, giving rise to a
reclassification of expenses associated with these employees. The effect of this
change increases selling expense and decreases research and development expense
by $1.6 million for the year ended December 31, 1996 as compared to the amounts
that would have been reported had this reorganization of the engineering
department not taken place. The combined selling, general and administrative
expenses and research and development expenses decreased $580,000 in 1996 as
compared to 1995.
Provision for Doubtful Accounts. The provision for doubtful accounts decreased
$456,000 for the year ended December 31, 1996 as compared to the year ended
December 31, 1995.
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<PAGE>
Research and Development Expenses. Gross spending for research and development
decreased $1.7 million for the twelve months ended December 31, 1996 as compared
to the same period in 1995. The Company capitalized $2.18 million in 1996
compared to $2.55 million in 1995 of internally developed software costs as
permitted by generally accepted accounting principles.
Income Tax Refund. In September 1996, the Company received a net federal income
tax refund in the amount of $1.3 million and approximately $259,000 of related
interest earned on the claim. The Company recorded the income tax benefit and
related interest income when the refund was received.
Liquidity and Capital Resources
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. 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.
The Company reported a net loss of $10.9 million in 1997. The loss included
non-cash charges of $11.9 million for depreciation and amortization, and
provisions for doubtful accounts, inventory losses and minority interest. Adding
net interest charges of $2.0 million, and income taxes of approximately
$300,000, results in an earnings before interest, taxes, depreciation and
amortization (EBITDA) of approximately $3.3 million. Net changes in operating
assets and liabilities during 1997 resulted in a use of cash approaching
$600,000.
Cash flows from financing activities were comprised of borrowings on revolving
lines of credit, and sales of common and preferred stock of both Intellicall and
ILD. The total value of all financing activities equaled approximately $20.2
million. The combined cash flow from operations, as adjusted for the non-cash
charges noted above, was therefore approximately $22.9 million.
Such cash flow was used by both entities in the consolidated group to fund
capital expenditures, including capitalized software development costs. In
addition, ILD used a substantial portion of its generated cash flow for the
consummation of its acquisitions of the WorldCom and Interlink assets.
Interest paid in 1997 was $2.1 million. The net change in cash resulting from
all of the above factors was a reduction of approximately $2.2 million.
During 1997, the Company's capital expenditures and investment in new product
development amounted to $3.4 million. In 1998, capital expenditures, not
including ILD, are expected to fall
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<PAGE>
below the amount invested in 1997 and below the Company's 1998 depreciation
expense. As in 1997, funds will be invested to upgrade computer equipment,
software and the Company's management information system. The Company's
investment in new product development is planned to approximate the 1997
investment. For additional information regarding new product development, see
PRODUCTS: Research and Development.
During 1997, the Company's secured lender reduced by $1,200,000 the amount
available to the Company to finance its investment in inventories. During 1998,
a further $300,000 reduction is scheduled to occur in the Company's first
quarter. Thereafter, no further reduction or growth in inventory financing is
required or permitted pursuant to existing provisions of the loan agreement
between the Company and Finova. Except as might be required by reductions in its
borrowing base, the Company is not required to make any principal payments on
its debts in 1998. ILD's scheduled debt repayments in 1998, based on its
obligations outstanding at December 31, 1997, are $4.9 million, for which ILD
anticipates that cash flow from its operations will be adequate to cover.
By prior arrangement and subject to an agreement between the companies, neither
Intellicall nor ILD guarantees or has financial responsibility for the debts and
obligations of the other company. No assets of either company are encumbered by
liens or security interests of the other. However, Intellicall has pledged its
holdings of ILD securities to its secured lender.
Cash balances of ILD and Intellicall are segregated and restricted for use in
their respective businesses. Pursuant to various agreements, including certain
agreements with the companies' secured lenders, each company is self funded and
neither company may use the other's cash balances for any purpose. However, no
agreement restricts either company from reimbursing the other for expenses paid
on the other company's behalf or from the payment of contractually required
amounts such as principal or interest on intercompany notes payable.
As of December 31, 1997 ILD has made extensive use of financial leverage and the
Company, without inclusion of ILD's operating results, has suffered from
historical losses which have required the Company to sell assets or obtain
external funding to provide it with necessary liquidity. Since neither company
may rely on the other for occasional funding of the other's needs, each company
is wholly dependent on its ability to attract external funds or generate funding
from operations. There can be no assurance that such funds would be internally
generated when required or in a sufficient amount; nor can there be any
assurance that funds which might be available to either company from external
sources would not materially dilute shareholder interests or returns.
Risk Factors Relating to Forward-Looking Statements
Regulatory Changes. As described in ITEM I., BUSINESS, the Company's and ILD's
sales and revenues are affected by existing regulations and by changes in state
and federal regulations to which the Company's and ILD's customers, equipment
business and service businesses are subject. The rate of change in proposed and
promulgated regulations affecting the operator service, long distance and
payphone manufacturers has accelerated since passage of the Telecommunications
Act of 1996 in February of that year. In addition, numerous parties affected by
regulatory changes have sought
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<PAGE>
modifications or rescission of proposed or existing regulations, some of which
would adversely affect the Company or ILD if adopted. There can be no assurance
that proposed regulatory changes that might adversely affect the Company or ILD
will not be adopted, or that recently adopted regulations that may benefit the
Company's or ILD's operations will not be rescinded or delayed in their
implementation. Furthermore, many aspects of telecommunications legislation and
regulations have been litigated in various federal and state courts. Decisions
emanating from federal and state courts could have an adverse effect on the
Company or ILD.
Acceleration of Dial-around. The number of long distance calls which are
billable by the Company has declined since 1992 as a consequence of aggressive
marketing programs pursued by AT&T, Sprint and MCI which have made it possible
for payphone callers to route their calls in ways that preclude the Company from
billing them. This process, termed "dial-around", has become increasingly
popular among payphone users as 1-800 numbers have proliferated in response to
the successful marketing of prepaid and other proprietary calling card programs.
In recent months, certain regional Bell Operating Companies have introduced
their own proprietary calling cards which may accelerate the incidence of
dial-around and further erode the Company's and ILD's revenues from operator
services. Moreover, at least one large interexchange carrier ("IXC") has
recently introduced a proprietary calling card offering reduced per-call pricing
with no per-call surcharges. Expanded utilization of dial-around programs will
have the effect of reducing the Company's revenues.
Decline in Long Distance Prices. In response to regulatory changes and expanded
capacity among IXCs, prices of long distance domestic phone calls have generally
declined over recent years and the rate of decline is believed by management to
be accelerating. Such declines have produced gross margin compression among IXCs
and have intensified competition among them to preserve or increase market
share. The effects of increased competition among providers of long distance
services may lead to a compression of margins available to resellers of such
services. In addition, as described more fully in ITEM 1., BUSINESS. OTHER
BUSINESS FACTORS: Regulation, the Company or ILD may be required to pay
dial-around compensation to payphone owners for calls made using its prepaid or
proprietary calling cards, and such payments may not be recoverable through
pricing changes.
Compression of Operator Service Margins. In 1996, but more markedly in 1997, the
Company's gross and pretax margins on operator service revenues have been
depressed by increased chargebacks from LECs for uncollectible call traffic.
Operator service margins have been compressed as well by the Company's and ILD's
inability to reduce fixed and semi-fixed costs of operator services as rapidly
as revenues have declined due to dial-around. Management anticipates a
continuation of this trend in the foreseeable future.
Volume and Profitability of Equipment Sales. The Company has developed products
which have found increasing customer acceptance in many of its markets. The
Company's long term financial welfare will depend on deeper and more profitable
penetration of existing and targeted markets. The Company's limited financial
resources may limit its ability to increase equipment sales as rapidly as
desired. Funds available under the Company's working capital line may be
insufficient to finance
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<PAGE>
concomitant growth in working capital, and internally generated funds may be
insufficient to finance desired capital spending or research and development
spending.
The Company has historically suffered from low gross margins on equipment sales.
Although provisions for inventory losses have resulted in negative gross margins
since 1993, the Company's variable gross margins on phone and network equipment
products introduced since 1996 have markedly improved. Notwithstanding such
improvement, increased equipment sales volume is required in future periods to
cover a variety of costs. Such costs include but may not be limited to fixed
manufacturing overhead expenses and selling, general and administrative expenses
associated with the production and sale of the Company's products. There is no
guarantee that the required increase in sales will generate sufficient gross
profit to finance the portion of working capital growth not financed by the
Company's working capital line.
