- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-10588
INTELLICALL, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-1993841
(State or other jurisdiction
of incorporation or organization) (I.R.S. Employer Identification number)
2155 Chenault, Suite 410
Carrollton, TX 75006
(Address of Principal Executive Offices)
(972) 416-0022
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class May 13,1999
- ---------------------------------------- -----------
Common Stock $.01 par value 12,074,385
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<PAGE>
INDEX
INTELLICALL, INC.
Part I. Financial Information
Item 1. Financial Statements
Balance Sheets at March 31, 1999
(Unaudited) and December 31, 1998............................1
Statements of Operations for each of the
three month periods ended March 31, 1999 and 1998
(Unaudited) ...........................................3
Statements of Cash Flows for each of the three month periods
ended March 31, 1999 and 1998
(Unaudited) ...........................................4
Notes to Financial Statements................................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K............................21
Signatures....................................................................22
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
INTELLICALL, INC.
BALANCE SHEETS
ASSETS
(in thousands)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
(unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents ............................................. $ 25 $ 16
Receivables............................................................ 7,889 11,267
Less allowance for doubtful accounts.............................. 3,053 3,417
--------- ---------
4,836 7,850
Inventories, net....................................................... 4,549 5,177
Receivables from related party, net.................................... 598 658
Other current assets................................................... 124 197
--------- ---------
Total current assets.............................................. 10,132 13,898
Fixed assets, net........................................................... 1,318 1,425
Capitalized software costs, net............................................. 2,608 2,481
Notes receivable, net....................................................... 982 1,074
Intangible assets, net...................................................... 726 749
Equity investment........................................................... 1,122 1,491
Other assets, net........................................................... 1,264 1,286
--------- ---------
$ 18,152 $ 22,404
======== ========
See notes to financial statements.
</TABLE>
- 1 -
<PAGE>
INTELLICALL, INC.
BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
(in thousands, except share information)
<TABLE>
<CAPTION>
March 31,1999 December 31, 1998
------------- -----------------
(Unaudited)
<S> <C> <C>
Current liabilities
Accounts payable.......................................... $ 2,961 $ 2,085
Accrued transmission, customer commissions and billing
charges............................................... 734 880
Deferred revenue.......................................... 84 84
Accrued liabilities....................................... 994 968
Current portion of long-term debt ........................ 1,000 3,811
-------- ------------
Total current liabilities................................. 5,773 7,828
Long-term debt ................................................ 7,343 7,312
Deferred gain on sale of assets................................ 968 968
Other liabilities.............................................. 250 250
Commitments and contingent liabilities......................... -- --
---------- -------------
Total liabilities 14,334 16,358
Stockholders' equity
Preferred stock, $.01 par value; 1,000,000 shares
authorized; zero and 510 shares issued
and outstanding, respectively......................... -- 1
Common stock, $.01 par value; 20,000,000 shares
authorized; 12,074,385 and 11,738,001 shares issued,
respectively......................................... 121 117
Additional paid-in capital................................ 57,893 57,895
Less common stock in treasury, at cost;
24,908 shares........................................ (258) (258)
Accumulated deficit....................................... (53,938) (51,709)
-------- -------
Total stockholders' equity........................... 3,818 6,046
--------- -------
$ 18,152 $ 22,404
======== ========
See notes to financial statements.
</TABLE>
- 2 -
<PAGE>
INTELLICALL, INC.
STATEMENTS OF OPERATIONS(UNAUDITED)
(in thousands, except share information)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
---- ----
<S> <C> <C>
Revenues and sales:
Service revenues $ 3,158 $ 5,619
Equipment sales 4,831 4,262
------- ------
7,989 9,881
------- -------
Cost of revenues and sales:
Service revenues 3,268 5,270
Equipment sales 4,269 3,512
------- -------
7,537 8,782
------- -------
Gross profit:
Service revenues (110) 349
Equipment sales 562 750
----- -------
452 1,099
Selling, general and administrative expenses 1,946 2,068
Provision for doubtful accounts (246) 85
Research and development expenses 224 295
------ ------
(1,472) (1,349)
Interest income 61 69
Interest expense (469) (393)
Gain on sale of assets -- 6,399
Loss in equity investee (358) (219)
Other income 9 11
--------- -------
Net income (loss) $ (2,229) $ 4,518
======== ========
Basic net income (loss) per share $ (0.19) $ 0.48
======== ========
Weighted average number of shares outstanding 12,029 9,468
======== ========
Fully diluted net income (loss) per share $ (0.19) $ 0.37
======== ========
Shares used in fully diluted net income (loss) per share calculation 12,029 12,610
======== ========
See notes to financial statements.
