<PAGE>
- --------------------------------------------------------------------------------
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 SEPTEMBER 30, 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 (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2155 CHENAULT, SUITE 410
CARROLLTON, TX 75006
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(972) 416-0022
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Outstanding at
Class November 15,1999
- ------------------------------- ----------------
<S> <C>
Common Stock $.01 par value 12,080,175
</TABLE>
- -------------------------------------------------------------------------------
<PAGE>
INDEX
INTELLICALL, INC.
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at September 30, 1999
(Unaudited) and December 31, 1998..........................................1
Statements of Operations for each of the
three month periods ended September 30, 1999 and 1998
(Unaudited) ..............................................................3
Statements of Operations for each of the
nine month periods ended September 30, 1999 and 1998
(Unaudited) ..............................................................4
Statements of Cash Flows for each of the nine month periods
ended September 30, 1999 and 1998
(Unaudited) ..............................................................5
Notes to Financial Statements (Unaudited)..................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..........................................................28
Item 6. Exhibits and Reports on Form 8-K...........................................28
Signatures..............................................................................29
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTELLICALL, INC.
BALANCE SHEETS
ASSETS
(in thousands)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
(unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents............................... $ 19 $ 16
Receivables............................................. 1,960 4,854
Less allowance for doubtful accounts............... 344 442
--------- ---------
1,616 4,412
Inventories, net........................................ 3,808 5,177
Receivables from related party, net..................... 287 658
Other current assets.................................... 364 197
--------- ---------
Total current assets............................... 6,094 10,460
Fixed assets, net............................................ 1,125 1,425
Capitalized software costs, net.............................. 2,646 2,481
Notes receivable, net........................................ 850 1,074
Intangible assets, net....................................... 681 749
Investment in unconsolidated investee........................ 624 1,491
Other assets, net............................................ 1,050 1,286
Assets of discontinued operations............................ 206 3,438
--------- ---------
$ 13,276 $ 22,404
========= =========
</TABLE>
See notes to financial statements.
<PAGE>
INTELLICALL, INC.
BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share information)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
(Unaudited)
<S> <C> <C>
Current liabilities
Accounts payable.......................................... $ 2,480 $ 2,085
Deferred revenue.......................................... -- 84
Accrued liabilities....................................... 1,107 968
Current portion of long-term debt ........................ -- 3,811
--------- ---------
Total current liabilities................................. 3,587 6,948
Long-term debt ................................................ 9,243 7,312
Deferred gain on sale of assets................................ 967 968
Other liabilities.............................................. 250 250
Liabilities of discontinued operations......................... 297 880
--------- ---------
Total liabilities........................................ 14,344 16,358
Commitments and contingent liabilities......................... -- --
Stockholders' equity (deficit)
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; 12,080,175 and 11,738,001 shares issued,
respectively......................................... 121 117
Additional paid-in capital................................ 58,054 57,895
Less common stock in treasury, at cost;
24,908 shares........................................ (258) (258)
Accumulated deficit....................................... (58,985) (51,709)
--------- ---------
Total stockholders' equity (deficit)................. (1,068) 6,046
--------- ---------
$ 13,276 $ 22,404
========= =========
</TABLE>
See notes to financial statements.
- 2 -
<PAGE>
INTELLICALL, INC.
STATEMENTS OF OPERATIONS(UNAUDITED)
(in thousands, except share information)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Equipment sales $ 2,830 $ 4,755
Cost of equipment sales 2,390 3,728
-------- --------
Gross profit from equipment sales 440 1,027
Selling, general and administrative expenses 1,486 2,047
Provision for doubtful accounts 57 93
Research and development expenses 197 286
-------- --------
Operating loss (1,300) (1,399)
Interest income 26 80
Interest expense (330) (376)
Loss in equity investee (212) (88)
Other income 16 --
-------- --------
Loss from continuing operations (1,800) (1,783)
Income (loss) from discontinued operations (189) 310
-------- --------
Net loss $ (1,989) $ (1,473)
======== ========
Earnings per share:
Basic:
Loss from continuing operations $ (0.15) $ (0.18)
Income (loss) from discontinued operations (0.02) 0.03
-------- --------
Net loss $ (0.17) $ (0.15)
======== ========
Diluted:
Loss from continuing operations $ (0.15) $ (0.18)
Income (loss) from discontinued operations (0.02) 0.03
-------- --------
Net loss $ (0.17) $ (0.15)
======== ========
Weighted average number of shares outstanding:
Basic 12,055 9,912
Diluted 12,055 9,912
======== ========
</TABLE>
See notes to financial statements.
