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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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-Registered Trademark-, 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 AMERICAN STOCK EXCHANGE
(Title of Class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock (which consists
solely of shares of Common Stock) held by non-affiliates of the registrant as
of March 17, 2000, computed by reference to the closing sales price of the
registrant's Common Stock on the American Stock Exchange on such date, was
approximately $16,351,118.
Number of shares of the registrant's Common Stock outstanding as
of March 17, 2000: 13,080,894.
Documents Incorporated By Reference:
The information required by Part III of this Form 10-K Annual
Report is incorporated by reference from the registrant's definitive proxy
statement to be filed not later than 120 days after the end of the 1999
fiscal year.
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PART I
ITEM 1. BUSINESS.
A. GENERAL DEVELOPMENTS
Intellicall-Registered Trademark-, Inc. ("Intellicall" or the "Company")
designs, manufactures and sells public access telecommunications equipment,
and until October 21, 1999, provided billing services and automated operator
services ("Services"), principally to payphone owners and telephone companies
in the United States and in developing countries.
The Company's line of products consists of payphone products and accessories,
network equipment and software (the "Products"). In various configurations,
the Products permit their owners to provide traditional payphone services to
users of the Products and live or automated operator services for
operator-assisted calls. In addition, the Products may be used in
international gateway applications and to render prepaid or other long
distance service to callers using prepaid or other calling cards. The Company
has historically sold most of its Products to the U.S. private pay telephone
industry. In recent years, a portion of the Products has been sold in
developing countries and in the United States to regulated telephone
companies.
The Company provides automated operator services to payphone users utilizing
patented microprocessor technology incorporated into the payphone. These
services enable callers to make collect, calling card and credit card calls
from the Company's payphones without requiring the assistance of live
operators.
Before 1998, the Company provided live operator services, prepaid calling
card and other long distance services principally to independent payphone
providers ("IPPs") either directly or through a then majority-owned
subsidiary, ILD Telecommunications, Inc. ("ILD"). ILD was formed by the
Company in May 1996 to conduct the long distance resale and live operator
service businesses previously owned by the Company. After its formation, ILD
grew rapidly and diversified its business, principally through acquisitions
of related businesses which included the prepaid calling card operations of
the Company. As a consequence of ILD issuing its stock to sellers of acquired
businesses and of the Company's sales of a portion of its ILD equity
investment to third parties, the Company's ownership interest in ILD's equity
declined to less than 50% in the first quarter of 1998. (See NOTE 1 TO THE
FINANCIAL STATEMENTS). Because of the change in the Company's ownership of
ILD, ILD's financial position and results of its operations have not been
consolidated with those of the Company since December 31, 1997. Thus, ILD's
revenues and associated costs and its individual assets and liabilities are
not shown in the Company's 1999 and 1998 financial statements. The Company
utilizes the equity method of accounting for its investment in ILD pursuant
to which the Company records its prorata share of ILD's net income and net
assets as single line items in its 1999 and 1998 statements of income and
balance sheets.
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On September 22, 1999, the Company elected to discontinue its billing
services operations segment 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
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. As a
result of this decision, the Company's revenues and operating expenses for
the periods presented reflect only the equipment operations with the net
result of the billing services operations reported on its statements of
operations under the caption "Income (loss) from discontinued operations"
(See NOTE 16 TO THE FINANCIAL STATEMENTS).
On January 18, 2000, Intellicall entered into a definitive agreement to
acquire, through the exchange of common stock of Intellicall, Heads Up
Technologies, Inc. ("Heads Up") of Carrollton, Texas. Heads Up designs,
manufactures and markets interactive digital products for the aviation, mass
transit and entertainment industries. The company sells computerized products
to nearly 1,250 customers in more than 10 countries. Pursuant to the merger
agreement, Intellicall and Heads Up have agreed to an exchange ratio of
approximately (1.3) shares of Intellicall common stock for each share of
Heads Up common stock. This will result in the Heads Up shareholders being
issued approximately 11.5 million shares of Intellicall common stock,
resulting in such shareholders owning approximately 46.8 % of the issued and
outstanding Intellicall common stock following such merger. The merger is
subject to a number of conditions, including without limitation, approval by
Intellicall's stockholders. The merger is scheduled to be completed in the
second quarter of 2000. There can be no assurance that this merger will be
consummated.
Management believes that the acquisition of Heads Up provides Intellicall the
opportunity to expand and grow into markets already established by Heads Up
and enhance the Company's current position in the public access market by
incorporating certain interactive voice and data technologies into existing
and new product lines.
The Company is a Delaware corporation with its principal executive offices
located at 2155 Chenault, Suite 410, Carrollton, Texas 75006-5023. The
Company's telephone number at that address is (972) 416-0022.
B. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company has one reportable industry segment - the equipment segment. The
equipment segment manufactures and sells payphones, switches and related
software. The Services segment, which was discontinued effective October 21,
1999 (See NOTE 16 TO THE FINANCIAL STATEMENTS), provided billing and
collection services to owners of payphones who utilize the Company's
automated operator technology.
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C. BUSINESS DESCRIPTION
INDUSTRY BACKGROUND. Prior to its breakup in 1984, payphone service in the
United States was provided solely by AT&T. In 1984, the Federal
Communications Commission ("FCC") authorized competition in the operation of
payphones subject to state and federal regulation. Since 1984 an industry
comprised of IPPs has emerged to compete with payphone networks owned and
operated by local exchange carriers ("LECs"). The principal difference
between payphone equipment utilized by IPPs and LECs can be found in the
location of the payphone system's intelligence. Since IPP payphones lacked
the intelligence provided to LEC phones by the LEC central office, IPPs moved
to incorporate system intelligence in the payphone itself. As a result, call
rating, answer detection, operator service and equipment status reporting
were among the features designed into IPP payphones. The IPP payphones in
turn utilized telephone lines, which provide little more than "dial-tone"
from the LEC central office. The "smart phone", as it came to be called, was
the product of choice of the IPP. The Company originated, and has extensively
developed, smart phone technology.
DOMESTIC PAYPHONES. The Company's principal payphone product (available in
multiple configurations) offered for sale in the United States is the
ASTRATEL 2-Registered Trademark-. This phone can be used to provide automated
operator service and to perform all functions customarily available in
payphones. As opposed to needing an external electric connection to operate,
the ASTRATEL 2 utilizes electrical current provided through the telephone
line. Because of its unique design, functionality of the ASTRATEL 2 is
principally provided through software. Most older payphones (including those
manufactured by the Company) utilize a product design, which incorporates a
far greater number of electronic components and circuitry.
The "brain" of the ASTRATEL 2 payphone is an integrated circuit board (the
"Boardset") located in the payphone housing. From its inception, the ASTRATEL
2 Boardset was designed to sell at attractive prices and to easily fit most
payphone housings, including those sold by the Company's competitors. As a
result, the Boardset has accounted for an increasing percentage of the
Company's equipment sales since 1996. The Boardset is not manufactured by the
Company, but by a number of companies that possess the ability to manufacture
the Boardset in accordance with the Company's specifications. The Boardset's
software intensity and flexibility provide the Company's customers with
considerable protection against obsolescence.
The Company's payphones operate by means of advanced microprocessor
technology located in the Boardset. When a call is initiated, the
microprocessor automatically performs a series of functions, including, in
the case of coin generated phone calls, determining the applicable rate for
the call and whether the call has been answered. The Company's payphones
communicate with a caller by voice messages digitally synthesized and stored
in memory chips located in the Boardset.
Among the most important features of an Intellicall payphone is the ability
to reliably and accurately detect whether a call has been answered. This
answer detection capability is not dependent upon an electronic signal from
the LEC central office. Accurate answer detection is critical to the
successful operation of a private payphone in order to ensure that all
completed
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calls are properly billed and that incomplete calls are not billed.
The ASTRATEL 2 possesses many programmable features that may be altered from
a remote location by means of the Company's proprietary software using a
personal computer. These programmable features include rate tables and
various management reporting capabilities that enable the owner to determine
if and when a payphone requires service or coin collection. In addition, a
number of enhancements may be added to the Company's payphones from a remote
location. Management believes the ASTRATEL 2 uses the highest speed modem in
the payphone industry (14.4 Kps) to communicate with a remote location and
that such high-speed modem constitutes a current competitive advantage.
INTERNATIONAL PAYPHONES. Since 1993, the Company has produced a line of
payphones targeted for sale outside the United States. These phones
accommodate a variety of payment systems including U.S. and international
coinage, credit cards and several types of prepayment cards, such as cards
based on personal identification numbers, magnetic stripe cards and
integrated circuit cards. Additionally, these telephones can be operated with
auxiliary power sources, including solar power or power supplied by telephone
lines, and can be utilized in wireless systems.
In 1997 and 1998, the Company modified the ASTRATEL 2 for sale in the
Canadian and Mexican markets and is working on further modifications to
enhance sales prospects in these and other countries. Because of its software
reliance, the ASTRATEL 2 can be economically modified to accommodate the
different calling patterns, coinage denominations, rating systems and
languages of numerous countries.
N-GENIUS SYSTEM. The Company's N-Genius-TM-System enables network operators in
the United States and abroad to provide enhanced, switched, public access
services. Public access services are of special importance to network
operators in developing countries where demand for publicly accessible
telephone service is high due to the expense of, and lengthy delays often
involved in, obtaining residential phone service.
Applications utilizing the N-Genius System permit network and payphone system
operators to offer prepaid calling services over wireline or cellular
networks. In addition, the N-Genius System can be used as a switched
international gateway that is transparent to the communications protocols,
which differ among countries. The system can be used as well to enhance the
public phone management capability of network and payphone system operators.
Among its other features, the N-Genius System can provide automated credit
card validation, calling card validation or voice recognition validation, and
protection against telephone fraud. The Company is developing applications
for the N-Genius, which allow payphone system operators to incorporate the
Internet to carry phone traffic. Specifically, the Company entered into a
strategic alliance with Netspeak Inc. in October 1998 to help facilitate the
development and delivery of these applications.
INTELLI*STAR. The Intelli*Star-Registered Trademark- system is an automated
operator product licensed to owners of the Company's payphones. The Company's
older UltraTel-Registered Trademark-line of payphones required the
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addition of a separate integrated circuit board, commonly called the I*Star
board, to complete the system. This separate integrated circuit board was
attached to the payphone's operating circuitry.
In the ASTRATEL line of payphones, Intelli*Star is activated by means of a
software enhancement and requires no additional circuit board. Intelli*Star
is available on every payphone offered for sale by the Company in the United
States.
SALES AND MARKETING. The Company's U.S. sales of Products are made through a
combination of distributors, strategic partners and a direct sales force
consisting of three employees. International sales are generally made through
in-country agents and distributors supported by the Company's sales,
engineering and technical support personnel.
The markets for the Company's Products consist of public access
telecommunications providers, principally providers of payphone services.
Included in this grouping are the payphone operations of IPPs and LECs in the
United States.
Receivables arising from domestic product sales are generally due within 30
days. Discounts are provided for prepayment or prompt payment. International
product sales are generally made pursuant to confirmed letters of credit or
payments prior to shipment.
MANUFACTURING AND ASSEMBLY. The Company's Products are principally assembled
at its manufacturing facility in McAllen, Texas. Boardsets are currently
assembled for the Company by an electronics manufacturer in McAllen, Texas.
After Products are assembled at the Company's manufacturing facility, they
are thoroughly tested before shipment to the purchaser. Once a payphone or
Boardset is shipped to a U.S. private payphone industry customer by the
Company, the Company is not responsible for ensuring that the Product is
properly installed, maintained or operated in accordance with applicable
federal and state regulations. The Company assists in the installation of
N-Genius Systems with respect to certain international customers and LECs.
The Company purchases certain components from single-source suppliers and as
a result of market factors, suppliers of certain components used in the
Company's equipment may occasionally place the Company on allocation for
those parts or discontinue those parts. The Company continues working to
secure alternate sources for single-source components and components subject
to allocation. There is a risk that the Company, in certain circumstances,
will not be able to procure certain parts and components and continue to
manufacture products key to the business segment.
WARRANTY, MAINTENANCE AND SERVICE. The Company provides the original
purchaser of Products (not including ASTRATEL electronic components) a
limited 90-day or one-year warranty, depending on the kind of equipment
involved. The Company offers a two-year limited warranty on ASTRATEL 2
electronic components. The Company's technical support staff at its corporate
offices currently provides support services over the telephone to customers
who have installation or operational questions. The Company currently offers
a maintenance
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agreement covering N-Genius Systems. Other non-warranty service is provided
on a per-repair basis. Warranty and non-warranty product repairs are
generally provided by the Company at its manufacturing facility in McAllen,
Texas.
The Company holds classes to train its customers in the proper installation,
operation and maintenance of the Company's products.
PATENTS AND LICENSES. The Company holds 23 United States patents and has
numerous United States and foreign pending patent applications relating to
the Company's Intelli*Star and other technology. These patents cover the
ability to complete automated collect telephone calls, perform certain
validity checks and internally store and retrieve data files from telephones,
as well as many other features and structures of payphones. The Company
considers its patents important to its business.
Under an exclusive patent license agreement between Gateway Technologies,
Inc. ("Gateway") and the Company, the Company and Gateway have agreed to
share revenues received from sub-licensing certain of Gateway's and the
Company's patents pertaining to call processing. The Company and Gateway have
entered into sublicensing arrangements with certain manufacturers and users
of call processing equipment. The patent license agreement with Gateway
expires in 2002.
In 1992, the Company entered into an agreement with MessagePhone, Inc.
("MPI"), pursuant to which the Company licenses MPI's automated voice
messaging patents. The license permits the Company to offer voice messaging
services to its Intelli*Star and call processing customers. The MPI agreement
expires in 2008, however, it is effective until the expiration of the MPI
patents, including any continuations of such patents.
The Company licenses certain Voice over Internet Protocol ("VOIP") software
from Netspeak Corporation. The Company pays fees to Netspeak on products
manufactured by the Company which utilize the licensed technology.
TRADEMARKS. The Company has registered in the United States its trademarks
"Intellicall," "ASTRATEL," "UltraTel"-Registered Trademark-, "N-Genius",
"World Connect"-Registered Trademark-, "Intelli*Star" and "Easy*Star". The
Company considers its trademarks important to its business.
SEASONALITY. The Company's revenues from domestic phone equipment sales are
affected by seasonal weather conditions throughout the United States, which
tend to reduce the number and duration of pay telephone calls made in the
winter months, and which similarly reduces the number of outdoor payphone
installations.
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MAJOR CUSTOMERS. The Company had three customers who accounted for 25.5% or
$2.8 million, 14.6% or $1.6 million, and 10.2% or $1.1 million of the
Company's revenues in 1999, one single customer who accounted for 11.1% or
$1.5 million of the Company's revenues in 1998, and two customers who
accounted for 17.2% or $3.2 million and 13.3% or $2.5 million of the
Company's revenues in 1997. The Company believes it has good relationships
with its customers.
COMPETITION. The Company competes directly with other payphone and switching
equipment manufacturers, and indirectly with providers of wireless portable
telephony, many of who are larger and better capitalized than the Company.
The Company's principal direct competitors in the U.S. private payphone
market are Elcotel, Inc. and Protel, Inc. (a subsidiary of Inductotherm
Industries, Inc.). Its indirect competitors include numerous service
businesses providing cellular, paging and personal communications services
("Wireless Telecommunications") throughout the Company's markets. In many
instances, Wireless Telecommunications compete successfully with
telecommunications services offered through payphones to callers away from
home. However, for callers with limited needs to make calls while
away-from-home, payphones offer a convenient and economical alternative to
Wireless Telecommunications devices.
The Telecommunications Act of 1996 (the "1996 Act") requires, among other
things, that LECs end subsidies to their own payphone services and provide
services to IPPs on the same rates, terms and conditions as they are made
available to their own payphone service operations. Effective April 15, 1997,
local telephone companies reclassified their payphone service from regulated
to non-regulated status, substantially changing many of the rates and terms
upon which payphone lines are available. These changes were required by the
1996 Act's explicit prohibition against the local telephone companies
discriminating between their own payphone operations and those of IPPs. Local
telephone companies generally must receive service under the same tariffs
available to IPPs for payphones. The Company expects these changes to benefit
its IPP customers. By equalizing the basis for competition between LECs and
IPPs, the 1996 Act may create additional opportunities for existing payphone
providers, or for new entrants, to compete with the LECs. The demand for
payphones may also be affected by the interconnection arrangements offered by
the local telephone operating companies to IPPs.
The 1996 Act contains provisions which, if not successfully challenged, would
permit Bell Operating Companies ("BOCs"), under certain circumstances, to
manufacture telecommunications equipment, including payphones and switched
network products. They may do so, however, only after the FCC finds that they
have completed actions necessary to open their local telecommunications
markets to competition. To date the FCC has made no such finding with respect
to any of the BOCs.
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Numerous entities compete with the Company in the international public
communications markets, including many larger and better-capitalized
companies with experience in the marketing of products internationally. The
Company has adopted a strategy of focusing its marketing efforts on countries
with a low ratio of public communication lines to total population, where
rapid growth in sales of public communications equipment is projected. Many
of the Company's competitors have adopted a similar strategy. The market for
international public communications is highly competitive and subject to the
risks of doing business abroad. Consequently, there can be no assurances that
the Company's efforts in international markets will be successful.
Although the Company is encountering and expects to continue to encounter
intense competition, the Company believes that its products are competitive
in its markets based upon price, equipment capabilities and quality. Since
the telephone industry is subject to rapid technological change, the Company
believes that it will continue to be required to develop improved or
additional Products and to continue to reduce the cost of existing Products
in order to remain competitive. The Company's ability to develop additional
Products will depend generally in the foreseeable future on its ability to
generate working capital internally.
R&D EXPENDITURES. The Company spent, for the years 1999, 1998 and 1997 $.9
million, $1.6 million and $.7 million, respectively, for research and
development of new products, product enhancements and technique improvements.
The Company's research and development programs are focused on development of
new products and product enhancements for payphone systems operated by IPPs,
regulated telephone companies and international customers. The Company's
focus in 1999 was on the development of (a) additional application software
to expand the utility of N-Genius systems, and (b) modifications of ASTRATEL
2 payphones which expand their functionality and (c) testing and modification
of issues related to Y2K.
In 2000, the Company intends to further modify the ASTRATEL 2 for use in new
markets and applications and continue development of the N-Genius to improve
and expand the switching platform product line.
The Company considers research and development to be important to the
continuation and enhancement of its competitive position. The Company's
ability to adequately fund future research and development costs will depend
on its ability to generate sufficient funds from operations or external
sources.