International Economic Conditions. As a manufacturer of payphone and network
switching equipment, the Company is a capital goods producer. As are most
capital goods producers, the Company is subject to changes in economic
conditions and in prospective returns available to its customers from the
purchase of its products. In the sale of the Company's products to customers in
developing countries, changes in currency values or the imposition of exchange
controls may lead to steep increases in the price of the Company's equipment or
leave customers unable to make payment for the equipment in U.S. dollars.
Existing Indebtedness. Both the Company and ILD are parties to loan agreements
with financial and other restrictive covenants limiting investment in capital
assets, sales of certain assets and the payment of dividends. In addition, to
varying degrees the covenants require the maintenance of certain account
balances, operating results or financial ratios. If the Company continues to
operate unprofitably in 1998, The Company's secured lender would be permitted by
current provisions of its loan agreement with Intellicall to accelerate the
Company's indebtedness and to cease making further loans. Similarly, if ILD were
to breach the terms of its loan agreement with its secured lender, the bank
would be entitled to seek a number of remedies. These remedies could include
those restricting ILD's ability to make further acquisitions with borrowed funds
or to make further payments of principal or interest on debts subordinated to
that of NationsBank.
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 believes that the Company's internal operations are Year 2000
compliant. The Company has installed a new accounting system integrating all
accounting aspects of the Company's manufacturing operations. The Company's
billing system pursuant to which call records received from the Company's
customers are billed, is a customer designed system not subject to Year 2000
problems.
Certain of the software included in the Company's Products sold to its customers
may have to be modified to address Year 2000 issues. During 1997 the Company
commenced a program
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<PAGE>
pursuant to which all software utilized in the Company's Products is to be
evaluated for Year 2000 problems. Such evaluation has not been finalized.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Index to Consolidated Financial Statements located on page F-1 for a
listing of the financial statements included as a part of this Annual Report on
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
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<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Items 10, 11, 12 and 13 of this Annual
Report on Form 10-K is omitted pursuant to General Instruction G(3) and will be
included in the Registrant's Definitive Proxy Statement to be filed with the
Commission not later than 120 days after the end of the fiscal year covered by
this Annual Report on Form 10-K.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) (1) Financial Statements.
The financial statements filed as a part of this
Annual Report on Form 10-K are listed in the "Index to
Financial Statements" on page F-1 hereof.
(2) Financial Statement Schedules.
The financial statement schedules filed as part of
this Annual Report on Form 10-K are listed in the "Index to
Financial Statements" on page F-1 hereof.
(3) Exhibits.
The following exhibits are filed as a part of this
Annual Report on Form 10-K.
(a)3.1 Certificate of Incorporation of the Company
and all amendments thereto through
December 31, 1992.
(c)3.2 Amendment to Certificate of Incorporation
raising the authorized common stock from
10,000,000 shares to 50,000,000 shares.
(f)3.3 Amendment to Certificate of Incorporation
lowering the authorized common stock from
50,000,000 shares to 20,000,000 shares.
(b)3.4 By-laws of the Company, as amended.
(a)4.1 Specimen certificate for Common Stock of
the Company.
(h)4.2 Certificate of Designation of Series A
Convertible Preferred Stock of
Intellicall, Inc.
(f)10.1 Intellicall, Inc. 1991 Stock Option Plan,
as amended.
(b)10.2 Form of Incentive Stock Option Agreement.
(b)10.3 Form of Nonqualified Stock Option
Agreement.
(b)10.4 Form of Director Stock Option Agreement.
(f)10.5 Form of 1995 Employee Stock Purchase Plan.
(b)10.6 ADREC Development and License Agreement,
dated as August 2, 1990, between VCS
Industries, Inc. d/b/a Voice Control
Systems and the Company.
(b)10.7 Amended and Restated Patent License
Agreement dated as of January 1, 1992,
between the Company and MessagePhone, Inc.
(d)10.8 Amended and Restated 10% Convertible
Subordinated Note Due 1999 dated
August 11, 1994 with T.J. Berthel
Investments, L.P.
(c)10.9 Registration Rights Agreement dated
February 14, 1994, among between the
Company and T.J. Berthel Investments, L.P.
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<PAGE>
(e)10.10 Note and Warrant Purchase, Paying and
Conversion/Exercise Agency Agreement
entered into on December 22, 1995 between
Banca Del Gottardo and the Company.
(e)10.11 Form of 8% Convertible Subordinated Note
executed by the Company to Banca Del
Gottardo dated December 22, 1995.
(e)10.12 Form of Banca Del Gottardo Warrants entered
into on December 22, 1995 between Banca Del
Gottardo and the Company.
(g) 10.13 Loan and Security Agreement executed with
Finova Capital Corporation.
(g) 10.14 Secured Revolving Credit Note made
payable to Finova Capital Corporation in
the original principal amount of
$12,000,000.
(h) 10.15 Second Amendment to Loan and Security
Agreement with Finova Capital Corporation.
(g) 10.16 Note and Warrant Purchase, Paying and
Conversion/Exercise Agency Agreement
executed with Banca del Gottardo.
(g) 10.17 Form of 8% Convertible Suborginated Notes
(included within Exhibit 10.16).
(g) 10.18 Form of Warrants issued with Notes
(included within Exhibit 10.16).
(h) 10.19 Securities Purchase Agreement executed
with four institutional investors
(the "Investors".)
(h) 10.20 Registration Rights Agreement executed
with the Investors.
(i) 10.21 Asset Purchase Agreement dated February 27,
1997 by and among WorldCom, Inc. and ILD
Communications, Inc. (c/ka/a ILD
Teleservices, Inc.)
(i) 10.22 Amendment No. 1 to Asset Purchase Agreement
(i) 10.23 Loan and Security Agreement dated
August 29, 1997 by and among ILD
Teleservices, Inc., Intellicall Operator
Services, Inc. and NationsBank, N.A.
(i) 10.24 Revolving Credit Note for $20,000,000
executed by ILD Teleservices, Inc. and
Intellicall Operator Services, Inc.
(i) 10.25 Term Note for $5,000,000 executed by ILD
Teleservices, Inc. and Intellicall
Operator Services, Inc.
(j) 10.26 Merger Agreement dated December 15, 1997
by and among Interlink Telecommunications,
Inc., Reginald P. McFarland and ILD
Teleservices, Inc.
(j) 10.27 Promissory Note in the original
principal amount of $2,700,000 issued by
ILD Teleservices, Inc. payable to Reginald
P. McFarland.
(j) 10.28 Promissory Note in the original
principal amount of $1,300,000 issued by
ILD Teleservices, Inc. payable to Reginald
P. McFarland.
.
++21.1 Subsidiaries of the Company.
++23.1 Consent of Independent Accountants.
++27.1 Financial Data Schedule.
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<PAGE>
++ Filed herewith.
(a) Incorporated by Reference from the Company's Form S-1 filed
August 28, 1987, file no.
33-15723.
(b) Incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1991.
(c) Incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993.
(d) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1994.
(e) Incorporated by reference from the Company's Current Report on Form
8-K (Date of Earliest Event Reported - December 28, 1995).
(f) Incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995.
(g) Incorporated by reference from the Company's Current Report on Form
8-K (Date of Earliest Event Reported - November 22, 1996).
(h) Incorporated by reference from the Company's Current Report on Form
8-K (Date of Earliest Event Reported - July 21, 1997).
(i) Incorporated by reference from the Company's Current Report on Form
8-K (Date of Earliest Event Reported - September 2, 1997).
(j) Incorporated by reference from the Company's Current Report on Form
8-K (Date of Earliest Event Reported - December 15, 1997).
(b) Reports on Form 8-K.
One report on Form 8-K was filed during the last fiscal
quarter of 1997 (Date of Report - December 15, 1997)
reporting on Item 5. Other Events and Item 7. Financial
Statements and Exhibits.
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<PAGE>
The following undertaking set forth herein relates to the Company's
Registration Statement on Form S-8 (No. 33-60235), and on Form S-8
(No. 33-64583):
"Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue."
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
March 31, 1998 INTELLICALL, INC.
signed 3/30/98 /s/ William O. Hunt
By: William O. Hunt
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated, on March 31, 1998.