- 3 -
<PAGE>
INTELLICALL, INC.
STATEMENTS OF OPERATIONS(UNAUDITED)
(in thousands, except share information)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Equipment sales $ 9,210 $ 12,338
Cost of equipment sales 8,312 9,797
-------- --------
Gross profit from equipment sales 898 2,541
Selling, general and administrative expenses 4,939 5,977
Provision for doubtful accounts 142 237
Research and development expenses 695 843
-------- --------
Operating loss (4,878) (4,516)
Interest income 146 239
Interest expense (1,336) (1,159)
Gain on sale of assets -- 6,892
Loss in equity investee (833) (418)
Other income 181 --
-------- --------
Income (loss) from continuing operations (6,720) 1,038
Income (loss) from discontinued operations (557) 839
-------- --------
Net income (loss) $ (7,277) $ 1,877
======== ========
Earnings per share:
Basic:
Income (loss) from continuing operations $ (0.56) $ 0.11
Income (loss) from discontinued operations (0.04) 0.08
-------- --------
Net income (loss) $ (0.60) $ 0.19
======== ========
Diluted:
Income (loss) from continuing operations $ (0.56) $ 0.10
Income (loss) from discontinued operations (0.04) 0.07
-------- --------
Net income (loss) $ (0.60 $ 0.17
======== ========
Weighted average number of shares outstanding:
Basic 12,045 9,716
Diluted 12,045 10,926
======== ========
</TABLE>
See notes to financial statements.
- 4 -
<PAGE>
INTELLICALL, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1999 1998
---- ----
<S> <C> <C>
Operating activities:
Net income (loss) $(6,720) $ 1,038
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Gain on sale of investments -- (6,892)
Depreciation and amortization 1,537 1,323
Provision for doubtful accounts 142 237
Provision for inventory 120 225
Loss of equity investee 833 418
Changes in operating assets and liabilities:
Receivables 2,712 (452)
Inventories 1,249 524
Receivables from related party 371 447
Other current assets (167) 60
Notes receivable 166 117
Accounts payable 396 (4,445)
Accrued liabilities 55 13
Deferred gain on sale of assets (1) 968
Other (63) (313)
------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 630 (6,732)
------- -------
Investing activities:
Purchase of equipment (162) (368)
Capitalized software (815) (750)
Cash received on sale of assets -- 8,463
------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (977) 7,345
------- -------
Financing activities:
Borrowings on notes payable 3,000 --
Payments on notes payable (2,000) (28)
Net repayments on line of credit (2,811) (1,759)
Proceeds from issuance of stock under stock option plans -- 433
------- -------
NET CASH USED IN FINANCING ACTIVITIES (1,811) (1,354)
------- -------
CASH FLOWS FROM DISCONTINUED OPERATIONS 2,161 1,072
------- -------
Net increase in cash and cash equivalents 3 331
Cash and cash equivalents at beginning of period 16 --
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19 $ 331
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 539 $ 656
======= =======
SUPPLEMENTAL NON CASH FLOW INFORMATION:
Conversion of debt to equity $ -- $ 210
======= =======
</TABLE>
See notes to financial statements.
- 5 -
<PAGE>
INTELLICALL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - CERTAIN ACCOUNTING POLICIES
BASIS OF PRESENTATION. The accompanying unaudited financial
statements of Intellicall, Inc. (the "Company"), for the quarter and nine
months ended September 30, 1999 and 1998, 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 quarter and nine months ended September 30,
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 third quarter of
1999 and 1998 were $.3 million and $.3 million, respectively. The Company
recorded $.2 million and $.2 million of software amortization expense for the
quarters ended September 30, 1999 and 1998.
For the nine months ended September 30, 1999 and 1998, the Company
capitalized $.8 million and $.8 million respectively. The software
amortization expense recorded was $.7 million and $.4 million for the nine
months ended September 30, 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.