ENVIRONMENTAL. Due to the nature of the business, the Company does not have a
significant environmental exposure in either the manufacturing or maintenance
of its products. Accordingly, there is no estimated capital expenditure for
environmental control facilities or clean up for the remainder of its fiscal
year and its succeeding fiscal year.
EMPLOYEES. As of December 31, 1999, the Company had 83 employees, of which 61
were employed in operations and 22 were employed in executive and
administrative capacities. The Company believes its employee relations are
good.
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ITEM 2. PROPERTIES.
The Company leases approximately 32,000 square feet of space at 2155
Chenault, Carrollton, Texas, where its principal executive, sales and product
development offices are located. The lease expires May 31, 2002. The Company
leases approximately 26,500 square feet of manufacturing space on a
month-to-month basis in McAllen, Texas. The Company considers that its
properties are generally in good condition, well-maintained and suitable to
carry on the Company's business.
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ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to ordinary legal proceedings incidental to and
arising in the normal course of its business. It is the opinion of the
management of the Company that the ultimate disposition of these proceedings
will not have a material adverse effect on the Company's financial position
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
STOCK PRICES
The Common Stock currently trades on the American Stock Exchange
("AMEX") under the symbol ICL. Up to July 6, 1999 the Company's stock traded
on the New York Stock Exchange ("NYSE"). The following table sets forth, for
each of the periods indicated, the reported high and low sales price per
share of the Company's Common Stock on the AMEX and NYSE.
<TABLE>
<CAPTION>
COMMON STOCK
--------------------
HIGH LOW
---- ---
<S> <C> <C>
1999
First Quarter........................................................... $ 3 1/2 $ 2 1/8
Second Quarter.......................................................... 2 1/2 1
Third Quarter........................................................... 1 9/16 11/16
Fourth Quarter ......................................................... 1 3/8 1/2
1998
First Quarter........................................................... $ 5 7/16 $ 4 1/8
Second Quarter.......................................................... 6 3/16 3 7/8
Third Quarter........................................................... 4 5/16 2
Fourth Quarter.......................................................... 2 7/16 1 3/8
</TABLE>
On March 17, 2000, the Company had approximately 1,043 stockholders
of record.
DIVIDEND POLICY ON INTELLICALL'S COMMON STOCK
The Company has never paid cash dividends on its Common Stock. The
Company currently intends to retain any future earnings for use in its
business and therefore does not expect to pay any cash dividends on Common
Stock in the foreseeable future. Any future determination to pay cash
dividends will depend upon the earnings and financial position of the Company
and such other factors as the Board of Directors of the Company may deem
appropriate at that time.
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ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial information for each of the five years
in the period ended December 31, 1999, is derived from the Company's
Financial Statements. The information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and the notes thereto included
elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(1)
-------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales and Revenues:
Equipment sales............................................ $ 11,131 $13,859 $19,313 $15,884 $ 19,944
Service revenues .......................................... -- -- 60,450 30,679 14,142
-------- ------- -------- ------- -------
11,131 13,859 79,763 46,563 34,086
Cost of Sales and Revenues:
Equipment sales............................................ 13,174 11,600 21,929 17,690 21,454
Service revenues .......................................... -- -- 52,523 27,049 10,650
-------- ------- -------- ------- -------
13,174 11,600 74,452 44,739 32,104
Gross profit (loss)........................................ (2,043) 2,259 5,311 1,824 1,982
Selling, general and administrative expenses............... (6,005) (7,363) (12,616) (7,861) (6,058)
Provision for doubtful accounts............................ (592) (876) (1,006) (364) (820)
Research and development expenses.......................... (907) (1,587) (741) (608) (2,350)
-------- ------- -------- ------- -------
Operating loss from continuing operations.................. (9,547) (7,567) (9,052) (7,009) (7,246)
Gain on sale of assets..................................... 1,431 7,389 -- 572 1,607
Loss on investments........................................ (338) -- -- -- --
Other income............................................... 346 538 695 710 440
Interest expense........................................... (1,717) (1,539) (2,660) (2,918) (3,310)
Subsidiary Loss............................................ (982) (762) -- -- --
Minority interest.......................................... -- -- (382) (113) --
-------- ------- -------- ------- -------
Loss before income taxes from continuing operations........ (10,807) (1,941) (11,399) (8,758) (8,509)
Income tax benefit......................................... 1,500 -- -- 1,303 --
Income tax expense......................................... -- -- (277) -- --
-------- ------- -------- ------- -------
Net loss from continuing operations........................ (9,307) (1,941) (11,676) (7,455) (8,509)
Income (loss) from discontinued operations................. (681) 85 585 2,460 2,370
-------- ------- -------- ------- -------
Net loss................................................... $ (9,988) $(1,856) $(11,091) $(4,995) $(6,139)
======== ======= ======== ======= =======
Basic and diluted net loss per share from continuing
operations............................................... $ (.76) $ (0.20) $ (1.26) $ (.93) $ (1.11)
======== ======= ======== ======= =======
Basic and diluted net income (loss) per share from
discontinued operations.................................. $ (.06) $ 0.01 $ 0.06 $ 0.31 $ 0.31
======== ======= ======== ======= =======
Weighted average number of basic and
diluted shares outstanding............................... 12,132 9,927 9,268 8,024 7,672
Balance Sheet Data:
Total assets (restated for 1998 and 1997).................. $ 12,117 $ 24,884 $ 84,789 $45,254 $48,644
Total long term obligations................................ $ 7,337 $ 8,530 $ 23,008 $20,107 $10,796
Redeemable preferred stock................................. $ -- $ -- $ 13,196 $ -- $ --
Convertible preferred stock................................ $ -- $ 1 $ 4 $ -- $ --
Stockholders' equity (deficit) (restated for 1998
and 1997)................................................ $ (338) $ 8,526 $ 9,951 $12,669 $13,243
</TABLE>
(1) Certain prior year amounts have been reclassified to conform to current
year presentation.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENTS - CAUTIONARY STATEMENTS
This Form 10-K 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. The Company's future operating results are
subject to a number of risks and uncertainties. Those believed by management
of the Company to be the most troublesome if they were to occur are set forth
below in RISK FACTORS RELATING TO FORWARD LOOKING STATEMENTS.
RISK FACTORS RELATING TO FORWARD-LOOKING STATEMENTS
REGULATORY CHANGES. The Company's sales and revenues are affected by existing
regulations and by changes in state and federal regulations to which the
Company's customers, equipment business and service business are subject. The
rate of change in proposed and promulgated regulations affecting operator
service businesses and payphone manufacturers has accelerated since passage
of the Telecommunications Act of 1996 in February of that year. In addition,
numerous parties affected by regulatory changes have sought modifications or
rescission of proposed or existing regulations, some of
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which would adversely affect the Company if adopted. There can be no
assurance that proposed regulatory changes that might adversely affect the
Company will not be adopted, or that existing regulations that may benefit
the Company's operations if implemented will not be rescinded or delayed in
their implementation. Furthermore, many aspects of telecommunications
legislation and regulations have been litigated in various federal and state
courts. Decisions emanating from federal and state courts could have an
adverse effect on the Company.
VOLUME AND PROFITABILITY OF EQUIPMENT SALES. The Company develops and sells
products into mature markets that have limited opportunity for growth and
expansion. The Company's long-term financial welfare will depend on deeper
and more profitable penetration within these markets. Furthermore, the
Company's ability to implement and execute an effective business strategy for
new products and services, will directly effect the Company's ability to
generate working capital and fund growth. Funds available to the Company from
external sources may be insufficient to finance growth in working capital,
and internally generated funds may be insufficient to finance desired capital
spending or research and development spending.
The Company has historically suffered from low gross margins on equipment
sales. Although provisions for inventory losses, bad debt, warranty reserves
and onetime write-offs of assets have resulted in negative gross margins
through 1999, the Company's variable gross margins on phone and network
equipment products introduced since 1996 have improved. Notwithstanding such
improvement, increased equipment sales volume is required in future periods
to cover a variety of costs. Such costs include but may not be limited to
fixed manufacturing overhead expenses and selling, general and administrative
expenses associated with the production and sale of the Company's products.
There is no guarantee that the required increase in sales will generate
sufficient gross profit to finance the portion of working capital growth not
financed externally.
INTERNATIONAL ECONOMIC CONDITIONS. As a provider of payphone and network
switching equipment into developing countries, the Company is subject to
economic and political instability that may affect its ability to sell its
products into these markets and/or collect on accounts for products sold in
these markets.
YEAR 2000 DISCUSSION. The Company undertook a multi-year program (the "Y2K
Program") during 1997 to ensure that its operations, computer systems and
certain products were not functionally impaired as a result of a failure to
properly record in any electronic medium the correct time and date on and
after January 1, 2000.
In general, the Company's products currently produced or supported have been
Y2K certified. Through 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 from
third-party vendors, the Company has concluded that the accounting, MRP and
payroll systems are Y2K compliant. Letters of assurance were requested from
other key third-party vendors concerning
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other equipment and systems utilized by the Company, including outside
billing agents used in the collection of customer call traffic accounts
receivable.
To date the Company has not encountered any material Y2K issues with respect
to the Companies products currently produced, supported or widely deployed,
IT Systems used by the Company in its manufacturing, accounting,
administration and human resources departments, or other key third-party
vendors concerning other equipment and systems utilized by the Company.
Despite the fact the Year 2000 has commenced and we have experienced no
material problems to date, the Company cannot assure that the risks posed by
Year 2000 issues will not materially adversely affect its business in the
future, either as a result of unanticipated difficulties related to the
Company's systems or to third parties.
The following discussion of the financial condition and results of operations
of the Company for 1999, 1998 and 1997 should be read in conjunction with the
Financial Statements of the Company, the Notes thereto and information
included elsewhere in this report. References in the following discussion to
annual periods refer to the Company's years ended December 31.
CHANGES IN PRESENTATION.
In 1997, ILD acquired the assets of WorldCom as well as all of the
outstanding common stock of Interlink (see Note 17). The issuance of stock by
ILD to third parties in these transactions decreased the Company's percentage
of ownership in ILD and the value assigned to ILD common stock issued under
both of the aforementioned transactions was substantially more than the
Company's carrying amount per share of ILD stock, thus triggering a change in
the Company's interest in ILD. The Company has restated its December 31, 1997
and December 31, 1998 financial statements in accordance with Staff
Accounting Bulletin ("SAB") Topic 5H, as amended by SAB 84, to reflect the
change of interest in ILD which arose in 1997.
As previously stated, effective January 1, 1998, the Company changed its
method of accounting for its investment in ILD from consolidation to the
equity method, since its percentage ownership in ILD declined from 53.7% at
December 31, 1997 to 42.0% in 1998 and 30.0% in 1999. Under the equity method,
an investment in common stock is generally shown in the balance sheet of an
investor as a single amount. Likewise, an investor's share of net earnings or
losses from its investment is ordinarily shown in its income statement as a
single amount. 1997 comparative financial information has not been restated to
the equity method and is presented as previously reported. In reviewing the
financial statements and discussion contained in this Form 10-K, the reader
must be aware that much of the
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information is not directly comparable as the operating results and balance
sheet of ILD were consolidated with those of the Company in 1997.
On September 22, 1999 the Company elected to discontinue its billing services
operations effective October 21, 1999 (See NOTE 16 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 that 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. 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 in its statements of operations under the caption
"Income (loss) from discontinued operations". Prior periods have been
presented under the revised format.
RESULTS OF OPERATIONS
1999 COMPARED TO 1998
EQUIPMENT SALES. Equipment sales declined from $13.9 million in 1998 to $11.1
million in 1999 primarily due to reduced N-Genius system sales. Sales for the
N-Genius system declined from $2.6 million in 1998 to $.5 million in 1999, and
were impacted by the currency weakness of the Pacific Rim and certain Latin
American countries and the inability of the customer base to expand and grow
their switching systems. Phone equipment sales were relatively consistent in
1999 when compared to 1998, decreasing $.4 million in the current period from
$10.8 million in 1998 to $10.4 million in 1999.
GROSS PROFIT (LOSS). Gross profit declined $4.3 million from $2.3 million in
1998 to a gross loss of $2.0 million in 1999, due primarily to a one-time
writeoff of goodwill and capitalized software costs of $3.2 million, as well
as excess capacity costs related to the McAllen manufacturing plant.
As of December 31, 1999, the Company reduced the net realizable value for its
goodwill related to the McAllen manufacturing plant ($.7 million) and
capitalized software costs related to products and services ($2.5 million) to
zero, pursuant to FAS 121 and FAS 86 (See NOTE 3 TO THE FINANCIAL STATEMENTS).
The change in Intellicall's manufacturing model from a full scale
manufacturing environment to an outsourced, light assembly operation led to
the reduction of goodwill. Similarly, the continued softness in the public
payphone market, coupled with the discontinuation of certain product lines and
the billing services segment, led to the reduction of capitalized software.
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Due to the down turn in the IPP market, which led to a significant reduction
in production, fixed costs associated with excess capacity in the McAllen
manufacturing facility resulted in an increase in cost of goods sold, thereby
reducing gross profit for the period by $.4 million.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative costs ("SG&A") declined in 1999 when compared to 1998 from $7.4
million to $6.0 million, a $1.4 million or 19% decrease. Cost reduction
programs initiated during the year had a positive impact within this cost
category. Specifically, payroll costs (salaries, wages and benefits) declined
$.8 million or 15%, from 1998 to 1999 pursuant to head count reductions of 55
employees over the course of the year. Similarly, the Company experienced a
general reduction in other costs as management focused on decreasing the
Company's cost to meet current operating requirements, including outsourcing
Human Resources and certain MIS functions, as well as reducing travel,
promotion and consulting expenses.
PROVISION FOR DOUBTFUL ACCOUNTS. Provision expense for doubtful accounts
declined from $.9 million in 1998 to $.6 million in 1999. Improvement in the
quality of the Company's receivables and positive collection efforts on old
and outstanding accounts contributed to an overall reduction of $.7 million
in the expense. However, this reduction was partially offset by a bad debt
expense of $.4 million was recorded for the write down of a $1.2 million note
receivable due from New York City Telecommunications ("NYCT"). The NYCT note,
due on December 31, 2001, provides for the monthly payment of interest and
principal of $34,238. Through June 1999, NYCT had serviced the note timely
and in full at which time the outstanding principal of the note was $1.2
million. The Company has initiated legal action for the immediate collection
of the principal balance pursuant to NYCT being in default of the note
agreement and has reserved $.4 million against the note subject to the
outcome of the litigation (See NOTE 1 TO THE FINANCIAL STATEMENTS).
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased
$.7 million from 1998 to 1999 due to the completion of all Y2K compliance
issues for products and services.
GAIN ON SALE OF ASSETS. 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. The Company sold
the shares for $250.00 each, for a total of $1.3 million of which $1.1 million
was recognized as a gain. The Company used the proceeds to fund operations.
The transaction lowered the Company's ownership percentage in ILD to 31.0% as
of October 21, 1999 (See NOTE 1 TO THE FINANCIAL STATEMENTS).
In the fourth quarter of 1999 the Company recognized a $.3 million
gain relating to the sale of the Company's prepaid services operation to ILD.
LOSS ON INVESTMENTS. The Company maintains a 3% equity ownership position in
New York City Telecommunications ("NYCT") which prior to 1999 was recorded on
the balance sheet for $.5 million. The Company is currently engaged in legal
proceedings with NYCT for the collection of a note due
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from NYTC (See PROVISION FOR DOUBTFUL ACCOUNTS within this section). Given the
current legal situation between Intellicall and NYCT and the lack of financial
information on NYCT, the Company has determined the current value of this
investment to be $.1 million, has reduced the investment accordingly,
recognizing a loss on investment of $.4 million (See NOTE 1 TO THE FINANCIAL
STATEMENTS).
INTEREST EXPENSE. Interest expense was $1.7 million for 1999 compared to $1.5
million for 1998. The increase is attributable to the payment of interest on
higher loan principal balances for the period. (See NOTE 7 TO THE FINANCIAL
STATEMENTS).
EQUITY IN LOSS OF UNCONSOLIDATED SUBSIDIARY. The Company reported a $1 million
loss on the equity investment in ILD for 1999. This loss represents
Intellicall's proportionate share, based on ownership, of ILD's net loss for
the period. In 1998 the Company's proportionate share of the loss was $.8
million.
DISCONTINUED OPERATIONS. On September 22,1999 the Company elected to
discontinue its billing services operations effective October 21, 1999 (See
NOTE 16 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. 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. As a result of
this action the net results of the billing services operations are reported on
the statements of operations under the caption "Income (loss) from
discontinued operations." Net revenues related to the billing services
operations were $9.3 million and $25.8 million for the years ended December
31, 1999 and 1998. During the years ended December 31, 1999 and 1998, the
Company reported a net loss of $.7 million and a net income of $.08 million,
attributable to billing service operations, respectively.
Assets of the billing services operations discontinued consisted of
receivables of $.5 million, net of $1.8 million of allowance for doubtful
accounts as of December 31, 1999 and $3.6 million, net of $3.2 million of
allowance for doubtful accounts as of December 31, 1998. Liabilities of the
billing services operations discontinued consisted of payables of $.01 million
as of December 31, 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 position with a valuation allowance reserved against its deferred
tax assets.
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1998 COMPARED TO 1997
EQUIPMENT SALES. Equipment sales declined in 1998 by $5.5 million, or 28.2%,
from $19.3 million in 1997. Demand for the Company's payphones and related
equipment from IPPs continued to be markedly weaker than in 1997 as evidenced
by a $6.2 million decline in equipment sales to IPPs from 1997 to 1998.
Delayed, sporadic and negligible payments to IPPs of dial-around compensation
appear to have diminished the incentives of IPPs to expand their routes. In
lieu of route expansion, many IPPs have chosen to rotate phones within their
routes from one location (where increased numbers of undercompensated
dial-around calls have rendered a location insufficiently profitable) to
another (where a higher rate of coin and lower rate of dial-around calls
promise profitability). Until the amount and timing of dial-around
compensation payments become adequate and reliable, management of the Company
believes that sales to IPP's will continue to be depressed.
Partially offsetting the weakness in the IPP market segment was the increased
demand for N-Genius systems from international customers and, commencing in
the 1998 third quarter, demand from a regulated telephone company for ASTRATEL
2 kits. Although international sales were impacted by the currency weakness of
Pacific Rim and certain Latin American countries, Intellicall's export sales
continued to expand in 1998. The Company's equipment sales in 1998 to the
international and regulated telephone company segments increased by $.7
million as compared to 1997.
