SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission file number 1-10588
INTELLICALL(R), INC.
(Exact name of registrant as specified in its charter)
Delaware 75-1993841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2155 Chenault, Suite 410, Carrollton, Texas 75006-5023
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 416-0022
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value New York Stock Exchange
(Title of Class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K/A or
any amendment to this Form 10-K.
[ X ]
The aggregate market value of the voting stock (which consists solely
of shares of Common Stock) held by non-affiliates of the registrant as of March
17, 1999, computed by reference to the closing sales price of the registrant's
Common Stock on the New York Stock Exchange on such date, was approximately
$24,458,530.
Number of shares of the registrant's Common Stock outstanding as of
March 17, 1999: 12,074,385.
Documents Incorporated By Reference:
The information required by Part III of this Form 10-K/A Annual
Report is incorporated by reference from the registrant's definitive proxy
statement to be filed not later than 120 days after the end of the 1998
fiscal year.
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
March 29, 1999 INTELLICALL, INC.
/s/ John J. McDonald, Jr.
----------------------------
By: John J. McDonald, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated, on March 29, 1999.
Name Office
---- ------
/s/ John J. McDonald, Jr.
- -----------------------------
John J. McDonald, Jr. President and Chief Executive Officer
(Principal Executive Officer)
/s/ R. Phillip Boyd
- -----------------------------
R. Phillip Boyd Vice President of Finance, Chief
(Principal Financial Financial Officer and Secretary
and Accounting Officer)
/s/ William O. Hunt
- -----------------------------
William O. Hunt Chairman of the Board
/s/ B. Michael Adler
- -----------------------------
B. Michael Adler Director
/s/ Thomas J. Berthel
- -----------------------------
Thomas J. Berthel Director
/s/ Lewis E. Brazelton III
- -----------------------------
Lewis E. Brazelton III Director
/s/ Arthur Chavoya
- -----------------------------
Arthur Chavoya Director
/s/ Richard B. Curran
- -----------------------------
Richard B. Curran Director
<PAGE>
INTELLICALL, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants...........................................F-2
Financial Statements:
Balance Sheets ..........................................................F-3
Statements of Operations ................................................F-5
Statements of Stockholders' Equity ......................................F-6
Statements of Cash Flows ................................................F-7
Notes to Financial Statements............................................F-8
Financial Statement Schedules (Note A):
Valuation and Qualifying Accounts...................................F-38
Note A: All other schedules are omitted, since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements and notes thereto.
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of Intellicall, Inc.
In our opinion, the financial statements listed in the accompanying index on
page F-1 present fairly, in all material respects, the financial position of
Intellicall, Inc. (the "Company") at December 31, 1998 and 1997, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Dallas, Texas
February 23, 1999
F-2
<PAGE>
INTELLICALL, INC.
<TABLE>
<CAPTION>
BALANCE SHEETS
ASSETS
(in thousands)
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
Current assets
Restricted cash .................................................. $ -- $ 2,488
Cash and cash equivalents ........................................ 16 66
Receivables............................................................ 11,267 34,881
Less allowance for doubtful accounts......................... 3,417 6,211
--------- ---------
7,850 28,670
Inventories, net.................................................. 5,177 5,002
Receivables from related party, net (See Note 1).................. 658 --
Other current assets.............................................. 197 1,908
--------- ---------
Total current assets......................................... 13,898 38,134
Fixed assets, net...................................................... 1,425 8,387
Capitalized software costs, net........................................ 2,481 2,968
Notes receivable, net.................................................. 1,074 1,125
Intangible assets, net................................................. 749 31,802
Investment in subsidiary............................................... 1,491 --
Other assets, net...................................................... 1,286 2,373
--------- ---------
$ 22,404 $ 84,789
======== ========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
INTELLICALL, INC.
<TABLE>
<CAPTION>
BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
(in thousands, except share information)
December 31,
1998 1997
---- ----
<S> <C> <C>
Current liabilities
Accounts payable.......................................... $2,085 $ 11,320
Accrued transmission, customer commissions and billing
charges............................................... 880 12,222
Deferred revenue.......................................... 84 1,262
Accrued liabilities....................................... 968 4,456
Capital lease obligation, current......................... -- 157
Current portion of long-term debt ........................ 3,811 4,928
--------- -------
Total current liabilities................................. 7,828 34,345
Long-term debt ................................................ 7,312 21,217
Capital lease obligation, long-term .......................... -- 843
Other liabilities.............................................. 250 948
Minority interest.............................................. -- 6,769
Deferred gain on sale of assets................................ 968 --
=== ========
Commitments and contingent liabilities (See Note 9)............ -- --
=========== ========
Total liabilities 16,358 64,122
======== ========
Redeemable preferred stock Series B-2, $100 par value;
zero and 111,960 shares issued and outstanding,
respectively.............................................. -- 11,196
Redeemable preferred stock Series B-3, $300 par value; zero
and 6,667 shares issued and outstanding,
respectively.............................................. -- 2,000
Stockholders' equity
Preferred stock, $.01 par value; 1,000,000 shares
authorized; 510 and 4,000 shares issued
and outstanding, respectively......................... 1 1
Common stock, $.01 par value; 20,000,000 shares
authorized; 11,738,001 and 9,471,944 shares issued,
respectively......................................... 117 95
Additional paid-in capital................................ 57,895 57,486
Less common stock in treasury, at cost;
24,908 shares........................................ (258) (258)
Accumulated deficit....................................... (51,709) (49,853)
-------- -------
Total stockholders' equity........................... 6,046 7,471
--------- -------
$ 22,404 $ 84,789
======== ========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
INTELLICALL, INC.
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
For the Years Ended December 31,
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues and sales:
Service revenues............................................. $ 25,769 $ 97,673 $ 76,905
Equipment sales.............................................. 13,859 19,313 15,884
========= ========== =========
39,628 116,986 92,789
--------- --------- ---------
Cost of revenues and sales:
Service revenues............................................. 24,948 87,830 68,078
Equipment sales.............................................. 11,600 21,929 17,690
========= ========== =========
36,548 109,759 85,768
========= ========= =========
Gross profit..... 3,080 7,227 7,021
Selling, general and administrative expenses...................... (8,099) (13,947) (10,598)
Provision for doubtful accounts................................... (876) (1,006) (364)
Research and development expenses................................. (1,587) (741) (608)
--------- ----------- ----------
Operating loss... (7,482) (8,467) (4,549)
Gain on sale of assets............................................ 7,389 -- 572
Other income. 538 695 710
Interest expense.................................................. (1,539) (2,660) (2,918)
Equity in the loss of subsidiary.................................. (762) -- --
Minority interest................................................. -- (196) (113)
--------- ----------- -----------
Loss before income taxes.......................................... (1,856) (10,628) (6,298)
Income tax refund................................................. -- -- 1,303
Income tax expense................................................ -- (277) --
------------ ------------
Net loss.......................................................... $ (1,856) $ (10,905) $ (4,995)
Redeemable preferred stock dividend............................... -- (186) --
========= =========== ==========
Net loss available to common shareholders......................... $ (1,856) $ (11,091) $ (4,995)
========= ========= ==========
Basic and diluted net loss per share.............................. $ (0.19) $ (1.20) $ (0.62)
========= ========== ==========
Weighted average number of basic and diluted
shares outstanding........................................... 9,927 9,268 8,024
========= ========== ==========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
INTELLICALL, INC.