- 6 -
<PAGE>
INTELLICALL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 2 - EARNINGS(LOSS) PER SHARE
The following table sets forth a reconciliation of the numerator and
denominator used in the basic and diluted EPS computation for the quarter and
nine month periods ended September 30, 1999 and 1998, respectively (in
thousands):
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Income (loss) from continuing operations $ (1,800) $ (1,783) (6,720) 1,038
Income (loss) from discontinued operations (189) 310 (557) 839
-------- -------- -------- --------
Net income (loss) $ (1,989) $ (1,473) (7,277) 1,877
Basic:
Weighted average number of shares outstanding 12,055 9,912 12,045 9,716
======== ======== ======== ========
Diluted:
Weighted average number of shares outstanding used
in the basic net income (loss) per share calculation 12,055 9,912 12,045 9,716
Weighted average shares from assumed exercise of
dilutive stock options and warrants, net of shares
assumed to be repurchased with exercise proceeds -- -- -- 208
Assumed conversion of Series A Preferred Stock
at beginning of period -- -- -- 1,002
-------- -------- -------- --------
Weighted average number of shares outstanding used
in the fully diluted net income (loss) per share
calculation 12,055 9,912 12,045 10,926
======== ======== ======== ========
</TABLE>
In accordance with FAS 128, options and warrants to purchase
3,609,378 and 2,915,705 shares of Common Stock were excluded in the diluted
EPS calculation because they were antidilutive, for the three months ended
September 30, 1999 and 1998, respectively. Conversion of debt and preferred
stock were antidilutive and therefore were excluded for both of the three
month periods calculations. For the nine month periods ended September 30,
1999 and 1998, options and warrants to purchase 3,609,378 and 1,883,580
shares respectively, of Common Stock were excluded in the diluted EPS
calculation because they were antidilutive. The September 30, 1999
calculation excluded 2,916,513 shares issuable upon conversion of debt
because they were antidilutive.
- 7 -
<PAGE>
INTELLICALL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 3 - LONG-TERM DEBT AND LINE OF CREDIT
The Company's debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 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
Asset-based note collateralized by certain assets, due 1999 -- 2,811
7% Convertible subordinated notes, due 2004 2,000 --
---------- ----------
9,630 11,441
Less unamortized debt discount (387) (318)
---------- ----------
Total debt 9,243 11,123
---------- ----------
Less current portion of long-term debt -- (3,811)
---------- ----------
Total long-term debt $ 9,243 $ 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 was payable quarterly and commenced March 31, 1994. The Company paid
the entire principal amount, including any accrued interest, on April 8, 1999.
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 418,507 shares of Common Stock, exercisable at
$3.01 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. Cumulative, as of
September 30, 1999, $4.87 million of the Banca Del Gottardo Notes were
converted to 1,159,517 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 255,643 shares of
Common Stock, exercisable at $3.91 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.
- 8 -
<PAGE>
INTELLICALL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
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 $12.0 million (the
"Loan") based on an available borrowing base. The borrowing base consisted
primarily of call traffic and trade equipment receivables and inventory,
subject to eligibility requirements determined by Finova. Amounts loaned
subject to the borrowing base were determined by percentages established in
the Loan Agreement.
The initial term of the Loan Agreement was three years. The Loan was
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. For the
quarter and nine months ended September 30, 1999, the Company incurred $.05
million and $.2 million of interest expense relating to this agreement.
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 through December 21, 2000.
On April 9, 1999 the Company was granted bridge financing of $1.0
million from Banca del Gottardo in Lugano, Switzerland for the purpose of
satisfying all obligations to T.J. Berthel Investments.
- 9 -
<PAGE>
INTELLICALL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
On June 11, 1999 the Company completed the sale of $2.0 million of
7.0% convertible subordinated notes, due June 11, 2004, to Banca del Gottardo
in Lugano, Switzerland. $1.0 million of the net proceeds from the sale of the
notes were used to repay the bridge financing, with the balance utilized for
working capital. The notes were issued with warrants to purchase 200,000
shares of the Company's Common Stock at $1.55 per share. The notes are
convertible into 1,290,323 shares of the Company's Common Stock at a price of
$1.55 per share. Interest is payable semi-annually beginning December 1999.
In connection with issuing the notes, the Company has granted to Banca del
Gottardo, a right of repayment from the sale of all or a portion of 50% of
Intellicall's stock ownership in ILD.