</TABLE>
- 3 -
<PAGE>
<TABLE>
<CAPTION>
INTELLICALL, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands) THREE MONTHS ENDED
MARCH 31,
1999 1998
---- ----
<S> <C> <C>
Operating activities:
Net income (loss) $ (2,229) $ 4,518
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Gain on sale of investments -- (6,399)
Depreciation and amortization 426 495
Provision for doubtful accounts (246) 85
Provision for inventory (105) 75
Loss of equity investee 358 219
Changes in operating assets and liabilities (See Note 1):
Restricted cash -- (5)
Amount due on sale of stock -- (5,963)
Receivables 3,261 1,585
Inventories 733 (52)
Related party 60 750
Other current assets 73 (18)
Notes receivable 92 (23)
Accounts payable 877 (1,408)
Accrued transmissions, customer commissions
and billing charges (146) (1,284)
Accrued liabilities 25 (155)
Deferred gain on sale of assets -- 968
Other (18) (202)
------- --------
Net cash provided by (used in) operating activities 3,161 (6,814)
Investing activities:
Purchase of equipment (25) (211)
Capitalized software (316) (250)
Cash received on sale of assets -- 7,963
-------- --------
Net cash provided by (used in) investing activities (341) 7,502
Financing activities:
Net repayments on notes payable and line of credit (2,811) (781)
Proceeds from issuance of stock under stock option plans -- 93
-------- --------
Net cash used in financing activities (2,811) (688)
Net increase in cash and cash equivalents 9 --
Cash and cash equivalents at beginning of period 16 --
--------- --------
Cash and cash equivalents at end of period $ 25 $ --
======== ========
Supplemental cash flow information:
Interest paid $ 120 $ 141
======== ========
Supplemental non cash information:
Conversion of preferred stock to common stock $ 510 $ 260
======== ========
See notes to financial statements.
</TABLE>
- 4 -
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - CERTAIN ACCOUNTING POLICIES
Basis of Presentation. The accompanying financial statements of
Intellicall, Inc. (the "Company") have been prepared in accordance with the
requirements of Form 10-Q and do not include all disclosures normally required
by generally accepted accounting principles or those normally made in annual
reports on Form 10-K. In management's opinion, all adjustments necessary for a
fair presentation of the results of operations for the periods shown have been
made and are of a normal and recurring nature.
The results of operations for the three months ended March 31, 1999, are not
necessarily indicative of the results of operations expected for the full year
1999. The financial statements herein should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998.
Software Development Costs. The Company capitalizes costs related to
the development of certain software products. In accordance with Statement of
Financial Accounting Standards No. 86, capitalization of costs begins when
technological feasibility has been established and ends when the product is
available for general release to customers. Amortization is computed on an
individual product basis based on the products' estimated economic life using
the straight line method, not to exceed five years.
The amounts of software development costs capitalized in the first quarter of
1999 and 1998 were $315,450 and $250,000, respectively. The Company recorded
$189,000 and $119,000 of software amortization expense for the three months
ended March 31, 1999 and 1998, respectively.
Cash and Cash Equivalents. For purposes of the balance sheets and
statements of cash flows, cash and cash equivalents include short-term liquid
investments purchased with remaining maturities of three months or less.
Earnings per Share: Basic net income (loss) per share has been computed
in accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share", ("FAS 128") using the weighted average number of common
shares outstanding. The provision and disclosure requirements for FAS 128 were
required to be adopted for interim and annual periods ending after December 15,
1997, with restatement of EPS for all prior periods.
- 5 -
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
The following table sets forth a reconciliation of the numerator and
denominator used in the basic and diluted EPS computation for the three month
periods ended March 31, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
Three months Three months
ended ended
March 31, March 31,
1999 1998
------------ -----------
<S> <C> <C>
Net income (loss) $ (2,229) $ 4,518
Basic:
Weighted average number of shares outstanding 12,029 9,468
========== =========
Diluted:
Weighted average number of shares outstanding used
in the basic net income (loss) per share calculation 12,029 9,468
Weighted average shares from assumed exercise of
dilutive stock options and warrants, net of shares
assumed to be repurchased with exercise proceeds -- 325
Assumed conversion of Series A Preferred Stock
at beginning of period -- 980
Assumed conversion of convertible debt -- 1,837
---------- ---------
Weighted average number of shares outstanding used
in the fully diluted net income (loss) per share
calculation 12,029 12,610
========== ========
</TABLE>
In accordance with FAS 128, options and warrants to purchase 1,906,580
and 1,024,150 shares respectively, of Common Stock were excluded in the diluted
EPS calculation for March 31, 1999, and warrants to purchase 350,000 shares of
Common Stock were excluded in the diluted EPS calculation for March 31, 1998, as
they were antidilutive. 1,786,190 shares issuable upon conversion of debt were
excluded for the March 31, 1999 calculation because they were antidilutive.
