--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-10588
INTELLICALL, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-1993841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
2155 Chenault, Suite 410
Carrollton, TX 75006
(Address of Principal Executive Offices)
(972) 416-0022
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class November 14, 2000
---------------------------------------------- -----------------
Common Stock $.01 par value 13,081,889
--------------------------------------------------------------------------------
<PAGE>
INDEX
INTELLICALL, INC.
Part I. Financial Information
<TABLE>
<CAPTION>
Item 1. Financial Statements
<S> <C> <C> <C>
Balance Sheets at September 30, 2000 (Unaudited) and December 31, 1999........................2
Statements of Operations for each of the three month periods
ended September 30, 2000 and 1999 (Unaudited)................................................4
Statements of Operations for each of the nine month periods
ended September 30, 2000 and 1999 (Unaudited)................................................5
Statement of Stockholders' Equity for the nine months ended
September 30, 2000 (Unaudited)...............................................................6
Statements of Cash Flows for each of the nine month periods
ended September 30, 2000 and 1999 (Unaudited) ...............................................7
Notes to Financial Statements (Unaudited) ....................................................8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................................16
Part II. Other Information
Item 1. Legal Proceedings ............................................................................23
Item 6. Exhibits and Reports on Form 8-K..............................................................23
Signatures ..............................................................................................24
</TABLE>
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<PAGE>
INTELLICALL, INC.
UNAUDITED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
(in thousands)
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Current assets
Cash and cash equivalents ........................................ $3,899 $ 694
Receivables, net of allowance for doubtful accounts
of $1,771 and $764........................................... 651 1,455
Inventories, net.................................................. 2,401 3,088
Receivables from related party, net .............................. 159 1,258
Deferred tax asset................................................ -- 1,500
Other current assets.............................................. 93 157
------ -------
Total current assets......................................... 7,203 8,152
Fixed assets, net...................................................... 600 980
Investment in unconsolidated subsidiary................................ -- 1,835
Other assets, net...................................................... 698 637
Assets of discontinued operations, net................................. 139 513
------ -------
Total assets...................................................... $8,640 $12,117
====== =======
See notes to financial statements.
</TABLE>
-2-
<PAGE>
INTELLICALL, INC.
UNAUDITED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
(in thousands, except share information)
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Current liabilities
Accounts payable.......................................... $ 708 $ 1,798
Accrued liabilities....................................... 515 610
Current portion of long-term debt ........................ -- 2,630
Deferred tax liability ................................... 589 --
------- ------
Total current liabilities................................. 1,812 5,038
Long-term debt ................................................ 1,945 6,557
Deferred gain on sale of assets................................ -- 730
Other liabilities.............................................. 50 50
Liabilities of discontinued operations......................... 21 80
------- ------
Total liabilities........................................ 3,828 12,455
------- ------
Commitments and contingent liabilities......................... -- --
Stockholders' equity (deficit)
Common stock, $.01 par value; 20,000,000 shares
authorized; 13,081,889 and 13,080,175 shares issued,
respectively......................................... 131 131
Additional paid-in capital................................ 61,604 61,486
Less common stock in treasury, at cost;
24,908 shares........................................ (258) (258)
Accumulated deficit....................................... (56,665) (61,697)
------- -------
Total stockholders' equity (deficit)................. 4,812 (338)
------- -------
$ 8,640 $12,117
======= =======
See notes to financial statements.
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
INTELLICALL, INC.
UNAUDITED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three Months Ended
September 30,
2000 1999
---- ----
<S> <C> <C>
Equipment sales.................................................. $ 1,253 $ 2,830
Cost of sales and revenues....................................... 1,060 2,390
------- -------
Gross profit..................................................... 193 440
Selling, general and administrative expenses..................... 1,394 1,683
Provision for doubtful accounts.................................. 654 57
------- -------
Operating loss from continuing operations........................ (1,855) (1,300)
Gain on sale of stock............................................ 12 --
Other income..................................................... 27 16
Interest income.................................................. 70 26
Interest expense................................................. (125) (330)
Equity in the loss of unconsolidated subsidiary.................. -- (212)
------- -------
Loss from continuing operations before income taxes.............. (1,871) (1,800)
Income tax benefit............................................... 1,349 --
------- -------
Loss from continuing operations.................................. (522) (1,800)
Loss from discontinued operations................................ (117) (189)
------- -------
Net loss......................................................... $ (639) $(1,989)
======= ========
Basic and diluted net loss per share from continuing
operations..................................................... $ (0.04) $ (0.15)
======= =======
Basic and diluted net loss per share from discontinued
operations..................................................... $ (0.01) $ (0.02)
======= =======
Basic and diluted net loss per share............................. $ (0.05) $ (0.17)
======= =======
Weighted average number of basic and diluted shares outstanding.. 13,057 12,055
======= =======
See notes to financial statements.