GROSS PROFIT. The Company's gross profit on 1998 equipment sales was $2.3
million, or 16.3% of equipment sales, compared to a $2.6 million negative
gross profit in 1997. In 1997, the Company provided $5.9 million for inventory
losses and the impairment of certain capitalized software costs (the "1997
Loss Provision"), without which gross profit from equipment sales would have
been $3.3 million, or 17.0% of 1997 equipment sales. After excluding the
effect of the 1997 Loss Provision from the comparison, the change in gross
margin from 17.0% in 1997 to 16.3% in 1998 resulted principally from the lower
volume of equipment sales in 1998, offset by a $.9 million reduction in 1998
of amortized software development costs, receipt in 1998 of a $.5 million
order cancellation fee, reduced material costs and reduced overhead costs and
labor efficiency.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. In 1997, ILD's and the prepaid
business' selling, general and administrative ("SG&A") expenses were $6.1
million. Excluding ILD's and the prepaid business' SG&A expenses from the
comparison of annual expense levels, the Company's SG&A expenses increased by
$.9 million, or 13.8%, from $6.5 million in 1997 to $7.4 million in 1998. The
increased expenses resulted from increases in marketing, public relations and
customer service expenses, offset by a general reduction in payroll related
expenses.
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DECONSOLIDATION OF ILD. In 1997 $60 million in service revenues and $53
million in cost of sales were reported as a result of the operator services
business related to ILD. In 1998 and 1999, these items, along with other
indirect costs, were reported as one line item on the Company's financial
statements (Equity in the loss of subsidiary), pursuant to the deconsolidation
of ILD (See CHANGES IN PRESENTATION of this discussion and NOTE 1 TO THE
FINANCIAL STATEMENTS).
DISCONTINUED OPERATIONS. On September 22, 1999, the Company elected to
discontinue its billing services operations effective October 21, 1999 (See
NOTE 16 TO THE FINANCIAL STATEMENTS). Accordingly, the net results of
operations for billing services for 1998 and 1997 are reported as income from
discontinued operations of $.09 million and $.6 million, respectively.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts declined
from $1.0 million in 1997 to $.9 million in 1998. The $.1 million decline is a
result of the improved credit quality and lower level of the Company's sales.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased
$.8 million from 1997 to 1998 partially due to a $.3 million reduction in the
amount of software development costs capitalized in 1998, as compared to 1997,
and an increase in research and development expenditures.
GAIN ON SALE OF ASSETS. During the first quarter of 1998, Intellicall reported
gains on sales of assets totaling $6.4 million resulting from the sale of the
Company's prepaid services operation to ILD and from a sale in March 1998 of a
portion of the Company's ownership interest in the common stock of ILD to an
unrelated third party.
During the second quarter of 1998, the Company reported a $.5 million gain
from the sale of a portion of the Company's ownership interest in ILD to an
unrelated third party.
In the fourth quarter of 1998, the Company recognized a $.5 million gain
relating to the sale of the Company's prepaid services operation to ILD.
INTEREST EXPENSE. Interest expense was $1.5 million for 1998 compared to $2.7
million for 1997. Excluding interest expense of $.8 million in 1997 relating
to ILD, interest expense decreased from $1.9 million in 1997 to $1.5 million
in 1998, primarily as a result of reduced debt.
LIQUIDITY AND CAPITAL RESOURCES
In recent years, the Company has financed its net losses, capital expenditures
and capitalized research and development costs through a combination of asset
sales, reductions in working capital and external financing. In 1998, the
Company generated $8.5 million of cash from asset sales, proceeds of which
were used in part to reduce outstanding borrowings under the Company's
previous line of credit. Assets sold in 1998 included the Company's prepaid
calling card operations and a
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portion of its holdings in ILD.
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 (See NOTE 7 TO THE FINANCIAL STATEMENTS). 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 5%
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 expires on December 21, 2000.
Proceeds from the sale of receivables have been used by the Company to retire
all of its obligations to Finova Capital Corporation ("Finova"), and for other
working capital purposes. In terminating its relationship with Finova, and
entering into the arrangement with RFC, Intellicall has retained the right to
use all of its assets which are not otherwise sold to RFC, including its ILD
holdings, in secured lending arrangements, should it become desirable and
possible to do so.
The Company reported a net loss from continuing operations of $10.8 million in
1999. This loss included non-cash charges of $7.1 million for depreciation and
amortization, provisions for doubtful accounts, inventory losses and the
minority interest of losses reported by ILD. Adding depreciation and
amortization of $5.2 million and interest charges of $1.7 million to the net
loss results in a loss before interest, taxes, depreciation and amortization
(EBITDA) of approximately $3.9 million. Net changes in operating assets and
liabilities during 1999 provided a source of cash of $4.9 million. Accounts
receivable declined $2.8 million for the period primarily resulting from lower
equipment and service sales, while inventories decreased $1.8 million as a
result of reduced inventory purchases and improved inventory management.
Cash flows from investing activities include capitalized equipment purchases
of $.1 million, software development costs of $1.0 million and receipts of
$1.3 million from the sale of 5,000 shares of ILD Series A Convertible
Preferred Stock to First Avenue (See NOTE 1 TO THE FINANCIAL STATEMENTS).
Cash flows from financing activities include the $2.8 million repayment on the
line of credit from
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Finova, additional net borrowings of $2.0 million from Banca del Gottardo, the
repayment of a $1.0 million convertible subordinated note due to T.J. Berthel
Investments, L.P and $.9 million in proceeds from the sale of Common stock,
also to Banca del Gottardo (See NOTES 7 AND 11 TO THE FINANCIAL STATEMENTS).
At March 31, 1999, the Company was required to retire the $1.0 million
convertible subordinated note due to T.J. Berthel Investments, L.P. On April
9, 1999 the Company obtained bridge financing of $1.0 million from Banca del
Gottardo for the purpose of satisfying all obligations to T.J. Berthel
Investments.
On June 11, 1999 the Company completed the sale of a $2.0 million of 7.0%
convertible subordinated note, due June 11, 2004, to Banca del Gottardo. $1.0
million of the net proceeds from the sale of the note was used to repay the
bridge financing, with the balance utilized for working capital. The note was
issued with warrants to purchase 200,000 shares of the Company's common stock
at $1.55 per share. The note is 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 note,
the Company has collateralized this note with 35,000 shares of ILD Series A
preferred stock. (See NOTE 7 TO THE FINANCIAL STATEMENTS).
On October 21, 1999 the Company sold to First Avenue 5,000 shares of ILD
Series A convertible preferred stock. First Avenue is an unrelated third
party. The Company sold the shares for $250.00 each, for a total of $1.3
million of which $1.1 million was recognized as a gain. The transaction
lowered the Company's ownership percentage in ILD to 31.0% as of October 21,
1999. Proceeds from the sale were used to fund operations (See NOTE 1 TO THE
FINANCIAL STATEMENTS).
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 note is $2.6 million. On December 30, 1999 the
Company issued warrants to purchase 200,000 shares of its common stock at a
price of $1.00 per share to Banca del Gottardo. In consideration of the
warrants, Banca del Gottardo amended the December 29, 1995 note to postpone
the put on the notes from December 31, 1999 to June 30, 2000 (See NOTE 7 TO
THE FINANCIAL STATEMENTS).
On December 30, 1999 the Company sold 1 million shares of common stock to
Banca del Gottardo for $0.85 per share. The purchase price represented a 15%
discount to the closing price of the Company's common stock upon the agreed
upon date of December 22, 1999. Proceeds from the sale were utilized for
working capital purposes (See NOTE 11 TO THE FINANCIAL STATEMENTS).
On January 4, 2000 the Company was notified by ILD of its intention to redeem
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Intellicall's interest in ILD's Series B preferred convertible stock. ILD is
to redeem 5,000 shares for $100 per share plus accrued and unpaid dividends by
April 11, 2000. As of March 31, 2000, ILD had remitted $.2 million to the
Company, redeeming 1,487 shares of the Series B preferred convertible stock
and became current on all accrued and unpaid dividends. Proceeds from the sale
were used for general operating purposes (See NOTE 19 TO THE FINANCIAL
STATEMENTS).
On February 11, 2000 the Company signed a $.5 million revolving promissory
note with Bank of America, N.A., due February 11, 2001. Interest is payable
monthly at its prime rate commencing on March 11, 2000 with the principal of
the note guaranteed by William O. Hunt, Chairman of the Board of Intellicall.
The Company may repay and re-borrow under the terms of the note at any time,
up to a maximum aggregate outstanding balance equal to the principal amount of
the note. Proceeds of the note will be used for working capital purposes. The
current outstanding balance on the note is $.5 million (See NOTE 19 TO THE
FINANCIAL STATEMENTS).
On April 11, 2000 the Company sold to Banca del Gottardo the Company's
remaining ownership in ILD, exclusive of 6,239 shares of Series A preferred
convertible stock the Company is required to hold pursuant to the ILD
organization agreement. The Company's ownership in ILD includes approximately
58,772 shares of ILD Series A preferred convertible stock, 725 shares of ILD
common stock and 11,111 shares of ILD common stock obtainable upon conversion
of the $1.0 million subordinated convertible note due from ILD to Intellicall,
dated May 10, 1996 (See ITEM 7 OF THE DISCUSSION). Pursuant to the sale to
Banca del Gottardo, Intellicall informed ILD as of March 10, 2000 of it's
election to convert the entire principal balance of the Note into 11,111
shares on ILD common stock.
The terms of the ILD stock sale include the purchase of the Company's
ownership in ILD (70,608 combined shares of Series A and Common shares) for
$220 per share or $15.5 million with the Company maintaining the option for 12
months to repurchase the shares at $250 per share. 100% of the purchase price
will be paid in US Dollars at the closing of such sale. This offer has been
communicated to ILD and ILD shareholders in accordance with the ILD
Shareholders' Agreement referencing ILD's and ILD shareholders' rights to
match the offer and exercise certain co-sale rights.
It is management's intention to use the proceeds from this sale to retire
approximately $8.0 million of the $10.0 million long and short-term debt
currently carried by the Company. The remaining proceeds will be used for
general operating purposes and to fund expansion into new markets subsequent
to the acquisition of Heads Up (SEE PART I, ITEM 1, GENERAL DEVELOPMENTS FOR
DISCUSSION OF THE HEADS UP ACQUISITION).
Management of the Company believes that the proceeds from the sale of the
Company's ownership in ILD will enable the Company to finance its operations
for the year ending December 31, 2000. Beyond 2000, 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, through the execution of its current business plan and the
implementation of the new
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business strategy related to the Heads Up acquisition. Although management of
the Company believes that the Company's sales will grow in 2000 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Index to Financial Statements located on page F-1 for a
listing of the financial statements included as a part of this Annual Report
on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
-25-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Items 10, 11, 12 and 13 of this Annual
Report on Form 10-K is omitted pursuant to General Instruction G(3) and will
be included in the Registrant's Definitive Proxy Statement to be filed with
the Commission not later than 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K.
-26-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) (1) Financial Statements.
The financial statements filed as a part of this
Annual Report on Form 10-K are listed in the "Index to
Financial Statements" on page F-1 hereof.
(2) Financial Statement Schedules.
The financial statement schedules filed as part of
this Annual Report on Form 10-K are listed in the "Index to
Financial Statements" on page F-1 hereof.
(3) Exhibits.
The following exhibits are filed as a part of this
Annual Report on Form 10-K.
<TABLE>
<S> <C>
(a)3.1 Certificate of Incorporation of the Company
and all amendments thereto through December
31, 1992.
(c)3.2 Amendment to Certificate of Incorporation
raising the authorized common stock from
10,000,000 shares to 50,000,000 shares.
(f)3.3 Amendment to Certificate of Incorporation
lowering the authorized common stock from
50,000,000 shares to 20,000,000 shares.
(b)3.4 Bylaws of the Company, as amended.
(a)4.1 Specimen certificate for Common Stock of
the Company.
(f)10.1 Intellicall, Inc. 1991 Stock Option Plan,
as amended.
(b)10.2 Form of Incentive Stock Option Agreement.
(b)10.3 Form of Nonqualified Stock Option
Agreement.
(b)10.4 Form of Director Stock Option Agreement.
(f)10.5 Form of 1995 Employee Stock Purchase Plan.
(b)10.6 ADREC Development and License Agreement,
dated as August 2, 1990, between VCS
Industries, Inc. d/b/a Voice Control
Systems and the Company.
(b)10.7 Amended and Restated Patent License
Agreement dated as of January 1, 1992,
between the Company and MessagePhone, Inc.
(d)10.8 Amended and Restated 10% Convertible
Subordinated Note Due 1999 dated August 11,
1994 with T.J. Berthel Investments, L.P.
-27-
<PAGE>
(c)10.9 Registration Rights Agreement dated
February 14, 1994, between the Company and
T.J. Berthel Investments, L.P.
(e)10.10 Note and Warrant Purchase, Paying and
Conversion/Exercise Agency Agreement
entered into on December 22, 1995 between
Banca Del Gottardo and the Company.
(e)10.11 Form of 8% Convertible Subordinated Note
executed by the Company to Banca Del
Gottardo dated December 22, 1995.
(e)10.12 Form of Warrants issued with Notes.
(g)10.13 Note and Warrant Purchase, Paying and
Conversion/Exercise Agency Agreement dated
November 22, 1996 and executed with Banca
del Gottardo.
(g)10.14 Form of 8% Convertible Subordinated Notes
executed by the Company to Banca Del
Gottardo dated November 22, 1996 (included
within Exhibit 10.13).
(g)10.15 Form of Warrants issued with Notes
(included within Exhibit 10.13).
(h)10.16 Receivable Sale Agreement executed with RFC
Capital Corporation.
++21.1 Subsidiaries of the Company.
++23.1 Consent of Independent Accountants.
++27.1 Financial Data Schedule.
</TABLE>
++ Filed herewith.
(a) Incorporated by Reference from the Company's Form S-1 filed August
28, 1987, file no. 33-15723.
(b) Incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1991.
(c) Incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993.
(d) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1994.
(e) Incorporated by reference from the Company's Current Report on Form
8-K (Date of Earliest Event Reported - December 28, 1995).
(f) Incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995.
(g) Incorporated by reference from the Company's Current Report on Form
8-K (Date of Earliest Event Reported - November 22, 1996).
(h) Incorporated by reference from the Company's Current Report on Form
8-K (Date of Earliest Event Reported - January 27, 1999).
-28-
<PAGE>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last fiscal
quarter of 1999.
The following undertaking set forth herein relates to the Company's
Registration Statement on Form S-8 (No. 33-60235), and on Form S-8 (No.
33-64583):
"Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue."
-29-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly casued this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
April 14, 2000 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 April 14, 2000.
Name Office
---- ------
/s/ John J. McDonald, Jr. President and Chief Executive Officer
- ------------------------------------ (Principal Executive Officer)
John J. McDonald, Jr.
/s/ R. Phillip Boyd Vice President of Finance, Chief
- ------------------------------------ Financial Officer and Secretary
R. Phillip Boyd
/s/ William O. Hunt Chairman of the Board
- ------------------------------------
William O. Hunt
Director
- ------------------------------------
B. Michael Adler
/s/ Lewis E. Brazelton III Director
- ------------------------------------
Lewis E. Brazelton III
/s/ Arthur Chavoya Director
- ------------------------------------
Arthur Chavoya
/s/ Richard B. Curran Director
- ------------------------------------
Richard B. Curran
-30-
<PAGE>
INTELLICALL, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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-34
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.
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Intellicall, Inc.
In our opinion, the financial statements and related schedule listed in the
accompanying index on page F-1 present fairly, in all material respects, the
financial position of Intellicall, Inc. at December 31, 1999 and 1998, and
the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States. 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
auditing standards generally accepted in the United States, 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.
As discussed in NOTE 2, the Company has restated its December 31, 1997
and December 31, 1998 financial statements.
While management believes it will be able to fund the December 31, 2000
operations from the $15.5 million proceeds received in the sale of the
Company's ownership in ILD, it has experienced recurring losses from
operations, continuous decline in revenues as well as difficulty in funding
its operations in recent years. Management's plans with respect to these
matters beyond 2000 are discussed in NOTE 4.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
April 11, 2000
F-2
<PAGE>
INTELLICALL, INC.
BALANCE SHEETS
ASSETS
(in thousands)
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
Current assets (Restated)
Cash and cash equivalents ........................................ $ 694 $ 16
Receivables, net of allowance for doubtful accounts
of $764 and $442............................................. 1,455 4,263
Inventories, net.................................................. 3,088 5,177
Receivables from related party, net .............................. 1,258 1,658
Deferred Tax Asset................................................ 1,500 --
Other current assets.............................................. 157 197
Total current assets......................................... 8,152 11,311
Fixed assets, net...................................................... 980 1,425
Capitalized software costs, net of accumulated amortization
of $2,652 in 1998................................................ -- 2,481
Notes receivable....................................................... -- 1,074
Intangible assets, net of accumulated amortization
of $1,118 in 1998............................................... -- 749
Investment in unconsolidated subsidiary................................ 1,835 2,971
Other assets, net...................................................... 637 1,286
Assets of discontinued operations...................................... 513 3,587
Total Assets...................................................... $12,117 $ 24,884
======= ========
See notes to financial statements.
</TABLE>
F-3
<PAGE>
INTELLICALL, INC.
BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
(in thousands, except share information)
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
<S> <C> <C>
Current liabilities (Restated)
Accounts payable.......................................... $ 1,798 $ 2,085
Accrued liabilities....................................... 610 1,052
Current portion of long-term debt ........................ 2,630 3,811
Total current liabilities................................. 5,038 6,948
Long-term debt ................................................ 6,557 7,312
Deferred gain on sale of assets................................ 730 968
Other liabilities.............................................. 50 250
Liabilities of discontinued operations......................... 80 880
Total liabilities........................................ 12,455 16,358
Commitments and contingent liabilities (See Notes 14 and 18)... -- --
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; 13,080,175 and 11,738,001 shares issued,
respectively......................................... 131 117
Additional paid-in capital................................ 61,486 60,375
Less common stock in treasury, at cost;
24,908 shares........................................ (258) (258)
Accumulated deficit....................................... (61,697) (51,709)
Total stockholders' equity (deficit)................. (338) 8,526
$ 12,117 $ 24,884
========== ========
See notes to financial statements.