Disclosures about Reporting Comprehensive Income: In June 1997,
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("FAS 130") was issued. FAS 130 establishes standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of general-purpose financial statements. It
requires all items that are required to be recognized under accounting
standards as components of
- 6 -
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
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 adopted this
Statement for the year ended December 31, 1998. There were no components of
comprehensive income for the quarters ended March 31, 1999 and 1998.
Disclosures about Segments of an Enterprise and Related Information: In
June 1997, Statement of Financial Accounting Standards No. 131 "Disclosures
About Segments of an Enterprise and Related Information" ("FAS 131") was issued.
FAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. FAS 131 is
effective for financial statements for periods beginning after December 15,
1997. The Company adopted FAS 131 for the year ended December 31, 1998. (See
Note 9.)
NOTE 2 - LONG-TERM DEBT AND LINE OF CREDIT
The Company's debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
8% Convertible subordinated notes, due 2000 $ 2,630 $ 2,630
8% Convertible subordinated notes, due 2001 5,000 5,000
Convertible subordinated note, due 1999 1,000 1,000
Asset-based note collateralized by certain assets, due 1999 -- 2,811
----------- ---------
8,630 11,441
Less unamortized debt discount (287) (318)
----------- ---------
Total debt 8,343 11,123
----------- ---------
Less: Current portion of long-term debt (1,000) (3,811)
----------- --------
Total long-term debt $ 7,343 $ 7,312
=========== =========
</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 4.2% of the Company's outstanding common stock. Interest
is payable quarterly and commenced March 31, 1994. The Company paid the entire
principal amount, including any accrued interest, on April 8, 1999.
- 7 -
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
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 at $4.20 per share. As a
result of activating certain anti-dilution provisions, the warrants entitle the
holder to purchase 412,637 shares of Common Stock, exercisable at $3.05 per
share. The notes are convertible into 1,785,714 shares of the Company's Common
Stock at a price of $4.20 per share. As of March 31, 1999, $4.87 million of the
Banca Del Gottardo Notes were converted to 1,159,517 shares of the Company's
Common Stock. Interest is payable semi-annually and commenced June 30, 1996.
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. As a result of activating certain anti-dilution provisions, the
warrants entitle the holder to purchase 251,234 shares of Common Stock,
exercisable at $3.98 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.
- 8 -
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
The initial term of the Loan Agreement is three years at which time,
unless extended, all amounts then outstanding must be repaid. The Loan Agreement
contains prepayment penalties in the event it is terminated prior to expiration
of its initial term. The Loan is secured by first and prior liens and security
interests encumbering substantially all of the assets of the Company, including
inventory, equipment, accounts receivable, general intangibles, trademarks and
tradenames. The Loan Agreement contains various restrictions (including a
prohibition against the payment of dividends, limitations on capital
expenditures, and restrictions on investments) and financial ratio maintenance
requirements (including minimum working capital and net worth requirements). On
January 28, 1999, the Company retired all of its obligations to Finova.
On January 27, 1999, the Company closed and commenced funding under a
Receivable Sale Agreement (the "RFC Agreement") with RFC Capital Corporation
("RFC") pursuant to which RFC has agreed to purchase from the Company certain
telecommunication receivables generated by the Company in the ordinary course of
the Company's business. The proceeds from the initial sale of receivables were
used to pay all of the Company's obligations to Finova and for working capital
purposes. The RFC Agreement calls for RFC to purchase eligible receivables from
the Company from time to time upon presentation thereof for a purchase price
equal to the net value of such receivables. Net value is designed to yield RFC
an effective rate of prime plus 2.75% plus allow RFC to retain a holdback of
5.00% in the face amount of the receivables, net of collections, against future
collection risk.
