--------------------------------------------------------------------------------
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 June 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 Identification number)
incorporation or organization)
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 August 14, 2000
--------------------- ---------------
Common Stock $.01 par value 13,080,894
--------------------------------------------------------------------------------
<PAGE>
INDEX
INTELLICALL, INC.
Part I. Financial Information
Item 1. Financial Statements
Balance Sheets at June 30, 2000 (Unaudited)
and December 31, 1999..... ........................ 1
Statements of Operations for each of the three month periods
ended June 30, 2000 and 1999 (Unaudited)..................... 3
Statements of Operations for each of the six month periods
ended June 30, 2000 and 1999 (Unaudited)..................... 4
Statements of Cash Flows for each of the six month periods
ended June 30, 2000 and 1999 (Unaudited) .................... 5
Notes to Financial Statements (Unaudited) ................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 15
Part II. Other Information
Item 1. Legal Proceedings .............................................23
Item 6. Exhibits and Reports on Form 8-K............................ 23
Signatures ............................................................ 24
<PAGE>
INTELLICALL, INC.
UNAUDITED BALANCE SHEETS
ASSETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Current assets
Cash and cash equivalents ........................................ $ 4,991 $ 694
Receivables, net of allowance for doubtful accounts
of $1,068 and $764........................................... 1,105 1,455
Inventories, net.................................................. 2,664 3,088
Receivables from related party, net .............................. 175 1,258
Deferred tax asset................................................ -- 1,500
Other current assets.............................................. 226 157
----- ------
Total current assets......................................... 9,161 8,152
Fixed assets, net...................................................... 740 980
Investment in unconsolidated subsidiary................................ -- 1,835
Other assets, net...................................................... 706 637
Assets of discontinued operations...................................... 420 513
------- -------
Total Assets...................................................... $11,027 $12,117
======= =======
See notes to financial statements.
</TABLE>
-1-
<PAGE>
INTELLICALL, INC.
UNAUDITED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
(in thousands, except share information)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Current liabilities
Accounts payable.......................................... $ 1,094 $ 1,798
Accrued liabilities....................................... 437 610
Current portion of long-term debt ........................ -- 2,630
Deferred tax liability ................................... 2,038 --
------- -------
Total current liabilities................................. 3,569 5,038
Long-term debt ................................................ 1,880 6,557
Deferred gain on sale of assets................................ -- 730
Other liabilities.............................................. 50 50
Liabilities of discontinued operations......................... 78 80
------- -------
Total liabilities........................................ 5,577 12,455
------- -------
Commitments and contingent liabilities......................... -- --
Stockholders' equity (deficit)
Common stock, $.01 par value; 20,000,000 shares
Authorized; 13,080,894 and 13,080,175 shares issued,
Respectively......................................... 131 131
Additional paid-in capital................................ 61,603 61,486
Less common stock in treasury, at cost;
24,908 shares........................................ (258) (258)
Accumulated deficit....................................... (56,026) (61,697)
-------- -------
Total stockholders' deficit.......................... 5,450 (338)
-------- -------
$ 11,027 $ 12,117
========== =========
See notes to financial statements.
</TABLE>
-2-
<PAGE>
INTELLICALL, INC.
UNAUDITED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
2000 1999
---- ----
<S> <C> <C>
Equipment sales.................................................. $ 1,100 $ 1,549
Cost of sales and revenues....................................... 1,049 1,653
------- -------
Gross profit (loss).............................................. 51 (104)
Selling, general and administrative expenses..................... 1,452 1,648
Provision for doubtful accounts.................................. 340 331
Research and development expenses................................ 240 274
------- ------
Operating loss from continuing operations........................ (1,981) (2,357)
Gain on sale of stock............................................ 13,784 --
Other income..................................................... 31 156
Interest income.................................................. 67 59
Interest expense................................................. (374) (537)
Equity in the earnings (loss) of unconsolidated subsidiary....... -- (263)
------- ------
Income (loss) from continuing operations before income taxes..... 11,527 (2,942)
Income tax expense............................................... (3,599) --
------- ------
Income (loss) from continuing operations 7,928 (2,942)
Loss from discontinued operations................................ -- (117)
------ ------
Income (loss) before extraordinary items......................... 7,928 (3,059)
Extraordinary items - early extinguishment of debt,
net of $61 tax benefit........................................... (97) --
------ -------
Net income (loss) available to common shareholders .............. $ 7,831 $(3,059)
======= =======
Basic net income (loss) per share from
continuing operations............................................ $ 0.61 $ (0.24)
======= =======
Diluted net income (loss) per share from
continuing operations............................................ $ 0.56 $ (0.24)
======= =======
Basic and diluted net loss per share from
discontinued operations.......................................... $ -- $ (0.01)
======= =======
Basic and diluted net loss per share from extraordinary items.... $ (0.01) $ --
======= =======
Basic net income (loss) per share................................ $ 0.60 $ (0.25)
======= =======
Diluted net income (loss) per share.............................. $ 0.55 $ (0.25)
======= =======
Weighted average number of basic shares outstanding.............. 13,056 12,049
======= =======
Weighted average number of diluted shares outstanding............ 14,386 12,049
======= =======
See notes to financial statements.