</TABLE>
F-4
<PAGE>
INTELLICALL, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Sales and Revenues:
Equipment sales.............................................. $11,131 $ 13,859 $19,313
Services revenues............................................ -- -- 60,450
------- -------- -------
11,131 13,859 79,763
Cost of sales and revenues:
Equipment sales, including writeoffs of $.7 million in
goodwill and $2.5 million in capitalized software costs
in 1999 and $1.6 million of capitalized software costs
in 1997 (See Note 3).................................... 13,174 11,600 21,929
Services revenues............................................ -- -- 52,523
------- -------- -------
13,174 11,600 74,452
------- -------- -------
Gross profit (loss).............................................. (2,043) 2,259 5,311
Selling, general and administrative expenses..................... (6,005) (7,363) (12,616)
Provision for doubtful accounts.................................. (592) (876) (1,006)
Research and development expenses................................ (907) (1,587) (741)
------- -------- -------
Operating loss from continuing operations........................ (9,547) (7,567) (9,052)
Gain on sale of assets........................................... 1,431 7,389 --
Loss on investments (See Note 1)................................. (338) -- --
Other income..................................................... 346 538 695
Interest expense................................................. (1,717) (1,539) (2,660)
Equity in the loss of unconsolidated subsidiary.................. (982) (762) --
Minority interest................................................ -- -- (382)
------- -------- -------
Loss before income taxes from continuing operations.............. (10,807) (1,941) (11,399)
Income tax benefit (expense)..................................... 1,500 -- (277)
------- -------- -------
Net loss from continuing operations.............................. (9,307) (1,941) (11,676)
Income (loss) from discontinued operations....................... (681) 85 585
-------- -------- --------
Net loss......................................................... $ (9,988) $ (1,856) $(11,091)
======== ======== ========
Basic and diluted net loss per share from continuing operations $ (0.76) $ (0.20) $ (1.26)
======== ======== ========
Basic and diluted net income (loss) per share from
discontinued operations.......................................... $ (0.06) $ 0.01 $ 0.06
======== ======== ========
Basic and diluted net loss per share............................. $ (0.82) $ (0.19) $ (1.20)
======== ======== ========
Weighted average number of basic and diluted
shares outstanding.......................................... 12,132 9,927 9,268
======== ======== ========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
INTELLICALL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional Treasury Stock
---------------- --------------- Paid-in -------------- Accumulated
Shares Amount Shares Amount Capital Shares Cost Deficit Total
------ ------ ------ ------ ------- ------ ---- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 plan 17 -- -- -- 74 -- -- -- 74
Issuance of stock 430 4 -- -- 481 -- -- -- 485
Conversion of subordinated notes 314 3 -- -- 1,237 -- -- -- 1,240
Issuance of preferred stock -- -- 4 1 3,824 -- -- -- 3,825
Effect of change in
Interest of unconsolidated
Subsidiary (Restated), (See
Note 2) -- -- -- -- 2,480 -- -- -- 2,480
Net loss -- -- -- -- -- -- -- (11,091) (11,091)
------ ------ ------ ------ ------- ----- ----- -------- --------
Balances at December 31, 1997
(Restated) 9,472 95 4 1 59,966 (25) (258) (49,853) 9,951
Exercise of stock options 47 -- -- -- 183 -- -- -- 183
Employee stock purchase plan 8 -- -- -- 30 -- -- -- 30
Conversion of subordinated notes 50 1 -- -- 200 -- -- -- 201
Conversion of preferred stock 2,149 21 (3) -- (12) -- -- -- 9
Issuance of stock 12 -- -- -- 8 -- -- -- 8
Net loss -- -- -- -- -- -- -- (1,856) (1,856)
------ ------ ------ ------ ------- ----- ----- -------- --------
Balances at December 31, 1998
(Restated) 11,738 117 1 1 60,375 (25) (258) (51,709) 8,526
Conversion of preferred stock 336 4 (1) (1) (2) -- -- -- 1
Employee stock purchase plan 6 -- -- -- 6 -- -- -- 6
Issuance of warrants -- -- -- -- 532 -- -- -- 532
Unearned Warrants -- -- -- -- (265) -- -- -- (265)
Issuance of stock 1,000 10 -- -- 840 -- -- -- 850
Net loss -- -- -- -- -- -- -- (9,988) (9,988)
------ ------ ------ ------ ------- ----- ----- -------- --------
Balances at December 31, 1999 13,080 $ 131 -- $ -- $61,486 (25) $(258) $(61,697) $ (338)
====== ====== ====== ====== ======= ===== =====
</TABLE>
See notes to financial statements.
F-6
<PAGE>
INTELLICALL, INC.
STATEMENTS OF CASH FLOWS (IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from continuing operating activities:
Net loss from continuing operations................... $ (9,307) $ (1,941) $(11,676)
Adjustments to reconcile net loss from continuing
operations to net cash provided by operating
activities:
Gain on sale of assets............................. (1,431) (7,389) --
Depreciation and amortization...................... 5,236 1,760 5,845
Provision for doubtful accounts.................... 592 876 1,393
Provision for inventory losses..................... 310 333 4,382
Equity in loss of unconsolidated subsidiary........ 982 762 --
Minority interest.................................. -- -- 382
Income Tax Benefit................................. (1,500) -- --
Changes in operating assets and liabilities:
Restricted cash................................ -- -- (2,473)
Receivables.................................... 2,766 (1,929) (12,718)
Inventories.................................... 1,779 (757) (1,451)
Receivables from related party, net............ 400 673 --
Other current assets........................... 40 233 (308)
Notes receivable............................... 525 160 446
Accounts payable .............................. (287) (4,187) 4,611
Transmission, customer commissions and billing
charges....................................... -- (939) 9,143
Accrued liabilities............................ (442) (153) 1,600
Deferred gain on sale of assets................ -- 938 (361)
Other.......................................... 143 (123) (2,051)
Net cash used in continuing operating
activities................................ (194) (11,683) (3,236)
Cash flows from investing activities:
Capital expenditures.................................. (122) (478) (2,082)
Capitalized software.................................. (966) (1,031) (1,322)
Cash received on sale of assets....................... 1,252 8,463 --
Capital lease obligation.............................. -- -- 1,000
Acquisition of WorldCom and Interlink assets.......... -- -- (20,542)
Net cash provided by (used in) investing
activities............................... 164 6,954 (22,946)
Cash flows from financing activities:
Net proceeds from (repayments on) line of credit...... (2,811) (1,303) 9,517
Net borrowings (repayments) on notes payable.......... 1,000 (28) --
Proceeds from issuance of stock...................... 856 223 4,653
Proceeds from issuance of stock in unconsolidated
subsidiary........................................... -- -- 6,088
Net cash provided by (used in) financing
activities................................ (955) (1,108) 20,258
Net cash flows from discontinued operations................ 1,663 5,787 3,719
Net increase (decrease) in cash and cash equivalents....... 678 (50) (2,205)
Cash and cash equivalents at beginning of period........... 16 66 2,271
Cash and cash equivalents at end of period................. $ 694 $ 16 $ 66
------ ------ ------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................ $ 988 $ 1,141 $ 2,056
------ ------ ------
SUPPLEMENTAL NON CASH FLOW INFORMATION:
Issuance of stock warrants............................... $ 267 $ -- $ --
------ ------ ------
Conversion of debt to equity............................. $ -- $ 210 $ 1,320
------ ------ ------
Stock issued to purchase WorldCom and Interlink assets... $ -- $ -- $ 13,196
------ ------ ------
Redeemable preferred stock dividend declared ............ $ -- $ -- $ 186
------ ------ ------
</TABLE>
See notes to financial statements.
F-7
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS: Intellicall, Inc. (the "Company") designs, engineers,
manufactures and sells pay telephones and retrofit kits, parts and intelligent
network platforms ("equipment sales") in the United States and internationally.
PRINCIPLES OF CONSOLIDATION: For the year ended December 31, 1997,
the consolidated financial statements include the accounts of the Company and
its then majority owned subsidiary, ILD Telecommunications, Inc. ("ILD"),
formed on May 10, 1996. All significant intercompany accounts and transactions
were eliminated in consolidation. As of December 31, 1999 and 1998, and for
the years then ended, the Company's investment in ILD is presented under the
equity method of accounting.
CREATION OF ILD TELECOMMUNICATIONS, INC.: On May 10, 1996, the
Company entered into an agreement with certain investor groups to create 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.
In September 1997, ILD acquired the Operator Services Division of
WorldCom, Inc. ("WorldCom") (See NOTE 17). 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 17), 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
common stock. SMCO is an unrelated third party, 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.
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.
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. The Company sold
F-8
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
the shares for $250.00 each for an aggregate of $1.3 million and recorded a
gain on the sale in the amount of $1.1 million. There were no additional
obligations or elements of financial consideration relating to the sale
transaction. The transaction lowered the Company's ownership percentage in ILD
to 31.0% as of October 21, 1999.
During November 1999, ILD issued additional shares of its stock to
unrelated third parties. As a result, the Company's ownership percentage in
ILD was reduced to 30.0%.
EQUIPMENT 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.
SERVICE REVENUE RECOGNITION: For 1997, prepaid debit card revenue
was deferred and recognized as calling services were used. The portion of the
business related to the prepaid calling card services was sold to ILD in
January 1998 (See NOTE 17), accordingly no debit card revenue was recorded in
1999 or 1998.
In 1997, 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. Additionally, ILD's call
revenues were recognized at the time the calls were placed.
ADVERTISING: The Company's advertising expenditures, which consist
primarily of advertisements placed in trade publications and participation in
trade shows, are expensed as incurred. The Company incurred $.4 million, $.7
million and $.3 million of advertising expenses for the years ended December
31, 1999, 1998 and 1997, respectively.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include
short-term liquid investments purchased with remaining maturities of three
months or less.
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" ("FAS 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 product's estimated
economic life using the straight line method. Effective January 1, 2000 and as
a result of the impairment charge on capitalized software costs recorded by
the Company on December 31, 1999 (See NOTE 3), the Company decided to expense
as incurred all future costs related to the development of software products
for payphone equipment.
The amounts of software development costs capitalized for the years
ended December 31, 1999, 1998 and 1997 were $1.0 million, $1.0 million and
$1.3 million, respectively. The Company recorded $.9 million, $.6 million and
$1.7 million of software amortization expense for the years ended December 31,
F-9
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1999, 1998 and 1997, respectively. For the years ended December 31, 1999 and
1997, the Company recognized an impairment in value of capitalized software
development costs of $2.5 million and $1.6 million, which is included in cost
of sales in the statement of operations for those years (See NOTE 3).
RECEIVABLES: Receivables (current and long-term) consist of amounts
owed by various customers for equipment sales, leases and license fees. The
Company has provided reserves for potential uncollectible accounts. The
Company's credit department determines collectibility based on customer
contact and financial information made available to the Company. Reserves for
uncollectible accounts include $.3 million for related party receivables in
1999 and 1998.
Also included in receivables for the year ended December 31, 1999 is
a $1.2 million note receivable due from New York City Telecommunications
("NYCT'). The NYCT note, due on December 31, 2001, provides for the monthly
payment of interest and principal of $34,238. Through June 1999, NYCT had
serviced the note timely and in full at which time the outstanding principal
of the note was $1.2 million. Since that time no payments have been received.
The Company has initiated legal action for the immediate collection of the
principal balance pursuant to NYCT being in default of the note agreement and
has reserved $.4 million against the note subject to the outcome of the
litigation. Receivables for the year ended December 31, 1998 include the
current portion of the NYCT notes of $.3 million with the remaining portion of
the note recorded as long term notes receivable.
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.
MAJOR CUSTOMERS: The Company had three customers who accounted for
25.5% or $2.8 million, 14.6% or $1.6 million, and 10.2% or $1.1 million of the
Company's revenues in 1999, one single customer who accounted for 11.1%, or
$1.5 million of the Company's revenues in 1998, and two customers who
accounted for 17.2% or $3.2 million and 13.3% or $2.5 million of the Company's
revenues in 1997.
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.
DEBT ISSUANCE COSTS: The stock purchase warrants issued in
connection with the issuance of debt obligations are valued by the Company
based on the Black-Scholes model and are recorded in accordance with
Accounting Principals Based Opinion No. 14 "Accounting for convertible Debt
and Debt issued with Stock Purchase Warrants" ("APB14"). Accordingly, the
Company defers costs incurred directly in connection with the issuance of
debt obligations and charges such costs to interest expense based on the
interest method, over the terms of the respective debt agreements (See NOTE 7).
F-10
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FIXED ASSETS: Fixed assets are recorded at cost. Depreciation
expense is computed by the straight-line method over the estimated useful
lives of the related assets, where the useful lives range from three to five
years. Maintenance and repairs are expensed as incurred while replacements and
betterments are capitalized.
INTANGIBLE ASSETS: Intangible assets consisted primarily of the cost
in excess of net assets of acquired businesses. These assets were amortized
using the straight-line method over 20 to 25 years. Based on its most recent
analysis, the Company determined that its goodwill existing at December 31,
1999 was fully impaired and accordingly, the Company has written off goodwill
in the amount of $.7 million (See NOTE 3).
OTHER ASSETS: Other assets include investments in stock of third
parties of $.3 million and $.6 million as of December 31, 1999 and 1998.
Included in these investments is a 3% equity ownership position in New York
City Telecommunications ("NYCT") which prior to 1999 was recorded on the
balance sheet for $.5 million. Given the current legal situation between
Intellicall and NYCT and the lack of financial information on NYCT, the
Company has determined the current value of this investment to be $.1 million
and has reduced the investment accordingly, recognizing a loss on investment
of $.4 million.
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 INCOME/LOSS PER SHARE: In February 1997, STATEMENT OF FINANCIAL
ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE" ("FAS 128") was issued. The
Company has adopted FAS 128, which establishes standards for computing and
presenting earnings per share ("EPS"). This statement requires dual
presentation of basic and diluted EPS on the face of the income statement for
entities with complex capital structures and requires a reconciliation of the
numerator and the denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation.
COMPREHENSIVE INCOME: Effective December 31, 1998, the Company adopted
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130, "REPORTING COMPREHENSIVE
INCOME" which 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. There were no items of comprehensive
F-11
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
income for the years ended December 31, 1999, 1998 and 1997.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION: The Company has
one reportable industry segment the equipment segment. The equipment segment
manufactures and sells payphones, switches and related software. The Services
segment, which was discontinued effective October 21, 1999 (See NOTE 16),
provided billing and collection services to owners of payphones who utilize
the Company's automated operator technology.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS: In June 1998, STATEMENT OF
FINANCIAL ACCOUNTING STANDARDS NO. 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES" ("FAS 133"), which, as amended, is
effective for fiscal years beginning after June 15, 2000 was issued. 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. Management is evaluating FAS 133 and does not believe that
adoption of the Statement will have a material impact on its results of
operations, financial position or cash flows.
ACCOUNTING FOR STOCK BASED COMPENSATION: In October 1995, STATEMENT
OF FINANCIAL ACCOUNTING STANDARDS NO. 123, "ACCOUNTING FOR STOCK BASED
COMPENSATION" ("FAS 123") was issued. This 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 statement or the pro
forma effect on net income and earnings per such of such compensation expense
to be disclosed in the footnotes to the Company's financial statements. The
Company has elected to follow ACCOUNTING PRINCIPLES BOARD OPINION NO. 25,
"ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB 25") and related
interpretations in accounting for its employee stock options, and
accordingly, applies FAS 123 on a disclosure basis only as permitted under
FAS 123 (See NOTE 8). As such, FAS 123 does not impact the Company's balance
sheet or results of operations.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified
to conform with the current year presentation.
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.
F-12
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - EFFECT OF RESTATEMENT
In 1997, ILD acquired the assets of WorldCom as well as all of the
outstanding common stock of Interlink (see Note 17). The issuance of stock by
ILD to third parties in these transactions decreased the Company's percentage
of ownership in ILD and the value assigned to ILD common stock issued under
both of the aforementioned transactions was substantially more than the
Company's carrying amount per share of ILD stock, thus triggering a change in
the Company's interest in ILD. The Company has restated its December 31, 1997
and December 31, 1998 financial statements in accordance with Staff
Accounting Bulletin ("SAB") Topic 5H, as amended by SAB 84, to reflect the
change of interest in ILD which arose in 1997.
The effects of the restatement at December 31, 1997 and 1998, were:
(1) to increase the investment in ILD by $1.5 million; (2) to recognize a
$1.0 million note receivable from ILD; and (3) to increase additional paid-in
capital (and stockholders' equity) by $2.5 million.
There was no impact to the Company's income statement and cash flows
for the year ended December 31, 1997 or 1998.
NOTE 3 - ASSET IMPAIRMENT
The continued decline in the public payphone equipment market during
1999 coupled with the discontinuation of certain product lines and the
billing services segment, led the Company to review the goodwill and
capitalized software costs for impairment.
As a result, the Company performed an impairment analysis of the
goodwill in accordance with STATEMENTS 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"), which requires that long-lived assets
held and used by an entity, or to be disposed of, be reviewed for impairment
whenever events or circumstances indicate that the net book value of such
assets may not be recoverable.
During the fourth quarter of 1999, the Company calculated the
estimated future cash flows, undiscounted and before interest, from
continuing operations over a three-year period and determined the goodwill to
be impaired. Consequently, the Company estimated the fair value of the
goodwill based on a discounted cash flow analysis and concluded that the net
book value of this asset of $.7 million needed to be written-off.
During the fourth quarter of 1999, the Company also compared the
unamortized capitalized software costs to their net realizable value, as
prescribed under FAS 86. The Company determined the net realizable value of
capitalized software costs by estimating the future net profits from those
assets over a three-year period and concluded that the net book value of $2.5
million of capitalized software costs as of December 31,
F-13
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1999 was not recoverable.
Accordingly, the Company recorded a non-recurring, non-cash
write-off of goodwill and capitalized software costs of $3.2 million, which
is presented in cost of sales in the statement of operations for the year
ended December 31, 1999.
During the third quarter of 1997, the Company evaluated the
recoverability of its capitalized switching software costs, as prescribed
under FAS 86. After comparing the net book value of the capitalized switching
software costs to the estimated future net profits from those assets, the
Company recognized a non-recurring, non-cash write-down of capitalized
software costs to net realizable value of $1.6 million.
NOTE 4 - RECURRING LOSSES FROM OPERATIONS, WORKING CAPITAL FUNDING
For the year ended December 31, 1999, the Company has continued to
experience significant losses from operations, resulting primarily from a
continuous decrease in revenues due to the decline in the payphone equipment
industry. As a result, the Company has faced difficulty in funding its
operations from internal sources and meeting its cash obligations. During the
year, significant cost-cutting measures have been undertaken by the Company.