Name Office
---- ------
/s/ William O. Hunt 3/30/98 Date
William O. Hunt Chairman of the Board
(Principal Executive Officer) and Chief Executive Officer
/s/ John M. Carradine 3/30/98 Date
John M. Carradine Chief Financial Officer
(Principal Financial and Vice President - Finance
and Accounting Officer)
/s/ B. Michael Adler 3/30/98 Date
B. Michael Adler Director
/s/ Thomas J. Berthel 3/30/98 Date
Thomas J. Berthel Director
/s/ Lewis E. Brazelton III 3/30/98 Date
Lewis E. Brazelton III Director
/s/ Arthur Chavoya 3/30/98 Date
Arthur Chavoya Director
/s/ Richard B. Curran 3/30/98 Date
Richard B. Curran Director
/s/ John J. McDonald, Jr. 3/30/98 Date
John J. McDonald, Jr. Director
<PAGE>
INTELLICALL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants...........................................F-2
Consolidated Financial Statements:
Balance Sheets ..........................................................F-3
Statements of Operations ................................................F-5
Statements of Stockholders' Equity ......................................F-6
Statements of Cash Flows ................................................F-7
Notes to Consolidated Financial Statements...............................F-8
Financial Statement Schedules (Note A):
Valuation and Qualifying Accounts...................................F-32
Note A: All other schedules are omitted, since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements and notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Intellicall, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index on page F-1 present fairly, in all material respects, the financial
position of Intellicall, Inc. and its subsidiary at December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion expressed above.
/s/ Price Waterhouse LLP
3/20/98 Date
PRICE WATERHOUSE LLP
Dallas, Texas
March 20, 1998
F-2
<PAGE>
INTELLICALL, INC.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
ASSETS
(in thousands)
December 31,
1997 1996
---- ----
<S> <C> <C>
Current assets
Restricted cash .................................................. $ 2,488 $ 15
Cash and cash equivalents ........................................ 66 2,271
Receivables....................................................... 34,881 25,738
Less allowance for doubtful accounts......................... 6,211 3,239
--------- ---------
28,670 22,499
Inventories, net.................................................. 5,002 7,902
Other current assets.............................................. 1,908 1,684
----------- ---------
Total current assets......................................... 38,134 34,371
Fixed assets, net...................................................... 8,387 1,964
Capitalized software costs, net........................................ 2,968 4,904
Notes receivable, net.................................................. 1,125 992
Intangible assets, net................................................. 31,802 928
Other assets, net...................................................... 2,373 2,095
--------- ---------
$ 84,789 $ 45,254
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
INTELLICALL, INC.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
(in thousands, except share information)
December 31,
1997 1996
---- ----
<S> <C> <C>
Current liabilities
Accounts payable.......................................... $11,320 $ 4,841
Accrued transmission, customer commissions and billing
charges............................................... 12,222 4,960
Deferred revenue.......................................... 1,262 1,028
Accrued liabilities....................................... 4,456 1,451
Capital lease obligation, current......................... 157 --
Current portion of long-term debt ........................ 4,928 85
-------- ---------
Total current liabilities................................. 34,345 12,365
Long-term debt ................................................ 21,217 19,312
Deferred revenue............................................... -- 595
Capital lease obligation ........... .......................... 843 --
Other liabilities.............................................. 948 200
Minority interest.............................................. 6,769 113
Commitments and contingent liabilities......................... -- --
---------- ----------
Total liabilities 64,122 32,585
-------- --------
Redeemable preferred stock Series B-2, $100 par value;
111,960 and zero shares issued and outstanding,
respectively.............................................. 11,196 --
Redeemable preferred stock Series B-3, $300 par value; 6,667
and zero shares issued and outstanding,
respectively.............................................. 2,000 --
Stockholders' equity
Preferred stock, $.01 par value; 1,000,000 shares
authorized; 4,000 and zero shares issued
and outstanding, respectively......................... 1 --
Common stock, $.01 par value; 20,000,000 shares
authorized; 9,471,944 and 8,646,278 shares issued,
respectively......................................... 95 87
Additional paid-in capital................................ 57,486 51,602
Less common stock in treasury, at cost;
24,908 shares........................................ (258) (258)
Accumulated deficit....................................... (49,853) (38,762)
--------- -------
Total stockholders' equity........................... 7,471 12,669
--------- --------
$ 84,789 $ 45,254
======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
INTELLICALL, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
For the Years Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues and sales:
Service revenues............................................. $ 97,673 $ 76,905 $ 54,558
Equipment sales.............................................. 19,313 15,884 19,944
--------- ------- ------
116,986 92,789 74,502
--------- ------- -------
Cost of revenues and sales:
Service revenues............................................. 87,830 68,078 45,318
Equipment sales.............................................. 21,929 17,690 21,454
--------- ------- -------
109,759 85,768 66,772
--------- ------- -------
Gross profit..... 7,227 7,021 7,730
Selling, general and administrative expenses...................... (13,947) (10,598) (9,436)
Provision for doubtful accounts................................... (1,006) (364) (820)
Research and development expenses................................. (741) (608) (2,350)
--------- -------- -------
Operating loss... (8,467) (4,549) (4,876)
Gain on sale of assets............................................ -- 572 1,607
Other income. 695 710 440
Interest expense.................................................. (2,660) (2,918) (3,310)
Minority interest................................................. (196) (113) --
--------- -------- --------
Loss before income taxes.......................................... (10,628) (6,298) (6,139)
Income tax refund................................................. -- 1,303 --
Income tax expense................................................ (277) -- --
-------- ---------- ----------
Net loss.......................................................... $ 10,905) $ (4,995) $ (6,139)
Redeemable preferred stock dividend............................... (186) -- --
-------- --------- --------
Net loss available to common shareholders......................... $ 11,091) $ (4,995) $ (6,139)
======== ========= ========
Basic and diluted net loss per share.............................. $ (1.20) $ (0.62) $ (0.80)
======== ========= ========
Weighted average number of basic and diluted
shares outstanding........................................... 9,268 8,024 7,672
======== ========= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
INTELLICALL, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Additional
Common Stock Preferred Stock Paid-in Treasury Stock Accumulated
Shares Amount Shares Amount Capital Shares Cost Deficit Total
------ ------ ------ ------ ------- ------ ---- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 7,686 $ 77 -- $ -- $47,131 (25) $(258) $(27,628) $19,322
Exercise of stock options 17 -- -- -- 60 -- -- -- 60
Net loss -- -- -- -- -- -- -- (6,139) (6,139)
------- ---- ------ ------ ------- ------- ------- -------- -------
Balances at December 31, 1995 7,703 77 -- -- 47,191 (25) (258) (33,767) 13,243
Exercise of stock options 31 -- -- -- 148 -- -- -- 148
Issuance of warrants -- -- -- -- 760 -- -- -- 760
Employee stock purchase 16 -- -- -- 48 -- -- -- 48
plan
Issuance of stock 100 2 -- -- 123 -- -- -- 125
Conversion of sub-ordinated 796 8 -- -- 3,332 -- -- -- 3,340
notes
Net loss -- -- -- -- -- -- -- (4,995) (4,995)
-------- ---- ------ ------ ------- ------- ------- -------- -------
Balances at December 31, 1996 8,646 87 -- -- 51,602 (25) (258) (38,762) 12,669
Exercise of stock options 65 1 -- -- 268 -- -- -- 269
Employee stock purchase 17 -- -- -- 74 -- -- -- 74
plan
Issuance of stock 430 4 -- -- 481 -- -- -- 485
Conversion of sub- ordinated 314 3 -- -- 1,237 -- -- -- 1,240
notes
Redeemable preferred -- -- -- -- -- -- -- (186) (186)
dividends declared
Issuance of preferred stock -- -- 4 1 3,824 -- -- -- 3,825
Net loss -- -- -- -- -- -- -- (10,905) (10,905)
------- ---- ------ ---- ------- ------- ------- -------- --------
Balances at December 31, 1997 9,472 $ 95 4 $ 1 $57,486 (25) $(258) $(49,853) $ 7,471
===== ==== ====== ==== ======= ===== ===== ======== =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
INTELLICALL, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (10,905) $ (4,995) $ (6,139)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization...................... 5,973 3,810 3,669
Provision for doubtful accounts.................... 1,393 364 820
Provision for inventory losses..................... 4,382 2,772 1,772
Minority interest in income of ILD................. 196 113 --
Changes in operating assets and liabilities:
Restricted cash................................ (2,473) 477 1,526
Receivables.................................... (7,830) 183 6,113
Inventories.................................... (1,451) 1,265 (776)
Other current assets........................... (308) (1,242) (453)
Notes receivable............................... 446 1,749 1,014
Accounts payable .............................. 4,611 2,172 (3,429)
Transmission, customer commissions and