</TABLE>
-3-
<PAGE>
INTELLICALL, INC.
UNAUDITED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
---- ----
<S> <C> <C>
Equipment sales.................................................. $ 2,029 $6,380
Cost of sales and revenues....................................... 2,101 5,922
------- ------
Gross profit (loss).............................................. (72) 458
Selling, general and administrative expenses..................... 2,920 3,453
Provision for doubtful accounts.................................. 359 85
Research and development expenses................................ 568 498
------- -----
Operating loss from continuing operations........................ (3,919) (3,578)
Gain on sale of stock............................................ 13,895 --
Other income..................................................... 57 165
Interest income.................................................. 94 120
Interest expense................................................. (709) (1,006)
Equity in the earnings (loss) of unconsolidated subsidiary....... (51) (621)
------- ------
Income (loss) from continuing operations before income taxes..... 9,367 (4,920)
Income tax expense............................................... (3,599) --
------- ------
Income (loss) from continuing operations 5,768 (4,920)
Loss from discontinued operations................................ -- (368)
------- ------
Income (loss) before extraordinary items......................... 5,768 (5,288)
Extraordinary items - early extinguishment of debt,
Net of $61 tax benefit........................................... (97) --
------- ------
Net income (loss) available to common shareholders $ 5,671 $(5,288)
======= =======
Basic net income (loss) per share from continuing
operations.................................................... $ 0.44 $ (0.41)
======= =======
Diluted net income (loss) per share from continuing
operations.................................................... $ 0.41 $ (0.41)
======= =======
Basic and diluted net loss per share from discontinued
operations.................................................... $ -- $ (0.03)
======= =======
Basic and diluted net loss per share from extraordinary items.... $ (0.01) $ --
======= =======
Basic net income (loss) per share................................ $ 0.43 $ (.44)
======= =======
Basic and diluted net income (loss) per share.................... $ 0.40 $ (.44)
======= =======
Weighted average number of basic shares outstanding.............. 13,056 12,049
======= =======
Weighted average number of diluted shares outstanding............ 14,428 12,049
======= =======
See notes to financial statements.
</TABLE>
-4-
<PAGE>
INTELLICALL, INC.
UNAUDITED STATEMENTS OF CASH FLOWS (in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
---- ----
Cash flows from continuing operating activities:
<S> <C> <C>
Net income (loss) from continuing operations............... $5,671 $ (4,920)
Adjustments to reconcile net loss from continuing operations to net
Cash provided by operating activities:
Gain on sale of stock................................... (13,895) --
Depreciation and amortization........................... 619 1,060
Provision for doubtful accounts......................... 359 86
Provision for inventory losses.......................... 200 (152)
Equity in loss of unconsolidated subsidiary............. 51 621
Changes in operating assets and liabilities:
Receivables......................................... (10) 2,793
Inventories......................................... 224 258
Receivables from related party, net................. 83 338
Other current assets................................ (69) 28
Notes receivable.................................... -- 163
Accounts payable ................................... (704) 1,114
Accrued income taxes ............................... 3,538 --
Accrued liabilities................................. (173) (297)
Other............................................... 9 (108)
------- --------
Net cash (used in) provided by continuing operating activities (4,097) 984
Cash flows from investing activities:
Capital expenditures....................................... -- (96)
Capitalized software....................................... -- (565)
Cash received on sale of stock............................. 15,732 --
------- --------
Net cash provided by (used in) investing activities 15,732 (661)
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 cash flows from discontinued operations..................... 92 1,482
------- ------
Net increase (decrease) in cash and cash equivalents............ 4,297 (6)
Cash and cash equivalents at beginning of period................ 16
------- --------
694
Cash and cash equivalents at end of period...................... $ 4,991 $ 10
======== ========
Supplemental cash flow information:
Interest paid................................................. $ 360 $ 491
======= ========
Supplemental non cash flow information:
Conversion of debt to equity.................................. $ -- $ 510
======= ========
See notes to financial statements.
</TABLE>
-5-
<PAGE>
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. 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 within 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, parts and
intelligent network platforms 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.