On October 21, 1999 the Company received notice from Banca del
Gottardo of its intent to "put" to the Company the balance of the 8%
convertible subordinate notes due December 31, 2000. The agreement, relating
to such convertible debt includes a put option, giving Banca del Gottardo the
right to tender payment for the outstanding balance of the notes on December
31, 1999. The current outstanding balance of the notes is $2.6 million.
The Company is currently in negotiation with Banca del Gottardo to
restructure the aforementioned debt with the intent of deferring and/or
eliminating the put tender. While the Company believes that the debt will be
restructured, there can be no assurance that terms acceptable to both the
Company and Banca del Gottardo can be agreed upon.
Without the additional sale of Company assets or the issuance of
additional debt or equity, the Company currently does not have adequate cash
resources to repay the outstanding balance of the notes in the event an
agreement between the Company and Banca del Gottardo cannot be reached.
NOTE 4 - INVENTORIES
As of September 30, 1999 and December 31, 1998, the Company's
inventories, net of related reserves, consisted of the following (in
thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Raw materials $ 3,403 $ 3,629
Work-in-process 347 428
Finished goods 58 1,120
-------- ----------
Total inventories, net $ 3,808 $ 5,177
========= ==========
</TABLE>
- 10 -
<PAGE>
INTELLICALL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 5 - 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 6 - EQUITY FINANCING
On July 21, 1997 (the "Closing Date") the Company entered into a
Securities Purchase Agreement (the "Purchase Agreement") with four
institutional investors (the "Investors") pursuant to which the Investors
purchased $4.0 million 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 $3.8 million) to pay down indebtedness
to Finova.
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 7 - EQUITY TRANSACTIONS
On August 10, 1999 the Company issued a warrant, effective June 21,
1999 to Paytel Canada, Inc. (the "Holder") entitling the holder to subscribe
for and purchase, during the period specified in the warrant, 500,000 shares
of duly authorized, validly issued, fully paid and non-assessable common
stock. This warrant has been granted to the Holder in exchange for its
commitment to purchase up to $30.0 million of products and services from the
Company. For each $1.0 million actually received by the Company from the
Holder for payment of purchases of products and services from the Company
from and after the date of this warrant, there shall vest in the Holder the
right to purchase 12,500 shares of common stock at a price of $1.30 per share.
In addition, upon receipt by the Company from the Holder of
aggregate payments equal to $30.0 million, there shall vest in the Holder the
right to purchase an additional 125,000 shares of common stock at a price of
$1.30 per share.
The warrant is effective June 21, 1999 and expires on January 19,
2004. As of September 30, 1999, the Holder has yet to accrue a vested
interest in the issued warrant.
- 11 -
<PAGE>
INTELLICALL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 8 - SALE OF PREPAID SERVICES OPERATION
On January 1, 1998 the Company sold its prepaid services operation
to ILD Telecommunications, Inc. ("ILD") in exchange for (i) $2.0 million in
cash, (ii) forgiveness of the Company's promissory note in the original
principal amount of $2.0 million 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 $1.0 million 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 $1.0 million promissory
note. The cash proceeds were used to further reduce the Company's
indebtedness to Finova. The Company recorded a $.8 million 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 September 30, 1999,
the Company had $1.0 million of deferred gain.
NOTE 9 - SALE OF STOCK OF ILD
On March 30, 1998, the Company sold to SMCO, LLP 18,348.62 shares of
ILD common stock. SMCO is an unrelated third party, the negotiations for the
sale transactions were at arm's length, and there were no additional
obligations or elements of financial consideration relating to the sale
transaction. The Company sold the shares for $325.00 each and recorded a gain
on the sale in the amount of $5.6 million. The transaction lowered the
Company's ownership percentage in ILD to 42.9% as of March 31, 1998.
Accordingly, the Company accounts for its investment in ILD under the equity
method of accounting retroactively to January 1, 1998.
On April 3, 1998 the Company sold 1,539 shares of its Series A
preferred stock in ILD to SMCO Investments, LLC. The shares were sold for
$325.00 per share and resulted in a gain on sale of assets of $.5 million.
The transaction lowered the Company's ownership percentage in ILD to 42.0% as
of April 3, 1998.