billing charges................................ 7,261 1,223 (298)
Deferred revenue............................... 234 311 717
Accrued liabilities............................ 1,600 (557) (497)
Deferred revenues.............................. (595) (1,381) 1,976
Other.......................................... (2,051) (1,344) (135)
------------ --------- ------------
Net cash provided by operating activities.. 483 4,920 5,880
------------- -------- -----------
(Continued on next page)
<PAGE>
(Continued from previous page)
Cash flows from investing activities:
Capital expenditures.................................. (2,082) (790) (845)
Capitalized software.................................. (1,322) (2,175) (2,550)
Capital lease obligation.............................. 1,000 -- --
Acquisition of WorldCom assets........................ (10,021) -- --
Acquisition of Interlink assets....................... (10,521) -- --
------------ ----------- -------------
Net cash used in investing activities..... (22,946) (2,965) (3,395)
------------ --------- -----------
Cash flows from financing activities:
Net proceeds from (repayments on) line of credit...... 9,517 (618) (2,740)
Proceeds from issuance of stock in
Intellicall........................................ 4,653 321 60
Proceeds from issuance of stock in ILD................ 6,088 -- --
----------- ----------- --------------
Net cash provided by (used in) financing
activities............................... 20,258 (297) (2,680)
--------- ---------- ------------
Net (decrease) increase in cash and cash equivalents....... (2,205) 1,658 (195)
Cash and cash equivalents at beginning of period........... 2,271 613 808
------------ ---------- ------------
Cash and cash equivalents at end of period................. $ 66 $ 2,271 $ 613
=========== ========= ===========
Supplemental cash flow information:
Interest paid............................................ $ 2,056 $ 2,387 $ 3,521
=========== ========= ===========
Supplemental non cash flow information:
Issuance of warrant...................................... $ -- $ 760 $ --
=========== ========= ===========
Conversion of debt to equity............................. $ 1,320 $ 3,340 $ --
=========== ========= ===========
Stock issued to purchase WorldCom assets................. $ 11,196 $ -- $ --
=========== ========= ===========
Stock issued to purchase Interlink assets................ $ 2,000 $ -- $ --
=========== ========= ===========
Redeemable preferred stock dividend declared ............ $ 186 $ -- $ --
=========== ========= ===========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business: Intellicall, Inc.("The Company") provides live and automated
operator services for the independent pay telephone, hospitality, and inmate
services industries, resale of direct dial long distance services to the private
pay telephone industry, and prepaid calling services ("service revenues"). The
Company designs, engineers, manufactures and sells pay telephones and retrofit
kits, parts and intelligent network platforms in the United States and
internationally ("equipment sales").
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its 53.7% owned subsidiary (the "Subsidiary")
formed on May 10, 1996. All significant intercompany accounts and transactions
are eliminated in consolidation. Certain reclassifications have been made to
prior year amounts to conform with current year presentation.
Creation of ILD Teleservices: On May 10, 1996, the Company entered into an
agreement with certain investor groups to create ILD Teleservices, Inc. ("ILD"),
a new long-distance re-sale and operator services company. The Company
transferred ownership in its wholly owned subsidiary, Intellicall Operator
Services, Inc. ("IOS"), to ILD in exchange for cash in the amount of $2.0
million, a $1.0 million subordinated convertible note, and preferred and common
stock representing approximately 72.5% of the voting stock of ILD. The other
investor groups collectively purchased $2.0 million, or 27.5% of the voting
stock of ILD, and $1.0 million of ILD's subordinated convertible notes. ILD also
issued a secured loan in the amount of $2.0 million, at inception. The Company
recorded a $572,000 gain from the transaction.
In September 1997, ILD acquired the Operator Services Division of WorldCom,
Inc. ("WorldCom") (see Note 7). The assets acquired by ILD include the operator
services and long distance customer contracts, operator service centers,
switching facilities, billing and collection operations and inmate operator
services businesses. This acquisition by ILD lowered the Company's ownership
percentage to 59.26%.
In December 1997, ILD acquired all of the outstanding common stock of
Interlink Telecommunications, Inc. ("Interlink") (see Note 7), a switched
reseller of long distance services and provider of enhanced services including
operator services, prepaid debit cards and prepaid local service. This
acquisition by ILD lowered the Company's ownership percentage to 53.7%.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition: Revenues from sales of telephones and related products
are recognized upon shipment to customers. Revenues relating to the licensing of
automated operator systems are recognized upon shipment of licensed technology
to licensees.
F-8
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Call revenues are recognized at the time that calls are placed. Call
revenues from customer-licensed microautomated operator systems, human operator
services and Company-owned call processing systems are recognized based on the
amounts charged to billed parties for calls processed and billed by the Company.
Revenues associated with customer-owned call processing systems and customers
utilizing licensed microautomated operator systems who have agreed to submit
call traffic to a third party billing service for processing, instead of the
Company, consist of the fees charged to customers for use of the technology.
Prepaid debit card revenue is deferred and recognized as calling services are
used.
Cash and Cash Equivalents: For purposes of the statements of cash flows and
the consolidated balance sheet, cash and cash equivalents include short-term
liquid investments purchased with remaining maturities of three months or less.
Restricted Cash: Represents amounts received by ILD from local exchange
carriers (LECs), arising from its capacity as a billing agent, that are
not yet remitted to its third party billing and collection customers. As cash
is received from the LEC, the amounts become a contractual obligation to ILD's
billing and collection customers.
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, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed", 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 product's estimated economic life
using the straight line method, not to exceed five years.
The amounts of software development costs capitalized for the years ended
1997, 1996 and 1995 were $1.32 million, $2.18 million and $2.55 million,
respectively. The Company recorded $1.70 million, $1.62 million and $745,322 of
software amortization expense for the years ended December 31, 1997, 1996 and
1995, respectively. The Company also recognized an impairment in value of
certain capitalized software development costs of $1.6 million during 1997. This
impairment is included in amortization in the statement of operations for the
year ended 1997.
Receivables: Receivables (current and long-term) consist of amounts owed by
various telephone companies for processed call traffic and amounts owed by
customers relating to uncollected call traffic and equipment sales, leases and
license fees. Approximately 82.0% and 78.0% of receivables relate to call
traffic due from various telephone companies and customers as of December 31,
1997 and 1996, respectively. The Company advances cash to a majority of its
customers prior to the time such cash is collected from end users, and generally
bears the risk of collection and bad debt. Such amounts previously advanced but
uncollected represent significant portions of the call traffic receivables.
Equipment receivables are subject to right of offset against payments due to
customers related to call revenues. The Company believes it has provided
adequate
F-9
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
reserves for potential uncollectible accounts.
Credit Concentrations: Certain financial instruments, consisting primarily
of accounts receivable, potentially subject the Company to concen- trations of
credit risk. The Company's customers range from individuals with small pay
telephone routes to large corporations, and reflect a large customer base with
much geographic diversity. The Company believes it has provided adequate
reserves for potential uncollectible accounts.
Inventories: Inventories are stated at the lower of cost or market with
cost determined on a first-in, first-out method. Costs include acquisition costs
of purchased components, freight costs, labor and overhead.
The components of inventories, net of the related reserves, are (in thousands):
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
<S> <C> <C>
Raw materials......................................................... $ 2,491 4,850
Work in process....................................................... 378 511
Finished goods........................................................ 2,133 2,541
-------- --------
$ 5,002 $ 7,902
======= =======
</TABLE>
Reserves in 1997, 1996 and 1995 were $2.7 million, $3.0 million and $3.9
million, respectively. Inventories in 1997 have been written down to estimated
net realizable value, and results of operations for 1997 include a charge of
$4.4 million which represents the excess of cost over market. In 1996 and 1995,
the Company established $2.7 million and $1.7 million of reserves for the excess
of cost over the estimated realizable value of slow moving and obsolete
inventories, respectively. Total charges for inventory reserves were $2.8
million and $1.8 million for the years ended December 31, 1996 and 1995,
respectively.
Debt Issuance Costs: The Company defers costs incurred directly in
connection with the issuance of debt obligations and charges such costs to
interest expense on a straight-line basis over the terms of the respective debt
agreements.