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
INTELLICALL, INC.
UNAUDITED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Nine Months Ended
September 30,
2000 1999
---- ----
<S> <C> <C>
Equipment sales.................................................. $ 3,282 $ 9,210
Cost of sales and revenues....................................... 3,161 8,312
------- --------
Gross profit .................................................... 121 898
Selling, general and administrative expenses..................... 4,882 5,634
Provision for doubtful accounts.................................. 1,013 142
------- --------
Operating loss from continuing operations........................ (5,774) (4,878)
Gain on sale of stock............................................ 13,907 --
Other income..................................................... 84 181
Interest income.................................................. 164 146
Interest expense................................................. (834) (1,336)
Equity in the loss of unconsolidated subsidiary.................. (51) (833)
------- --------
Income (loss) from continuing operations before income taxes..... 7,496 (6,720)
Income tax expense............................................... (2,250) --
------- --------
Income (loss) from continuing operations......................... 5,246 (6,720)
Loss from discontinued operations................................ (117) (557)
------- --------
Income (loss) before extraordinary items......................... 5,129 (7,277)
Extraordinary items - loss on early extinguishment of debt,
net of $61 tax benefit......................................... (97) --
------- --------
Net income (loss)................................................ $ 5,032 $ (7,277)
======= ========
Basic net income (loss) per share from continuing operations..... $ 0.40 $ (0.56)
======= ========
Diluted net income (loss) per share from continuing
operations..................................................... $ 0.37 $ (0.56)
======= ========
Basic and diluted net loss per share from discontinued
operations ................................................... $ (0.01) $ (0.04)
======= ========
Basic and diluted net loss per share from extraordinary items.... $ (0.01) $ --
======== ========
Basic net income (loss) per share................................ $ 0.38 $ (0.60)
======= ========
Diluted net income (loss) per share............................. $ 0.35 $ (0.60)
======= ========
Weighted average number of basic shares outstanding.............. 13,056 12,045
======= ========
Weighted average number of diluted shares outstanding............ 14,404 12,045
======= ========
See notes to financial statements.
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
INTELLICALL, INC.
UNAUDITED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
Additional
Common Stock Paid-in Treasury Stock Accumulated
------------ --------------
Shares Amount Capital Shares Cost Deficit Total
------ ------ ------- ------ ---- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 2000 13,080 $ 131 $61,486 (25) $(258) $(61,697) $ (338)
Employee stock purchase plan 2 -- 1 -- -- -- 1
Issuance of warrants -- -- 117 -- -- -- 117
Net income -- -- -- -- -- 5,032 5,032
------ ----- ------- ---- ----- ------- ------
Balances at September 30, 2000 13,082 $ 131 $61,604 (25) $(258) $(56,665) $4,812
====== ===== ======= === ===== ======== ======
See notes to financial statements.
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
INTELLICALL, INC.
UNAUDITED STATEMENTS OF CASH FLOWS (in thousands)
Nine Months Ended
September 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................... $5,032 $ (7,277)
Adjustments to reconcile net income (loss) to net cash
provided by continuing operations:
Loss from discontinued operations....................... 117 557
Gain on sale of stock................................... (13,907) --
Depreciation and amortization........................... 803 1,537
Provision for doubtful accounts......................... 1,013 142
Provision for inventory losses.......................... 305 120
Equity in loss of unconsolidated subsidiary............. 51 833
Changes in operating assets and liabilities:
Receivables......................................... (210) 2,712
Inventories......................................... 382 1,249
Receivables from related party, net................. 102 371
Other current assets................................ 64 (167)
Notes receivable.................................... -- 166
Accounts payable ................................... (1,090) 396
Accrued income taxes ............................... 2,089 --
Accrued liabilities................................. (95) 55
Other............................................... 11 (64)
-------- -------
Net cash (used in) provided by continuing operations (5,333) 630
Cash flows from investing activities:
Net cash flows from discontinued operations................ 199 2,161
Capital expenditures....................................... -- (162)
Capitalized software....................................... -- (815)
Cash received on sale of stock............................. 15,769 --
-------- -------
Net cash provided by (used in) investing activities 15,968 1,184
Cash flows from financing activities:
(Repayments) borrowings on notes payable................... (7,430) 1,000
Net repayments on line of credit........................... -- (2,811)
-------- -------
Net cash used in financing activities........... (7,430) (1,811)
Net increase in cash and cash equivalents....................... 3,205 3
Cash and cash equivalents at beginning of period................ 694 16
-------- -------
Cash and cash equivalents at end of period...................... $ 3,899 $ 19
======== =======
Supplemental cash flow information:
Interest paid................................................. $ 827 $ 1,180
======== =======
Income taxes paid............................................. $ 100 $ --
======== =======
Non-cash investing transactions:
Issuance of stock warrants $ 117 $ --
======== =======
See notes to financial statements.