On October 21, 1999 the Company sold to First Avenue Partners, LP
("First Avenue") 5,000 shares of ILD Series A Convertible Preferred Stock.
First Avenue Partners 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 $250.00 each for an aggregate of
$1.3 million and will record a gain of approximately $1.1 million. The
transaction lowered the Company's ownership percentage in ILD to 31.0% as of
October 21, 1999. Proceeds from the sale will be used for general operating
capital purposes.
- 12 -
<PAGE>
INTELLICALL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 10 - BUSINESS SEGMENTS
The Company had two reportable segments, billing services operations
("Services") and equipment. The Services segment, which was discontinued
effective October 21, 1999 (See Note 11), 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
September 30, 1999 and 1998, and the nine months ended September 30, 1999 and
1998 is as follows (in thousands):
- 13 -
<PAGE>
INTELLICALL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
QUARTER ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
SERVICES(5) EQUIPMENT SUBTOTAL CORPORATE(4) TOTAL
----------- ---------- -------- ------------ -----
<S> <C> <C> <C> <C> <C>
REVENUES(1) $ 2,866 $ 2,830 $ 5,696 $ 5,696
50.3% 49.7% 100.0%
GROSS PROFIT
(LOSS)(2) $ (52) $ 440 $ 388 $ 388
11.8% 100.0% N/A
NET LOSS(3) $ (189) $(1,300) $(1,489) $(500) $(1,989)
12.7% 87.3% 100.0%
</TABLE>
(1) Equipment revenues include international sales of $422.
(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 $440, while the absolute value of all segments
reporting a negative gross profit is $52. Accordingly, the percentages are
calculated based on a denominator of $440.
(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 $1,489. Accordingly, the percentages
are calculated based on a denominator of $1,489.
(4) Note that "Corporate" is not a segment. As a consequence, percentage
amounts are not calculated for "Corporate".
(5) The Services segment was discontinued effective October 21, 1999. See Note
11.
- 14 -
<PAGE>
INTELLICALL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
QUARTER ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SERVICES(5) EQUIPMENT SUBTOTAL CORPORATE(4) TOTAL
----------- --------- -------- ------------ -----
<S> <C> <C> <C> <C> <C>
REVENUES(1) $8,542 $ 4,755 $ 13,297 $ 13,297
64.2% 35.8% 100.0%
GROSS PROFIT(2) $ 482 $ 1,027 $ 1,509 $ 1,509
31.9% 68.1% 100.0%
NET INCOME (LOSS)(3) $ 310 $(1,399) $(1,089) $(384) $(1,473)
22.2% 100.0% N/A
</TABLE>
(1) Equipment revenues include international sales of $1,382.
(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 $1,509, while the absolute value of all segments
reporting a negative gross profit is zero. Accordingly, the percentages are
calculated based on a denominator of $1,509.
(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 $310, while the absolute value
of all segments reporting a loss is $1,399. Accordingly, the percentages
are calculated based on a denominator of $1,399.
(4) Note that "Corporate" is not a segment. As a consequence, percentage
amounts are not calculated for "Corporate".
(5) The Services segment was discontinued effective October 21, 1999. See Note
11.
- 15 -
<PAGE>
INTELLICALL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
SERVICES(5) EQUIPMENT SUBTOTAL CORPORATE(4) TOTAL
----------- --------- --------- ------------ -----
<S> <C> <C> <C> <C> <C>
REVENUES(1) $ 8,975 $ 9,210 $ 18,185 $ 18,185
49.4% 50.6% 100.0%
GROSS PROFIT
(LOSS)(2) $ (107) $ 898 $ 791 $ 791
11.9% 100.0% N/A
NET LOSS(3) $ (557) $(4,878) $(5,435) $(1,842) $(7,277)
10.2% 89.8% 100.0%
</TABLE>
(1) Equipment revenues include international sales of $624.
(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 $898, while the absolute value of all segments
reporting a negative gross profit is $107. Accordingly, the percentages are
calculated based on a denominator of $898.
(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 $5,435. Accordingly, the percentages
are calculated based on a denominator of $5,435.
(4) Note that "Corporate" is not a segment. As a consequence, percentage
amounts are not calculated for "Corporate".
(5) The Services segment was discontinued effective October 21, 1999. See Note
11.