F-10
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Fixed Assets: Fixed assets are recorded at cost. Depreciation expense is
computed by the straight-line method over the estimated useful lives of the
related assets, where the useful lives range from three to five years.
Maintenance and repairs are expensed as incurred while replacements and
betterments are capitalized.
<TABLE>
<CAPTION>
The components of fixed assets are (in thousands): December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Office equipment........................................................... $ 8,148 $ 6,550
Switching and other network equipment....................................... 1,720 --
Tooling and other equipment................................................. 5,342 4,153
------- -------
15,210 10,703
Less accumulated depreciation............................................... (6,823) (8,739)
-------- --------
$ 8,387 $ 1,964
======== ========
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1996 and 1995 was
$1,279,000, $901,000 and $1,064,000, respectively.
Intangible Assets: Intangible assets consist primarily of the cost in
excess of net assets of acquired businesses. These assets are amortized using
the straight-line method over 20 to 25 years. Additionally, intangible assets
include $2.9 million for a covenant not to compete and a consulting agreement
from Interlink amortized over five years and certain contracts acquired from the
WorldCom transaction valued at $2.5 million amortized over six years (see Note
7). In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("FAS 121") was issued. Effective January 1, 1996, the Company
adopted FAS 121 which requires that long-lived assets (primarily goodwill) held
and used by an entity, or to be disposed of, be reviewed for impairment whenever
events or changes in circumstances indicate that the net book value of the asset
may not be recoverable. An impairment loss will be recognized if the sum of the
expected future cash flows (undiscounted and before interest) from the use of
the asset is less than the net book value of the asset. The amount of the
impairment loss will generally be measured as the difference between the net
book value of the asset and the estimated fair value of the related asset. Based
on its most recent analysis, the Company believes that no impairment of long
lived assets existed at December 31, 1997 and 1996.
Accrued Transmission, Customer Commissions and Billing Charges: Accrued
transmission consists of transmission costs incurred to originate and terminate
a call over ILD's owned or leased transmission facilities. This category
generally includes costs of local access circuits and transmission facilities,
as well as switched costs for calls carried on another provider's network. The
customer commissions consist of monies owed to customers for calls processed and
billed. Payments are made within 15-90 days based on the customer agreement.
Billing charges consist of monies owed to billing agents for fees charged to
process call traffic.
F-11
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Capital Lease Obligation: Assets recorded under capital leases, primarily
consisting of switching equipment, are recorded at the lower of the present
value of future minimum lease payments or the fair value of the asset. Total
assets recorded under capital leases in 1997 were $1,000,000. No amortization of
the capital lease asset was recorded in 1997 due to the asset being placed in
service at the end of December. Amortization of assets under capital leases is
included in depreciation and amortization expense.
Future minimum lease payments and related interest are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
<S> <C>
1998.................................................................. $ 263,759
1999.................................................................. 263,759
2000.................................................................. 263,759
2001.................................................................. 263,759
2002.................................................................. 263,759
-----------
Aggregate minimum lease payments...................................... $ 1,318,795
Less: amount representing interest................................... (318,795)
Total capital lease obligation........................................ 1,000,000
Less: current portion................................................ (157,104)
-----------
Capital lease obligation, long term portion........................... $ 842,896
===========
</TABLE>
The interest rate on the capital lease is approximately 11.5%. Interest expense
for the year ended December 31, 1997 was $0.
Income Taxes: Income taxes are accounted for using the asset and liability
method pursuant to Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("FAS 109"). Deferred taxes are recognized for the
tax consequences of temporary basis differences by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities.
The effect on deferred taxes for a change in tax rates is recognized in income
in the period that includes the enactment date. In addition, FAS 109 requires
the recognition of future tax benefits to the extent that realization of such
benefits is more likely than not. A valuation allowance is provided for a
portion or all of the deferred tax assets when there is sufficient uncertainty
regarding the Company's ability to recognize the benefits of the assets in
future years.
Net Loss per Share: The Company has adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS 128
simplifies the standards for computing earnings per share ("EPS") previously
found in Accounting Principles Board No. 15, "Earnings per Share" ("APB 15"),
and makes them comparable to international EPS standards by replacing the
presentation of primary EPS with a presentation of basic EPS. The provisions 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 prior
periods required.
F-12
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Accordingly, EPS data for allperiods presented has been restated to reflect the
computation of EPS in accordance with provisions of FAS 128.
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.
Disclosures about Segments of an Enterprise and Related Information: In
June 1997, Statement of Financial Accounting Standards No. 131, "Disclosure
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 Fair Value of Financial Instruments: The following
methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that value:
Restricted Cash and Cash equivalents. The carrying amount approximates fair
value because of the short maturity of those instruments.
Long-term debt. Based on the borrowing rates and terms of secured and
subordinated loans which the Company believes are currently available, the fair
value of long-term debt is $21.8 million ($19.3 million in 1996).
Short-term debt. Based on the borrowing rates and terms of secured and
subordinated loans which the Company believes are currently available, the fair
value of short-term debt is $4.6 million ($85,000 in 1996).
Major Customers: One single customer accounted for 10.5%, or $9.7 million,
of the Company's consolidated revenues during 1996. No single customer accounted
for more than 10% of the Company's consolidated revenues during 1997 or 1995.
F-13
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - LONG-TERM DEBT AND LINE OF CREDIT
<TABLE>
<CAPTION>
The Company's debt consisted of the following (in thousands):
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 4,114 6,862
Installment note, due 1998 28 113
---------- ---------
12,982 17,135
Less unamortized debt discount (450) (660)
--------- ---------
12,532 16,475
--------- ---------
ILD Teleservices, Inc.
Senior secured debt, due 2001 2,000 2,000
Revolving credit facility, due 2001 1,957 --
Term loan facility, due 2001 5,000 --
Promissory note payable, due 1998 2,700 --
Promissory note payable, due 1999 1,000 --
Convertible subordinated notes, due 2001 1,000 1,000
--------- ---------
13,657 3,000
Less unamortized debt discount (44) (78)
---------- ---------
13,613 2,922
---------- ---------
Total debt 26,145 19,397
Less: Current portion of long-term debt (4,928) (85)
---------- ----------
Total long-term debt $ 21,217 $ 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 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 December 31, 1997, $4.66 million of the Banca Del Gottardo Notes were
converted to 1,109,517 shares of the Company's Common Stock. Interest is
F-14
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
Interest is paid quarterly.
On May 10, 1996 ILD issued Secured Promissory Notes in the aggregate
principal amount of $2.0 million with warrants to purchase an aggregate of 7,239
shares of ILD common stock at a price of $0.01 per share. Sirrom Capital
Corporation purchased a note in the original amount of $1.5 million with a
warrant to purchase 5,429 shares of common stock and Reedy River Ventures
Limited Partnership purchased a note in the original amount of $500,000 with a
warrant to purchase 1,810 shares of common stock at a price of $0.01 per share.
The notes are payable on May 10, 2001 and bear interest at 13.5% annually.
Interest is paid quarterly.
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
F-15
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 December 31, 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, as 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, as the sum of the Prime Rate plus an amount
dependent on the calculation of Senior Funded Debt/EBITDA (as defined) and is
payable monthly. ILD borrowed $1,221,000 on the Revolving Credit Loan to pay for
assets acquired from WorldCom (see Note 7). 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 29, 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"). 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 last day of each and every fiscal quarter thereafter through
and including the last fiscal quarter in 1999, (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).
F-16
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On December 15, 1997 ILD entered into two promissory notes in consideration
for partial payment in the acquisition of the Interlink common stock. The first
promissory note in the amount of $2,700,000 is due $1,800,000 on December 31,
1997 and $900,000 on March 31, 1998 bearing no interest and the second
promissory note in the amount of $1,000,000 is due $250,000 on a quarterly basis
commencing September 30, 1998 with interest at 9% per annum also paid quarterly.
ILD paid the $1.8 million on January 2, 1998.
Aggregate maturities of long-term debt in the next five years are
$4,928,000, $6,814,000, $4,520,000 and $10,377,000.