In addition, the Company has consistently looked for external financial
support or has sold existing assets in order to meet these cash obligations.
Additionally, during the fourth quarter of 1999, the Company
received a letter from Banca del Gottardo ("Banca") stating its intention to
"Put" to the Company its option to require repayment of the $2.6 million 8%
convertible subordinated notes (originally due on December 31, 2000) in
December 1999. The Company was able to negotiate an extension of the "Put"
option up to June 30, 2000 (See NOTE 7).
In order to address their current liquidity needs, management sold
to Banca del Gottardo the Company's ownership in ILD (See NOTE 19). The
estimated proceeds from this transaction are $15.5 million. The proceeds will
be primarily used to pay down existing debt, including the "Put" due June 30,
2000 and to fund future operations. Such reduction in debt is expected to
deleverage the Company and put management in a better position to move
forward with their current growth opportunities.
On January 18, 2000, the Company entered into a definitive agreement
to acquire Heads Up Technologies, Inc. ("Heads Up", See NOTE 19). Heads Up
designs, manufactures and markets interactive digital products for the
aviation, mass transit and entertainment industries. This acquisition is
expected to give Intellicall the opportunity to expand and grow into markets
already established by Heads Up and enhance the Company's current position in
the public access market by incorporating certain interactive voice and data
technologies into existing and new product lines.
F-14
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Management of the Company believes that the proceeds from the sale
of the Company's ownership in ILD will enable the Company to finance its
operations for the year ending December 31, 2000. Beyond 2000, 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, through the execution of its current business plan and
implementation of the new business strategy related to the Heads Up
acquisition. Although management of the Company believes that the
Company'sales will grow 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.
NOTE 5 - INVENTORIES
The components of inventories are (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
------- -------
<S> <C> <C>
Raw materials ................................................................ $ 3,362 $ 3,629
Work in process................................................................ 133 428
Finished goods ................................................................ 1,003 3,150
------- -------
4,498 7,207
Less reserves for obsolescence................................................. (1,410) (2,030)
------- -------
Net inventory $ 3,088 $ 5,177
======= =======
</TABLE>
Results of operations for the years ended December 31, 1998 and
1997 also include a charge of $.1 million and $4.4 million which represents
the excess of cost over market.
F-15
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - FIXED ASSETS
The components of fixed assets are (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
<S> <C> <C>
Office equipment.............................................................. $3,404 $ 3,351
Tooling and other equipment................................................... 5,001 5,010
------ -------
8,405 8,361
Less accumulated depreciation................................................. (7,425) (6,936)
------ -------
$ 980 $ 1,425
====== =======
</TABLE>
Depreciation expense for the years ended December 31, 1999, 1998 and
1997 was $.5 million, $.7 million and $1.3 million, respectively.
NOTE 7 - LONG-TERM DEBT AND LINE OF CREDIT
The Company's debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
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
7% Convertible subordinated notes, due 2004 2,000 --
Convertible subordinated note, due 1999 -- 1,000
Asset-based note collateralized by certain assets, due 1999 -- 2,811
---------- ----------
9,630 11,441
Less: Unamortized debt discount (443) (318)
---------- ----------
9,187 11,123
---------- ----------
Less: Current portion of long-term debt (2,630) (3,811)
---------- ----------
Total long-term debt $ 6,557 $ 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 3.9% 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 9, 1999.
F-16
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On December 29, 1995 the Company completed the sale of $7.5 million
of 8.0% convertible subordinated notes, due December 31, 2000, to Banca Del
Gottardo 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 unamortized portion of the deferred debt costs recorded by the Company in
connection with those warrants was $42,081 and $84,161 as of December 31,
1999 and 1998. Additionally, a third party holds an additional warrant to
purchase 313,500 shares of common stock exercisable at $2.68 per share. The
notes are convertible into 1,785,714 shares of the Company's common stock at
a price of $4.20 per share. As of 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 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, with the proceeds used to repay a portion of the previous lender's
debt and for working capital purposes. These notes contain an optional
redemption clause ("Put") where, on November 22, 2000, at the holder's
discretion, the holder can Put to the Company the balance of the notes at
106% of the outstanding principal amount. 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 unamortized portion of the deferred debt costs recorded
by the Company in connection with those warrants was $153,334 and $233,333 as
of December 31, 1999 and 1998. In addition, a third party holds an additional
warrant to purchase 209,473 shares of common stock at $3.58 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.
Total interest paid to Banca del Gottardo for the year ended
December 31, 1999 was $.7 million.
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.
F-17
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 year
ended December 31, 1999, the Company incurred $.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 expires on December 21, 2000.
On April 9, 1999 the Company obtained bridge financing of $1.0
million from Banca del Gottardo for the purpose of satisfying all obligations
to T.J. Berthel Investments.
On June 11, 1999 the Company completed the sale of $2.0 million of
a 7.0% convertible subordinated note, due June 11, 2004, to Banca del
Gottardo. $1.0 million of the net proceeds from the sale of the note was used
to repay the bridge financing, with the balance utilized for working capital.
The note was issued with warrants to purchase 200,000 shares of the Company's
common stock at $1.55 per share. The stock purchase warrants were valued at
$160,456 and recorded as deferred debt costs by the Company. The unamortized
portion of those deferred debt costs was $141,779 as of December 31, 1999.
The note is 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
collateralized the note with 35,000 shares of ILD Series A preferred stock.
On October 21, 1999 the Company received notice from Banca del
Gottardo of its intent to "Put" to the Company the balance of the 8.0%
convertible subordinated 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.
On December 30, 1999 the Company issued warrants to purchase
200,000 shares of its Common Stock at a price of $1.00 per share to Banca del
Gottardo. In consideration of the warrants, Banca del Gottardo amended the 8%
convertible, subordinated notes due December 31, 2000 to postpone the Put on
the notes from December 31, 1999 to June 30, 2000.
F-18
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Aggregate maturities of long-term debt in the next five years are
$2.6 million, $5.0 million, $0, $0 and $2.0 million.
NOTE 8 - STOCK-BASED COMPENSATION
As permitted under FAS 123, the Company applies APB 25, and related
interpretation, in accounting for its employee stock options. In accordance
with APB 25, no compensation expense or unearned compensation was recorded
for the years ended December 1999, 1998 and 1997. As discussed in NOTE 1, the
Company has adopted the disclosure-only provisions of FAS 123. Had
compensation cost for the Company's stock option plans been determined based
on the fair value provisions of FAS 123, the Company's net loss per share
would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C> <C>
Net loss
available to
common As reported $ 11,488,000 $ 1,856,000 $11,091,000
shareholders Pro forma $ 11,820,000 $ 2,410,000 $12,179,000
Basic and
diluted net loss As reported $ 0.95 $ 0.19 $ 1.20
per share Pro forma $ 0.97 $ 0.24 $ 1.31
</TABLE>
F-19
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The pro forma disclosures provided are not likely to be representative
of the effects on reported net income or loss for future years due to future
grants and the vesting requirements of the Company's stock option plans. The
fair value of each grant is estimated on the date of grant using the
Black-Scholes Option pricing model with the following weighted-average
assumptions used for grants during the years ended December 31, 1999, 1998 and
1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Dividend yield -- -- --
Expected volatility 51.20% 46.85% 66.95%
Risk free interest rate 4.94% 5.59% 5.96%
Option term 10 years 10 years 9 years
</TABLE>
The weighted average fair value for all options granted in 1999, 1998
and 1997 was $2.03, $2.86 and $3.53 respectively.
NOTE 9 - STOCK OPTION PLANS
The Company maintains a Nonqualified Stock Option ("NSO") Plan, an
Incentive Stock Option ("ISO") Plan (as amended), a Directors' Stock Option
Plan ("DSO") (adopted in 1991) and Other Directors Options Plan. The number
of shares which may be granted under the NSO, ISO Plans, DSO Plans and other
Directors' Option Plan may not exceed 600,000, 1,304,400, 350,000 and 67,500,
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 1999, 1998 and 1997 were issued at the fair market value of the
Company's common stock.
F-20
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NSO, ISO, DSO PLANS
Stock option activity under the NSO, ISO, DSO and Other Directors' Options Plans
was:
<TABLE>
<CAPTION>
NSO ISO DSO OTHER DIRECTORS' OPTIONS
------------------- --------------------- --------------------- ------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Option Option Option Option
Options Price Options Price Options Price Options Price
------- ----- ------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at December 31, 1996... 600,000 $4.61 1,141,615 $5.24 200,000 $5.70 60,000 $11.08
Granted .......................... -- -- 239,880 $4.62 -- -- -- --
Exercised.......................... -- -- (63,925) $4.21 -- -- -- --
Canceled .......................... -- -- (120,065) $5.28 (30,000) $6.04 -- --
------- --------- ------- -------
Outstanding at December 31, 1997... 600,000 $4.61 1,197,505 $5.17 170,000 $5.64 60,000 $11.08
Granted .......................... -- -- 207,500 $4.27 30,000 $4.56 -- --
Exercised.......................... -- -- (46,715) $3.96 -- -- -- --
Canceled .......................... -- -- (129,085) $5.49 -- -- (15,000) $7.56
------- --------- ------- -------
Outstanding at December 31, 1998... 600,000 $4.61 1,229,205 $5.03 200,000 $5.48 45,000 $12.25
Granted .......................... -- -- 6,500 $3.00 -- -- -- --
Canceled .......................... -- -- (308,950) $5.32 (80,000) $5.23 (32,500) $11.87
------- --------- ------- -------
Outstanding at December 31, 1999... 600,000 $4.61 926,755 $4.92 120,000 $5.64 12,500 $13.25
======= ========= ======= =======
</TABLE>
At December 31, 1999, 1998 and 1997, there were no shares available to be
granted under the NSO plan.
At December 31, 1999, 1998 and 1997, there were 4,305, 392,455 and 870
shares, respectively, available for grant under the ISO Plan.
At December 31, 1999, 1998 and 1997, there were 180,000, 100,000 and 130,000
shares, respectively, available for grant under the DSO Plan.
At December 31, 1999, 1998 and 1997, there were 47,500, 15,000 and zero
shares, respectively, available for grant under the Other Directors' Options
Plan.
F-21
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following tables summarize information about the fixed-price stock options
outstanding at December 31, 1999:
NSO PLAN
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- ---------------------------------
Weighted-Average
Range of Outstanding Remaining Weighted-Average Exercisable at Weighted-Average
Exercise Prices at 12/31/99 Contractual Life Exercise Price 12/31/99 Exercise Price
--------------- ----------- ---------------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C>
$3.625 430,000 2.9 years $3.63 430,000 $3.63
$6.625 100,000 1.1 years $6.63 100,000 $6.63
$7.750 70,000 0.6 years $7.75 70,000 $7.75
------- -------
$3.625 - 7.750 600,000 2.3 years $4.61 600,000 $4.61
ISO PLAN
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- ---------------------------------
Weighted-Average
Range of Outstanding Remaining Weighted-Average Exercisable at Weighted-Average
Exercise Prices at 12/31/99 Contractual Life Exercise Price 12/31/99 Exercise Price
--------------- ----------- ---------------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C>
$1.688 25,000 9.0 years $1.69 18,750 $1.69
$3.00 - 4.50 470,875 4.5 years $3.81 469,250 $3.82
$4.625 - 6.625 308,880 7.2 years $5.09 263,255 $5.17
$7.75 - 10.375 122,000 3.2 years $9.42 122,000 $9.42
------- -------
$1.688 - 10.375 926,755 5.4 years $4.92 873,255 $4.96
======= =======
F-22
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DSO PLAN & OTHER DIRECTORS' OPTIONS
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- ---------------------------------
Weighted-Average
Range of Outstanding Remaining Weighted-Average Exercisable at Weighted-Average
Exercise Prices at 12/31/99 Contractual Life Exercise Price 12/31/99 Exercise Price
--------------- ----------- ---------------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C>
$3.50 30,000 6.1 years $3.50 30,000 $3.50
$4.56 30,000 8.1 years $4.56 30,000 $4.56
$6.25 40,000 3.2 years $6.25 40,000 $6.25
$9.25 20,000 4.1 years $9.25 20,000 $9.25
$13.25 12,500 0.2 years $13.25 12,500 $13.25
------- -------
$3.50 - 13.25 132,500 4.8 years $6.36 132,500 $6.36
======= =======
</TABLE>
NOTE 10 - EMPLOYEE STOCK PURCHASE PLAN
On November 16, 1995 the Company adopted the Intellicall Employee
Stock Purchase Plan (the "ESPP"). After the offering period ending December
31, 1999, there remain authorized and available for sale to employees an
aggregate of 250,560 shares of the Company's common stock. The maximum number
of shares available for sale 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, 8,190 shares were issued 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; 1,603 shares at $1.859 for the offering period ended December 31,
1998; 5,790 shares at $1.06 for the offering period ended June 30, 1999; and
719 shares at $.956 for the offering period ended December 31, 1999.
NOTE 11 - STOCKHOLDERS' EQUITY
COMMON STOCK: On December 30, 1999 the Company sold 1.0 million
shares of its common stock to Banca del Gottardo for $.85 per share. The
purchase price represented a 15% discount to the closing price of the
Company's common stock upon the agreed upon date of December 22, 1999.
Proceeds from the sale of the Company's stock of $.9 million were utilized for
working capital purposes.
F-23
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At December 31, 1999, there were 3,256,378 shares of common stock
reserved for options and warrants. At December 31, 1999, there were 250,560
shares of common stock reserved for the Company's Employee Stock Purchase Plan.
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.
As of December 31, 1999, all of the Company's Series A convertible
preferred stock had been converted for 2.5 million shares of common stock.
COMMON STOCK PURCHASE WARRANTS: In connection with the December 29,
1995 subordinated debt issuance discussed in NOTE 7, and a result of
activating certain anti-dilution provisions, Banca Del Gottardo holds warrants
entitling the holder to purchase 418,507 shares of common stock, exercisable
at $3.01 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, a third
party holds an additional Warrant to purchase 313,500 shares of common stock
exercisable at $2.68 per share. These warrants vested immediately and expire
upon the date of maturity of the underlying debt.
On November 22, 1996, the Company issued additional subordinated
debt to Banca Del Gottardo as discussed in NOTE 7, and as a result of
activating certain anti-dilution provisions, Banca Del Gottardo holds warrants
entitling the holder to purchase 255,643 shares of common stock at $3.91 per
share. In addition, a third party holds an additional warrant to purchase
209,473 shares at $3.58. These warrants vested immediately and expire upon the
date of maturity of the underlying debt.
On June 11, 1999, the Company issued additional subordinated debt to
Banca del Gottardo as discussed in NOTE 7. The notes were issued with warrants
to purchase 200,000 shares of the Company's common stock at $1.55 per share.
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 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.
F-24
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 December 31, 1999, the Holder has yet to accrue a vested interest in the
issued warrant, as the Company has not received $1.0 million worth of payments
from Paytel since June 22, 1999.
On December 30, 1999 the Company issued warrants to purchase 200,000
shares of its Common Stock at a price of $1.00 per share to Banca del Gottardo
(See NOTE 7).
NOTE 12 - INCOME TAXES
The components of the income tax benefit are as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 0 $0 $0
State 0 0 0
------- ---- ----
Total Current $ 0 $0 $0
------- ---- ----
Deferred
Federal $(1,500) $0 $0
State 0 0 0
------- ---- ----
Total Deferred (1,500) 0 0
------- ---- ----
Total Income Tax Benefit $(1,500) $0 $0
======= ==== ====
</TABLE>
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
----------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected income tax benefit at the statutory rate.. $(3,905) $(631) $(3,759)
Amortization of cost in excess of net assets
of acquired businesses........................ 255 31 31
Other..............................................
Minority interest............................... -- -- 277
Other........................................... 2 (1) 6
Operating loss not benefited.................... 2,148 601 3,722
----- ------ ------
Income tax (benefit) provision..................... $(1,500) $ -- $ 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.
F-25
<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,
1999 1998
<S> <C> <C>
Deferred tax assets:
Bad debt reserves........................................ $ 239 $ --
Investment in subsidiary................................. 1,100 824
Other reserves and accruals.............................. 654 974
Net operating loss carryforwards......................... 18,228 16,238
Unused alternative minimum tax credits................... 127 127
Deferred revenue........................................ 420 86
Depreciation and amortization........................... 363 --
Total gross deferred tax assets.............................. 21,131 18,249
Deferred tax liabilities:
Bad debt reserves........................................ -- (183)
Depreciation and amortization............................ -- (584)
Total gross deferred tax liabilities.......................... -- (767)
Less valuation allowance...................................... (19,631) (17,482)
Net deferred tax assets....................................... $ 1,500 $ --
-------- --------
</TABLE>
The valuation allowance on deferred tax assets reflects the Company's
uncertainty regarding realization of such assets due to recent operating loss
trends. The Company expects that the sale of the ILD stock (See Note 19) will
give rise to taxable income in the year 2000 and accordingly has reduced its
valuation allowance.
At December 31, 1999 the Company has net operating loss
carryforwards of approximately $53.6 million for federal income tax reporting
purposes. Such carryforwards, which may provide future tax benefits, expire
as follows:
<TABLE>
<S> <C>
2007 $ 4,600
2008 $16,000
2009 $11,000
2010 $ 2,000
2011 $ 8,000
2018 $ 7,000
2019 $ 5,000
-------
$53,600
</TABLE>
Additionally, in conjunction with the Alternative Minimum Tax ("AMT") rules,
the Company has available an AMT credit carryforward for tax purposes of
$126,541. Such credit may be carried forward indefinitely as a credit against
regular tax liability.
F-26
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 - 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 1999, 1998 and 1997. The weighted average shares of common
stock outstanding were 12,132,000, 9,927,000 and 9,268,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
The diluted per share calculation 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, 1999, 1998 and
1997; the shares of Series A preferred stock, convertible into common stock
(See NOTE 11), the options (See NOTE 9), the warrants outstanding (See NOTE 7
and NOTE 11) and the shares of common stock to be issued upon conversion of
debt to equity (See NOTE 7) at each of the period ends were excluded from the
diluted net loss per share calculation for the years ended December 31, 1999,
1998, and 1997, as they were anti-dilutive.
NOTE 14 - 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):
<TABLE>
<S> <C>
2000.................................................................................................... $ 429
2001.................................................................................................... 365
2002.................................................................................................... 155
2003.................................................................................................... --
2004 and thereafter..................................................................................... --
--------
$ 949
========
</TABLE>
Total operating lease expense was $591,000, $610,000, and $1,011,000
for the years ended December 31, 1999, 1998 and 1997, respectively.