- 16 -
<PAGE>
INTELLICALL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SERVICES(5) EQUIPMENT SUBTOTAL CORPORATE(4) TOTAL
----------- --------- -------- ------------ -----
<S> <C> <C> <C> <C> <C>
REVENUES(1) $21,689 $ 12,338 $ 34,027 $34,027
63.7% 36.3% 100.0%
GROSS PROFIT(2) $ 1,347 $ 2,541 $ 3,888 $ 3,888
34.6% 65.4% 100.0%
NET PROFIT(LOSS)(3) $ 839 $(4,516) $(3,677) $5,554 $ 1,877
18.6% 100.0% N/A
</TABLE>
(1) Equipment revenues include international sales of $3,105.
(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 $3,888, while the absolute value of all segments
reporting a negative gross profit is zero. Accordingly, the percentages are
calculated based on a denominator of $3,888.
(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 $839, while the absolute value
of all segments reporting a loss is $4,516. Accordingly, the percentages
are calculated based on a denominator of $4,516.
(4) Note that "Corporate" is not a segment. As a consequence, percentage
amounts are not calculated for "Corporate".
(5) The Services segment was discontinued effective October 21, 1999. See Note
11.
- 17 -
<PAGE>
INTELLICALL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 11 - DISCONTINUED OPERATIONS
On September 22, 1999 the Company elected to discontinue its billing
services operations effective October 21, 1999. The billing services segment
of the Company's business was determined to be unprofitable after taking into
account the administrative and support costs for the segment. The Company's
billing services system is a combination of hardware and software that
performs, without human intervention, all 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.
During the quarter and nine months ended September 30, 1999 the Company
reported a net loss of $.2 million and $.6 million, respectively. During the
quarter and nine months ended September 30, 1998 the Company reported a net
income of $.3 million and $.8 million, respectively. As a result of this
action, the Company's revenues and operating expenses for the periods
presented herein reflect only the equipment operations with the net results
of the billing services operations reported on its statements of operations
under the caption "Income (loss) from discontinued operations". Net revenues
related to the Billing Services operations were $2.9 million and $8.5 million
for the quarters ended September 30, 1999 and 1998, respectively. Net
revenues related to the billing services operations were $9.0 million and
$21.7 million for the nine months ended September 30, 1999 and 1998,
respectively.
Assets of the billing services operations disposed of consisted of
receivables of $.2 million, net of $2.2 million of allowance for doubtful
accounts as of September 30, 1999 and $3.4 million, net of $3.0 million of
allowance for doubtful accounts as of December 31, 1998.
Liabilities of the billing services operations disposed of consisted of
payables of $.3 million as of September 30, 1999 and $.9 million as of
December 31, 1998.
The Company believes there is no tax impact resulting from the
discontinued operations as the Company has historically been in a net loss
carryforward, and a valuation allowance reserved against its deferred tax
assets.
- 18 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The accompanying financial statements, in the opinion of the
Company's management, contained all material, normal and recurring
adjustments necessary to present accurately the financial condition of the
Company and the results of its operations for the periods indicated. The
results of operations for the periods reported are not necessarily indicative
of the results to be experienced for the entire year.
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
- 19 -
<PAGE>
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.
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 September 30, 1999, estimated total costs and targeted
completion dates.
<TABLE>
<CAPTION>
Phase
------------------------------------------------------
Test Programming Final Test
---- ----------- ----------
<S> <C> <C> <C>
Estimated Cost to 9/30/99 $ 143,550 $ 158,400 $ 59,850
Percent Complete at 9/30/99 99% 99% 95%
Estimated Total Cost $ 145,000 $ 160,000 $ 63,000
Estimated Completion Date 11/99 11/99 11/99
</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.
- 20 -
<PAGE>
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. On September
22, 1999 the Company elected to discontinue its Billing Services operation
effective October 21, 1999 (See Recent Developments section of this
discussion). Accordingly, the ISG program to address Y2K readiness within the
CTD system has been discontinued, including system design, system coding and
system tests.
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 $.1 million 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.
- 21 -
<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 September 22, 1999 the Company elected to discontinue its billing
services operation effective October 21, 1999. The Company's billing services
system is a combination of hardware and software that performs, without human
intervention, all 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. (See Note 11 to the financial
statements.)
The billing services segment of the Company's business was
determined to be unprofitable after taking into account the administrative
and support costs for the segment.