</TABLE>
-7-
<PAGE>
INTELLICALL, INC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements, in the opinion of the
Company's management, contain all material, normal and recurring adjustments
necessary to present accurately the financial condition of the Company and the
results of its operations for the periods indicated. The results of operations
for the interim periods reported are not necessarily indicative of the results
to be experienced for the entire year.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999, as amended.
Significant accounting policies followed by the Company were disclosed in the
notes to the Company's Annual Report on Form 10-K. The year-end balance sheet
data included herein was derived from the audited financial statements, but does
not include all of the disclosures required by generally accepted accounting
principles.
Business: Intellicall, Inc. ("Intellicall" or the "Company")
designs, engineers, manufactures and sells pay telephones and retrofit kits
and parts in the United States and internationally.
Creation of ILD Telecommunications, Inc. ("ILD"): 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.
At that time the Company transferred ownership in its wholly owned
subsidiary, Intellicall Operator Services, Inc. ("IOS"), to ILD.
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.
As of September 30, 2000, ILD had remitted $.3 million to the Company, redeeming
1,975 shares of the Series B preferred convertible stock and became current on
all accrued and unpaid dividends. As a result of the transaction, the Company
recorded a $.1 million gain on the sale of the stock to ILD. Proceeds from the
sale were used for general operating purposes.
On April 11, 2000 the Company sold the majority of its interest in ILD
(See Note 8). Accordingly, the Company discontinued reporting its investment in
ILD on the equity method under the caption "Investment in Unconsolidated
Subsidiary" as was required under the Accounting Principles Board Opinion 18
("APB 18") "The Equity Method of Accounting for Investments in Common Stock." As
of April 11, 2000 the Company no longer reports a portion of gains and losses
from ILD in its financial statements. Additionally, the Company has reported its
investment in ILD with its other investments under the caption "Other Assets".
As of September 30, 2000 and December 31, 1999, the Company's
ownership percentage in ILD was 2.7% and 30.0%.
-8-
<PAGE>
Software Development Costs: Effective January 1, 2000 and as a result
of the impairment charge on capitalized software costs recorded by the Company
on December 31, 1999, 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 quarters ended
September 30, 2000 and 1999 were zero and $.3 million. The Company recorded zero
and $.2 million of software amortization expense for the quarters ended
September 30, 2000 and 1999. Approximately $.1 million of software development
costs were expensed as incurred during the three months ended September 30,
2000.
The amounts of software development costs capitalized for the nine
months ended September 30, 2000 and 1999 were zero and $.8 million. The Company
recorded zero and $.7 million of software amortization expense for the nine
months ended September 30, 2000 and 1999. Approximately $.4 million of software
development costs were expensed as incurred during the nine months ended
September 30, 2000.
Reclassifications: Certain prior year amounts have been
reclassified to conform with the current year presentation.
NOTE 2 - INVENTORIES
The components of inventories are (in thousands):
September 30, December 31,
2000 1999
---- ----
Raw materials ...................... $ 3,167 $ 3,362
Work in process...................... 27 133
Finished goods ...................... 698 1,003
------- -------
3,892 4,498
Less reserves for obsolescence...... (1,491) (1,410)
------- -------
Net inventory $ 2,401 $ 3,088
======= =======
-9-
<PAGE>
NOTE 3 - FIXED ASSETS
<TABLE>
<CAPTION>
The components of fixed assets are (in thousands):
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Office equipment..................... $ 3,340 $ 3,404
Tooling and other equipment.......... 5,001 5,001
------- -------
8,341 8,405
Less accumulated depreciation............. (7,741) (7,425)
------- -------
$ 600 $ 980
======= ==-====
</TABLE>
NOTE 4 - LONG-TERM DEBT
<TABLE>
<CAPTION>
The Company's debt consisted of the following (in thousands):
September 30, December 31,
2000 1999
---- ----
<S> <C> <C> <C>
8% Convertible subordinated notes, due 2000 $ -- $ 2,630
8% Convertible subordinated notes, due 2001 200 5,000
7% Convertible subordinated notes, due 2004 2,000 2,000
-------- -------
2,200 9,630
Less: Unamortized debt discount (255) (443)
-------- -------
1,945 9,187
Less: Current portion of long-term debt -- (2,630)
-------- -------
Total long-term debt $ 1,945 $ 6,557
======== =======
</TABLE>
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 Prime 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 equal to the principal amount of the note.