As of June 30, 2000 and December 31, 1999, the Company's ownership
percentage in ILD was 2.7% and 30.0%.
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 June 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 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). 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." As of April 11, 2000 the Company no
longer reports a portion of gains and losses from ILD in its financial
statements.
-6-
<PAGE>
Additionally, the Company has prospectively reported its investment
in ILD with its other investments under the caption "Other Assets" as of the
quarter ended June 30, 2000, as required under the Statement of Financial
Accounting Standards No. 115 ("FAS 115") "Accounting for Certain Investments in
Debt and Equity Securities". 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 June 30, 2000 and 1999 were zero and $.3 million. The Company recorded
zero and $.2 million of software amortization expense for the quarters ended
June 30, 2000 and 1999. $.1 million of software development costs were
expensed as incurred during the three months ended June 30, 2000.
The amounts of software development costs capitalized for the six
months ended June 30, 2000 and 1999 were zero and $.6 million. The Company
recorded zero and $.4 million of software amortization expense for the six
months ended June 30, 2000 and 1999. $.2 million of software development costs
were expensed as incurred during the six months ended June 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):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Raw materials ................................................................ $ 3,350 $ 3,362
Work in process................................................................ 94 133
Finished goods ................................................................ 786 1,003
------- -------
4,230 4,498
Less reserves for obsolescence................................................. (1,566) (1,410)
------ ------
Net inventory $ 2,664 $ 3,088
======= =======
</TABLE>
-7-
<PAGE>
NOTE 3 - FIXED ASSETS
<TABLE>
<CAPTION>
The components of fixed assets are (in thousands): June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Office equipment.............................................................. $3,404 $3,404
Tooling and other equipment................................................... 5,001 5,001
------ ------
8,405 8,405
Less accumulated depreciation................................................. (7,665) (7,425)
------ ------
$ 740 $ 980
====== ======
</TABLE>
NOTE 4 - LONG-TERM DEBT
<TABLE>
<CAPTION>
The Company's debt consisted of the following (in thousands):
June 30, December 31,
2000 1999
---- ----
<S> <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 (320) (443)
------- -------
1,880 9,187
------- -------
Less: Current portion of long-term debt -- (2,630)
------- ------
Total long-term debt $ 1,880 $ 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.
Proceeds of the note were
-8-
<PAGE>
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 principle 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 June 30, 2000 and 1999, the Company reported a loss from discontinued
operations of zero and $.1 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 $3.0 million for the quarters ended June 30,
2000 and 1999, and zero and $6.1 million for the six months ended June 30, 2000
and 1999.
NOTE 6 - BUSINESS COMBINATION
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 agreed to an exchange ratio of approximately
1.3 shares of Intellicall common stock for each share of Heads Up common stock.
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
-9-
<PAGE>
merger, including anticipated cost reductions and the ability to
expand in new markets, did not justify the cost of combining the two
companies (See Note 11). The Company's management is currently actively
pursuing other opportunities.
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 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, with the Company maintaining the option for 12 months to
repurchase the shares at $250 per share. The Company also has a right of first
refusal, should Banca del Gottardo 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 financial statements (See Note 1).
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
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<PAGE>
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 (See Note 8) 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.
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 $3.6 million.
-11-
<PAGE>
NOTE 10 - BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net 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 six months ended June 30, 2000 and 1999. Diluted net loss
per share gives effect to all dilutive potential common shares that were
outstanding during the period.
The weighted average basic and diluted common shares outstanding are as follows
(in thousands):
<TABLE>
<CAPTION>
Quarter ended
June 30, 2000 June 30, 1999
Basic Diluted Basic Diluted
<S> <C> <C> <C> <C>
Continuing Operations
Income (loss) from continuing operations 7,928 7,928 (2,942) (2,942)
Interest charges applicable to the convertible debt -- 24 -- --
------- ------- ------ ------
Income (loss) from continuing operations-available 7,928 7,952 (2,942) (2,942)
Average Equivalent Shares
Weighted average shares outstanding 13,056 13,056 12,049 12,049
Warrants to purchase common shares -- -- -- --
Convertible debt -- 1,330 -- --
------- ------- ------ ------
Total average shares equivalent 13,056 14,386 12,049 12,049
</TABLE>
-12-
<PAGE>
<TABLE>
<CAPTION>
Six months ended
June 30, 2000 June 30, 1999
Basic Diluted Basic Diluted
<S> <C> <C> <C> <C>
Continuing Operations
Income (loss) from continuing operations 5,768 5,768 (4,920) (4,920)
Interest charges applicable to the convertible debt -- 48 -- --
------- ------- ------ ------
Income (loss) from continuing operations-available 5,768 5,816 (4,920) (4,920)
Average Equivalent Shares
Weighted average shares outstanding 13,056 13,056 12,049 12,049
Warrants to purchase common shares -- 42 -- --
Convertible debt -- 1,330 -- --
------ ------ ------ ------
Total average shares equivalent 13,056 14,428 12,049 12,049
</TABLE>
Excluded from the diluted earnings per share calculation for the
quarter and six months ended June 30, 2000 are options to purchase 1,551,480
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 June 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 pric 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 in part on its ability to generate operating
profits, or to substantially reduce its operating losses, through the
execution of its current business plan. As a result of the cancellation of the
merger with Heads Up (See Note 6), the Company's ability to successfully
implement its current business plan is dependent upon its ability to find new
strategic partners and/or opportunities. 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
-13-
<PAGE>
available, would not potentially dilute shareholders' interests or returns.