<TABLE>
<CAPTION>
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Additional
Common Stock Preferred Stock Paid-in Treasury Stock Accumulated
------------ --------------- --------------
Shares Amount Shares Amount Capital Shares Cost Deficit Total
------ ------ ------ ------ ------- ------ ---- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 7,703 $ 77 -- $ -- $47,191 (25) $(258) $(33,767) $13,243
Exercise of stock options 31 -- -- -- 148 -- -- -- 148
Issuance of warrants -- -- -- -- 760 -- -- -- 760
Employee stock purchase 16 -- -- -- 48 -- -- -- 48
plan
Issuance of stock 100 2 -- -- 123 -- -- -- 125
Conversion of sub-ordinated 796 8 -- -- 3,332 -- -- -- 3,340
notes
Net loss -- -- -- -- -- -- -- (4,995) (4,995)
-------- -------- ------- --------- ------- ------- ----- ------ -------
Balances at December 31, 1996 8,646 87 -- -- 51,602 (25) (258) (38,762) 12,669
Exercise of stock options 65 1 -- -- 268 -- -- -- 269
Employee stock purchase 17 -- -- -- 74 -- -- -- 74
plan
Issuance of stock 430 4 -- -- 481 -- -- -- 485
Conversion of sub- ordinated 314 3 -- -- 1,237 -- -- -- 1,240
notes
Redeemable preferred -- -- -- -- -- -- -- (186) (186)
dividends declared
Issuance of preferred stock -- -- 4 1 3,824 -- -- -- 3,825
Net loss -- -- -- -- -- -- -- (10,905) (10,905)
-------- ------- ------ ------- ------- -------- ------ -------- -------
Balances at December 31, 1997 9,472 95 4 1 57,486 (25) (258) (49,853) 7,471
Exercise of stock options 47 -- -- -- 183 -- -- -- 183
Employee stock purchase 8 -- -- -- 30 -- -- -- 30
plan
Conversion of sub-ordinated 50 1 -- -- 200 -- -- -- 201
notes
Conversion of preferred 2,149 21 (3) -- (12) -- -- -- 9
stock
Issuance of stock 12 -- -- -- 8 -- -- -- 8
Net loss -- -- -- -- -- -- -- (1,856) (1,856)
-------- -------- ------ -------- ------- -------- ----- -------- -------
Balances at December 31, 1998 11,738 $ 117 1 $ 1 $57,895 (25) $(258) $(51,709) $ 6,046
====== ======== ======= ======== ======= ======== ===== ======== =======
</TABLE>
See notes to financial statements.
F-6
<PAGE>
INTELLICALL, INC.
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS (in thousands)
For the Years Ended December 31,
1998 1997 1996
==== ==== ====
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................... $ (1,856) $ (10,905) $ (4,995)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Gain on sale of investments..................... (7,389) -- --
Depreciation and amortization................... 2,002 5,973 3,810
Provision for doubtful accounts................. 876 1,393 364
Provision for inventory losses.................. 333 4,382 2,772
Equity in loss of an unconsolidated subsidiary.. 762 -- --
Minority interest in income of ILD.............. -- 196 113
Changes in operating assets and liabilities, net of prepaid sale:
Restricted cash............................. -- (2,473) 477
Cash of deconsolidated subsidiary........... (66) -- --
Receivables................................. 4,356 (7,830) 183
Inventories................................. (757) (1,451) 1,265
Receivables from related party, net......... 673 -- --
Other current assets........................ 233 (308) (1,242)
Notes receivable............................ 160 446 1,749
Accounts payable ........................... (4,187) 4,611 2,172
Transmission, customer commissions and .....
billing charges............................. (1,764) 7,261 1,223
Accrued liabilities......................... (153) 1,600 (557)
Deferred revenues........................... 938 (361) (1,070)
Other....................................... (57) (2,051) (1,344)
----------- -------------- -------------
Net cash provided by operating activities... (5,896) 483 4,920
=========== ============== =============
(CONTINUED ON NEXT PAGE)
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
Cash flows from investing activities:
Capital expenditures............................... (478) (2,082) (790)
Capitalized software............................... (1,031) (1,322) (2,175)
Cash received on sale of assets.................... 8,463 -- --
Capital lease obligation........................... -- 1,000 --
Acquisition of WorldCom assets..................... -- (10,021) --
Acquisition of Interlink assets.................... -- (10,521) --
------------- ------------- -------------
Net cash used in investing activities.. 6,954 (22,946) (2,965)
----------- ------------- -------------
Cash flows from financing activities:
Net proceeds from (repayments on) line of credit... (1,303) 9,517 (618)
Net borrowings (repayments) on notes payable....... (28) -- --
Proceeds from issuance of stock................... 223 4,653 321
Proceeds from issuance of stock in ILD............. -- 6,088 --
------------- ------------- -------------
Net cash provided by (used in) financing
activities............................ (1,108) 20,258 (297)
----------- ------------- -------------
Net (decrease) increase in cash and cash equivalents.... (50) (2,205) 1,658
Cash and cash equivalents at beginning of period........ 66 2,271 613
------------- ------------- -------------
Cash and cash equivalents at end of period.............. $ 16 $ 66 $ 2,271
============= =============== =============
Supplemental cash flow information:
Interest paid......................................... $ 1,141 $ 2,056 $ 2,387
=========== ============== =============
Supplemental non cash flow information:
Issuance of warrant................................... $ -- $ -- $ 760
============= ============== =============
Conversion of debt to equity.......................... $ 210 $ 1,320 $ 3,340
============= ============== =============
Stock issued to purchase WorldCom assets.............. $ -- $ 11,196 $ --
============= ============== =============
Stock issued to purchase Interlink assets............. $ $ 2,000 $ --
============= ============== =============
Redeemable preferred stock dividend declared ......... $ -- $ 186 $ --
============= ============== =============
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business: Intellicall, Inc. (the "Company") provides automated
operator services for the independent pay telephone industry ("service
revenues"). The Company designs, engineers, manufactures and sells pay
telephones and retrofit kits, parts and intelligent network platforms
in the United States and internationally ("equipment sales").
Principles of Consolidation: In 1997 and 1996, the consolidated
financial statements include the accounts of the Company and its then majority
owned subsidiary (the "Subsidiary") formed on May 10, 1996. All significant
intercompany accounts and transactions were eliminated in consolidation.
Creation of ILD Telecommunications, Inc.: On May 10, 1996, the Company
entered into an agreement with certain investor groups to create ILD
Telecommunications, Inc. ("ILD"), a new long-distance re-sale and operator
services company. The Company transferred ownership in its wholly owned
subsidiary, Intellicall Operator Services, Inc. ("IOS"), to ILD in exchange for
cash in the amount of $2.0 million, a $1.0 million subordinated convertible
note, and preferred and common stock representing approximately 72.5% of the
voting stock of ILD. The other investor groups collectively purchased $2.0
million, or 27.5% of the voting stock of ILD, and $1.0 million of ILD's
subordinated convertible notes. ILD also issued a secured loan in the amount of
$2.0 million, at inception. The Company recorded a $572,000 gain from the
transaction.
In September 1997, ILD acquired the Operator Services Division of
WorldCom, Inc. ("WorldCom") (see Note 8). The assets acquired by ILD include the
operator services and long distance customer contracts, operator service
centers, switching facilities, billing and collection operations and inmate
operator services businesses. This acquisition by ILD lowered the Company's
ownership percentage to 59.26%.
In December 1997, ILD acquired all of the outstanding common stock of
Interlink Telecommunications, Inc. ("Interlink") (see Note 8), a switched
reseller of long distance services and provider of enhanced services including
operator services, prepaid debit cards and prepaid local service. This
acquisition by ILD lowered the Company's ownership percentage to 53.7%.
In March 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 arms 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 accounting
retroactively to January 1, 1998.
On April 3, 1998 the Company sold 1,539 shares of its Series A
preferred stock in ILD Telecommunications, Inc. to SMCO Investments, LLC. This
transaction lowered the Company's ownership percentage to 42.0% as of April 3,
1998.
F-8
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires the Company to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition: Revenues from sales of telephones and related
products are recognized upon shipment to customers. Revenues relating to the
licensing of automated operator systems are recognized upon shipment of licensed
technology to licensees.
Call revenues from customer-licensed microautomated operator systems
are recognized based on the amounts charged to billed parties for calls
processed and billed by the Company. In 1997 and prior, ILD's call revenues were
recognized at the time the calls were placed. Revenues associated with
customer-owned call processing systems and customers utilizing licensed
microautomated operator systems who have agreed to submit call traffic to a
third party billing service for processing, instead of the Company, consist of
the fees charged to customers for use of the technology.
For 1997 and 1996, prepaid debit card revenue is deferred and
recognized as calling services are used. The prepaid calling card division was
sold in January 1998, therefore no debit card revenue was recorded in 1998.
Cash and Cash Equivalents: Cash and cash equivalents include
short-term liquid investments purchased with remaining maturities of three
months or less.