Under the RFC Agreement, the Company performs certain servicing,
administrative and collection functions with respect to the receivables sold to
RFC. Also, pursuant to the terms of the RFC Agreement, the Company has granted
to RFC a security interest in and to the Company's receivables not sold to RFC
and the Company's customer base relating to the generation of such accounts
receivable.
The initial term of the RFC Agreement is to December 21, 2000.
- 9 -
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - INVENTORY
As of March 31, 1999 and December 31, 1998, the Company's inventories,
net of related reserves, consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Raw materials $ 3,512 $ 3,629
Work-in-process 584 428
Finished goods 453 1,120
--------- --------
Total inventories $ 4,549 $ 5,177
========== ========
</TABLE>
NOTE 4 - LITIGATION AND CONTINGENCIES
From time to time, the Company is subject to legal proceedings and
claims in the ordinary course of business, including claims of alleged
infringement of trademarks and other intellectual property rights. The Company
is not currently aware of any legal proceedings or claims that the Company
believes will have, individually or in the aggregate, a material adverse effect
on the Company's financial position, results of operations or cash flows.
NOTE 5 - EQUITY FINANCING
On July 21, 1997 (the "Closing Date") the Company entered into a
Securities Purchase Agreement (the "Purchase Agreement") with four institutional
investors (the "Investors") pursuant to which the Investors purchased $4,000,000
of the Company's Series A Convertible preferred stock (the "preferred stock").
The Company utilized the net proceeds from the sale of the preferred stock
(approximately $3,800,000) to pay down indebtedness to Finova.
- 10 -
<PAGE>
INTELLICALL, INC.
NOTES TO 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 the Closing Date, the fee payable to the Company is 6.25% times
the Variable Conversion Price times the number of such shares of Common Stock.
As of March 31, 1999, all of the Company's Series A convertible
preferred stock had been converted for 2.5 million shares of common stock. The
Company filed a registration statement on the common stock underlying the
conversion of the preferred stock on September 5, 1997.
NOTE 6 - SALE OF PREPAID SERVICES OPERATION
On January 1, 1998 the Company sold its prepaid services operation to
ILD Telecommunications, Inc. in exchange for (i) $2,000,000 in cash, (ii)
forgiveness of the Company's promissory note in the original principal amount of
$2,000,000 which had previously been executed and delivered to ILD to purchase
18,348.62 shares of ILD common stock valued at $109 a share, and (iii) a
$1,000,000 promissory note due at the earlier of the date of ILD's public
offering or December 31, 1998. As of March 31, 1999, ILD had agreed to payment
arrangements to satisfy the $1,000,000 promissory note. The cash proceeds were
used to further reduce the Company's indebtedness to Finova. The Company
recorded a $835,000 gain on the sale of the prepaid services operation with the
balance recorded as deferred gain on sale of assets to an unconsolidated
investee. As of March 31, 1999, the Company had $968,000 of deferred gain.
- 11 -
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - SALE OF STOCK OF ILD TELECOMMUNICATIONS, INC.
On March 30, 1998, the Company sold to SMCO, LLP 18,348.62 shares of
ILD Telecommunications, Inc. common stock. SMCO is an unrelated third party, the
negotiations for the sale transaction were at arm's length, and there were no
additional obligations or elements of financial consideration relating to the
sale transaction. The Company sold the shares for $325 each and recorded a gain
on the sale in the amount of $5.6 million. This transaction lowered the
Company's ownership percentage to 42.9% as of March 31, 1998. Accordingly, the
Company accounts for its investment in ILD under the equity method of accouting
retroactively to January 1, 1998.
NOTE 8 - SUBSEQUENT EVENT
On April 9, 1999 the Company was granted bridge financing of $1.0
million by Banca del Gottardo in Lugano, Switzerland for the purpose of
satisfying all obligations to T.J. Berthel Investments. The $1.0 million in
bridge financing, together with an additional $1.0 million to be used for
working capital purposes, is to be refinanced by Banca del Gottardo into a 7%
convertible long-term note due June 11, 2004, and 200,000 stock purchase
warrants expiring June 11, 2004. In connection with the the note, the
Company anticipates it will grant to Banca del Gottardo a right of prepayment
from the sale of all or a portion of 50% of Intellicall's ownership of ILD
Telecommunications, Inc..
NOTE 9 - BUSINESS SEGMENTS
The Company has two reportable segments, services and equipment.
The services segment provides billing and collection services to owners of
payphones who use the Company's automated operator technology. The equipment
segment manufactures and sells payphones, switches and related software.