-10
<PAGE>
NOTE 4 - LONG-TERM DEBT (Continued)
Proceeds of the note were used for working capital purposes. On May 1, 2000 the
Company used a portion of the proceeds from the sale of its ownership in ILD
(See Note 8) to retire the $.5 million note to Bank of America.
On April 27, 2000 the Company used a portion of the proceeds from the
sale of its ownership in ILD (See Note 8) to retire the remaining $2.6 million
8.0% convertible subordinated notes due December 31, 2000 and $4.8 million of
the 8.0% convertible subordinated notes due November 22, 2001, both due to Banca
del Gottardo. The Company incurred a $.1 million expense, net of $.06 income tax
benefit, relating to the extinguishment of the $2.6 million 8.0% convertible
subordinated notes due December 31, 2000, which has been reported in its
statements of operations and statements of cash flow under the caption
"Extraordinary items - early extinguishment of debt." This expense resulted from
the Company paying to Banca del Gottardo a 6.0% premium on the outstanding
principal balance of the note upon its retirement as required by the note
agreement.
NOTE 5 - 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 quarters
ended September 30, 2000 and 1999, the Company reported a loss from discontinued
operations of $.1 million and $.2 million. 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 zero and $2.9 million for the
quarters ended September 30, 2000 and 1999, and zero and $9.0 million for the
nine months ended September 30, 2000 and 1999.
NOTE 6 - BUSINESS COMBINATIONS
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. On July 24, 2000 the
executives of the Company and Heads Up mutually announced the cancellation of
the merger between the two companies. The business opportunities presented by
the merger, including anticipated cost reductions and the ability to expand in
new markets, did not justify the cost of combining the two companies.
-11-
<PAGE>
NOTE 6 - BUSINESS COMBINATIONS (Continued)
On August 29, 2000, Intellicall entered into an agreement and plan of
merger with Wireless WebConnect! Inc ("WWC"), a reseller of high-speed, mobile
wireless internet service. Pursuant to the merger agreement, Intellicall will
issue to the shareholders of WWC 16,426,420 shares of common stock of
Intellicall. After the combination, WWC will own approximately 56% of the
outstanding stock of Intellicall.
The merger is subject to certain conditions, including approval by
Intellicall's stockholders. There are no assurances that the conditions
precedent will be satisfied or that the merger will be consummated.
NOTE 7 - NEW CONTRACT
On June 30, 2000 the Company entered into an agreement with Homisco,
Inc. ("Homisco") whereby, the Company granted Homisco a non-exclusive,
non-transferable license to use the Company's N-Genius hardware and software
products. The Company will receive a 15.0% royalty on gross revenues attributed
to the N-Genius products sold by Homisco. Additionally, Homisco has assumed
future warranty liabilities on any N-Genius systems currently under warranty.
NOTE 8 - SALE OF ILD STOCK
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 included 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 (the "Note") due from ILD to Intellicall,
dated May 10, 1996. Pursuant to the sale to Banca del Gottardo, Intellicall, as
of March 10, 2000, elected to convert the entire principal balance of the Note
into 11,111 shares of ILD Common stock.
The terms of the offer included 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. The Company previously reported in error that it had an option to
repurchase such shares at $250 per share. The Company and Banca del Gottardo
entered into an amendment to the ILD stock purchase agreement on June 1, 2000
that was intended to delete the provision of that agreement providing for such
option. The Company has filed the corrected amendment with this Report on Form
10-Q, which deletes the option as intended by both parties. The Company has a
right of first refusal, should Banca del Gottardo desire to transfer or sell the
ILD stock to a third party. The Company recorded a gain on the sale of $13.8
million. As a result of the ILD stock sale to Banca del Gottardo, the Company's
ownership in ILD decreased to 2.7%. Accordingly, the Company discontinued
reporting its investment in ILD on the equity method of accounting and no longer
reports a portion of gains and losses from ILD in its
-12-
<PAGE>
financial statements (See Note 1).