Restricted Cash: Restricted cash at December 31, 1997 represents
amounts received by ILD from local exchange carriers (LECs), arising from its
capacity as a billing agent, that were not yet remitted to its third party
billing and collection customers. As cash was received from the LEC, the amounts
would become a contractual obligation to ILD's billing and collection customers.
Related Party: Related party represents a $1 million note receivable
due from ILD, which is partially offset by receivables and payables between the
Company and ILD, which were incurred during the normal course of business.
Software Development Costs: The Company capitalizes costs related to
the development of certain software products. In accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed", capitalization of costs
begins when technological feasibility has been established and ends when the
product is available for general release to customers. Amortization is computed
on an individual product basis based on the product's estimated economic life
using the straight line method, not to exceed five years.
F-9
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The amounts of software development costs capitalized for the years
ended December 31, 1998, 1997 and 1996 were $1.03 million, $1.32 million and
$2.18 million, respectively. The Company recorded $575,000, $1.70 million and
$1.62 million of software amortization expense for the years ended December 31,
1998, 1997 and 1996, respectively. The Company also recognized an impairment in
value of certain capitalized software development costs of $1.6 million during
1997, which is included in amortization in the statement of operations for the
year ended 1997.
Receivables: Receivables (current and long-term) consist of amounts
owed by various telephone companies for processed call traffic and amounts owed
by customers relating to uncollected call traffic and equipment sales, leases
and license fees. Excluding the call traffic receivable amounts for ILD,
approximately 50% and 68% of receivables relate to call traffic due from various
telephone companies and customers as of December 31, 1998 and 1997,
respectively. The Company advances cash to a majority of its customers prior to
the time such cash is collected from end users, and generally bears the risk of
collection and bad debt. Such amounts previously advanced but uncollected
represent significant portions of the call traffic receivables. Equipment
receivables are subject to right of offset against payments due to customers
related to call revenues. The Company believes it has provided adequate reserves
for potential uncollectible accounts. Reserves for uncollectible accounts
include $269,000 for related party receivables.
Credit Concentrations: Certain financial instruments, consisting
primarily of accounts receivable, potentially subject the Company to
concentrations of credit risk. The Company's customers range from individuals
with small pay telephone routes to large corporations, and reflect a large
customer base with much geographic diversity. The Company believes it has
provided adequate reserves for potential uncollectible accounts.
Inventories: Inventories are stated at the lower of cost or market
with cost determined on a first-in, first-out method. Costs include acquisition
costs of purchased components, freight costs, labor and overhead.
The components of inventories, net of the related reserves, are (in thousands):
December 31,
------------
1998 1997
---- ----
Raw materials......................................... $ 3,629 $ 2,491
Work in process....................................... 428 378
Finished goods........................................ 1,120 2,133
------- -------
$ 5,177 $ 5,002
======= =======
F-10
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Reserves in 1998, 1997 and 1996 were $2.0 million, $2.7 million and
$3.0 million, respectively. 1998 results of operations include a charge of
$132,000, representing the excess of cost over market for a product manufactured
for a related party, which was not sold. Inventories in 1997 were written down
to estimated net realizable value, and results of operations for 1997 include a
charge of $4.4 million which represents the excess of cost over market. In 1996,
the Company established $2.7 million of reserves for the excess of cost over the
estimated realizable value of slow moving and obsolete inventories.
Debt Issuance Costs: The Company defers costs incurred directly in
connection with the issuance of debt obligations and charges such costs to
interest expense on a straight-line basis over the terms of the respective debt
agreements.
Fixed Assets: Fixed assets are recorded at cost. Depreciation expense
is computed by the straight-line method over the estimated useful lives of the
related assets, where the useful lives range from three to five years.
Maintenance and repairs are expensed as incurred while replacements and
betterments are capitalized.
The components of fixed assets are (in thousands):
December 31,
------------
1998 1997
---- ----
Office equipment.... $ 3,351 $ 8,148
Switching and other network equipment................. -- 1,720
Tooling and other equipment........................... 5,010 5,342
------- -------
8,361 15,210
Less accumulated depreciation......................... (6,936) (6,823)
------- --------
1,425 $ 8,387
======= ========
Depreciation expense for the years ended December 31, 1998, 1997 and 1996 was
$704,000, $1,279,000 and $901,000, respectively.
Intangible Assets: Intangible assets consist primarily of the cost in
excess of net assets of acquired businesses. These assets are amortized using
the straight-line method over 20 to 25 years. Additionally in 1997, intangible
assets included $2.9 million for a covenant not to compete and a consulting
agreement from Interlink amortized over five years and certain contracts
acquired from the WorldCom transaction valued at $2.5 million amortized over six
years (see Note 8). In March 1995, Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("FAS 121") was issued. Effective January 1, 1996, the
Company adopted FAS 121 which requires that long-lived assets (primarily
goodwill) held and used by an entity, or to be disposed of, be reviewed for
impairment whenever events or changes in circumstances indicate that the net
book value of the asset may not be recoverable. An impairment loss will be
recognized if the sum of the expected future cash flows (undiscounted and before
interest) from the use of the asset is less than the net book value of the
asset. The amount of the
F-11
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
impairment loss will generally be measured as the difference between the net
book value of the asset and the estimated fair value of the related asset. Based
on its most recent analysis, the Company believes that no impairment of long
lived assets existed at December 31, 1998 and 1997.
Accrued Transmission, Customer Commissions and Billing Charges: The
customer commissions consist of monies owed to customers (payphone owners) for
calls processed and billed. Payments are made within 15-90 days based on the
customer agreement. Billing charges consist of monies owed to billing agents for
fees charged to process call traffic. Additionally, for 1997, Accrued
Transmission consists of transmission costs incurred to originate and terminate
a call over ILD's owned or leased transmission facilities. This category
generally includes costs of local access circuits and transmission facilities,
as well as switched costs for calls carried on another provider's network.
Capital Lease Obligation: In 1997, assets recorded under capital
leases, primarily consisting of switching equipment, are recorded at the lower
of the present value of future minimum lease payments or the fair value of the
asset. Total assets recorded under capital leases in 1998 and 1997 were $0 and
$1,000,000, respectively. No amortization of the capital lease asset was
recorded in 1997 due to the asset being placed in service at the end of
December.
Income Taxes: Income taxes are accounted for using the asset and
liability method pursuant to Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("FAS 109"). Deferred taxes are recognized
for the tax consequences of temporary basis differences by applying enacted
statutory tax rates applicable to future years to differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred taxes for a change in tax rates is
recognized in income in the period that includes the enactment date. In
addition, FAS 109 requires the recognition of future tax benefits to the extent
that realization of such benefits is more likely than not. A valuation allowance
is provided for a portion or all of the deferred tax assets when there is
sufficient uncertainty regarding the Company's ability to recognize the benefits
of the assets in future years.
Net Loss per Share: The Company has adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS 128
simplifies the standards for computing earnings per share ("EPS") previously
found in Accounting Principles Board No. 15, "Earnings per Share" ("APB 15"),
and makes them comparable to international EPS standards by replacing the
presentation of primary EPS with a presentation of basic EPS. The provisions and
disclosure requirements for FAS 128 were required to be adopted for interim and
annual periods ending after December 15, 1997, with restatement of EPS for prior
periods required. Accordingly, EPS data for all periods presented has been
restated to reflect the computation of EPS in accordance with provisions of FAS
128.
F-12
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Disclosures about Reporting Comprehensive Income: In June 1997,
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("FAS 130") was issued. FAS 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general-purpose financial statements. It requires
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. FAS 130 is
effective for fiscal years beginning after December 15, 1997. The Company has
adopted this Statement for the year ending December 31, 1998. There were no
items of comprehensive income for the years ended December 31, 1998, 1997 and
1996.
Disclosures about Segments of an Enterprise and Related Information:
In June 1997, Statement of Financial Accounting Standards No. 131, "Disclosure
About Segments of an Enterprise and Related Information" ("FAS 131") was issued.
FAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. FAS 131 is
effective for financial statements for periods beginning after December 15,
1997. The Company has adopted FAS 131 for the year ended December 31, 1998.
(See Note 7.)