F-17
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - STOCKHOLDERS' EQUITY
Accounting for Stock-based Compensation: In October 1995, Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation" ("FAS 123"), was issued. The statement requires the fair value of
stock options and other stock-based compensation issued to employees to either
be included as compensation expense in the income statements of companies or the
proforma effect on net income and earnings per share of such compensation
expense to be disclosed in the footnotes to the Company's financial statements
beginning in 1996. The Company has elected to adopt FAS 123 on a disclosure
basis only. Had compensation cost for the Company's stock option plans been
determined based on the fair market value at the grant dates for awards under
those plans consistent with the method pro- vided by FAS 123, the Company's net
loss and net loss per share would have been reflected by the following proforma
amounts for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
Net loss As reported $11,091,000 $4,995,000 $6,139,000
available to Proforma $12,179,000 $5,877,000 $6,500,000
common
shareholders
Basic and As reported $ 1.20 $ .62 $ .80
diluted net Proforma $ 1.31 $ .74 $ .85
loss per share
</TABLE>
The fair value of each grant is estimated on the date of grant using the
Black-Scholes Option pricing model with the following weighted-average
assumptions used for grants during the years ended December 31, 1997, 1996 and
1995:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Dividend yield -- -- --
Expected volatility 66.95% 65.49% 62.47%
Risk free interest rate 5.96% 6.55% 6.55%
Option term 9 years 9 years 9 years
</TABLE>
The weighted average fair value for all options granted in 1997, 1996 and 1995
was $3.53, $4.06 and $2.89, respectively.
F-18
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Stock Option Plans: The Company maintains a Nonqualified Stock Option
("NSO") Plan, an Incentive Stock Option ("ISO") Plan (as amended) and a
Directors' Stock Option ("DSO") Plan (adopted in 1991). The number of shares
which may be granted under the NSO, ISO Plans, and DSO Plans may not exceed
600,000, 1,525,000, and 350,000, respectively. ISO's and NSO's are exercisable
at such times and in such installments as the Organization and Compensation
Committee of the Board of Directors (the "Committee") shall determine at the
time of grant. In the case of ISO's and DSO's, the option price of the shares
cannot be less than the fair market value of the underlying common stock at the
date of the grant. In the case of NSO's, the option price is determined by the
Committee and cannot be less than 85% of the fair market value of the underlying
common stock. Options expire at such time as the Committee shall determine at
the time of grant, but in the case of ISO's and DSO's no later than ten years
from the grant date. Options vest as follows: 50% on December 31 of the year of
grant and 25% on December 31 of each following year. All options granted under
all plans in 1997, 1996 and 1995 were issued at fair market value.
<TABLE>
<CAPTION>
NSO PLAN
Stock option activity under the NSO Plan was:
Weighted Average
Options Option Price
------- ------------
<S> <C> <C>
Outstanding at December 31, 1994................................. 600,000 $4.61
Activity......................................................... -- --
-------
Outstanding at December 31, 1995................................. 600,000 $4.61
Activity......................................................... -- --
-------
Outstanding at December 31, 1996................................. 600,000 $4.61
Activity......................................................... -- --
-------
Outstanding at December 31, 1997................................. 600,000 $4.61
=======
</TABLE>
At December 31, 1997, 1996 and 1995, there were no shares available to be
granted under the NSO plan.
F-19
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ISO PLAN
Stock option activity under the ISO Plan was:
Weighted Average
Options Option Price
------- ------------
<S> <C> <C>
Outstanding at December 31, 1994................................... 1,026,315 $6.02
Granted............................................................ 231,080 $3.95
Exercised.......................................................... (16,500) $3.59
Canceled........................................................... (67,575) $6.44
----------
Outstanding at December 31, 1995................................... 1,173,320 $5.63
Granted............................................................ 142,000 $4.57
Exercised.......................................................... (32,200) $4.61
Canceled........................................................... (141,505) $7.85
---------
Outstanding at December 31, 1996................................... 1,141,615 $5.24
Granted............................................................ 239,880 $4.62
Exercised.......................................................... (63,925) $4.21
Canceled........................................................... (120,065) $5.28
---------
Outstanding at December 31, 1997................................... 1,197,505 $5.17
=========
</TABLE>
At December 31, 1997, 1996 and 1995, there were 870, 120,685 and 115,180
shares, respectively, available for grant under the ISO Plan.
<TABLE>
<CAPTION>
DSO PLAN
Stock option activity under the DSO Plan was:
Weighted Average
Options Option Price
------- ------------
<S> <C> <C>
Outstanding at December 31, 1994................................... 140,000 $6.65
Activity........................................................... -- --
----------
Outstanding at December 31, 1995................................... 140,000 $6.65
Granted............................................................ 60,000 $3.50
-------
Outstanding at December 31, 1996................................... 200,000 $5.70
Canceled........................................................... (30,000) $6.04
---------
Outstanding at December 31, 1997................................... 170,000 $5.64
=========
</TABLE>
F-20
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
There were 130,000, 100,000 and 100,000 shares available for grant at December
31, 1997, 1996 and 1995, under the DSO Plan.
OTHER DIRECTORS' OPTIONS
The Company issued to certain members of the Board of Directors options prior
to the establishment of the DSO Plan.
Stock option activity pursuant to these options was:
<TABLE>
<CAPTION>
Weighted Average
Options Option Price
------- ------------
<S> <C> <C>
Outstanding at December 31, 1994................................. 60,000 $11.08
Activity......................................................... -- --
---------
Outstanding at December 31, 1995................................. 60,000 $11.08
Activity......................................................... -- --
----------
Outstanding at December 31, 1996................................. 60,000 $11.08
Activity......................................................... -- --
----------
Outstanding at December 31, 1997................................. 60,000 $11.08
</TABLE>
F-21
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following tables summarize information about the fixed-price stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
NSO PLAN
Options Outstanding Options Exercisable
------------------------------------------------------------------- ----------------------------------------
Weighted-Average Weighted- Weighted-
Range of Outstanding Remaining Average Exercisable at Average
Exercise Prices at 12/31/97 Contractual Life Exercise Price 12/31/97 Exercise Price
--------------- ----------- ---------------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
$3.625 430,000 5 years $3.625 430,000 $3.625
6.625 100,000 4 years 6.625 100,000 6.625
7.75 70,000 3 years 7.75 70,000 7.75
--------- --------
$3.625 - 7.75 600,000 4 years $4.61 600,000 $4.61
======== ========
</TABLE>
<TABLE>
<CAPTION>
ISO PLAN
Options Outstanding Options Exercisable
------------------------------------------------------------------- -----------------------------------
Weighted-Average Weighted- Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
--------------- ----------- ---------------- -------------- -------- --------------
<S> <C> <C> <C> <C>
$3.375 - 4.50 713,965 6.8 years $3.92 628,121 $3.91
4.75 - 5.75 187,040 6.5 years 5.34 140,850 5.31
5.813 - 8.00 221,500 3.8 years 7.29 209,000 7.37
10.375 75,000 6 years 10.375 75,000 10.375
---------- ----------
$3.375 - 10.375 1,197,505 6.1 years $5.17 1,052,971 $5.24
========= =========
</TABLE>
F-22
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DSO PLAN & OTHER DIRECTORS OPTIONS
Options Outstanding Options Exercisable
------------------------------------------------------------------- -------------------------------------
Weighted-Average Weighted- Weighted-
Range of Outstanding Remaining Average Exercisable at Average
Exercise Prices at 12/31/97 Contractual Life Exercise Price 12/31/97 Exercise Price
--------------- ----------- ---------------- -------------- -------- --------------
<S> <C> <C> <C> <C>
$3.50 60,000 9 years $3.50 60,000 $3.50
5.75 20,000 5 years 5.75 20,000 5.75
6.25 40,000 6 years 6.25 40,000 6.25
6.625 30,000 5 years 6.625 30,000 6.625
7.56 15,000 1 year 7.56 15,000 7.56
9.25 20,000 7 years 9.25 20,000 9.25
11.00 20,000 2 years 11.00 20,000 11.00
13.25 25,000 3 years 13.25 25,000 13.25
------ ------
$3.50 - 13.25 230,000 5.7 years $7.06 230,000 $7.06
======= =======
</TABLE>
Stock Option Plans for ILD Teleservices, Inc.: ILD Teleservices, Inc.
maintains a Non-incentive Stock Option ("NSO") Plan and an Incentive Stock
Option ("ISO") Plan. The number of shares which may be granted under the NSO and
ISO Plans may not exceed 49,500 shares to directors, officers, and employees.
Options under the Plan have a five year life. Options granted in 1996 vested
immediately. Options granted in 1997 vest ratably over a three year period.