On October 21, 1999 the Company sold to First Avenue Partners, LP
5,000 shares of ILD Series A Convertible Preferred stock. First Avenue
Partners is an unrelated third party, and the negotiations for the sale
transaction were at arm's length. The Company sold the shares for $250.00
each for an aggregate of $1.3 million and will record a gain of approximately
$1.1 million. This transaction lowered the Company's ownership percentage in
ILD to 31.0% as of October 21, 1999. Proceeds from the sale will be used for
general operating capital purposes.
On October 21, 1999 the Company received notice from Banca del
Gottardo of its intent to "put" to the Company the balance of the 8%
convertible subordinate notes due December 31, 2000 (See Note 3 to the
financial statements). The agreement, relating to such convertible debt
includes a put option, giving Banca del Gottardo the right to tender payment
for the outstanding balance of the notes on December 31, 1999. The current
outstanding balance of the notes is $2.6 million.
The Company is currently in negotiation with Banca del Gottardo to
refinance the aforementioned debt in order to provide the funding to satisfy
the tender. The Company and Banca del Gottardo have tentatively agreed to the
terms of the new financing.
Without the additional sale of Company assets or the issuance of
additional debt or equity, the Company currently does not have adequate cash
resources to repay the outstanding balance of the notes in the event an
agreement between the Company and Banca del Gottardo cannot be reached.
- 22 -
<PAGE>
The board of directors of the Company has authorized the management
of the Company to investigate and pursue various strategic business
alternatives to enhance the future of the Company, including acquisition,
merger, sale or other corporate transaction. While management has identified
potential strategic opportunities, no definitive agreement or understanding
relating to such opportunities has been reached with any party as of the date
of this filing.
- 23 -
<PAGE>
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1999 the Company
generated $.6 million of cash from operations including changes in operating
assets and liabilities.
Net changes in operating assets and liabilities during the nine
months ended September 30, 1999 provided a source of cash of $4.7 million.
The primary factors affecting these changes were a decrease in accounts
receivable of $2.7 million, an increase in accounts payable of $.4 million, a
decrease in related party receivables of $.4 million and a decrease in
inventory of $1.2 million.
Cash flows from investing activities include capital expenditures of
$.2 million and expenditures for software and product development of $.8
million.
Cash flows from financing activities include a $2.8 million
repayment on the line of credit from Finova, a $1.0 million repayment on the
note from T.J. Berthel Investments, L.P., and the issuance of $2.0 million in
Notes to Banca Del Gottardo.
Cash flows from discontinued operations include a net loss from
discontinued operations of $.6 million, depreciation and amortization of $.1
million, a decrease in receivables of $3.2 million and a decrease in payables
of $.6 million.
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. For the
quarter and nine months ended September 30, 1999, the Company incurred $.05
million and $.2 million of interest expense relating to this agreement.
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 through December 21, 2000.
- 24 -
<PAGE>
On October 21, 1999 the Company sold to First Avenue Partners, LP
("First Avenue") 5,000 shares of ILD Series A Convertible Preferred Stock.
First Avenue is an unrelated third party, and the negotiations for the sale
transactions were at arms length. The Company sold the shares for $250.00
each, for a total of $1.3 million. The Company intends to use the proceeds to
fund operations and may have to sell additional assets in the future if
operations do not generate sufficient profits and cash to finance its
activities. The Company believes the sale of such stock will give the Company
sufficient cash reserves to fund operations through at least January 2000,
assuming no principal payments are due to Banca del Gottardo prior to such
time.
On October 21, 1999 the Company received notice from Banca del
Gottardo of its intent to "put" to the Company the balance of the 8%
convertible subordinate notes due December 31, 2000 (See Note 3 to the
financial statements). The agreement, relating to such convertible debt
includes a put option, giving Banca del Gottardo the right to tender payment
for the outstanding balance of the notes on December 31, 1999. The current
outstanding balance of the notes is $2.6 million.
The Company is currently in negotiation with Banca del Gottardo to
restructure the aforementioned debt with the intent of deferring and/or
eliminating the put tender. While the Company believes that the debt will be
restructured, there can be no assurance that terms acceptable to both the
Company and Banca del Gottardo can be agreed upon.