The accounting policies of the segments are the same as those
described in Note 1, Certain Accounting Policies. The Company evaluates segment
performance based on revenues, gross profit and net income before taxes and
interest.
Financial information that is provided to the chief operating
decision maker includes revenues, gross profit and net income. Note that there
are no intersegment revenues. The Company's primary measure of profit, net
income, is that by which it formulates decisions and communicates to investors
and analysts. Gross profit data is provided for additional information.
Financial information internally reported for the quarters ended March 31, 1999,
and 1998 is as follows (in thousands):
- 12 -
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, 1999
SERVICES EQUIPMENT SUBTOTAL CORPORATE(4) TOTAL
-------- --------- -------- --------- -----
<S> <C> <C> <C> <C> <C>
REVENUES(1) 3,158 4,831 7,989 7,989
39.5% 60.5% 100.0%
GROSS PROFIT 452
(LOSS)(2) (110) 562 452
19.6% 100.0% N/A
NET LOSS(3) (251) (1,221) (1,472) (757) (2,229)
17.1% 82.9% 100.0%
<FN>
(1) Equipment revenues include international sales of $15.
(2) Percentage is determined based on the greater of the absolute amount of all
segments reporting a positive gross profit or all segments reporting a
negative gross profit. The absolute amount of all segments reporting a
positive gross profit is $562, while the absolute value of all segments
reporting a negative gross profit is $110. Accordingly, the percentages are
calculated based on a denominator of $562.
(3) Percentage is determined based on the greater of the absolute amount of all
segments reporting a profit or all segments reporting a loss. The absolute
amount of all segments reporting a profit is zero, while the absolute value
of all segments reporting a loss is $1,472. Accordingly, the percentages
are calculated based on a denominator of $1,472.
(4) Note that "corporate" is not a segment. As a consequence, percentage amounts
are not calculated for "Corporate".
</FN>
</TABLE>
- 13 -
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, 1998
SERVICES EQUIPMENT SUBTOTAL CORPORATE(4) TOTAL
-------- --------- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
REVENUES(1) 5,619 4,262 9,881 9,881
56.9% 43.1% 100.0%
GROSS PROFIT(2) 349 750 1,099 -- 1,099
31.8% 68.2% 100.0%
NET INCOME (LOSS)(3) 146 (1,495) (1,349) 5,867 4,518
9.8% 100.0% N/A
<FN>
(1) Equipment revenues include international sales of $1,548.
(2) Percentage is determined based on the greater of the absolute amount of all
segments reporting a positive gross profit or all segments reporting a
negative gross profit. The absolute amount of all segments reporting a
positive gross profit is $1,099, while the absolute value of all segments
reporting a negative gross profit is zero. Accordingly, the percentages are
calculated based on a denominator of $1,099.
(3) Percentage is determined based on the greater of the absolute amount of all
segments reporting a profit or all segments reporting a loss. The absolute
amount of all segments reporting a profit is $146, while the absolute value
of all segments reporting a loss is $1,495. Accordingly, the percentages
are calculated based on a denominator of $1,495.
(4) Note that "corporate" is not a segment. As a consequence, percentage amounts
are not calculated for "Corporate".
</FN>
</TABLE>
- 14 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements - Cautionary Statements
This Form 10-Q contains certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Specifically, all statements other than statements
of historical facts included in this report regarding the Company's financial
position, business strategy and plans and objectives of management of the
Company for future operations are forward-looking statements. These
forward-looking statements are based on the beliefs of the Company's management,
as well as assumptions made by and information currently available to the
Company's management. When used in this report, the words "anticipate,"
"believe," "estimate," "expect," "intend", and words or phrases of similar
import, as they relate to the Company or Company management, are intended to
identify forward-looking statements. Such statements (the "cautionary
statements") reflect the current view of the Company with respect to future
events and are subject to risks, uncertainties and assumptions related to
various factors including, without limitation, competitive factors, general
economic conditions, customer relations, relationships with vendors, the
interest rate environment, governmental regulation and supervision, seasonality,
product introductions and acceptance, technological change, changes in industry
practices and one-time events. Although the Company believes that expectations
are reasonable, it can give no assurance that such expectations will prove to be
correct. Based upon changing conditions, should any one or more of these risks
or uncertainties materialize, or should any underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, expected or intended. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the applicable
cautionary statements.