F-27
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents,
accounts receivable, receivables from related party, notes receivable,
accounts payable and long-term debt. Because of their short maturity, the
carrying values of cash and cash equivalents, accounts receivable, receivables
from related party, notes receivable and accounts payable approximate their
fair values. The fair value of long-term debt was determined by discounting
expected cash flows at discount rates currently available to the Company for
debt with similar terms and remaining maturities.
The carrying values and estimated fair values of the Company's financial
instruments at December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------- -------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 694 $ 694 $ 16 $ 16
Accounts receivable $1,455 $1,455 $ 4,263 $ 4,263
Receivables from related party $1,258 $1,258 $ 1,658 $ 1,658
Notes receivable $ -- $ -- $ 1,074 $ 1,074
Accounts payable $1,798 $1,798 $ 2,085 $ 2,085
Long-term debt $9,187 $8,389 $11,123 $10,404
</TABLE>
NOTE 16 - 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 years ended December 31, 1999, 1998 and 1997, the Company reported a net
loss from discontinued operations of $.7 million, a net income of $.01
million, and a net income of $.6 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 discontinued billing services operations were $9.3 million, $25.8
million and $37.2 million for the years ended December 31, 1999, 1998 and
1997, respectively.
F-28
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Assets of the billing services operations disposed of consisted of
receivables of $.5 million, net of $1.8 million of allowance for doubtful
accounts as of December 31, 1999 and $3.6 million, net of $3.2 million of
allowance for doubtful accounts as of December 31, 1998.
Liabilities of the billing services operations disposed of consisted
of payables of $.01 million as of December 31, 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 position, and has a valuation allowance reserved against its
deferred tax assets.
NOTE 17 - ACQUISITIONS MADE BY ILD TELECOMMUNICATIONS
On September 2, 1997 the Company announced that its majority owned
subsidiary, ILD, purchased the operator services business and related assets
from 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 accomplished the acquisition of WorldCom's net assets
through issuance of the following:
(i) $.6 million in cash;
(ii) 111,960 shares of redeemable preferred stock at $100 per
share;
(iii) 34,403.67 shares of its common stock valued at $3.7 million;
and
(iv) loan agreements with NationsBank in the amount of $6.2 million
(including $.3 million of debt costs.
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.
F-29
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following unaudited proforma consolidated results of operations
for the year ended December 31, 1997 is presented as if the WorldCom
acquisition had been made at the beginning of the 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 period 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 years ended December 31, 1999 or 1998, and therefore,
have not been included in the following table.
<TABLE>
<CAPTION>
Year ended December 31,
(in thousands, except per share)
1997
--------
<S> <C>
Net sales $168,862
Net loss available to common shareholders (11,027)
Basic and diluted net loss per common share (1.19)
</TABLE>
On December 15, 1997 ILD also acquired all of the outstanding common
stock of 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) $2.0 million in cash;
(ii) $2.7 million in the form of a promissory note;
(iii) $1.0 million 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) $.9 million, payable $.5 million on June 1, 1998 and $.4
million on June 1, 1999, for a five year consulting agreement.
F-30
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 in exchange for:
(i) $2.0 million in cash;
(ii) forgiveness of the Company's promissory note in the original
principal amount of $2 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.
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 December 31, 1999, the
Company had $.7 million of deferred gain.
F-31
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 18 - LITIGATION AND CONTINGENCIES
The Company is subject to ordinary legal proceedings incidental to and arising
in the normal course of its business. It is the opinion of the management of the
Company that the ultimate disposition of these proceedings will not have a
material adverse effect on the Company's financial position or results of
operations.
In April 1997, U.S. Long Distance, Inc. ("USLDI") filed a Second
Amended Complaint against the Company, the ("Lawsuit"). The complaint sought
actual damages of $4.0 million, exemplary damages, attorney's fees and
interest for the Company's alleged tortious interference of USLDI's existing
and prospective contractual relationships with PhoneTel Technologies, Inc.
("PhoneTel"). The Second Amended Complaint alleged the Company and its then
subsidiary, Intellicall Operator Services, Inc., interfered with USLDI's
existing contractual relationship with PhoneTel, another defendant, when
PhoneTel executed an operator services agreement with the Company and its
subsidiary. On July 24, 1998, the Company, Intellicall Operator Services and
ILD settled the Lawsuit with USLDI through the collective payment of $225,000
(of which $112,500 was paid by the Company) and execution of a mutual release
of all claims.
NOTE 19 - SUBSEQUENT EVENTS
On January 4, 2000 the Company was notified by ILD of its intention
to redeem Intellicall's interest in ILD's Series B preferred convertible
stock. ILD is to redeem 5,000 shares for $100 per share plus accrued and
unpaid dividends by April 11, 2000. As of March 31, 2000, ILD had remitted $.2
million to the Company, redeeming 1,487 shares of the Series B preferred
convertible stock and becoming current on all accrued and unpaid dividends.
Proceeds from the sale were used for general operating purposes.
On January 18, 2000, Intellicall entered into a definitive agreement
to acquire, through the exchange of common stock of Intellicall, Heads Up
Technologies, Inc. ("Heads Up") of Carrollton, Texas. Heads Up designs,
manufactures and markets interactive digital products for the aviation, mass
transit and entertainment industries. Heads Up sells computerized products to
nearly 1,250 customers in more than 10 countries. Pursuant to the merger
agreement, Intellicall and Heads Up have agreed to an exchange ratio of
approximately (1.3) shares of Intellicall common stock for each share of Heads
Up common stock. This will result in the Heads Up shareholders being issued
approximately 11.5 million shares of Intellicall common stock, resulting in
such shareholders owning approximately 46.8 % of the issued and outstanding
Intellicall common stock following such merger. The merger is subject to a
number of conditions, including without limitation, approval by Intellicall's
stockholders. The merger is scheduled to be completed in the second quarter of
2000. There can be no assurance that this merger will be consummated.
On February 11, 2000 the Company signed a $.5 million revolving
promissory note with Bank of America due February 11, 2001. Interest is
payable monthly at the Prime Rate commencing on March 11, 2000 with the
principal of the note guaranteed by Bill Hunt, Chairman of the Board of
Intellicall. The Company may repay and re-borrow under the terms of the note
at any time, up to a maximum aggregate outstanding balance
F-32
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
equal to the principal amount of the note. Proceeds of the note will be used
for working capital purposes. The current outstanding balance on the note is
$.5 million.
On April 11, 2000 the Company sold to Banca del Gottardo the
Company's remaining ownership in ILD, exclusive of 6,239 shares of Series A
preferred convertible stock the Company is required to hold pursuant to the
ILD Organization Agreement. The Company's ownership in ILD includes
approximately 58,772 shares of ILD Series A convertible stock, 725 shares of
ILD Common stock and 11,111 shares of ILD Common stock obtainable upon
conversion of the $1.0 million subordinated convertible note due from ILD to
Intellicall, dated May 10, 1996. Pursuant to the sale to Banca del Gottardo,
Intellicall informed ILD as of March 10, 2000 of it's election to convert the
entire principal balance of the Note into 11,111 shares on ILD Common stock.
The terms of the offer include the purchase of the ownership of ILD
(70,608 combined shares of Series A and Common shares) for $220 per share or
$15.5 million with the Company maintaining the option for 12 months to
repurchase the shares at $250 per share. 100% of the purchase price will be
paid in US Dollars at the completion of agreement documentation. This offer
has been communicated to ILD and ILD shareholders in accordance with the ILD
Shareholders' Agreement referencing ILD's and ILD shareholders' rights to
match the offer and exercise certain co-sale rights.
NOTE 20 - SUMMARIZED FINANCIAL INFORMATION FOR UNCONSOLIDATED SUBSIDIARY
As of December 31, 1999 and 1998, and for the years then ended, the
Company accounted for its investment in ILD under the equity method. The
Company's ownership percentage in ILD was 30% and 42% as of December 31, 1999
and 1998, respectively. As ILD's fiscal year end is September 30, the
summarized financial information for ILD is presented as follows:
<TABLE>
<CAPTION>
September 30,
1999 1998
---- ----
<S> <C> <C>
Total assets $90,855 $82,102
Total liabilities $65,055 $63,081
Redeemable preferred stock $12,224 $12,224
Stockholder's equity $13,576 $ 6,797
<CAPTION>
Years Ended September 30,
1999 1998
---- ----
Net loss $(3,181) $(1,802)
</TABLE>
F-33
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
INTELLICALL, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
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, 1999:
Allowance for doubtful
accounts........................ $ 442 $ 233 $ -- $ (270)(a) $ 405
========== ============ ========== ======== ===========
Allowance for doubtful accounts -
notes receivable................ $ -- $ 359 $ -- $ -- $ 359
========== ============ ========== ======== ===========
Reserve for inventory obsolescence.. $ 2,030 $ 310 $ -- $ (930)(c) $ 1,410
========== ============ ========== ======== ===========
Year Ended December 31, 1998:
Allowance for doubtful
accounts........................ $ 1,574 $ 876(b) $ -- $ (2,008)(a) $ 442
========== ============ ========== ======== ===========
Reserve for inventory obsolescence.. $ 2,700 $ 333 $ -- $ (1,003)(c) $ 2,030
========== ============ ========== ======== ===========
Year Ended December 31, 1997:
Allowance for doubtful
accounts........................ $ 1,607 $ 1,006 $ -- $ (1,039)(a) $ 1,574
========== ============ ========== ======== ===========
Allowance for doubtful accounts -
notes receivable................ $ 1,762 $ -- $ -- $ (1,762)(a) $ --
========== ============ ========== ======== ===========
Reserve for inventory obsolescence.. $ 3,026 $ 4,382 $ -- $ (4,708)(c) $ 2,700
========== ============ ========== ======== ===========
</TABLE>
(a) Write-off of uncollectible accounts.
(b) Includes $94,000 reserved from a related party receivable.
(c) Write-off/write-down of inventory.
F-34
<PAGE>
ILD TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Accountants for the year ended September 30, 1998 and the
nine-month period ended September 30, 1997..................................................S-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 1998 and 1997............................S-3
Consolidated Statements of Operations for the year ended September 30, 1998 and the
nine-month period ended September 30, 1997.............................................S-4
Consolidated Statements of Stockholders' Equity for the year ended September 30, 1998
and the nine-month period ended September 30, 1997.....................................S-5
Consolidated Statements of Cash Flows for the year ended September 30, 1998 and the
nine-month period ended September 30, 1997.............................................S-6
Notes to Consolidated Financial Statements...............................................S-7
</TABLE>
S-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of ILD Telecommunications, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of ILD
Telecommunications, Inc. and its subsidiaries at September 30, 1998 and 1997,
and the results of their operations and their cash flows for the year ended
September 30, 1998 and the nine-month period ended September 30, 1997 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
June 25, 1999
S-2
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 744 $ 358
Restricted cash 3,718 -
Accounts receivable, net of allowance for doubtful
accounts of $3,198 and $828, respectively 17,585 8,283
Accounts receivable from related parties 5,184 1,629
Other current assets 3,717 599
---------------- ----------------
Total current assets 30,948 10,869
Property and equipment, net 10,768 5,603
Excess of cost over net assets acquired, net 39,567 17,410
Other assets, net 819 671
---------------- ----------------
Total assets $ 82,102 $ 34,553
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and other accrued liabilities $ 11,155 $ 1,320
Accrued telecommunication costs (includes $2,749 and $818 payable to
related parties in 1998 and 1997, respectively) 11,886 7,374
Deferred revenue 2,618 100
Accrued salaries, wages and other employee expenses 1,053 686
Accrued payables to related parties 1,976 417
Acquisition obligations 1,079 -
Current maturities of long-term obligations 4,600 1,400
---------------- ----------------
Total current liabilities 34,367 11,297
Long-term obligations, less current maturities (includes $8,286 and $4,000
face amount payable to related parties in 1998 and 1997, respectively) 28,714 8,375
Commitments and contingencies
Series B-2 Redeemable Preferred Stock, $.01 par value; $100 stated value;
150,000 shares authorized; 102,243 and 111,960 shares
issued and outstanding, respectively 10,224 11,196
Series B-3 Redeemable Preferred Stock, $.01 par value; $300 stated
value; 10,000 shares authorized; 6,667 shares issued and outstanding in 1998 2,000 -
Stockholders' equity:
Series A and B Convertible Preferred Stock, $.01 par value; 105,000 shares
authorized; 103,461 and 105,000 shares issued and
outstanding, respectively 1 1
Common Stock, $.01 par value; 300,000 shares authorized;
72,828 and 54,887 shares issued and outstanding, respectively 1 1
Additional paid-in capital 10,724 7,810
Stock subscription receivable from related party - (2,000)
Retained deficit (3,929) (2,127)
---------------- ----------------
Total stockholders' equity 6,797 3,685
---------------- ----------------
Total liabilities and stockholders' equity $ 82,102 $ 34,553
================ ================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
S-3
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------------- ---------------------
<S> <C> <C>
Telecommunications revenues $ 117,700 $ 30,349
Cost of revenues 89,812 26,298
------------------- ---------------------
Gross profit 27,888 4,051
Operating expenses:
Selling, general and administrative 13,430 1,450
Provision for doubtful accounts 8,380 1,312
Depreciation and amortization 3,793 243
Write-off of deferred offering costs 1,197 -
------------------- ---------------------
Total operating expenses 26,800 3,005
------------------- ---------------------
Income from operations 1,088 1,046
Other income (expense):
Interest expense (2,215) (463)
Interest income 173 76
------------------- ---------------------
Total other expense (2,042) (387)
------------------- ---------------------
Income (loss) before provision for income taxes (954) 659
Provision (benefit) for income taxes:
Current 136 195
Deferred (358) (44)
------------------- ---------------------
Total provision (benefit) for income taxes (222) 151
------------------- ---------------------
Net income (loss) (732) 508
Preferred dividend requirements (1,070) (113)
------------------- ---------------------
Net income (loss) applicable to common stockholders $ (1,802) $ 395
=================== =====================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
S-4
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK
------------------- -------------------- ------------------- PAID-IN SUBSCRIPTION RETAINED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT TOTAL
--------- --------- --------- ---------- --------- --------- ------------ -------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1996 100 $ 1 5 $ - 1 $ - $ 2,042 $ - $ (2,522) $ (479)
Issuance of common
stock - - - - 54 1 5,768 - - 5,769
Preferred dividend
requirements - - - - - - - - (113) (113)
Stock subscription
receivable from
related party - - - - - - - (2,000) - (2,000)
Net income - - - - - - - - 508 508
--------- --------- --------- ---------- --------- --------- ------------ -------------- --------- ---------
Balances at
September 30, 1997 100 1 5 - 55 1 7,810 (2,000) (2,127) 3,685
Issuance of common
stock - - - - 16 - 2,914 - - 2,914
Conversion of
preferred stock (2) - - - 2 - - - - -
Preferred dividend
requirements - - - - - - - - (1,070) (1,070)
Cancellation of
stock subscription
receivable - - - - - - - 2,000 - 2,000
Net loss - - - - - - - - (732) (732)
--------- --------- --------- ---------- --------- --------- ------------ -------------- --------- ---------
Balances at
September 30, 1998 98 $ 1 5 $ - 73 $ 1 $ 10,724 $ - $ (3,929) $6,797
========= ========= ========= ========== ========= ========= ============ ============== ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
S-5
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
-------------------- ---------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (732) $ 508
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,793 243
Provision for doubtful accounts 8,380 1,312
Other 127 -
Changes in operating assets and liabilities, net of effect of
acquisitions:
Increase in restricted cash (3,718) -
Increase in accounts receivable (15,641) (6,385)
Increase in accounts receivable from related parties (3,296) (1,629)
Increase in other current assets (2,647) (92)
(Increase) decrease in other assets (375) 139
Increase (decrease) in trade accounts payable and other accrued
liabilities 4,695 (287)
Increase in accrued telecommunication costs 4,142 5,157
Increase in accrued payables to related parties 1,559 292
Increase in deferred revenue 553 100
Increase in accrued salaries, wages, and other
employee expenses 367 686
-------------------- ---------------------
Net cash provided by (used in) operating activities (2,793) 44
-------------------- ---------------------
Cash flows from investing activities:
Purchase of Interlink, net of cash (5,743) -
Purchase of Intellicall Prepaid Operations (2,026) -
Purchase of other prepaid operations (5,475) -
Purchase of WorldCom Assets (235) (10,117)
Purchases of property and equipment (5,970) (199)
Sale of assets 2,750 -
-------------------- ---------------------
Net cash used in investing activities (16,699) (10,316)
-------------------- ---------------------
Cash flows from financing activities:
Net proceeds from credit facility 16,449 564
Proceeds from borrowing on long-term debt 3,521 5,000
Repayments of borrowings on long-term debt (1,134) -
Proceeds from sales-leaseback of equipment 2,378 -
Payments on capital leases (263) -
Dividends paid (1,073) (59)
Proceeds from issuance of stock - 3,268
Payments for debt issuance costs - (414)
-------------------- ---------------------
Net cash provided by financing activities 19,878 8,359
-------------------- ---------------------
Net increase (decrease) in cash and cash equivalents 386 (1,913)
Cash and cash equivalents at beginning of period 358 2,271
-------------------- ---------------------
Cash and cash equivalents at end of period $ 744 $ 358
==================== =====================
</TABLE>
See Notes 3, 4, 5, 8 and 11 for supplementary disclosures
The accompanying notes are an integral part of these
consolidated financial statements.
S-6
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND ORGANIZATION
ILD Telecommunications, Inc. ("ILD" or the "Company") is a nationwide
facilities-based provider of prepaid phone services and
telecommunications outsourcing services. The Company offers prepaid
services through prepaid long distance calling cards and prepaid local
phone service to individual consumers nationwide through vending and
over-the-counter retail outlets and the Internet. ILD offers a broad
range of outsourcing services including operator services, billing and
collection services and traditional long distance services. The core of
ILD's outsourced services is operator services consisting of operator
assisted (auto and live) calls and long-distance services that are
processed through its state-of-the-art call centers and switch-based
network. Customers served are generally grouped in the following
categories: hospitality, payphone, correctional, interexchange carriers
("IXCs"), Regional Bell Operating Companies ("RBOCs") and other
long-distance providers.
In January 1998, the Company acquired the prepaid service operations of
Intellicall, Inc. ("Intellicall") (see Note 5). This acquisition expanded
the Company's prepaid calling card distribution channels and increased
the volume of minutes over ILD's network.