Accounting for Derivative Instruments: In June 1998, Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"), which is effective for fiscal
years beginning after June 15, 1999. Earlier application for certain
provisions of this standard is permitted. FAS 133 establishes accounting and
reporting standards for derivative instruments. The Statement requires that an
entity recognize all derivatives as either assets or liabilities in the
financial statements and measure those instruments at fair value, and it defines
the accounting for changes in the fair value of the derivatives depending on the
intended use of the derivative. FAS 133 is not expected to have a material
impact on the Company's results of operations, financial position or cash flows.
Accounting for Computer Software Developed or Obtained for Internal
Use: In March 1998, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1").
SOP 98-1 provides guidance on accounting for the costs of computer software
developed or obtained for internal use. This pronouncement identifies the
characteristics of internal use software and provides guidance on new cost
recognition principles. SOP 98-1 is effective for fiscal years beginning
after December 15, 1998. SOP 98-1 is not expected to have a material
impact on the Company's results of operations, financial position or
cash flows.
Disclosures about Fair Value of Financial Instruments: The following
methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that value:
Restricted Cash and Cash equivalents. The carrying amount
approximates fair value because of the
F-13
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
short maturity of those instruments.
Long-term debt. Based on the borrowing rates and terms of secured and
subordinated loans which the Company believes are currently available, the fair
value of long-term debt is $7.3 million ($21.2 million in 1997).
Short-term debt. Based on the borrowing rates and terms of secured and
subordinated loans which the Company believes are currently available, the fair
value of short-term debt is $3.8 million ($4.9 million in 1997).
Major Customers: The Company had one single customer who accounted for
14.6%, or $5.8 million of the Company's revenues in 1998. No single customer
accounted for more than 10% of the Company's revenues during 1997. One single
customer accounted for 10.5%, or $9.7 million, of the Company's revenues during
1996.
F-14
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - LONG-TERM DEBT AND LINE OF CREDIT
The Company's debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1998 1997
----------- -----------
<S> <C> <C>
Intellicall, Inc.
8% Convertible subordinated notes, due 2000 $ 2,630 $ 2,840
8% Convertible subordinated notes, due 2001 5,000 5,000
Convertible subordinated note, due 1999 1,000 1,000
Asset-based note collateralized by certain assets, due 1999 2,811 4,114
Installment note, due 1998 -- 28
--------- ---------
11,441 12,982
Less unamortized debt discount (318) (450)
--------- ---------
11,123 12,532
--------- ---------
ILD Telecommunications, Inc.
Senior secured debt, due 2001 -- 2,000
Revolving credit facility, due 2001 -- 1,957
Term loan facility, due 2001 -- 5,000
Promissory note payable, due 1998 -- 2,700
Promissory note payable, due 1999 -- 1,000
Convertible subordinated notes, due 2001 -- 1,000
--------- ---------
-- 13,657
Less unamortized debt discount -- (44)
--------- ---------
-- 13,613
--------- ---------
Total debt 11,123 26,145
Less: Current portion of long-term debt (3,811) (4,928)
--------- ---------
Total long-term debt $ 7,312 $ 21,217
========= =========
</TABLE>
On February 15, 1994 the Company issued a $1.0 million, 10.0%,
convertible, subordinated note to T.J. Berthel Investments, L.P., whose
ownership also controls 5.5% of the Company's outstanding common stock. Interest
is payable quarterly and commenced March 31, 1994. The entire principal amount
matures on March 31, 1999. The note may be converted by the holder into 160,000
shares of the Company's Common Stock at any time.
On December 29, 1995 the Company completed the sale of $7.5 million of
8.0% convertible subordinated notes, due December 31, 2000, to Banca Del
Gottardo in Lugano, Switzerland with the proceeds used to repay the previous
lender and for working capital purposes. The notes were issued with warrants to
purchase 300,000 shares of the Company's Common Stock 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
F-15
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Stock at a price of $4.20 per share. As of December 31, 1998, $4.87 million of
the Banca Del Gottardo Notes were converted to 1,159,517 shares of the Company's
Common Stock. Interest is payable semi-annually and commenced June 30, 1996.
On May 10, 1996 a majority-owned subsidiary of the Company during 1997,
ILD Telecommunications, Inc. ("ILD") completed the sale of $1.0 million of 10.0%
convertible subordinated notes, due May 10, 2001, to Triad-ILD Partners, L.P.
and Morris Telecommunications, LLC in the amounts of $666,666.67 and
$333,333.33, respectively. The notes can be converted at the rate of one (1)
share of common stock of ILD for each $90.00 of principal then due the holder.
Interest is paid quarterly.
On May 10, 1996 ILD issued Secured Promissory Notes in the aggregate
principal amount of $2.0 million with warrants to purchase an aggregate of 7,239
shares of ILD common stock at a price of $0.01 per share. Sirrom Capital
Corporation purchased a note in the original amount of $1.5 million with a
warrant to purchase 5,429 shares of common stock and Reedy River Ventures
Limited Partnership purchased a note in the original amount of $500,000 with a
warrant to purchase 1,810 shares of common stock at a price of $0.01 per share.
The notes are payable on May 10, 2001 and bear interest at 13.5% annually.
Interest is paid quarterly.
On November 22, 1996 the Company completed the sale of $5.0 million of
8.0% convertible subordinated notes, due November 22, 2001, to Banca Del
Gottardo in Lugano, Switzerland with the proceeds used to repay a portion of the
previous lender's debt and for working capital purposes. The notes were issued
with warrants to purchase 200,000 shares of the Company's Common Stock at $5.00
per share. 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
F-16
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
of the amount of the Total Facility payable on the first anniversary of the
Agreement and one each subsequent anniversary thereof. Interest is paid monthly.
The initial term of the Loan Agreement is three years at which time,
unless extended, all amounts then outstanding must be repaid. The Loan Agreement
contains prepayment penalties in the event it is terminated prior to expiration
of its initial term. The Loan is secured by first and prior liens and security
interests encumbering substantially all of the assets of the Company, including
inventory, equipment, accounts receivable, general intangibles, trademarks and
tradenames. The Loan Agreement contains various restrictions (including a
prohibition against the payment of dividends, limitations on capital
expenditures, and restrictions on investments) and financial ratio maintenance
requirements (including minimum working capital and net worth requirements). In
January 1999 the Company retired all of its obligations to Finova (See Note 10).
On August 29, 1997 ILD entered into a Loan and Security Agreement with
Nationsbank, N.A. ("Nations") pursuant to which Nations agreed to loan ILD up to
$20,000,000 (the "Revolving Credit Loan") based on an available borrowing base
comprised primarily of ILD's receivables, inventory, contract rights, general
intangibles, equipment, and deposit accounts. Borrowing under the revolving
credit loan bears interest at the current rate which is calculated (a) in the
case of Prime Rate Advances and LIBOR Advances made prior to December 30, 1998,
as the sum of the Prime Rate plus .50% per annum and LIBOR plus 2.75% per annum,
respectively, (b) in the case of Prime Rate Advances and LIBOR Advances made on
or after December 31, 1998, as the sum of the Prime Rate plus an amount
dependent on the calculation of Senior Funded Debt/EBITDA (as defined) and is
payable monthly. ILD borrowed $1,221,000 on the Revolving Credit Loan to pay for
assets acquired from WorldCom (see Note 8). The Revolving Credit Loan has an
unused line fee of one-quarter of one percent (0.25%) per annum of the
difference between $20,000,000 and the average daily outstanding balances of the
revolving credit loans during the period for which the unused line fee is due.
ILD further paid a closing fee of $300,000 to Nations and an annual
administrative fee of $25,000. The Revolving Credit Loan's initial term ends
February 13, 2001.