Year 2000 Discussion
The Company has undertaken a program (the "Y2K Program") to ensure that
its operations, computer systems and certain products are not functionally
impaired as a result of a failure to properly record in any electronic medium
the correct time and date on and after January 1, 2000. The Y2K Program is a
multi-year program which commenced in 1997.
Responsibilities for achieving Y2K compliance have been assigned to two
groups of employees: the Engineering Group and the Information Systems Group.
The Engineering Group is responsible for ensuring that the functionality of
certain of the Company's products is not impaired as a result of being Y2K
non-compliant. The Information Systems Group is responsible for assessing and
suitably modifying or replacing components of systems and networks used in the
Company's operations, including those used to process customer call records, so
as to ensure that the Company's business is not materially disrupted by an
instance of Y2K non-compliance over which the Company had control.
Engineering Group Y2K Program Status. The Company issues periodic
status reports on its Web Page concerning the products which will be certified
for Y2K operation. In general, products which are currently produced, supported
or widely deployed will be certified.
- 15 -
<PAGE>
Conceptually, the certification process requires (a) the testing of
selected existing products in a simulated Y2K environment to determine whether
remediation is required (the "Test Phase"), (b) the development of remedial
software (the "Programming Phase"), and (c) final testing and product
certification (the "Final Test Phase"). Since the Test Phase requires the
development of test plans and scripts for a multitude of products and their
components, it is necessarily a lengthy one. The Table below summarizes, for
each phase, the estimated historical cost, the percentage of completion at March
31, 1999, estimated total costs and targeted completion dates.
<TABLE>
<CAPTION>
Phase
---------------------------------------
Test Programming Final Test
<S> <C> <C> <C>
Estimated Cost to 3/31/99 $ 110,000 $ 80,000 $ 22,000
Percent Complete at 3/31/99 75% 50% 35%
Estimated Total Cost $ 145,000 $ 160,000 $ 63,000
Estimated Completion Date 5/99 8/99 10/99
</TABLE>
Until the Test Phase is complete, the timing and cost of remedial
programming can not be reliably estimated. Y2K product modifications are
expected to be completed principally by Company personnel.
There can be no assurance that tests and scripts devised by the Company
will detect all instances of Y2K non-compliance, or that the scope and cost of
work shown to be required upon completion of testing will be consistent with the
Company's current expectations, or that appropriate personnel will be available
when required to make and test the modifications, or that upgraded software will
be installed in customer equipment on a timely basis.
Information Systems Group ("ISG") Y2K Program Status. The ISG's areas
of responsibility include the evaluation and remediation (or replacement) of
information technology systems ("IT Systems") used by the Company, and of the
Y2K readiness of the Company's key vendors. Based upon its evaluation of the IT
system used to process customer-submitted call traffic data (the "CTD System"),
the ISG has concluded that the CTD System requires a major rewrite and upgrade
to be made Y2K compatible. The CTD System upgrade is expected to be undertaken
by existing Intellicall personnel with the use of outside consultants as needed,
to be completed by the end of 1999. The phases, estimated historical and
projected costs, estimated completion dates and percentages of completion of the
CTD System upgrade are set forth in the following table.
<TABLE>
<CAPTION>
Phase
--------------------------------------------
System Design Coding System Test
------------- ------ -----------
Implementation
<S> <C> <C> <C>
Estimated Cost to 3/31/99 $ 33,300 27,300 0
Percent Complete at 3/31/99 100% 12% 0%
Estimated Total Cost $ 33,300 $225,000 $ 25,000
Estimated Completion Date 4/99 10/99 11/99
</TABLE>
- 16 -
<PAGE>
Estimates of work scope and projected costs may be imprecise, as there
can be no assurance that the CTD System upgrade will be completed on time or
within budget, or that it will be sufficiently Y2K compatible to permit
processing of customer call traffic without material business disruption or
cost.
The ISG has completed its evaluation of IT Systems used by the Company
in its manufacturing, accounting, administration and human resources
departments, and on the basis of letters of assurance obtained and expected from
third-party vendors, has concluded that the Company's accounting, MRP and
payroll systems will fundamentally be Y2K capable in 1999. Letters of assurance
have been requested from other key third-party vendors concerning other
equipment and systems utilized by the Company, including outside billing agents
used in the collection of customer call traffic accounts receivable. However,
there can be no assurance that the Company will receive responses from all of
its vendors in a timely manner, or that such responses will be accurate or
complete. Moreover, the Company has not conducted, and will be unable to
conduct, an in-depth evaluation of third-party providers in relation to their
ability to adequately address Y2K issues.