NSO PLAN
<TABLE>
<CAPTION>
Stock option activity under the NSO Plan was:
Weighted Average
Options Option Price
------- ------------
<S> <C> <C>
Outstanding at May 10, 1996.......................................... -- --
Granted.............................................................. 2,325 $24.20
--------
Outstanding at December 31, 1996..................................... 2,325 $24.20
Granted.............................................................. 2,500 $175.00
Exercised............................................................ (775) $24.20
-------
Outstanding at December 31, 1997..................................... 4,050 $117.28
========
</TABLE>
F-23
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
ISO PLAN
<TABLE>
<CAPTION>
Stock option activity under the ISO Plan was:
Weighted Average
Options Option Price
------- ------------
<S> <C> <C>
Outstanding at May 10, 1996........................................ -- $24.20
Granted............................................................ 19,350 $24.20
------
Outstanding at December 31, 1996................................... 19,350 $24.20
Granted............................................................ 23,650 $126.90
------
Outstanding at December 31, 1997................................... 43,000 $80.68
======
</TABLE>
At December 31, 1997 and 1996 there were 11,675 and 5,825 shares available to
be granted.
EMPLOYEE STOCK PURCHASE PLAN FOR INTELLICALL
On November 16, 1995 the Company adopted the Intellicall Employee Stock
Purchase Plan (the "ESPP"). After the offering period ending December 31, 1997,
there remain authorized and available for sale to employees an aggregate of
262,007 shares of the Company's common stock. The maximum number of shares
subject to each option under the ESPP is determined on the date of grant and
equals the sum of the payroll deductions authorized by each participating
employee (up to 10.0% of regular pay) divided by 85.0% of the lower of the fair
market value of a share of common stock on either the first or last trading day
of each offering period. Each offering period is approximately six months in
duration and commences on the first trading day on or after January 1 and
terminates on the last trading day ending the following June 30, or commences on
the first trading day on or after July 1 and terminates on the last trading day
ending the following December 31. Under the ESPP, 5,967 shares were issued at
$2.87 per share for the offering period ended December 31, 1995; 9,927 shares at
$3.08 for the offering period ended June 30, 1996; 8,998 shares at $4.675 for
the offering period ended December 31, 1996; 8,190 shares at $3.936 for the
offering period ended June 30, 1997 and 4,911 shares at $3.825 for the offering
period ended December 31, 1997.
Common Stock: At December 31, 1997, there were 3,038,375 shares of common
stock reserved for options and warrants.
Preferred Stock: 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.
F-24
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 Closing Date, the fee payable to the Company is 6.25% times the
Variable Conversion Price times the number of such shares of common stock.
Any shares of preferred stock outstanding two years after the Closing Date
will automatically convert into common stock.
The Investors may require the Company to redeem certain shares of preferred
stock (i) in the event the number of shares of common stock issuable upon
conversion (based on the conversion price in existence from time to time)
multiplied by 1.25 would exceed the maximum number of shares of common stock
which the Company can issue without shareholder approval pursuant to applicable
New York Stock Exchange Guidelines, unless shareholder approval is so obtained
within 120 days of such occurrence, (ii) in the event the Company fails to
reserve an adequate number of shares of common stock as contemplated by the
designation of preferred stock creating the preferred stock (the "Designation"),
unless such failure is cured by board of directors and/or shareholder approvals
as required, (iii) in the event the Company fails to honor a conversion notice
and (iv) in other events as more fully set forth in the Designation. Any
redemptions, however, are limited to the Company's borrowing availability under
its loan agreement with Finova, as further described below.
The Designation grants to the Company the option, under certain
circumstances, to redeem for cash any shares of preferred stock submitted for
conversion if the Variable Conversion Price is less than $4.00 per share and
funds are available under the Company's loan agreement with Finova.
The Company 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
F-25
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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
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.
Series B-2 Redeemable Preferred Stock was issued upon ILD's acquisition
of WorldCom assets (see Note 7). Each share of the Series B-2 Redeemable
Preferred Stock has a stated value of $100 and entitles the holder to receive an
annual cumulative dividend of $8.50 payable semi-annually. Subject to certain
restrictions in loan agreements, each holder has the right, commencing on the
fifth anniversary date after issuance, to require the Company to purchase the
holder's shares at the stated value of $100 per share, making such Series B-2
stock mandatorily redeemable. The Company, at its discretion, has the right to
purchase the holder's shares at the stated value of $100 per share for all
shares not previously purchased. Series B-2 Redeemable Preferred Stock is
nonvoting, but has preference over Common Stock and Series A Convertible
Preferred Stock.
Series B-3 Redeemable Preferred Stock was issued upon ILD's acquisition of
Interlink (see Note 7). Each share of the Series B-3 Redeemable Preferred Stock
has a stated value of $300 and entitles the holder to receive an annual
cumulative dividend of $18.00 payable quarterly. Subject to certain restrictions
in loan agreements, each holder has the right, commencing on the fifth
anniversary date after issuance, to require the Company to purchase the holder's
shares at the stated value of $300 per share, making such Series B-3 stock
mandatorily redeemable. The Company, at its discretion, has the right to
purchase the holder's shares at the stated value of $300 per share for all
shares not previously purchased. Series B-3 Redeemable Preferred Stock is
nonvoting, but has preference over Common Stock and Series A Convertible
Preferred Stock.
Common Stock Purchase Warrants: In connection with the December 29, 1995
subordinated debt issuance discussed in Note 2, the Company issued a Warrant to
Banca Del Gottardo ("Gottardo") entitling the holder to purchase 300,000 shares
of common stock, exercisable at $4.20 per share. These warrants vested
immediately and expire upon the date of maturity of the underlying debt.
In connection with the issuance of the subordinated debt, the Company
issued an additional Warrant to purchase 200,000 shares of common stock (the
"Additional Warrant"). The exercise price for the Additional Warrant is the same
price as for the Gottardo Warrants. These warrants vested immediately and expire
upon the date of maturity of the underlying debt.
In November 1996, the Company issued additional subordinated debt to Banca
Del Gottardo ("Gottardo") with warrants to purchase 200,000 shares of common
stock at $5.00 per share. In addition to the 200,000 shares an additional
warrant to purchase 150,000 shares at $5.00 was also issued. These warrants
vested immediately and expire upon the date of maturity of the underlying debt.
F-26
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - INCOME TAXES
<TABLE>
<CAPTION>
Differences between the income tax benefit calculated using the statutory
federal income tax rate and the actual income tax provision are (in thousands):
Year Ended December 31
----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income tax benefit at the statutory rate............ $(3,759) $(1,731) $ (2,087)
Amortization of cost in excess of net assets
of acquired businesses.......................... 31 31 31
Other:
Refund of federal income taxes................... -- (622) --
Minority interest................................ 277 (101) --
Other............................................ 6 -- --
Operating loss not benefited .................... 3,722 2,423 2,056
-------- --------- ---------
Income tax provision................................ $ 277 $ -- $ --
======== ========= =========
</TABLE>
The tax effect of temporary differences that give rise to a significant
portion of deferred tax assets and deferred tax liabilities consisted primarily
of timing differences in the recognition of license fee revenues and related
costs, provisions for doubtful accounts in excess of write-offs, warranty costs,
legal fees, gain or loss on sale of assets, software development and operator
services costs, and excess tax depreciation.
At December 31, 1997 the Company has net operating loss carryforwards of
$43.4 million for federal income tax reporting purposes. Such carryforwards,
which may provide future tax benefits, do not expire before 2007. Additionally,
in conjunction with the Alternative Minimum Tax ("AMT") rules, the Company has
available a minimum tax credit carryforward for tax purposes of $126,541. Such
credit may be carried forward indefinitely as a credit against regular tax
liability.
The Company received no income tax refunds in 1997 or 1995. The Company
received a net tax refund of $1.3 million in 1996. The Company received the
refund as a result of a ten-year carryback claim under Section 172(f) of the
Internal Revenue Code. The refund was associated with a claim of $4,534,487 of
Net Operating Loss. The Company also used $448,459 of its Alternative Minimum
Tax ("AMT") credit, the result of being subject to AMT in the fiscal year ended
June 30, 1989.