On August 29, 1997 Nations also agreed to loan ILD $5.0 million in a
term loan due February 13, 2001 with an interest rate of 11.5% per annum or
prime plus 2.5% per annum payable quarterly beginning March 31, 1998 (the "Term
Loan"). The Term Loan requires a mandatory reduction in the amount of $500,000
payable on or before March 31, 1998. The principal balance is due and payable in
(i) eight (8) consecutive quarterly installments in an amount equal to $300,000
each, commencing on the last day of the first (1st) fiscal quarter of 1998 and
continuing on the last day of each and every fiscal quarter thereafter through
and including the last fiscal quarter in 1999, (ii) four (4) consecutive
quarterly installments in an amount equal to $420,000 each, commencing on the
last day of the first (1st) fiscal quarter of 2000 through and including the
last fiscal quarter of 2000, and (iii) one (1) final installment in an amount
equal to $420,000 on the earlier to occur of (A) the Termination Date or (B) the
last day of the first (1st) fiscal quarter of 2001. Any portion of the Term Loan
repaid may not be reborrowed.
F-17
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Nations loan agreement contains various restrictions (including a
prohibition against the payment of dividends, limitations on capital
expenditures, and restrictions on investments) and financial ratio maintenance
requirements (including fixed charge coverage and net worth requirements).
On December 15, 1997 ILD entered into two promissory notes in
consideration for partial payment in the acquisition of the Interlink common
stock. The first promissory note in the amount of $2,700,000 is due $1,800,000
on December 31, 1997 and $900,000 on March 31, 1998 bearing no interest and the
second promissory note in the amount of $1,000,000 is due $250,000 on a
quarterly basis commencing September 30, 1998 with interest at 9% per annum also
paid quarterly.
Aggregate maturities of long-term debt in the next three years are
$3,811,000, $2,630,000 and $5,000,000.
NOTE 3 - STOCKHOLDERS' EQUITY
Accounting for Stock-based Compensation: In October 1995, Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation" ("FAS 123"), was issued. The statement requires the fair value of
stock options and other stock-based compensation issued to employees to either
be included as compensation expense in the income statements of companies or the
proforma effect on net income and earnings per share of such compensation
expense to be disclosed in the footnotes to the Company's financial statements
beginning in 1996. The Company has elected to adopt FAS 123 on a disclosure
basis only. Had compensation cost for the Company's stock option plans been
determined based on the fair market value at the grant dates for awards under
those plans consistent with the method provided by FAS 123, the Company's net
loss and net loss per share would have been reflected by the following proforma
amounts for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Net loss
available to
common As reported $ 1,856,000 $11,091,000 $4,995,000
shareholders Proforma $ 2,509,000 $12,179,000 $5,877,000
Basic and
diluted net As reported $ 0.19 $ 1.20 $ 0.62
loss per share Proforma $ 0.26 $ 1.31 $ 0.74
</TABLE>
The fair value of each grant is estimated on the date of grant using the
Black-Scholes Option pricing model
F-18
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
with the following weighted-average assumptions used for grants during the years
ended December 31, 1998, 1997 and 1996:
Year Ended December 31,
1998 1997 1996
---- ---- ----
Dividend yield -- -- --
Expected volatility 46.85% 66.95% 65.49%
Risk free interest rate 5.59% 5.96% 6.55%
Option term 10 years 9 years 9 years
F-19
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The weighted average fair value for all options granted in 1998, 1997 and 1996
was $2.86, $3.53 and $4.06 respectively.
Stock Option Plans: The Company maintains a Nonqualified Stock
Option ("NSO") Plan, an Incentive Stock Option ("ISO") Plan (as amended) and a
Directors' Stock Option ("DSO") Plan (adopted in 1991). The number of shares
which may be granted under the NSO, ISO Plans, and DSO Plans may not exceed
600,000, 1,995,000, and 350,000, respectively. ISO's and NSO's are exercisable
at such times and in such installments as the Organization and Compensation
Committee of the Board of Directors (the "Committee") shall determine at the
time of grant. In the case of ISO's and DSO's, the option price of the shares
cannot be less than the fair market value of the underlying common stock at the
date of the grant. In the case of NSO's, the option price is determined by the
Committee and cannot be less than 85% of the fair market value of the underlying
common stock. Options expire at such time as the Committee shall determine at
the time of grant, but in the case of ISO's and DSO's no later than ten years
from the grant date. Options vest as follows: 50% on December 31 of the year of
grant and 25% on December 31 of the following two years. All options granted
under all plans in 1998, 1997 and 1996 were issued at fair market value.
NSO PLAN
Stock option activity under the NSO Plan was:
<TABLE>
<CAPTION>
Weighted Average
Options Option Price
------- ------------
<S> <C> <C>
Outstanding at December 31, 1995............... 600,000 $4.61
Activity....................................... -- --
-------
Outstanding at December 31, 1996............... 600,000 $4.61
Activity....................................... -- --
-------
Outstanding at December 31, 1997............... 600,000 $4.61
Activity....................................... -- --
-------
Outstanding at December 31, 1998............... 600,000 $4.61
=======
</TABLE>
At December 31, 1998, 1997 and 1996, there were no shares available to be
granted under the NSO plan.
F-20
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
ISO PLAN
Stock option activity under the ISO Plan was:
<TABLE>
<CAPTION>
Weighted Average
Options Option Price
------- ------------
<S> <C> <C>
Outstanding at December 31, 1995............... 1,173,320 $5.63
Granted........................................ 142,000 $4.57
Exercised...................................... (32,200) $4.61
Canceled...................................... (141,505) $7.85
---------
Outstanding at December 31, 1996............... 1,141,615 $5.24
Granted........................................ 239,880 $4.62
Exercised...................................... (63,925) $4.21
Canceled....................................... (120,065) $5.28
--------
Outstanding at December 31, 1997............... 1,197,505 $5.17
Granted........................................ 207,500 $4.27
Exercised...................................... (46,715) $3.96
Canceled....................................... (129,085) $5.49
---------
Outstanding at December 31, 1998............... 1,229,205 $5.03
=========
</TABLE>
At December 31, 1998, 1997 and 1996, there were 392,455, 870 and 120,685
shares, respectively, available for grant under the ISO Plan.
DSO PLAN
Stock option activity under the DSO Plan was:
<TABLE>
<CAPTION>
Weighted Average
Options Option Price
<S> <C> <C>
Outstanding at December 31, 1995............... 140,000 $6.65
Granted........................................ 60,000 $3.50
---------
Outstanding at December 31, 1996.............. 200,000 $5.70
Canceled...................................... 30,000) $6.04
---------
Outstanding at December 31, 1997.............. 170,000 $5.64
Granted....................................... 30,000 $4.56
---------
Outstanding at December 31, 1998.............. 200,000 $5.48
=========
</TABLE>
F-21
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
There were 100,000, 130,000 and 100,000 shares available for grant at December
31, 1998, 1997 and 1996, under the DSO Plan.
OTHER DIRECTORS' OPTIONS
The Company issued to certain members of the Board of Directors options prior
to the establishment of the DSO Plan.