The ISG has inventoried all personal computers, and related servers and
software used by the Company. The inventory is largely complete, on the basis of
which, the Company has tentatively adopted a plan to spend approximately
$100,000 for replacements and upgrades of the inventoried equipment and software
to achieve Y2K capability and otherwise improved performance. Management
believes that the necessary replacements and upgrades can be obtained from third
parties on a timely basis.
The success of Intellicall's business is dependent on and
interconnected with numerous third-party suppliers. The depth and complexity of
interconnectivity raises the probability that an unforeseen Y2K problem may
arise, notwithstanding the best efforts of the Company and its suppliers to
avoid one. Consequently, there can be no assurance that the Company's
operations, financial condition or prospects will not be materially impaired by
a non-compliant Y2K event over which it had no control.
Y2K Risk Assessment and Contingency Plans. Intellicall's business
interruption insurance excludes coverage of losses resulting from Y2K defects,
and the Company has been informed by its insurance agent that reasonable
insurance protection is unavailable. Most of the Company's software used in its
accounting, human resources, payroll and production functions is purchased from
reliable third-party vendors that have provided assurance of Y2K compatibility.
The planned modifications of product and most other software will be made by
company personnel in lieu of being outsourced. On a scale of difficulty, such
modifications are not expected to be more challenging than other software
modifications routinely made by Company personnel in the ordinary conduct of
their jobs.
The Company views the inability of the CTD call processing software to
properly edit decripted call records for uncollectible calls after 1999 as the
most probable Y2K worst case scenario. Notwithstanding the Company's effort to
rewrite the system by year end, 1999, the Company's contingency plan for the Y2K
problem relating to the CTD system includes decripting the customer's call
records and submitting them to third party billing agents to collect the call
traffic revenue for the customer. This contingency plan essentially moves
customers using the Easy*Star program to an Unbundled program.
- 17 -
<PAGE>
The Company has no other contingency plan at the present time for Y2K
problems that might emerge, but will continue to develop other plans as problems
become evident. There can be no assurance, however, that any plan, currently
developed or yet to be developed, will be sufficiently timely or effective to
avoid a material disruption of Intellicall's or its customer's operations.
Recent Developments
On April 9, 1999 the Company was granted bridge financing of $1.0
million by Banca del Gottardo in Lugano, Switzerland for the purpose of
satisfying all obligations to T.J. Berthel Investments. The $1.0 million in
bridge financing, together with an additional $1.0 million to be used for
working capital purposes, is to be refinanced by Banca del Gottardo into a 7%
convertible long-term note due June 11, 2004, and 200,000 stock purchase
warrants expiring June 11, 2004. In connection with issuing the note, the
Company anticipates it will grant to Banca del Gottardo a right of prepayment
from the sale of all or a portion of 50% of Intellicall's ownership of ILD
Telecommunications, Inc..
Financial Condition
Liquidity and Capital Resources
During the three months ended March 31, 1999 the Company generated $3.2
million of cash from operations including changes in operating assets and
liabilities.
Net changes in operating assets and liabilities during the first
quarter of 1999 provided a source of cash of $5.0 million. The primary factors
affecting these changes were a decrease in accounts receivable of $3.3 million
and an increase in accounts payable of $1.3 million.
Cash flows from investing activities include capital expenditures of
$25,000 and expenditures for software and product development of $316,000.
Cash flows from financing activities include a $2.8 million repayment
on the line of credit from Finova.
On January 27, 1999, the Company closed and commenced funding under a
Receivable Sale Agreement (the "RFC Agreement") with RFC Capital Corporation
("RFC") pursuant to which RFC has agreed to purchase from the Company certain
telecommunication receivables generated by the Company in the ordinary course of
the Company's business. The proceeds from the initial sale of receivables were
used to pay all of the Company's obligations to Finova and for working capital
purposes. The RFC Agreement calls for RFC to purchase eligible receivables from
the Company from time to time upon presentation thereof for a purchase price
equal to the net value of such receivables. Net value is designed to yield RFC
an effective rate of prime plus 2.75% plus allow RFC to retain a holdback of
5.00% in the face amount of the receivables, net of collections, against future
collection risk.
- 18 -
<PAGE>
Under the RFC Agreement the Company performs certain servicing,
administrative and collection functions with respect to the receivables sold to
RFC. Also, pursuant to the terms of the RFC Agreement, the Company has granted
to RFC a security interest in and to the Company's receivables not sold to RFC
and the Company's customer base relating to the generation of such accounts
receivables.