In December 1997, the Company acquired all of the outstanding common
stock of Interlink Telecommunications, Inc. ("Interlink") (see Note 4), a
facilities-based reseller of long distance services and provider of
enhanced services including prepaid calling cards, prepaid local service
and operator services. Interlink provided the Company with the
infrastructure for offering prepaid phone services.
In September 1997, the Company acquired certain network assets and
customer contracts (the "WorldCom Assets") from WorldCom, Inc. now known
as MCI WorldCom, Inc. ("WorldCom") (see Note 3), making ILD one of the
largest independent facilities-based telecommunications outsourced
service providers in the United States. WorldCom is one of the largest
single customers of ILD by virtue of its five-year agreement with ILD to
process specific types of call traffic.
The Company was formed in April 1996 and commenced operations on May 10,
1996 when Intellicall entered into an agreement with certain investor
groups to create ILD. Intellicall transferred ownership in its
wholly-owned subsidiary, Intellicall Operator Services, Inc. ("IOS") and
the activities of the long distance resale division of Intellicall to the
Company in exchange for $2,000,000 cash, a $1,000,000 convertible
subordinated note, and preferred and common stock representing
approximately 72.5% of the voting stock of the Company. The consideration
was treated as a dividend to Intellicall and was reflected as a reduction
of retained earnings. The other investor groups collectively purchased
$2,000,000 of common stock, representing approximately 27.5% of the
voting stock of the Company, and purchased $1,000,000 of the Company's
subordinated convertible notes. At September 30, 1998, Intellicall holds
stock representing 41.9% of the voting stock of the Company. The decrease
in Intellicall's ownership in the Company is primarily related to
issuance of the Company's stock in connection with acquisitions and the
sale of a portion of the Company's stock held by Intellicall to
third-party investors.
S-7
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain prior period
amounts have been reclassified for comparative purposes.
FINANCIAL INSTRUMENTS
The fair market value of financial instruments is determined by reference
to various market data and other valuation techniques as appropriate. The
Company believes that the fair values of financial instruments at
September 30, 1998 and 1997 approximate their recorded values. The fair
values of cash and cash equivalents, restricted cash, accounts
receivable, accounts receivable from affiliates, trade accounts payable
and other accrued liabilities, accrued telecommunication costs, accrued
salaries, wages and other employee expenses, and accrued payables to
affiliates approximate cost because of the immediate or short-term
maturity of these financial instruments. The fair value of long-term
obligations, including current maturities, with no quoted market prices
has been estimated based on the current rates offered to the Company for
similar types of borrowing arrangements with comparable terms and
maturities. The fair values of the Series B-2 and B-3 Redeemable
Preferred Stock and the Series A and B Convertible Preferred Stock are
estimated at the related carrying values as such stock is not traded in
the open market and market prices are not readily available.
BUSINESS AND CREDIT CONCENTRATIONS
In the normal course of business, the Company extends unsecured credit to
its customers. Management has provided an allowance for doubtful accounts
to provide for amounts which may eventually become uncollectible and to
provide for any disputed charges. Two customers accounted for
approximately 13% and 11%, respectively, of total consolidated revenues
for the year ended September 30, 1998 and one customer accounted for
approximately 27% of total consolidated revenues for the nine months
ended September 30, 1997.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and investments with
purchased original maturities of three months or less. The Company has
approximately $9,988,000 of cash and cash equivalents in excess of FDIC
insured limits at September 30, 1998. The Company has not experienced any
losses on its cash and cash equivalents.
RESTRICTED CASH
Restricted cash represents collections from local exchange carriers
("LECs") which are contractually owed to the Company's billing and
collections customers but have not been remitted due to timing. A
corresponding liability is recorded in the Company's balance sheet.
S-8
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
for financial statement purposes are provided by the straight-line method
over the estimated useful lives of the depreciable assets. Maintenance
and repairs are expensed as incurred while replacements and betterments
are capitalized.
EXCESS OF COST OVER NET ASSETS ACQUIRED
Excess of cost over net assets acquired reflects the acquired cost of
goodwill, customer contracts, other intangibles, and related items. These
items are being amortized by the straight-line method over their
estimated useful lives, ranging from 2 to 25 years. In accordance with
the provisions of 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"), it is the Company's policy to
review long-lived assets and identifiable intangibles for impairment
whenever events or changes in circumstances indicate that the carrying
amount of as asset may not recoverable. In the event that total assets
(including property and equipment) are found to be stated at amounts in
excess of estimated future cash flows, the assets are adjusted for
impairment to a level commensurate with a discounted cash flow analysis
of the underlying assets. The Company's policy with respect to intangible
assets, including goodwill, is to compare the carrying value of such
assets to the estimated fair market value of these assets. In cases where
the carrying value exceeds the estimated fair market value, impairment
charges are taken.
Based on its most recent analysis, the Company believes no impairment of
such assets existed at September 30, 1998.
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.
REVENUE RECOGNITION
The Company recognizes revenue as services are performed based on end
user usage, net of an estimate for uncollectible revenue. The Company
sells its services to its customers primarily on a measured time basis.
The Company recognizes revenue from its billing and collection services
upon processing records that are to be billed and collected by the
Company.
The Company records deferred revenue on prepaid calling cards when the
customer is invoiced or the cards are purchased by the end user. The
Company recognizes the deferred revenue as revenue when the end user
utilizes calling time or upon expiration of the card.
S-9
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
CUSTOMER COMMISSIONS
The Company pays commissions based on call traffic to payphone owners and
hospitality facilities (referred to by the Company as "customers",
although such persons are not the end users of the Company's service) for
call traffic originating at such customers' phones that is processed by
the Company. Such commissions are included in cost of revenues in the
period the traffic originates, and such payments are generally made
within thirty days of the end of the processing month.
ADVERTISING COSTS
Advertising costs are expensed in the period incurred. Advertising
expense for the year ended September 30, 1998 and the nine months ended
September 30, 1997 was $287,000 and $33,000, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, Statement of Financial Accounting Standards No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION ("FAS 123"), was issued. This
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 statement, or the pro forma effect on net income
and earnings per share of such compensation expense to be disclosed in
the footnotes to the Company's financial statements commencing with the
Company's 1996 fiscal year. The Company has adopted FAS 123 on a
disclosure basis only. The Company has elected to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES ("APB 25"), and related interpretations.
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.
INCOME TAXES
In accordance with Statement of Financial Accounting Standards No. 109,
ACCOUNTING FOR INCOME TAXES ("FAS 109"), deferred income taxes are
calculated utilizing an asset and liability approach whereby deferred
taxes are provided for tax effects of basis differences for assets and
liabilities arising from differing treatments for financial and income
tax reporting purposes. Valuation allowances against deferred tax assets
are provided where appropriate.
S-10
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("FAS 133")
was issued and is effective for fiscal years beginning after June 15,
2000. FAS 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction.
The Company believes that adoption of the standard will not have a
material impact on the Company's consolidated results of operations or
financial position.
In April 1998, Statement of Position 98-5, REPORTING ON THE COSTS OF
START-UP ACTIVITIES ("SOP 98-5"), was issued and is effective for fiscal
years beginning after December 15, 1998. SOP 98-5 provides guidance on
the financial reporting of start-up and organization costs and requires
that these costs be expensed as incurred. The Company believes that the
adoption of this standard will not have a material impact on the
Company's consolidated results of operations or financial position.
In March 1998, Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE ("SOP 98-1") was
issued and is effective for fiscal years beginning after December 15,
1998. SOP 98-1 provides guidelines for companies to capitalize or expense
costs incurred to develop or obtain internal use software. The company
believes that the adoption of this standard will not have a material
impact on the Company's consolidated results of operations or financial
position.
In June 1997, Statement of Financial Accounting Standards No. 130,
REPORTING COMPREHENSIVE INCOME ("FAS 130"), was issued and is effective
for fiscal years beginning after December 15, 1997. FAS 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. The
Company believes that the adoption of this standard will not have a
material effect on the Company's consolidated results of operations or
financial position.
3. ACQUISITION OF WORLDCOM ASSETS
Effective September 1, 1997, the Company acquired certain network assets
and customer contracts from WorldCom (the "WorldCom Assets"),
headquartered in San Antonio, Texas, for a total consideration of
$21,392,040. The assets acquired included all payphone, hospitality and
corrections customer contracts, an operator services agreement with
another service provider, associated billing and collection assets,
leases on operator call center and office facilities, all intangibles
including customer lists, trade secrets, etc., miscellaneous equipment
incident to the operations, and two DEX switches integrated into the
Company's network.
The purchase price of $21,392,040 was paid (i) $9,696,020 in cash, (ii)
4,587 shares of the Company's Common Stock valued at $500,000, and (iii)
111,960 shares of the Company's Series B-2 Redeemable Preferred Stock
valued at $11,196,020. The cash portion of the purchase price was funded
by the $5,000,000 term loan facility from NationsBank, N.A.
("NationsBank"),
S-11
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
$1,221,000 from the NationsBank revolving credit facility (see Note
8), $1,600,000 from the sale of the Company's Common Stock, and
$1,875,020 from operating cash. The Company included $656,000 of
transaction costs related to the acquisition in excess of cost over
net assets acquired.
The acquisition was accounted for as a purchase whereby the excess
purchase price over the net assets acquired has been recorded based upon
the fair market values of assets acquired and liabilities assumed. The
Company's consolidated statements of operations include the results of
the operations of the WorldCom Assets since September 1, 1997.
Effective January 1, 1998, the Company sold the acquired assets located
at inmate facilities for $2,750,000.
Effective June 30, 1998, in accordance with the Worldcom Asset purchase
agreement, the $21,392,040 purchase price was reduced by $1,050,000 to
reflect a "true-up" for contracts purchased which were terminated by the
customer prior to March 1, 1998 and customer commission adjustments for
pre-acquisition issues. The purchase price consideration was adjusted by
canceling 9,717 shares of the Series B-2 Redeemable Preferred Stock
valued at $972,000 and a payment of $78,000 in cash.
The approximate fair values of property and equipment acquired and
current and long-term liabilities assumed at the date of acquisition were
$5,500,000, $919,000 and $265,000, respectively.
A summary of the WorldCom Assets excess of cost for financial reporting
purposes over net assets acquired is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------------
1998 1997 LIFE
----------------- ----------------- --------------
<S> <C> <C> <C>
Goodwill $ 15,470 $ 14,983 25 years
Customer contracts 1,333 2,510 6 years
----------------- -----------------
16,803 17,493
Accumulated amortization (990) (83)
----------------- -----------------
$ 15,813 $ 17,410
================= =================
</TABLE>
S-12
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The following unaudited pro forma combined results of operations of the
Company assume that the acquisition was completed on January 1, 1997.
These pro forma amounts represent historical operating results of the
WorldCom Assets combined with those of the Company with appropriate
adjustments which give effect to interest expense, depreciation and
amortization expense and preferred dividend requirements. These pro forma
amounts are not necessarily indicative of consolidated operating results
which would have been included in the operations of the Company during
the periods presented, or which may result in the future, because these
amounts do not reflect full transmission and switched service cost
optimization, and the synergistic effect on operating, selling, general
and administrative expenses nor do the amounts reflect any higher costs
associated with unanticipated integration or other organizational
activities the Company may be forced to undertake as a result of the
acquisition (in thousands):
<TABLE>
<CAPTION>
NINE
MONTHS ENDED
SEPTEMBER 30,
1997
------------------
<S> <C>
Revenues $ 82,225
Net income $ 1,382
Net income applicable to common stockholders $ 635
</TABLE>
4. ACQUISITION OF INTERLINK TELECOMMUNICATIONS, INC.
Effective December 15, 1997, the Company acquired all of the outstanding
common stock of Interlink Telecommunications, Inc. ("Interlink"), a
facilities-based reseller of long distance services and provider of
enhanced services including prepaid debit cards, prepaid local service
and operator services. Interlink is located in Atlanta, Georgia and
principally serves the southeastern United States.
The acquisition of Interlink common stock was accomplished by payment of
the following consideration: (i) $2,000,000 in cash, (ii) $2,700,000 in
the form of a promissory note payable due $1,800,000 on December 31, 1997
and $900,000 on March 31, 1998 bearing no interest, (iii) $1,000,000 in
the form of a promissory note payable due $250,000 on a quarterly basis
commencing September 30, 1998 with interest at 9% per annum also payable
quarterly, (iv) 16,117 shares of the Company's Common Stock valued at
$175 per share, (v) 6,667 shares of the Company's Series B-3 Redeemable
Preferred Stock which has a stated value of $300 and (vi) a five year
consulting agreement for $850,000 payable $425,000 on June 1, 1998 and
$425,000 on June 1, 1999. The consulting agreement is being amortized on
a straight-line basis over a period of five years. The Company included
$371,000 of transaction costs related to the acquisition in excess of
cost over net assets acquired.
The acquisition was accounted for as a purchase whereby the purchase
price over the net assets acquired has been recorded based upon the fair
values of the assets acquired and liabilities assumed. The Company's
consolidated statements of income include the results of operations of
Interlink since December 15, 1997.
S-13
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The approximate fair value of accounts receivable, property and
equipment and other assets acquired and current and long-term
liabilities assumed at the date of the acquisition were $540,000,
$1,103,000, $44,000, $2,217,000 and $628,000, respectively.
A summary of the Interlink excess of cost over net assets acquired for
financial reporting purposes is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 LIFE
---------------- ----------------
<S> <C> <C>
Goodwill $ 10,203 25 years
Noncompete agreement 2,000 5 years
Other 850 5 years
----------------
13,053
Accumulated amortization (791)
----------------
$ 12,262
================
</TABLE>
The following unaudited pro forma combined results of operations of the Company
assume that the Interlink acquisition was completed on January 1, 1997. These
pro forma amounts represent historical operating results of Interlink combined
with those of the Company with appropriate adjustments to give effect to
interest expense, depreciation and amortization expense and preferred dividend
requirements. These pro forma amounts also include the results of operations of
a business acquired from WorldCom, Inc. on September 1, 1997 (see Note 3), as if
such business had been acquired on January 1, 1997. These pro forma amounts are
not necessarily indicative of consolidated operating results which would have
been included in the operations of the Company during the periods presented, or
which may result in the future, because those amounts do not reflect full
transmission and switched service cost optimization, and the synergistic effect
on operating, selling, general and administrative expenses nor do the amounts
reflect any higher costs associated with unanticipated integration or other
organizational activities the Company may be forced to undertake as a result of
the acquisitions (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
-------------------- --------------------
<S> <C> <C>
Revenues $ 120,040 $ 88,851
Net income (loss) $ (756) $ 748
Net loss applicable to common stockholders $ (1,851) $ (89)
</TABLE>
S-14
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
5. ACQUISITION OF INTELLICALL AND OTHER PREPAID OPERATIONS
Effective January 1, 1998, the Company acquired the prepaid service
operations of Intellicall, Inc. ("Intellicall Prepaid Operations") by
payment of the following consideration: (i) $2,000,000 in cash, (ii)
cancellation of a note in the original principal amount of $2,000,000
reflected as stock subscription receivable as of September 30, 1997,
which amount was recorded upon the sale of 18,349 shares of Common Stock
at $109 per share in September 1997, and (iii) $1,000,000 in the form of
a promissory note due no later than December 31, 1998.
The acquisition was accounted for as a purchase whereby the excess
purchase price over the net assets acquired was recorded based upon the
fair values of the assets acquired and liabilities assumed. The Company's
consolidated statements of income include the results of operations of
the Intellicall Prepaid Operations since January 1, 1998.
The approximate fair value of accounts receivable, property and equipment
and other assets acquired and current and long-term liabilities assumed
at the date of the acquisition were $922,000, $110,000, $139,000,
$938,000 and $300,000, respectively.
A summary of the Intellicall Prepaid Operations excess of cost over net
assets acquired for financial reporting purposes is as follows (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 LIFE
---------------- ----------------
<S> <C> <C>
Goodwill $ 3,929 25 years
Contracts 1,311 4 years
----------------
5,240
Accumulated amortization (237)
----------------
$ 5,003
================
</TABLE>
The revenue and net income provided by this acquisition are not
significant to the Company's operations.
The Company acquired several other prepaid operations throughout the year
at an aggregate purchase price of approximately $6,653,000. The purchase
price includes 286 shares of the Company's common stock valued at $325, a
contingent earn-out agreement that was settled by the payment of $425,000
and issuance of 500 shares of the Company's Common Stock valued at $325,
and a $250,000 note payable in the form of a promissory note due January
1, 1999.
The approximate fair value of accounts receivable, property and equipment
and other assets acquired and current liabilities assumed at the date of
acquisitions were $254,000, $969,000, $757,000, and $2,003,000,
respectively.
S-15
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The acquisitions were accounted for as a purchase whereby the purchase
price over the net assets acquired has been recorded based upon the fair
values of the assets acquired and liabilities assumed. This allocation
was based on preliminary estimates and may be revised at a later date,
although management of the Company does not expect such adjustments to be
material in nature.
A summary of the prepaid operations excess of cost over net assets
acquired for financial reporting purposes is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 LIFE
---------------- ----------------
<S> <C> <C>
Goodwill $ 3,334 15-25 years
Contracts 2,803 2-4 years
Other 599 4-5 years
----------------
6,736
Accumulated amortization (247)
----------------
$ 6,489
================
</TABLE>
The revenue and net income provided by these acquisitions are not
significant to the Company's operations.
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------
1998 1997 LIFE
------------------- ------------------- ------------
<S> <C> <C> <C>
Switching and other network equipment $ 3,838 $ 2,017 5 years
Computer equipment and software 2,277 2,172 5 years
Prepaid calling card vending machines 3,343 - 5 years
Furniture, fixtures and other equipment 2,806 1,526 5 years
------------------- -------------------
12,264 5,715
Accumulated depreciation and amortization (1,496) (112)
------------------- -------------------
$ 10,768 $ 5,603
=================== ===================
</TABLE>
Switching and other network equipment totaling $2,687,000 were
acquired under capital leases in the year ended September 30, 1998.
Accumulated amortization for switching and other network equipment
under capital leases was $265,000 at September 30, 1998. The Company
has the option to purchase this equipment upon expiration of the
leases. Total depreciation and amortization expense related to
property and equipment, including equipment under capital leases,
charged to income for the year ended September 30, 1998 and the nine
months ended September 30, 1997 was $1,446,000 and $110,000,
respectively.