Stock option activity pursuant to these options was:
<TABLE>
<CAPTION>
Weighted Average
Options Option Price
------- ------------
<S> <C> <C>
Outstanding at December 31, 1995.............. 60,000 $11.08
Activity...................................... -- --
---------
Outstanding at December 31, 1996.............. 60,000 $11.08
Activity...................................... -- --
---------
Outstanding at December 31, 1997.............. 60,000 $11.08
Canceled...................................... (15,000) $ 7.56
---------
Outstanding at December 31, 1998............... 45,000 $12.25
=========
</TABLE>
F-22
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following tables summarize information about the fixed-price stock options
outstanding at December 31, 1998:
<TABLE>
NSO PLAN
Options Outstanding Options Exercisable
------------------------------------------------------------------- --------------------------------------------
Weighted-Average Weighted- Weighted-
Range of Outstanding Remaining Average Exercisable at Average
Exercise Prices at 12/31/98 Contractual Life Exercise Price 12/31/98 Exercise Price
--------------- ----------- ---------------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
$3.625 430,000 4.0 years $3.63 430,000 $3.63
6.625 100,000 2.9 years 6.63 100,000 6.63
7.750 70,000 1.7 years 7.75 70,000 7.75
-------- --------
$3.625 - 7.750 600,000 3.6 years $4.61 600,000 $4.61
========= ========
</TABLE>
<TABLE>
<CAPTION>
ISO PLAN
Options Outstanding Options Exercisable
------------------------------------------------------------------- --------------------------------------------
Weighted-Average Weighted- Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price
--------------- ------------ ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
$1.688 25,000 10.0 years $1.69 12,500 $1.69
3.375 - 4.50 621,825 5.9 years 3.91 589,200 3.90
4.625 - 5.625 330,880 8.2 years 4.99 224,630 5.11
5.813 - 8.00 176,500 3.4 years 7.27 170,250 7.32
10.375 75,000 5.3 years 10.38 75,000 10.38
---------- --------
$1.688 - 10.375 1,229,205 6.2 years $5.03 1,071,580 $5.12
========= =========
</TABLE>
F-23
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DSO PLAN & OTHER DIRECTORS OPTIONS
Options Outstanding Options Exercisable
------------------------------------------------------------------- -------------------------------------------
Weighted-Average Weighted- Weighted-
Range of Outstanding Remaining Average Exercisable at Average
Exercise Prices at 12/31/98 Contractual Life Exercise Price 12/31/98 Exercise Price
--------------- ----------- ---------------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
$3.50 60,000 7.2 years $3.50 60,000 $3.50
4.56 30,000 9.2 years 4.56 20,000 4.56
5.75 20,000 3.1 years 5.75 20,000 5.75
6.25 40,000 4.2 years 6.25 40,000 6.25
6.63 30,000 3.1 years 6.63 30,000 6.63
9.25 20,000 5.2 years 9.25 20,000 9.25
11.00 20,000 0.2 years 11.00 20,000 11.00
13.25 25,000 1.2 years 13.25 25,000 13.25
------ -------
$3.50 - 13.25 245,000 4.7 years $6.72 235,000 $6.81
======= =======
</TABLE>
Stock Option Plans for ILD Telecommunications, Inc.: ILD
Telecommunications, Inc. maintains a Non-qualified Stock Option ("NSO") Plan and
an Incentive Stock Option ("ISO") Plan. The number of shares which may be
granted under the NSO and ISO Plans may not exceed 49,500 shares to directors,
officers, and employees. Options under the Plan have a five year life. Options
granted in 1996 vested immediately. Options granted in 1997 vest ratably over a
three year period. ILD was not consolidated with the Company in 1998, therefore
option activity for 1998 is not included in the following schedules.
<TABLE>
<CAPTION>
NSO PLAN
Stock option activity under the NSO Plan was:
Weighted Average
Options Option Price
------- ------------
<S> <C> <C>
Outstanding at May 10, 1996.......................................... -- --
Granted.............................................................. 2,325 $24.20
--------
Outstanding at December 31, 1996..................................... 2,325 $24.20
Granted.............................................................. 2,500 $175.00
Exercised............................................................ (775) $24.20
-------
Outstanding at December 31, 1997..................................... 4,050 $117.28
========
</TABLE>
F-24
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ISO PLAN
Stock option activity under the ISO Plan was:
Weighted Average
Options Option Price
------- ------------
<S> <C> <C>
Outstanding at May 10, 1996........................................ -- --
Granted............................................................ 19,350 $24.20
------
Outstanding at December 31, 1996................................... 19,350 $24.20
Granted............................................................ 23,650 $126.90
------
Outstanding at December 31, 1997.................................... 43,000 $80.68
======
</TABLE>
At December 31, 1997 and 1996 there were 11,675 and 5,825 shares available to
be granted.
EMPLOYEE STOCK PURCHASE PLAN FOR INTELLICALL
On November 16, 1995 the Company adopted the Intellicall Employee
Stock Purchase Plan (the "ESPP"). After the offering period ending December 31,
1998, there remain authorized and available for sale to employees an aggregate
of 257,069 shares of the Company's common stock. The maximum number of shares
subject to each option under the ESPP is determined on the date of grant and
equals the sum of the payroll deductions authorized by each participating
employee (up to 10.0% of regular pay) divided by 85.0% of the lower of the fair
market value of a share of common stock on either the first or last trading day
of each offering period. Each offering period is approximately six months in
duration and commences on the first trading day on or after January 1 and
terminates on the last trading day ending the following June 30, or commences on
the first trading day on or after July 1 and terminates on the last trading day
ending the following December 31. Under the ESPP, 9,927 shares were issued at
$3.08 for the offering period ended June 30, 1996; 8,998 shares at $4.675 for
the offering period ended December 31, 1996; 8,190 shares at $3.936 for the
offering period ended June 30, 1997; 4,911 shares at $3.825 for the offering
period ended December 31, 1997; 3,335 shares at $3.347 for the offering period
ended June 30, 1998; and 1,603 shares at $1.859 for the offering period ended
December 31, 1998.
Common Stock: At December 31, 1998, there were 3,793,934 shares of
common stock reserved for options and warrants.
Preferred Stock: On July 21, 1997 (the "Closing Date") the Company
entered into a Securities Purchase Agreement (the "Purchase Agreement") with
four institutional investors (the "Investors") pursuant to which the Investors
purchased $4,000,000 of the Company's Series A Convertible preferred stock (the
"preferred stock"). The Company utilized the net proceeds from the sale of the
preferred stock (approximately $3,800,000) to pay down indebtedness to Finova.
F-25
<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 from 91 to
180 days after the Closing Date, the fee payable to the Company is 25% times the
Variable Conversion Price times the number of such shares of common stock; and
(b) in the event the issuance of such common stock occurs from 181 to
365 days after Closing Date, the fee payable to the Company is 6.25% times the
Variable Conversion Price times the number of such shares of common stock.
Any shares of preferred stock outstanding two years after the Closing
Date will automatically convert into common stock.
The Investors may require the Company to redeem certain shares of
preferred stock (i) in the event the number of shares of common stock issuable
upon conversion (based on the conversion price in existence from time to time)
multiplied by 1.25 would exceed the maximum number of shares of common stock
which the Company can issue without shareholder approval pursuant to applicable
New York Stock Exchange Guidelines, unless shareholder approval is so obtained
within 120 days of such occurrence, (ii) in the event the Company fails to
reserve an adequate number of shares of common stock as contemplated by the
designation of preferred stock creating the preferred stock (the "Designation"),
unless such failure is cured by board of directors and/or shareholder approvals
as required, (iii) in the event the Company fails to honor a conversion notice
and (iv) in other events as more fully set forth in the Designation. Any
redemptions, however, are limited to the Company's borrowing availability under
its loan agreement with Finova, as further described below.
The Designation grants to the Company the option, under certain
circumstances, to redeem for cash any shares of preferred stock submitted for
conversion if the Variable Conversion Price is less than $4.00 per share and
funds are available under the Company's loan agreement with Finova.
As of December 31, 1998, $3.5 million of the Company's Series A
convertible preferred stock had been converted for 2.1 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.
F-26
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In conjunction with the issuance of the preferred stock, the Company
entered into a Second Amendment to the Loan and Security Agreement with Finova
(the "Second Amendment"). The Second Amendment modified one financial covenant
and allowed the Company to redeem the preferred stock as contemplated in the
Designation if (i) following and giving effect to such redemption the Company
shall have excess borrowing availability under its borrowing base of not less
than $500,000, and shall have paid in full or made provision for payment in full
of all of Company's accounts payable in excess of $500,000 which are outstanding
beyond their due date and are not contested in good faith by the Company and all
bank overdrafts and (ii) at the time of such redemption no event of Monetary
Default, as defined in the loan agreement with Finova, and no event which, with
notice or passage of time or both, would constitute an event of Monetary Default
under the loan agreement with Finova has occurred and is continuing, or would
result from such redemption.
Series B-2 Redeemable Preferred Stock was issued by ILD upon ILD's
acquisition of WorldCom assets (see Note 8). Each share of the Series B-2
Redeemable Preferred Stock has a stated value of $100 and entitles the holder to
receive an annual cumulative dividend of $8.50 payable semi-annually. Subject to
certain restrictions in loan agreements, each holder has the right, commencing
on the fifth anniversary date after issuance, to require ILD to purchase the
holder's shares at the stated value of $100 per share, making such Series B-2
stock mandatorily redeemable. ILD, at its discretion, has the right to purchase
the holder's shares at the stated value of $100 per share for all shares not
previously purchased. Series B-2 Redeemable Preferred Stock is nonvoting, but
has preference over ILD's Common Stock and Series A Convertible Preferred Stock.