The initial term of the RFC Agreement is to December 21, 2000.
In and beyond 1999, the Company's ability to obtain further funds from
external sources will depend in part on its ability to generate operating
profits, or to substantially reduce its operating losses. Although management of
the Company believes that the Company's sales will grow during the remainder of
1999 and that profitability will improve with sales, there can be no assurance
that the events necessary for such sales growth will occur as or when expected,
or that future sales growth will be sufficiently large or profitable to permit
the Company to finance its activities without recourse to continuing sales of
assets or external funding sources. There can be no assurance that under such
conditions, external funds would be available or, if available, would not
potentially dilute shareholders' interests or returns.
Results of Operations
Service Revenues. Service revenues for the first quarter ended March
31, 1999 were $3.2 million compared to $5.6 million for the same period in 1998.
The $2.4 million decline resulted from the discontinuation of call traffic
submissions to the Company by a major customer and the occurance of dial-around.
Dial-around is the increasingly prevalent practice by payphone users of
accessing operator service systems other than those used by payphone owners.
Of the $2.4 million decline, $599,000 resulted from the loss of a major
customer during the latter part of 1998. The remaining $1.8 million of the
decline is a result of the continuing decline in the volume of call traffic due
to dial-around. Dial-around is the increasingly prevalent practice by payphone
users of accessing operator service systems other than those used by payphone
owners.
Equipment Sales. Equipment sales were $4.8 million and $4.3 million in
the three months ended March 31, 1999 and 1998, respectively. The following
table analyzes sales by market (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Domestic Equipment........................ $ 4,816 $ 2,714
International Equipment .................. 15 1,548
------- -------
Total equipment sales................. $ 4,831 $ 4,262
======= =======
</TABLE>
The increase in domestic sales is attributed to initial shipments into
the newly deregulated Canadian market and shipments of product by Intellicall's
strategic partner into the regulated market.
- 19 -
<PAGE>
The Company believes that Independent Payphone Provider (IPP) sales have been,
and will continue to be, negatively impacted by unresolved regulatory issues
surrounding dial-around compensation. Management believes that delayed, sporadic
and negligible payments to IPP's of dial-around compensation have diminished the
incentives of IPP's to expand their routes. In lieu of route expansion, many
IPP's have chosen to rotate phones within their routes from one location (where
increased numbers of undercompensated dial-around calls have rendered a location
insufficiently profitable) to another (where a higher rate of coin and lower
rate of dial-around calls promise profitability). Until the amount and timing of
dial-around compensation payments become adequate and reliable, management of
the Company believes that sales to IPP's will continue to be depressed.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $1.9 million for the quarter ended March 31, 1999
as compared to $2.1 million for the quarter ended March 31, 1998. Selling,
general and administrative expenses declined $200,000 in the quarter ended March
31, 1999 primarily due to cost cutting measures undertaken by the Company.
Research and Development Expenses. Gross spending for research and
development decreased $71,000 for the three months ended March 31, 1999, as
compared to the same period in 1998. In the first quarter of 1999, the Company
capitalized software development costs of $316,000 compared to $250,000 in the
first quarter of 1998.
Provision for Doubtful Accounts. The provision for doubtful accounts
decreased $331,000 from $85,000 in the quarter ended March 31, 1998. The
decrease is primarily due to increased efforts to collect aged accounts
receivables which were previously reserved for.
Gain on Sale of Assets. During the first quarter of 1998 the Company
reported gains on sales of assets totaling $6.4 million. Such gains resulted
from partial gain recognition on the January 1998 sale of the Company's prepaid
services operation to ILD and from gain on the March 1998 sale of a portion of
the Company's ownership interest in ILD to an unrelated third party.
- 20 -
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
From time to time, the Company is subject to legal proceedings and
claims in the ordinary course of business, including claims of alleged
infringement of trademarks and other intellectual property rights. The Company
is not currently aware of any legal proceedings or claims that the Company
believes will have, individually or in the aggregate, a material adverse effect
on the Company's financial position, results of operations or cash flows.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None.
- 21 -
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
INTELLICALL, INC.
/s/ John J. McDonald, Jr.
-------------------------------------
John J. McDonald, Jr.
President and
Chief Executive Officer
/s/ R. Phillip Boyd
--------------------------------------
R. Phillip Boyd
Vice President Finance
and Chief Financial Officer
Date: May 14, 1999
- 22 -
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