NOTE 8 - SALE OF ILD STOCK (Continued)
The Company received $1.0 million on March 13, 2000 from Banca del
Gottardo as an advance payment toward the ILD stock sale. On April 27, 2000, the
Company received the remaining proceeds from Banca del Gottardo.
Proceeds of the stock sale have been used to pay off all of the $2.6
million, 8% convertible subordinated noted due December 31, 2000, $4.8 million
of the $5.0 million, 8% convertible subordinated noted due November 22, 2001,
and the $.5 million revolving promissory note due February 11, 2001 (See Note
4). The remainder of the proceeds will be used for working capital purposes.
On July 11, 2000 the Company issued warrants to purchase 100,000
shares of the Company's common stock at $1.25 per share and warrants to purchase
100,000 shares of the Company's common stock at $1.00 per share to Banca del
Gottardo. These warrants were issued in lieu of transaction fees for the sale of
the Company's interest in ILD to Banca del Gottardo and subsequent retirement of
the $2.6 million 8% convertible, subordinated notes due December 31, 2000 and
$4.8 million of the $5.0 million 8% convertible, subordinated notes due November
22, 2000 (See Note 4). Although the issuance of the warrants was finalized on
July 11, 2000, it was contemplated during the second quarter as part of the sale
of the Company's interest in ILD. As such, the Company recorded the fair value
of the warrants as additional paid in capital in the second quarter and as a
cost of the sale of ILD stock.
NOTE 9 - INCOME TAXES
The Company provided for income taxes on a current year-to-date basis,
based on the effective tax rate expected to be applicable for the full fiscal
year. As a result, the Company recorded an income tax expense of $2.3 million.
NOTE 10 - BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
Basic and diluted net income (loss) per share has been computed in
accordance with the Statement of Financial Standards No. 128 "Earnings per
Share" ("FAS 128") and is based on the weighted average number of common shares
outstanding for the quarters and nine months ended September 30, 2000 and 1999.
Diluted net income (loss) per share gives effect to all dilutive potential
common shares that were outstanding during the period.
-13-
<PAGE>
NOTE 10 - BASIC AND DILUTED NET INCOME (LOSS) PER SHARE (Continued)
The weighted average basic and diluted common shares outstanding are as follows
(in thousands):
<TABLE>
<CAPTION>
Quarter ended
September 30, 2000 September 30, 1999
Basic Diluted Basic Diluted
----- ------- ----- -------
<S> <C> <C> <C> <C>
Net loss
Income (loss) from continuing operations $ (522) $ (522) $(1,800) $(1,800)
Loss from discontinued operations (117) (117) (189) (189)
------ ------- ------- -------
Net loss $ (639) $ (639) $(1,989) $(1,989)
====== ======= ======= =======
Average equivalent shares
Weighted average shares outstanding 13,057 13,057 12,055 12,055
====== ======= ======= ======
Nine months ended
September 30, 2000 September 30, 1999
Basic Diluted Basic Diluted
----- ------- ----- -------
Net income (loss)
Income (loss) from continuing operations $ 5,246 $ 5,246 $(6,720) $(6,720)
Interest charges applicable to convertible debt
-- 72 -- --
------- ------- ------- -------
Income (loss) from continuing operations 5,246 5,318 (6,720) (6,720)
Loss from discontinued operations (117) (117) (557) (557)
-------- ------- ------- -------
Income (loss) before extraordinary item 5,129 5,201 (7,277) (7,277)
Extraordinary item, net (97) (97) -- --
-------- ------- ------- -------
Net income (loss) $ 5,032 $ 5,104 $(7,277) $(7,277)
======= ======= ======= =======
Average equivalent shares
Weighted average shares outstanding 13,056 13,056 12,045 12,045
Warrants to purchase common shares -- 17 -- --
Convertible debt -- 1,331 -- --
------- ------- -------- --------
Total average shares equivalent 13,056 14,404 12,045 12,045
======= ======= ======== ========
</TABLE>
-14-
<PAGE>
NOTE 10 - BASIC AND DILUTED NET INCOME (LOSS) PER SHARE (Continued)
Excluded from the diluted earnings per share calculation for the
quarter and nine months ended September 30, 2000 are options to purchase
1,436,980 shares of the Company's common stock. Additionally, warrants to
purchase 1,809,623 and 1,509,623 shares of the Company's common stock as of the
quarter and year to date ended September 30, 2000 were excluded from the diluted
earnings per share calculation. These options and warrants were excluded because
they have an antidilutive effect as their exercise price exceeds the average
market price of the Company's common stock.