F-27
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Significant components of the Company's deferred tax assets and deferred
tax liabilities under FAS 109 are (in thousands):
December 31,
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Other reserves and accruals............................... $2,302 1,628
Net operating loss carryforwards.......................... 14,756 12,791
Unused alternative minimum tax credits.................... 127 125
------ ------
Total gross deferred tax assets............................... 17,185 14,544
------ ------
Deferred tax liabilities:
Bad debt reserves......................................... (370) (421)
Deferred revenue 147 (12)
Depreciation and amortization............................. (478) (1,226)
---- ------
Total gross deferred tax liabilities........................... (701) (1,659)
---- ------
Less valuation allowance....................................... (16,484) (12,885)
------- -------
Net deferred tax assets........................................ $ -- $ --
======== =========
</TABLE>
The valuation allowance on deferred tax assets reflects the Company's
uncertainty regarding realization of such assets due to recent operating loss
trends. Additionally, included in other assets and liabilities is a net deferred
asset of $44,115 related to the Company's subsidiary not consolidated for tax
purposes.
NOTE 5 - BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss per share has been computed in accordance with
FAS 128 and is based on the weighted average number of common shares outstanding
during 1997, 1996 and 1995. The weighted average common shares outstanding were
9,268,000, 8,024,000 and 7,672,000 for the years ended December 31, 1997, 1996
and 1995, respectively.
Diluted net loss per share gives effect to all dilutive potential common
shares that were outstanding during the period. The Company had a net loss for
each of the three years ended December 31, 1997; therefore, none of the Series A
preferred shares, convertible into common stock as described in Note 3, or the
options or warrants outstanding in Note 3 at each of the period ends were
included in the diluted net loss per share calculation for the years ended
December 31, 1997, 1996, and 1995, as they were anti-dilutive. The denominator
(the number of shares) and the numerator (net loss) is the same for the basic
and diluted EPS computations for all periods presented.
F-28
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - COMMITMENTS
The Company and ILD lease their office space, manufacturing facility, and
certain office equipment under operating leases.
Future minimum rental commitments under noncancelable operating leases are
(in thousands):
1998..................................................... $ 1,700
1999..................................................... 1,300
2000..................................................... 1,014
2001..................................................... 636
2002..................................................... 408
-------
$5,058
Total operating lease expense was $1,011,000, $840,000 and $765,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
F-29
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - ACQUISITIONS MADE BY ILD TELESERVICES
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 was accounted for under the purchase method as prescribed
by Accounting Principles Board No. 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 $15.5 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
years ended December 31, 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 expected future results of the combined operations.
<TABLE>
<CAPTION>
Year ended December 31,
(in thousand, except per share)
1997 1996
----- -----
<S> <C> <C>
Net sales $168,862 $186,288
Net loss available to common shareholders (11,027) (5,826)
Basic and diluted net loss per common share (1.19) (.73)
</TABLE>
F-30
<PAGE>
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On December 15, 1997 ILD also acquired all of the outstanding common stock
of Interlink Telecommunications, Inc. ("Interlink"), a switched reseller of long
distance services and provider of enhanced services including operator services,
prepaid calling cards and prepaid local service. Interlink is located in
Atlanta, Georgia and principally serves the southeastern United States.
The acquisition was accounted for as a purchase whereby the excess purchase
price over net assets acquired was recorded based upon the fair values of assets
acquired and liabilities assumed. The results of operations of the acquired
business are included in the consolidated financial statements from the date of
acquisition. The purchase price was $11.4 million. ILD accomplished the
acquisition of the Interlink common stock by the following consideration (i)
$2,000,000 in cash; (ii) $2,700,000 in the form of a promissory note; (iii)
$1,000,000 in the form of a promissory note; (iv) 16,117 shares of ILD's common
stock valued at $175 per share; (v) 6,667 shares of ILD's Series B-3 Redeemable
Preferred Stock valued at $300 per share which is mandatorily redeemable; and
(vi) a five year consulting agreement for $850,000 payable $425,000 on June 1,
1998 and $425,000 on June 1, 1999.
Approximately $10.6 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 $2.0 million was
assigned to the non-compete agreement and is being amortized over 5 years.
NOTE 8 - 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.
NOTE 9 - SUBSEQUENT EVENT
On January 1, 1998 the Company sold its prepaid services operation to ILD
Teleservices, 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 April 1998.
F-31
<PAGE>
<TABLE>
<CAPTION>
INTELLICALL, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Additions
-------------------------------
Balance at
Beginning Charged to Costs Charged to Other Deductions- Balance at End
Description of Period and Expenses Accounts - Describe Describe of Period
- ------------------------------------------ ------------ ---------------- -------------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997:
Allowance for doubtful
accounts - receivable........... $ 3,513 $ 6,493 $ -- $ (5,584) $ 4,422
============= ============= ================ =========== ===========
Allowance for doubtful
accounts - ILD.................. $ 97 $ 2,838 $ -- $ 823 $ 2,112
============== ============= ================ =========== ===========
Allowance for doubtful accounts
notes - receivable.............. $ 1,762 $ -- $ -- $ (1,762) $ --
============ ============= ================ =========== ===========
Year Ended December 31, 1996:
Allowance for doubtful
accounts - receivable........... $ 718 $ 172 $ -- $ (830)(a) $ 60
============ ============= ================ ============ ===========
Allowance for doubtful
accounts - license fees receivable
non-current..................... $ 414 $ -- $ -- $ (44)(a) $ 370
============ ============= ================ ============ ===========
Allowance for doubtful accounts
call traffic.................... $ 2,542 $ 3,621 $ -- $ (2,983)(a)(e)$ 3,180
============ ============ ================ ============ ===========
Allowance for doubtful accounts
notes - receivable.............. $ 2,718 $ -- $ -- $ (956)(a) $ 1,762
============ ============ ================ ============ ===========
Year Ended December 31, 1995:
Allowance for doubtful
accounts - receivable........... $ 2,570 $ 714 $ -- $ (2,566)(a) $ 718
============ ============ ================ ============ ===========
Allowance for doubtful
accounts - license fees receivable
non-current..................... $ 523 $ 412 $ -- $ (521)(a) $ 414
============ ============ ================ ============ ===========
Allowance for doubtful
accounts - investment in sales-type
leases, non-current............. $ 14 $ -- $ -- $ (14)(a) $ --
============ ============ ================ ========== ===========
Allowance for doubtful accounts
call traffic.................... $ 2,550 $ 2,530 $ 231(b) $ (2,769)(a) $ 2,542
============ ============ ================ ============ ===========
Allowance for doubtful accounts
notes - receivable.............. $ 2,683 $ -- $ 1,190(d) $ (1,155)(a)(b $ 2,718
============ ============ ================ ============ ===========
<FN>
(a) Write-off of uncollectible accounts.
(b) Includes $231,000 reclassified to allowance for doubtful accounts call
traffic. (c) Includes $924,000 charge to contra-asset and $259,000 charge from a
liability account.
(d) Includes $1.1 million reserved directly against another asset and $89,000 of
interest payments used to build reserve instead of recognizing as revenue. (e)
Includes $912,000 reserved directly against another asset.
</FN>
</TABLE>
F-32
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
The Company, as of 12/31/97, owns 53.7% of the outstanding
common stock of ILD Teleservices, Inc.
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 of our report dated
March 20, 1998 appearing on page F-2 of Intellicall Inc.'s Annual Report on Form
10-K for the year ended December 31, 1997. We also consent to the incorporation
by reference in the Registration Statements on Form S-8 (Nos. 33-60235 and
33-64583) of such report. We also consent to the reference to us under the
heading "Experts" in the Prospectus constituting part of the Registration
Statement on Form S-3.
PRICE WATERHOUSE LLP
Dallas, Texas
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000818674
<NAME> Intellicall, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 2,554
<SECURITIES> 0
<RECEIVABLES> 34,881
<ALLOWANCES> (6,211)
<INVENTORY> 5,002
<CURRENT-ASSETS> 38,134
<PP&E> 16,210
<DEPRECIATION> (7,823)
<TOTAL-ASSETS> 84,789
<CURRENT-LIABILITIES> 34,345
<BONDS> 0
13,196
1
<COMMON> 95
<OTHER-SE> 7,375
<TOTAL-LIABILITY-AND-EQUITY> 84,789
<SALES> 19,313
<TOTAL-REVENUES> 116,986
<CGS> 21,929
<TOTAL-COSTS> 109,759
<OTHER-EXPENSES> 15,694
<LOSS-PROVISION> (8,467)
<INTEREST-EXPENSE> (2,660)
<INCOME-PRETAX> (10,628)
<INCOME-TAX> (277)
<INCOME-CONTINUING> (11,091)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,091)
<EPS-PRIMARY> (1.20)
<EPS-DILUTED> 0
</TABLE>