Without the additional sale of Company assets or the issuance of
additional debt or equity, the Company currently does not have adequate cash
resources to repay the outstanding balance of the notes in the event an
agreement between the Company and Banca del Gottardo cannot be reached.
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 equipment 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
EQUIPMENT SALES. Equipment sales for the third quarter ended
September 30, 1999 were $2.8 million compared to $4.8 million for the same
period last year. For the nine month period ended September 30, 1999
equipment revenues were $9.2 million compared to $12.3 million for the same
period last year. The following table analyzes sales by market (in thousands):
- 25 -
<PAGE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Domestic $ 2,408 $ 3,373 $ 8,586 $ 9,233
International 422 1,382 624 3,105
------------ ------------ ----------- -----------
Total Equipment Sales $ 2,830 $ 4,755 $ 9,210 $ 12,338
============ ============ =========== ===========
</TABLE>
The decrease in domestic sales for the quarter ended September 30, 1999 and
nine months ended September 30, 1999 is due primarily to less than expected
shipments into the newly deregulated Canadian market, which was affected by a
labor strike of Bell Canada telephone workers. The decrease in international
sales for the quarter and nine months ended September 30, 1999 is primarily
due to less than anticipated switch sales. It is believed that the weak Asian
economy adversely impacted anticipated sales into the region.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $1.5 million for the quarter ended September 30,
1999 compared to $2.0 million for the same period last year. For the nine
months ended September 30, 1999 selling, general and administrative expenses
were $4.9 million compared to $6.0 million for the same period last year.
Selling, general and administrative expenses declined $.5 million for the
quarter ended September 30, 1999 and $1.1 million for the nine months ended
September 30, 1999 compared to the same periods last year primarily due to
cost cutting measures undertaken by the Company, including a reduction in
personnel in the corporate and administrative areas of the Company.
COST OF SALES. Cost of sales for equipment was $2.4 million for the
quarter ended September 30, 1999 as compared to $3.7 million for the same
period last year. For the nine months ended September 30, 1999 cost of sales
for equipment was $8.3 million as compared to $9.8 million for the same
period last year. The $1.3 million and $1.5 million decrease for the quarter
and nine months ended September 30, 1999 are primarily due to a decrease in
equipment sales and cost cutting measures undertaken by the Company.
GROSS PROFIT. Gross profit for equipment sales for the quarter ended
September 30, 1999 was $.4 million as compared to $1.0 million for the same
period last year. For the nine months ended September 30, 1999 gross profit
for equipment sales was $.9 million as compared to $2.5 million for the same
period last year. The $.6 million reduction in gross profit for the quarter
ended September 30, 1999 and $1.6 million reduction in gross profit for the
nine months ended September 30, 1999 are primarily a result of reduced
equipment sales coupled with a shift in product mix to sales of lower margin
products.
- 26 -
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Gross spending for research and
development decreased $.1 million for the quarter ended September 30, 1999
compared to last year and decreased $.2 million for the nine months ended
September 30, 1999. During the quarters ended September 30, 1999 and
September 30, 1998 the Company capitalized $.3 million of software
development costs.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts
decreased $.04 million and $.1 million for the quarter and nine months ended
September 30, 1999, respectively. The decrease is primarily due to lower
accounts receivables and increased efforts to collect aged accounts
receivables which were previously reserved.
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.
During the second quarter of 1998 the Company reported a gain on sale of
assets of $.5 million from the sale of a portion of the Company's ownership
interest in ILD to an unrelated third party (see Note 9).
LOSS OF EQUITY INVESTEE. During the quarter ended September 30,
1999, the Company recorded a $.2 million loss in its investment in ILD as
compared to a $.09 million loss for the same period last year. For the nine
months ended September 30, 1999 the Company recorded a $.8 million loss in
its investment in ILD as compared to $.4 million for the same period last
year. The $.1 million and $.4 million increase for the quarter and nine
months ended September 30, 1999 is primarily due to the increased operating
losses of ILD.
INTEREST EXPENSE. Interest expense for the quarter ended September
30, 1999 was $.3 million as compared to $.4 million for the same period last
year. For the nine months ended September 30, 1999, interest expense was $1.3
million as compared to $1.2 million for the same period last year.
- 27 -
<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.
- 28 -
<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: November 15, 1999
- 29 -
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0
0
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