NOTE 11 - WORKING CAPITAL FUNDING
Beyond 2000, the Company's ability to obtain further funds
from external sources will depend on its ability to find new strategic partners
and/or opportunities. Although management of the Company believes that the WWC
acquisition will provide a strategic partnership, there can be no assurance that
the conditions precedent to the merger will be satisfied or that the merger will
be consummated. In the event of the consummation of the merger, there can be no
assurance that external funds would be available or, if available, would not
potentially dilute shareholders' interests or returns.
-15-
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The accompanying unaudited financial statements, in the opinion of the
Company's management, contain all material, normal and recurring adjustments
necessary to present accurately the financial condition of the Company and the
results of its operations for the periods presented. The results of operations
for the periods reported are not necessarily indicative of the results to be
experienced for the entire year.
The following discussion of the financial condition and results of
operations of the Company 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, 1999.
Forward-Looking Statements - Cautionary Statements
This Form 10-Q contains certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Specifically, all statements other than statements
of historical facts included in this report regarding the Company's financial
position, business strategy and plans and objectives of management of the
Company for future operations are forward-looking statements. These
forward-looking statements are based on the beliefs of the Company's management,
as well as assumptions made by and information currently available to the
Company's management. When used in this report, the words "anticipate,"
"believe," "estimate," "expect," "intend", and words or phrases of similar
import, as they relate to the Company or Company management, are intended to
identify forward-looking statements. Such statements (the "cautionary
statements") reflect the current view of the Company with respect to future
events and are subject to risks, uncertainties and assumptions related to
various factors including, without limitation, competitive factors, general
economic conditions, customer relations, relationships with vendors, the
interest rate environment, governmental regulation and supervision, seasonality,
product introductions and acceptance, technological change, changes in industry
practices and one-time events. Although the Company believes that expectations
are reasonable, it can give no assurance that such expectations will prove to be
correct. Based upon changing conditions, should any one or more of these risks
or uncertainties materialize, or should any underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, expected or intended. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the applicable
cautionary statements. The Company's future operating results are subject to a
number of risks and uncertainties.
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<PAGE>
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
and its customers are subject. The rate of change in proposed and promulgated
regulations affecting 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 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 and warranty
reserves resulted in negative gross margins through 1998, the Company's variable
gross margins on phone and network equipment products introduced since 1998 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.
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<PAGE>
Changes in Presentation
On September 22, 1999 the Company elected to discontinue its billing
services operations effective October 21, 1999 (See Note 5 to the unaudited
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.
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 (See Note 8 to the unaudited Financial Statements). As a
result, the Company's ownership in ILD, as of April 11, 2000, decreased to 2.7%.
Accordingly, the Company discontinued reporting its investment in ILD on the
equity method under the caption "Investment in Unconsolidated Subsidiary" as was
required under the Accounting Principles Board Opinion 18 ("APB 18") "The Equity
Method of Accounting for Investments in Common Stock." The Company has reported
its investment in ILD with its other investments under the caption "Other
Assets" as of the quarter ended September 30, 2000. (See Note 1 to the unaudited
Financial Statements).
Recent Developments
On January 4, 2000 the Company was notified by ILD Telecommunications,
Inc. ("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. As of September 30, 2000, ILD had remitted
$.3 million to the Company, redeeming 1,975 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 1 to
the unaudited 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 received $1.0 million on March 13, 2000 from
Banca del Gottardo as an advance payment toward the stock sale. The Company's
ownership in ILD included 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. Pursuant to
the sale to Banca del Gottardo, Intellicall, as of March 10, 2000, elected to
convert the entire principal balance of the Note into 11,111 shares of ILD
common stock.
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<PAGE>
Recent Developments (Continued)
The terms of the ILD stock sale included 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. The Company previously reported in error that it had
an option to repurchase such shares at $250 per share. The Company and Banca del
Gottardo entered into an amendment to the ILD stock purchase agreement on June
1, 2000 that was intended to delete the provision of that agreement providing
for such option. The Company has filed the corrected amendment with this Report
on Form 10-Q, which deletes the option as intended by both parties. The Company
has a right of first refusal, should Banca del Gottardo transfer or sell the ILD
stock to a third party.
On April 27, 2000 the Company received the remaining proceeds from the
sale of its ownership in ILD. A portion of the proceeds were used to retire the
remaining $2.6 million 8.0% convertible subordinated notes due December 31, 2000
and $4.8 million of the 8.0% convertible subordinated notes due November 22,
2001, both due to Banca del Gottardo. Additionally, On May 1, 2000 the Company
retired the $.5 million note due to Bank of America. The remaining proceeds will
be used for general operating purposes and to fund expansion into new markets.