Series B-3 Redeemable Preferred Stock was issued by ILD upon ILD's
acquisition of Interlink (see Note 8). Each share of the Series B-3 Redeemable
Preferred Stock has a stated value of $300 and entitles the holder to receive an
annual cumulative dividend of $18.00 payable quarterly. Subject to certain
restrictions in loan agreements, each holder has the right, commencing on the
fifth anniversary date after issuance, to require ILD to purchase the holder's
shares at the stated value of $300 per share, making such Series B-3 stock
mandatorily redeemable. ILD, at its discretion, has the right to purchase the
holder's shares at the stated value of $300 per share for all shares not
previously purchased. Series B-3 Redeemable Preferred Stock is nonvoting, but
has preference over ILD's Common Stock and Series A Convertible Preferred Stock.
Common Stock Purchase Warrants: In connection with the December 29,
1995 subordinated debt issuance discussed in Note 2, and a result of activating
certain anti-dilution provisions, Banca Del Gottardo holds warrants entitling
the holder to purchase 412,637 shares of common stock, exercisable at $3.05 per
share. These warrants vested immediately and expire upon the date of maturity of
the underlying debt.
In connection with the issuance of the subordinated debt and
as a result of activating certain anti-dilution provisions, a third party
holds an additional Warrant to purchase 200,000 shares of common stock
exercisable at $4.20 per share. These warrants vested immediately and
expire upon the date of maturity of the underlying debt.
F-27
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In November 1996, the Company issued additional subordinated debt to
Banca Del Gottardo as discussed in Note 2, and as a result of activating
certain anti-dilution provisions, Banca Del Gottardo holds warrants entitling
the holder to purchase 251,234 shares of common stock at $3.98 per share.
In addition, a third party holds an additional warrant to purchase
150,000 shares at $5.00. These warrants vested immediately and expire
upon the date of maturity of the underlying debt.
F-28
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - INCOME TAXES
Differences between the expected income tax benefit calculated
using the statutory federal income tax rate and the actual income tax
provision are (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected income tax benefit at the statutory rate............ $(631) $(3,759) $(1,731)
Amortization of cost in excess of net assets
of acquired businesses........................ 31 31 31
Other:
Refund of federal income taxes................... -- -- (622)
Minority interest................................ -- 277 (101)
Other............................................ (1) 6 --
Operating loss not benefited..................... 601 3,722 2,423
------- ------------ ---------
Income tax provision................................ $ -- $ 277 $ --
========== ============ ===========
</TABLE>
The tax effect of temporary differences that give rise to a
significant portion of deferred tax assets and deferred tax liabilities
consisted primarily of timing differences in the recognition of license fee
revenues and related costs, provisions for doubtful accounts in excess of
write-offs, warranty costs, inventory reserves, gain or loss on sale of assets,
software development and operator services costs, and excess tax depreciation.
At December 31, 1998 the Company has net operating loss carryforwards
of $47.8 million for federal income tax reporting purposes. Such carryforwards,
which may provide future tax benefits, do not expire before 2007. Additionally,
in conjunction with the Alternative Minimum Tax ("AMT") rules, the Company has
available a minimum tax credit carryforward for tax purposes of $126,541. Such
credit may be carried forward indefinitely as a credit against regular tax
liability.
The Company received no income tax refunds in 1998 or 1997. The
Company received a net tax refund of $1.3 million in 1996. The Company received
the refund as a result of a ten-year carryback claim under Section 172(f) of the
Internal Revenue Code. The refund was associated with a claim of $4,534,487 of
Net Operating Loss. The Company also used $448,459 of its Alternative Minimum
Tax ("AMT") credit, the result of being subject to AMT in the fiscal year ended
June 30, 1989.
F-29
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Significant components of the Company's deferred tax assets and
deferred tax liabilities under FAS 109 are (in thousands):
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Investment in subsidiary................................. $ 824 -
Other reserves and accruals............................... 974 $2,302
Net operating loss carryforwards.......................... 16,238 14,756
Unused alternative minimum tax credits.................... 127 127
Deferred revenue.......................................... 86 147
-------- --------
Total gross deferred tax assets............................... 18,249 17,332
======== ========
Deferred tax liabilities:
Bad debt reserves......................................... (183) (370)
Depreciation and amortization............................. (584) (478)
--------- ---------
Total gross deferred tax liabilities........................... (767) (848)
--------- ---------
Less valuation allowance....................................... (17,482) (16,484)
-------- --------
Net deferred tax assets........................................ $ -- $ --
========== ==========
</TABLE>
The valuation allowance on deferred tax assets reflects the Company's
uncertainty regarding realization of such assets due to recent operating loss
trends.
NOTE 5 - BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss per share has been computed in accordance
with FAS 128 and is based on the weighted average number of common shares
outstanding during 1998, 1997 and 1996. The weighted average common shares
outstanding were 9,927,000, 9,268,000 and 8,024,000 for the years ended December
31, 1998, 1997 and 1996, respectively.
Diluted net loss per share gives effect to all dilutive potential
common shares that were outstanding during the period. The Company had a net
loss for each of the three years ended December 31, 1998; therefore, none of the
Series A preferred shares, convertible into common stock as described in Note 3,
or the options or warrants outstanding in Note 3 or the shares of common stock
to be issued upon conversion of debt to equity at each of the period ends were
included in the diluted net loss per share calculation for the years ended
December 31, 1998, 1997, and 1996, as they were anti-dilutive. The denominator
(the number of shares) and the numerator (net loss) is the same for the basic
and diluted EPS computations for all periods presented.
F-30
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - COMMITMENTS
The Company leases its office space, manufacturing facility, and
certain office equipment under operating leases.
Future minimum rental commitments under noncancelable operating leases
are (in thousands):
1999................................................... $ 446
2000................................................... 429
2001................................................... 365
2002................................................... 155
2003................................................... --
------
$1,395
======
Total operating lease expense was $610,000, $1,011,000 and $840,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
F-31
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - 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, Business and Significant 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 years ended December 31, 1998, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
SERVICES EQUIPMENT SUBTOTAL CORPORATE(3) TOTAL
-------- --------- -------- ------------ -----
<S> <C> <C> <C> <C> <C>
REVENUES(1) 25,769 13,859 39,628 39,628
65.0% 35.0% 100.0%
GROSS PROFIT 821 2,259 3,080 -- 3,080
26.7% 73.3% 100.0%
NET INCOME (LOSS)(2) 215 (7,697) (7,482) 5,626 (1,856)
2.8% 100.0% N/A
<FN>
(1) Equipment revenues include international sales of $2,798.
(2) 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 $215, while the
absolute value of all segments reporting a loss is $7,697. Accordingly,
the percentages are calculated based on a denominator of $7,697.
(3) Note that "corporate" is not a segment. As a consequence, percentage
amounts are not calculated for "Corporate".
</FN>
</TABLE>
F-32
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
SERVICES EQUIPMENT SUBTOTAL CORPORATE(4) TOTAL
-------- --------- -------- ------------ -----
<S> <C> <C> <C> <C> <C>
REVENUES(1) 97,673 19,313 116,986 116,986
83.5% 16.5% 100.0%
GROSS PROFIT(2) 9,843 (2,616) 7,227 -- 7,227
100.0% 26.6% N/A
NET INCOME (LOSS)(3) 8,941 (17,408) (8,467) (2,438) (10,905)
51.4% 100.0% N/A
<FN>
(1) Equipment revenues include international sales of $2,575.
(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 $9,843, while the absolute value of all segments
reporting a negative gross profit is $2,616. Accordingly, the percentages
are
calculated based on a denominator of $9,843.
(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 $8,941, while the absolute
value of all segments reporting a loss is $17,408. Accordingly, the
percentages are calculated based on a denominator of $17,408.
(4) Note that "corporate" is not a segment. As a consequence, percentage amounts
are not calculated for "Corporate".
</FN>
</TABLE>
F-33
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
SERVICES EQUIPMENT SUBTOTAL CORPORATE(4) TOTAL
-------- --------- -------- ------------ -----
<S> <C> <C> <C> <C> <C>
REVENUES(1) 76,905 15,884 92,789 92,789
82.9% 17.1% 100.0%
GROSS PROFIT(2) 8,827 (1,806) 7,021 -- 7,021
100.0% 20.5% N/A
NET INCOME (LOSS)(3) 8,163 (12,712) (4,549) (446) (4,995)
64.2% 100.0% N/A
<FN>
(1) Equipment revenues include international sales of $3,934.