S-16
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
7. ACCRUED TELECOMMUNICATION COSTS
Accrued telecommunication costs consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 1997
---------------- ----------------
<S> <C> <C>
Transmission $ 6,100 $ 2,035
Customer commissions payable 2,955 3,380
Other 2,831 1,959
---------------- ----------------
$ 11,886 $ 7,374
================ ================
</TABLE>
8. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 1997
-------------- ---------------
<S> <C> <C>
Senior secured notes to investors due on May 2001
with interest payable monthly at 13.5% per annum $ 2,000 $ 2,000
Convertible subordinated notes to investors due on
May 2001 with interest payable quarterly at 10% per annum 2,000 2,000
Senior secured term note payable to a bank 3,900 5,000
Senior secured revolving credit facility payable to a bank 17,013 564
Subordinated promissory note to officer due on June 30, 1999
with interest due quarterly at 9% per annum 750 -
Subordinated convertible notes to shareholders with interest due
quarterly at 15% per annum 2,536 -
Subordinated promissory note to affiliate due December 31, 1998 1,000 -
Capital lease obligations 2,498 -
Promissory note secured by equipment, payable in monthly
installments due July 2003 950 -
Other 690 265
-------------- ---------------
33,337 9,829
Less current maturities:
Long term debt (3,250) (1,400)
Capital lease obligations (660) -
Other (690) -
Less unamortized debt discount (23) (54)
-------------- ---------------
Long-term portion $ 28,714 $ 8,375
============== ===============
</TABLE>
S-17
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
On August 29, 1997, the Company obtained a $5,000,000 senior secured term
loan facility and a $20,000,000 senior secured revolving credit facility
(subject to borrowing availability) from NationsBank to facilitate the
acquisition of the WorldCom Assets and to provide working capital for
operations and future acquisitions. At September 30, 1998, $3,900,000 of
the senior secured term loan facility was outstanding and $17,013,000 of
the $20,000,000 senior secured revolving credit facility was outstanding.
Unused borrowing availability under the senior secured revolving credit
facility was approximately $2,400,000 at September 30, 1998. The
borrowings under these credit facilities are secured by principally all
of the assets of the Company.
The senior secured term loan facility bears interest at prime plus 2.5%
(10.75% at September 30, 1998) per annum and is payable monthly.
Principal payments are due in quarterly installments of $300,000 through
December 31, 1999, and a final payment of $2,100,000 on March 31, 2000.
The Company made its September 30, 1998 payment of $300,000 on October 1,
1998.
The senior secured revolving credit facility has a maximum availability
of $20,000,000, with borrowings based on 85% of eligible receivables
minus certain reserves. This facility matures on March 31, 2000.
Borrowings under this facility bear interest at a floating rate from the
bank's prime rate to .5% above the bank's prime rate (8.75% at September
30, 1998) depending upon the ratio of senior funded debt to earnings
before interest, taxes, depreciation and amortization ("EBITDA"). At the
Company's option, the interest rate on additional advances may be fixed
at a floating rate ranging from 2.25% to 2.75% above the London Interbank
Offered Rate ("LIBOR"), subject to certain minimum amounts and duration
of borrowings, which is also dependent upon the ratio of senior funded
debt to EBITDA. LIBOR borrowings outstanding at September 30, 1998 were
$12,000,000.
The Company was required to pay a $300,000 closing fee for the credit
facilities. On the closing date and each subsequent anniversary date, the
Company is required to pay a $25,000 administration fee. Additionally, on
a monthly basis, the Company is required to pay an unused line fee of
one-quarter of one percent (0.25%) per annum of the difference between
$20,000,000 and the average outstanding borrowings under the senior
secured revolving credit facility.
The credit facilities agreement contains covenants which, among other
restrictions, (i) require the Company to satisfy certain financial ratios
related to senior funded debt to EBITDA, minimum net worth and minimum
fixed charge coverage; (ii) limit the Company's ability to incur
indebtedness; (iii) limit investments and capital expenditures; (iv)
limit operating leases; (v) limit mergers, consolidation or sale of
assets; (vi) limit liens; (vii) require the Company to maintain minimum
availability under the revolving credit facility of not less than
$500,000; (viii) require the Company to maintain a positive net income in
the 1997 fiscal year; and (ix) prohibit the payment of dividends without
the prior written consent of the lender when dividends paid, together
with interest paid on the convertible subordinated debt, exceed
$1,500,000 in the aggregate in any fiscal year. Effective December 15,
1997, the credit facilities agreement was amended to increase the
restriction on the payment of dividends and interest to $1,900,000.
At September 30, 1998, the Company was not in compliance with the senior
funded debt to EBITDA ratio and capital expenditure limitation
requirements contained in the senior credit agreement. On June 15, 1999,
the Company entered into an amendment with the bank whereby the
S-18
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
bank deleted all covenant requirements on the aforementioned date and
reset the covenant requirements on a prospective basis after March 31,
1999. The Company expects to be in compliance with all future
measurement dates. Under this amendment the Company was required to
pay a one-time amendment fee to the bank of $50,000. Additionally, the
bank amendment accelerated the maturity date of the credit facilities
to March 31, 2000. On May 26, 1999, the Company entered into a
commitment letter with a new senior secured lender that will refinance
all existing bank and certain other outstanding indebtedness.
In 1996, $2,000,000 of senior secured notes were issued with a Common
Stock purchase warrant exercisable into 7,239 shares of stock at $0.01
per share. In 1997, these notes were subordinated to the senior secured
term loan and senior secured revolving credit facility. Under the terms
of the senior secured notes, the Company may not pay dividends without
the prior written consent of the lenders, although dividends may be paid
to the holders of the Series B Convertible Preferred Stock as long as the
Company is not in default under the notes.
The $2,000,000 of convertible subordinated notes are convertible into
Common Stock at the rate of one share of Common Stock of the Company for
each $90 of principal then due the holder.
The $750,000 subordinated promissory note to an officer was issued as a
portion of the consideration paid in the acquisition of Interlink.
Principal payments are due in quarterly installments of $250,000, which
commenced September 30, 1998.
The $2,536,000 subordinated convertible notes to shareholders were issued
to facilitate the acquisition of a prepaid operations company. The notes
were converted at December 31, 1998 into Common Stock at the rate of one
share of Common Stock of the Company for each $325 of principle plus
accrued interest then due the holder, therefore these notes are not
classified as current liabilities and are not included in the maturity
schedule below.
The $1,000,000 subordinated promissory note to a related party was issued
as a portion of the consideration paid in the acquisition of the
Intellicall Prepaid Operations.
The aggregate maturities of long-term obligations over the next five
years as adjusted for the June 1999 credit agreement amendment are (in
thousands) $4,600, $20,076, $4,742, $829 and $554, respectively.
Interest paid during the year ended September 30, 1998 and the nine
months ended September 30, 1997 was $2,151,000 and $331,000,
respectively.
9. CAPITAL STOCK
Each share of the Series A Convertible Preferred Stock has a stated value
of $72.69 and entitles the holder to convert it into one share of Common
Stock. Voting rights are the same as for common stockholders, no
preferences exist except over Common Stock and holders are not entitled
to receive dividends. In 1998, the holder of the Series A Convertible
Preferred Stock converted 1,539 shares into 1,539 shares of the Company's
Common Stock.
S-19
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Each share of the Series B Convertible Preferred Stock has a stated value
of $100 and entitles the holder to receive an annual cumulative dividend
of $9, payable quarterly. The Company has the right to call the Series B
Convertible Preferred Stock at its discretion and if not called within
three years of issuance, the shares are convertible at the option of the
holder into Common Stock at the rate of $90 per common share. The Series
B Convertible Preferred Stock has a put provision providing the holder
the right to force repurchase if the Company raises at least $5,000,000
through either a debt or equity public offering. Series B Convertible
Preferred Stock is nonvoting, but has preference over Common Stock and
Series A Convertible Preferred Stock with respect to liquidation and
dividend rights.
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 semiannually. The redemption amount of the
Series B-2 Redeemable Preferred Stock is equivalent to the stated value
plus any additional dividends accrued at the date of redemption. Subject
to certain restrictions in loan agreements, each holder has the right,
commencing on the fifth anniversary date after issuance, to require the
Company to purchase the holder's shares at the stated value of $100 per
share plus any additional dividends accrued at the date of redemption,
making it mandatorily redeemable. The Company, at its discretion, has the
right to purchase the holder's shares at the stated value of $100 per
share for all shares not previously purchased. Series B-2 Redeemable
Preferred Stock is nonvoting, but has preference over Common Stock and
Series A Convertible Preferred Stock with respect to liquidation and
dividend rights.
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 $6.00, payable quarterly. The redemption amount of the Series
B-3 Redeemable Preferred Stock is equivalent to the stated value plus any
additional dividends accrued at the date of the redemption. Subject to
certain restrictions in loan agreements, each holder has the right,
commencing on the fifth anniversary date after issuance, to require the
Company to purchase the holder's shares at the stated value of $300 per
share plus any additional dividends accrued at the date of redemption,
making it mandatorily redeemable. The Company, at its discretion, has the
right to purchase the holder's shares at the stated value of $300 per
share for all shares not previously purchased. Series B-3 Redeemable
Preferred Stock is nonvoting, but has preference over Common Stock and
Series A Convertible Preferred Stock with respect to liquidation and
dividend rights.
In 1996, the Company issued the holders of the convertible subordinated
notes a common stock purchase warrant exercisable into 7,239 shares of
common stock at $.01 per share. The Company also issued a stockholder a
common stock purchase warrant exercisable into 6,000 shares of Common
Stock at $90 per share.
10. STOCK OPTIONS
The Company maintains an Incentive Stock Option ("ISO") Plan and a
Nonincentive Stock Option ("NSO") Plan under which 66,900 options to
purchase shares of Common Stock may be granted to directors, officers and
employees. Options under the plans have a five-year term. Options granted
in 1996 vested immediately. Options granted in 1997 vest ratably over a
three-year period. Options granted in 1998 vest from immediately upon
issuance to over a three-year period. The
S-20
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
exercise price of the options granted under the plans is not less than
the market value of the stock on the dates the options were granted.
Accordingly, no compensation expense is recognized by the Company with
respect to such grants.
Pro forma information regarding net income (loss) is required by FAS 123
and has been determined as if the Company had accounted for its
directors, officers and employee stock options under the fair value
method of that statement. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions used for grants in
1998 and 1997, respectively: no dividend yield; expected volatility of
21.72% and 43.8%; risk-free interest rates of 5.54% and 6.2%; and
expected lives of five years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The
Company's pro forma information follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
---------------------------------- ----------------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income (loss) applicable to
common stockholders $ (1,802) $ (2,909) $ 395 $ 255
================ ================ ================ ================
</TABLE>
The effects of applying FAS 123 in this pro forma disclosure are not
indicative of future amounts as FAS 123 does not consider additional
awards anticipated in the future.
A summary of options granted and outstanding under the plans is
summarized below:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
---------------------------------- ----------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 35,400 $ 53.84 21,675 $ 24.20
Granted 21,550 243.91 14,500 96.55
Exercised - - (775) 24.20
Forfeited (300) 175.00 - -
---------------- ---------------- ---------------- ----------------
Outstanding at end of period 56,650 $ 125.50 35,400 $ 53.84
================ ================
Exercisable at end of period 32,483 $ 85.93 20,900 $ 24.20
================ ================
Weighted average fair value
of options granted during period $ 76.58 $ 45.71
</TABLE>
S-21
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The following table summarizes information about options outstanding
under the plans at September 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED --------------------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------------ ---------------- ---------------- ---------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
$ 24.20 20,900 2.63 $ 24.20 20,900 $ 24.20
$ 90.00 - 109.00 14,500 3.81 $ 96.55 4,833 $ 96.55
$ 175.00 11,350 4.08 $ 175.00 2,500 $ 175.00
$ 325.00 9,900 4.75 $ 325.00 4,250 $ 325.00
</TABLE>
11. INCOME TAXES
The components of the income tax provision (benefit) were (in thousands):
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
----------------- -----------------
<S> <C> <C>
Current provision:
Federal $ 121 $ 163
State 15 32
----------------- -----------------
136 195
================= =================
Deferred (benefit):
Federal (338) (39)
State (20) (5)
----------------- -----------------
(358) (44)
----------------- -----------------
Provision (benefit) for income taxes $ (222) $ 151
================= =================
</TABLE>
S-22
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The following is a reconciliation of the provision (benefit) for
income taxes at the statutory federal income tax rate to the income
taxes reflected in the consolidated statements of operations (in
thousands):
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
----------------- -----------------
<S> <C> <C>
Income tax expense at the statutory rate (34%) $ (324) $ 224
Valuation allowance - (133)
Permanent differences 106 45
State income taxes, net of federal income tax benefit (3) 7
Other (1) 8
----------------- -----------------
Provision (benefit) for income taxes $ (222) $ 151
================= =================
The components of the net deferred tax asset were (in thousands):
SEPTEMBER 30,
1998 1997
----------------- -----------------
Deferred tax assets:
Bad debt reserves $ 788 $ 92
Net operating loss carryforwards 252 -
Other reserves and accruals 236 9
AMT credit carryforwards 176 -
----------------- -----------------
Total gross deferred tax assets 1,452 101
Deferred tax liabilities:
Depreciation and amortization 1,000 57
----------------- -----------------
Total gross deferred tax liabilities 1,000 57
----------------- -----------------
Net deferred tax assets $ 452 $ 44
================= =================
</TABLE>
The Company files a consolidated tax return and has elected to report
on a calendar year basis the results of its operations for federal and
state income tax purposes.
S-23
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
At September 30, 1998 and September 30, 1997 the Company had net
operating loss carryforwards of approximately $741,000 and $0,
respectively, for federal income tax purposes of which approximately
$485,000 represents net operating losses acquired as a result of the
acquisition of a prepaid operations company. The net operating loss
carryforwards begin to expire in 2010. Utilization of the net operating
loss carryforwards may be limited by the separate return loss year rules
and could be affected by ownership changes which have occurred or could
occur in the future. In addition, the Company has a minimum tax credit
carryforward of $176,000, of which approximately $39,000 represents
credits acquired as a result of the acquisition of a prepaid operations
company. This credit may be carried forward indefinitely.
A valuation allowance has not been established, as management believes it
is more likely than not that the net deferred tax asset will be realized.
Income tax paid during the year ended September 30, 1998 and the nine
months ended September 30, 1997 were $460,000 and $4,000, respectively.
12. BENEFIT PLAN
The Company adopted a 401(k) Retirement Plan (the "401(k) Plan")
effective September 1, 1997. Employees may elect to reduce their
compensation and contribute to the 401(k) Plan provided they have
completed six consecutive months of employment and reached the age of
twenty and one-half. Each employee may defer up to 15% of their salary
not to exceed the limit allowable by law in any one year. The Company
matches up to 100% of the first 3% of the employee's annual compensation
contributed to the 401(k) Plan. Vesting is 25% per year of service and
the employee is credited with a year of service if they have completed at
least 1,000 hours of service. Employer contributions totaled $147,000 and
$0 for the year ended September 30, 1998 and the nine months ended
September 30, 1997, respectively. Distributions from the 401(k) Plan are
not permitted before the age of 65 except in the event of death,
disability, or termination of employment, except in the case of early
retirement.
13. LEASES
The Company leases office space and certain equipment under operating
leases. Future minimum rental commitments under noncancelable operating
leases are (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
-------------------
<S> <C>
1999 $ 1,038
2000 987
2001 939
2002 937
2003 889
Thereafter 178
---------------
$ 4,968
===============
</TABLE>
S-24
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Total operating lease expense was $686,000 and $472,000 for the year
ended September 30, 1998 and the nine months ended September 30, 1997,
respectively.
14. COMMITMENTS AND CONTINGENCIES
The Company has been a co-defendant with its former parent, Intellicall,
in a lawsuit brought by U.S. Long Distance, Inc. ("USLDI") against
PhoneTel Technologies, Inc. ("PhoneTel"). The suit alleged tortious
interference and civil conspiracy in connection with an Operator Service
Subscriber Agreement between USLDI and PhoneTel. The suit was later
amended seeking 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.
To avoid the expense and disruption of protracted litigation, the
Company, its former parent and the claimant reached an agreement to
settle the lawsuit in July 1998. Without admitting guilt or negligence,
the Company and its former parent paid USLDI $225,000 in full settlement
of the lawsuit of which $112,500 was the Company's portion.
The Company is included in various other claims and legal actions arising
in the normal course of business. Management believes it is unlikely that
the final outcome of any of the claims or proceedings to which the
Company is a party would have a materially adverse effect on the
Company's financial position, or results of operations or cash flows.
15. RELATED PARTY TRANSACTIONS
The Company had an agreement with Intellicall, Inc. until May 1997
whereby Intellicall would provide management and administrative services
to the Company. The cost of such services was based on actual costs
incurred by Intellicall. The types of services provided included, but
were not limited to, such functions as consulting, legal, accounting,
human resources, senior management support, billing and collection, and
MIS support. Charges for consulting, accounting and human resources were
paid monthly in the total amount of $52,000 for the nine months ended
September 30, 1997. Legal services were billed based on the actual cost
incurred by Intellicall. The Company believes that all fees paid for such
services during the periods approximated those that would be paid under
an arm's-length transaction. Prior to January 1, 1998, the Company
purchased switched transmission services from Intellicall based on
Intellicall's contract with a third party long distance provider. The
amounts purchased for the nine-month period ended September 30, 1997 were
approximately $3,300,000 and for the three months ended December 31,
1997, the amounts purchased were approximately $1,085,000. Effective
January 1, 1998, the Company purchases such services directly from the
long distance provider at comparable rates. At September 30, 1998, the
Company owed Intellicall $492,000 primarily related to the acquisition of
the Intellicall Prepaid Operations. At September 30, 1998, Intellicall
owed ILD $743,000 mainly related to collections made on ILD's behalf.
S-25
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
WorldCom, a switched service wholesale provider to the Company, owns
4,587 shares of the Company's Common Stock and 102,243 shares of the
Company's Series B-2 Redeemable Preferred Stock (see Note 3). The Company
recorded revenue from WorldCom of approximately $5,772,000 and $711,000
for the year ended September 30, 1998 and the nine months ended September
30, 1997, respectively, for services provided by the Company. At
September 30, 1998, the Company owed WorldCom approximately $2,749,000
for switched transmission services and $1,484,000 for collections made on
WorldCom's behalf. WorldCom owed ILD approximately $4,441,000 for billing
of nonrelated party customers and fees charged for billing and collection
services.
16. WRITE-OFF OF DEFERRED OFFERING COSTS
On June 9, 1999, the Company withdrew its Registration Statement on Form
S-1 for an initial offering ("IPO") of stock and recorded a one-time
charge of $1,197,000 at September 30, 1998. This one-time charge included
printing, legal and accounting costs incurred in the IPO.
S-26
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