On June 30, 2000 the Company entered into an agreement with Homisco,
Inc. ("Homisco") whereby, the Company has given Homisco a non-exclusive,
non-transferable license to use the Company's N-Genius hardware and software
products. The Company will receive a 15.0% royalty on gross revenues attributed
to the N-Genius products sold by Homisco. Additionally, Homisco has assumed
future warranty liabilities on any N-Genius systems currently under warranty
(See Note 7 to the unaudited Financial Statements).
On August 29, 2000, Intellicall entered into an agreement and plan of
merger with Wireless WebConnect!, Inc ("WWC"), a reseller of high-speed, mobile
wireless internet service. Pursuant to the merger agreement, Intellicall will
issue to the shareholders of WWC 16,426,420 shares of common stock of
Intellicall. After the combination, WWC will own approximately 56% of the
outstanding stock of Intellicall.
The merger with WWC will place Intellicall in the wireless internet
market, which presents substantial growth opportunities. Intellicall's business
plan has been to initiate a strategic move to create opportunity for growth.
This was necessary due to the rapid decline in Intellicall's traditional
business. The Company's management believes the combined experience and
financial resources will allow for rapid sales deployment and expansion of the
customer base of WWC. With the expansion of the customer base, management
expects opportunities will be created to bring a broader range of service and
value added product.
The merger is subject to certain conditions, including approval by
Intellicall's stockholders. There are no assurances that the conditions
precedent will be satisfied or that the merger will be consummated. If the
merger is not comsummated, management of the Company will seek other strategic
alternatives to create opportunities for the growth of the Company.
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<PAGE>
Results of Operations
Equipment Sales. Equipment sales for the quarter ended September 30, 2000 were
$1.3 million compared to $2.8 million for the same period last year. The $1.5
million decrease is principally due to an overall reduction in demand for
payphones and their related parts. Equipment sales for the nine months ended
September 30, 2000 were $3.3 million compared to $9.2 million for the same
period last year. The $5.9 million decrease is mainly a result of a reduction of
shipments into the Canadian market and an overall reduction in demand for
payphones and their related parts.
Gross Profit (Loss). Gross profit for the quarter ended September 30, 2000 was
$.19 million compared to $.44 million the same period last year. Gross profit
for the nine months ended September 30, 2000 was $.12 million compared to a
gross profit of $.9 million for the same period last year. The decline in gross
profit is due to the down turn in sales as noted above, 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 relative to sales, thereby reducing gross profit for the periods.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") for the quarter ended September 30, 2000 were
$1.4 million compared to $1.7 million for the same period last year. SG&A
expenses for the nine months ended September 30, 2000 were $4.9 million compared
to $5.6 million for the same period last year. The $.3 million and $.7 million
declines are mainly due to cost cutting measures undertaken by the Company,
including a reduction in personnel in the corporate and administrative areas.
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 and advertising expenses.
Provision for Doubtful Accounts. Provision for doubtful accounts expense for the
quarter ended September 30, 2000 was $.65 million compared to $.06 million for
the same period last year. Provision for doubtful accounts expense for the nine
months ended September 30, 2000 was $1.0 million compared to $.14 million for
the same period last year. The increases are due to the Company increasing
reserves for bad debt during 2000.
Gain on Sale of Stock. The gain on sale of stock of $13.9 million during the
nine months ended September 30, 2000 represents the Company's sale of the
majority of its interest in ILD. (See "Recent Developments" and Notes 1 and 8 to
the unaudited Financial Statements)
Interest Income. Interest income for the quarter ended September 30, 2000 was
$.07 million compared to $.03 million for the same period last year. The $.04
million increase is primarily a principally a result of investing the proceeds
from the ILD stock sold to Banca del Gottardo. Interest income for the nine
months ended September 30, 2000 was $.16 million compared to $.15 million for
the same period last year. This $.01 increase is also a result of investing the
proceeds from the ILD stock sale.