(2) Percentage is determined based on the greater of the absolute amount of all
segments reporting a positive growth profit or all segments reporting a
negative gross profit. The absolute amount of all segments reporting a
positive gross profit is $8,827, while the absolute value of all segments
reporting a negative gross profit is $1,806. Accordingly, the percentages
are calculated based on a denominator of $8,827.
(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 $8,163, while the absolute
value of all segments reporting a loss is $12,712. Accordingly, the
percentages are calculated based on a denominator of $12,712.
(4) Note that "corporate" is not a segment. As a consequence, percentage amounts
are not calculated for "Corporate".
</FN>
</TABLE>
F-34
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - ACQUISITIONS MADE BY ILD TELECOMMUNICATIONS
On September 2, 1997 the Company announced that its majority owned
subsidiary, ILD Telecommunications, Inc. (ILD), purchased the operator services
business and related assets from WorldCom, Inc. ("WorldCom"). The assets
acquired by ILD include the operator services and related long distance customer
contracts, operator service centers in San Antonio, Texas, Las Vegas, Nevada and
Boca Raton, Florida and switching facilities in Dallas, Texas and Los Angeles,
California as well as WorldCom's billing and collection operations and inmate
operator services businesses. ILD also entered into a long-term operator
services agreement with WorldCom to handle the international and domestic
operator services requirements of WorldCom. In addition, ILD entered into a
network services contract with WorldCom.
The acquisition was accounted for under the purchase method as
prescribed by Accounting Principles Board No. 16 "Business Combinations". The
results of operations of the acquired business are included in the consolidated
financial statements from the date of acquisition through December 31, 1997. The
purchase price was $21.4 million net of $1.2 million of liabilities assumed. ILD
paid $550,000 in cash, issued 111,960 shares of redeemable preferred stock at
$100 per share, issued 34,403.67 shares of its common stock valued at
$3,750,000, and entered into loan agreements with Nationsbank in the amount of
$6.2 million (including $325,000 of debt costs - see Note 2).
Approximately $15.5 million was assigned to the excess of purchase
price over the fair value of net assets of the business acquired. The asset is
amortized using the straight-line method over 25 years. Also, $2.5 million was
assigned to contracts acquired and are being amortized over 6 years.
The following unaudited proforma consolidated results of operations
for the years ended December 31, 1997 and 1996 are presented as if the WorldCom
acquisition had been made at the beginning of each period presented. The
unaudited proforma information is not necessarily indicative of either the
results of operations that would have occurred had the purchase been made during
the periods presented or the expected future results of the combined operations.
The Company's financial statements have not been consolidated with those of
ILD's for the year ended December 31, 1998, therefore information for 1998 has
not been included in the following table.
Year ended December 31,
(in thousand, except per share)
1997 1996
---------- ----------
Net sales $168,862 $186,288
Net loss available to common shareholders (11,027) (5,826)
Basic and diluted net loss per common share (1.19) (.73)
F-35
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On December 15, 1997 ILD also acquired all of the outstanding common
stock of Interlink Telecommunications, Inc. ("Interlink"), a switched reseller
of long distance services and provider of enhanced services including operator
services, prepaid calling cards and prepaid local service. Interlink is located
in Atlanta, Georgia and principally serves the southeastern United States.
The acquisition was accounted for as a purchase whereby the excess
purchase price over net assets acquired was recorded based upon the fair values
of assets acquired and liabilities assumed. The results of operations of the
acquired business were included in the consolidated financial statements from
the date of acquisition through December 31, 1997. The purchase price was $11.4
million. ILD accomplished the acquisition of the Interlink common stock through
issuance of the following consideration; (i) $2,000,000 in cash; (ii) $2,700,000
in the form of a promissory note; (iii) $1,000,000 in the form of a promissory
note; (iv) 16,117 shares of ILD's common stock valued at $175 per share; (v)
6,667 shares of ILD's Series B-3 Redeemable Preferred Stock valued at $300 per
share which is mandatorily redeemable; and (vi) $850,000, payable $425,000 on
June 1, 1998 and $425,000 on June 1, 1999, for a five year consulting agreement.
Approximately $10.6 million has been assigned to the excess of
purchase price over the fair value of net assets of the business acquired. The
asset is amortized using the straight-line method over 25 years. Also $2.0
million was assigned to the non-compete agreement and is being amortized over 5
years.
On January 1, 1998 the Company sold its prepaid services operation to
ILD Telecommunications, Inc. in exchange for (i) $2,000,000 in cash, (ii)
forgiveness of the Company's promissory note in the original principal amount of
$2,000,000 which had previously been executed and delivered to ILD to purchase
18,348.62 shares of ILD common stock valued at $109 a share, and (iii) a
$1,000,000 promissory note due at the earlier of the date of ILD's public
offering or December 31, 1998. The cash proceeds were used to further reduce the
Company's indebtedness to Finova. The Company recorded a $835,000 gain on the
sale of the prepaid services operation with the balance recorded as deferred
gain on sale of assets to an unconsolidated investee. As of December 31, 1998,
the Company had $968,000 of deferred gain.
As stated in Note 1, the Company's ownership interest declined below
50% as of January 1, 1998, therefore the Company has not consolidated its
financial position and results of operations, with those of ILD.
NOTE 9 - LITIGATION AND CONTINGENCIES
In April 1997, U.S. Long Distance, Inc. ("USLDI") filed a Second
Amended Complaint against the Company, the ("Lawsuit"). The complaint sought
actual damages of $4.0 million, exemplary damages, attorney's fees and interest
for the Company's alleged tortious interference of USLDI's existing and
prospective contractual relationships with PhoneTel Technologies, Inc.
("PhoneTel"). The Second Amended Complaint alleged the Company and its then
subsidiary, Intellicall Operator Services, Inc., interfered with USLDI's
existing contractual relationship with PhoneTel, another defendant, when
PhoneTel executed an operator services
F-36
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
agreement with the Company and its subsidiary. On July 24, 1998, The Company,
Intellicall Operator Services and ILD settled the Lawsuit with USLDI through the
collective payment of $225,000 (of which approximately $112,500 was paid by the
Company) and execution of a mutual release of all claims.
NOTE 10 - SUBSEQUENT EVENT
On January 27, 1999, the Company closed and commenced funding under a
Receivables 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 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 interest rate of prime plus 2.75% plus allow RFC to
retain a holdback of five percent of 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.
F-37
<PAGE>
<TABLE>
<CAPTION>
INTELLICALL, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Additions
------------------------------------
Balance at
Beginning Charged to Costs Charged to Other Deductions- Balance at End
Description of Period and Expenses Accounts - Describe Describe of Period
- ---------------------------------------------- --------- --------------- ------------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998:
Allowance for doubtful
accounts........................ $ 4,422 $ 4,688(c) $ -- $ (5,693)(a) $ 3,417
============ ============ ================ =========== ============
Year Ended December 31, 1997:
Allowance for doubtful
accounts........................ $ 3,610 $ 9,331 $ -- $ (6,407) $ 6 ,534
Allowance for doubtful accounts -
notes receivable................ $ 1,762 $ -- $ -- $ (1,762) $ --
========= ============ ================ ============ ===========
Year Ended December 31, 1996:
Allowance for doubtful
accounts........................ $ 3,674 $ 3,793 $ -- $ (3,857)(a)(b) $ 3,610
============= ============ ================ =========== ===========
Allowance for doubtful accounts -
notes receivable................ $ 2,718 $ -- $ -- $ (956)(a) $ 1,762
============ ============ ================ =========== ===========
<FN>
(a) Write-off of uncollectible accounts.
(b) Includes $912,000 reserved directly against another asset.
(c) Includes $94,000 reserved from a related party receivable.
</FN>
</TABLE>
F-38
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-60235 and 33-64583) of our report dated
February 23, 1999 appearing on page F-2 of Intellicall Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1998.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
March 25, 1999