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<PAGE>
Results of Operations (Continued)
Interest Expense. Interest expense for the quarter ended September 30, 2000 was
$.13 million compared to $.33 million for the same period last year. The $.2
million decrease is mainly a result of the Company retiring long-term debt
during the second quarter of 2000. (See "Recent Developments" and Note 4 to the
unaudited Financial Statements) Interest expense for the nine months ended
September 30, 2000 was $.8 million compared to $1.3 million for the same period
last year. The $.5 million decrease is predominately a result of the Company
expensing debt costs relating to the retirement of the Finova obligations of $.2
million. The remaining $.3 million decrease is related to the Company paying
less interest to RFC Capital Corporation on fewer sold receivables and the
retirement of the Company's notes payable during the quarter ended September 30,
2000 as mentioned above.
Equity in Gain/Loss of Unconsolidated Subsidiary. For the quarters ended
September 30, 2000 and 1999, the Company reported a zero and $.21 million loss
on the equity investment in ILD. For the nine months ended September 30, 2000,
the Company reported a $.05 million loss on the equity investment in ILD
compared to $.8 million for the same period last year. The gain and losses
represents Intellicall's proportionate share, based on ownership, of ILD's net
loss for the periods.
As a result of Intellicall's change in ownership in ILD (See Notes 1 and 8 to
the unaudited Financial Statements), the Company discontinued reporting its
investment in ILD on the equity method and has reported its investment in ILD
with its other investments as of the quarter ended September 30, 2000.
Accordingly, the Company no longer reports a portion of the gains and losses
from ILD in its financial statements
Discontinued Operations. On September 22, 1999, after determining it to be
unprofitable, the Company elected to discontinue its billing services operations
effective October 21, 1999 (See Note 5 to the unaudited Financial Statements).
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 discontinued billing
services operations were zero and $2.9 million for the quarters ended September
30, 2000 and 1999 and zero and $9.0 million for the nine months ended September
30, 2000 and 1999. Net loss related to the discontinued billing services
operations were zero and $.2 million for the quarters ended September 30, 2000
and 1999 and zero and $.6 million for the nine months ended September 30, 2000
and 1999.
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<PAGE>
Liquidity and Capital Resources
Cash flows from investing activities include receipts of $.2 million
from ILD representing the redemption of 1,975 shares of ILD's Series B
convertible preferred stock, exclusive of $.1 million received from ILD for
accrued and unpaid dividends and receipts of $15.5 million from Banca del
Gottardo representing the purchase of ILD Series A convertible stock and ILD
common stock (See Notes 1 and 8 to the unaudited Financial Statements). The
proceeds provided the primary source of cash to enable the Company to fund its
operations. Cash used in operating activities was $5.5 million.
Cash flows from financing activities include the repayment of the
remaining $2.6 million 8.0% convertible subordinated notes due December 31, 2000
and $4.8 million of the 8.0% convertible subordinated notes due November 22 (See
Note 4 to the unaudited Financial Statements)
During February 2000 the Company signed a $.5 million revolving
promissory note with Bank of America, N.A. Proceeds of the note were used for
working capital purposes. The note was subsequently retired in May 2000. (See
Note 4 to the unaudited Financial Statements).
Beyond 2000, the Company's ability to obtain further funds
from external sources will depend on its ability to find new strategic partners
and/or opportunities. Although management of the Company believes that the WWC
acquisition will provide a strategic partnership, there can be no assurance that
the conditions precedent to the merger will be satisfied or that the merger will
be consummated. In the event of the consummation of the merger, there can be no
assurance that external funds would be available or, if available, would not
potentially dilute shareholders' interests or returns.
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<PAGE>
Part II. Other Information
ITEM 1. Legal Proceedings.
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as a part of this Quarterly Report
on Form 10-Q:
(a) 2.1 Agreement and Plan of Merger by and among
Intellicall, Inc., WWC Acquisition, Inc. and
Wireless WebConnect!, Inc. dated August 29, 2000
*10.2 Amendment to Stock Purchase Agreement
dated June 1, 2000 by and between
Intellicall, Inc. and Gotthardfin Limited
(b) Reports on Form 8-K:
(b)Item 4. Changes in the Registrant's Certifying Accountant
filed September 15, 2000
(c)Item 4. Changes in the Registrant's Certifying Accountant
filed October 4, 2000
* Filed herewith.
(a) Previously filed as an exhibit to Intellicall, Inc.'s Preliminary Proxy
Statement filed on October 18, 2000 with the SEC and incorporated
herein by reference.
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<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
INTELLICALL, INC.
/s/ John J. McDonald, Jr.
-----------------------------------------------
John J. McDonald, Jr.
President and
Chief Executive Officer
/s/ R. Phillip Boyd
-----------------------------------------------
R. Phillip Boyd
Vice President Finance
and Chief Financial Officer
Date: November 14, 2000