-14-
<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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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 have resulted in negative gross margins until 1998, 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 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.
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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
prospectively reported its investment in ILD with its other investments under
the caption "Other Assets" as of the quarter ended June 30, 2000, as required
under the Statement of Financial Accounting Standards No. 115 ("FAS 115")
"Accounting for Certain Investments in Debt and Equity Securities" (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 June 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 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. On July 24, 2000 the executives of the
Company and Heads Up mutually announced the cancellation of the merger between
the two companies (See Note 6 to the unaudited Financial Statements). 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. The Company's management is currently
actively pursuing
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other opportunities .
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.
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 also 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 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).
Results of Operations
Equipment Sales. Equipment sales for the quarter ended June 30, 2000 were $1.1
million compared to $1.5 million for the same period last year. $.2 million of
the $.4 million decrease is principally due to an overall reduction in demand
for payphones and their related parts. The remaining $.2 million of the $.4
million decrease is due to a reduced demand for switching hardware and software.
Equipment sales for the six months ended June 30, 2000 were $2.0 million
compared to $6.4 million for the same period last year. $4.2 million of the $4.4
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. The remaining $.2 million of the $4.4 million decrease is due to
a reduced demand for switching
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hardware and software.
Gross Profit (Loss). Gross profit for the quarter ended June 30, 2000 was $.05
million compared to a gross loss of $.1 million the same period last year. The
$.15 million increase is primarily due to an overall reduction in work force and
the elimination of costs associated with capitalized software and goodwill,
which were written off during the fourth quarter of 1999. Gross loss for the six
months ended June 30, 2000 was $.1 million compared to a gross profit of $.5
million for the same period last year. The $.6 million decline in gross profit
is primarily 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 period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") for the quarter ended June 30, 2000 were $1.5
million compared to $1.6 million for the same period last year. SG&A expenses
for the six months ended June 30, 2000 were $2.9 million compared to $3.4
million for the same period last year. The $.1 million and $.5 million decline
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 June 30, 2000 was $.34 million compared to $.33 million for the
same period last year. The $.01 million increase is predominately a result of
the Company increasing reserves for bad debt during the quarter ended June 30,
2000, partially offset by an increase in reserves for bad debt during the
quarter ended June 30, 1999 to offset a reclassification of provision for
doubtful accounts expense between the equipment segment and the billing services
segment during the first quarter of 1999. Provision for doubtful accounts
expense for the six months ended June 30, 2000 was $.36 compared to $.09 million
for the same period last year. The $.27 million increase is primarily due the
Company increase reserves for bad debt during the six months ended June 30,
2000.
Research and Development Expenses. Research and development expenses for the
quarter ended June 30, 2000 were $.2 million compared to $.3 million for the
same period last year. The $.1 million decrease is mainly a result of a
reduction of salaries due to a reduction in head count and other costs
associated with research and development. Research and development expenses
for the six months ended June 30, 2000 was $.6 million compared to $.5
million for the same period last year. The $.1 million increase is mainly due to
the Company's decision to discontinue capitalizing software development, which
increases the expense reported on the income statement. This increase is
partially offset by a reduction of salaries due to a reduction in head count and
other costs associated with research and development.
Gain on Sale of Assets. On January 4, 2000 the Company was notified by ILD of
its intention to redeem Intellicall's interest in ILD's Series B convertible
preferred stock. ILD is to redeem 5,000
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shares for $100 per share plus accrued and unpaid dividends. As of June 30,
2000, ILD had remitted $.3 million to the Company, redeeming 1,975 shares of
the Series B convertible preferred stock and became current on all accrued and
unpaid dividends. As a result, the Company recorded a gain on the sale of
the 1,975 shares of $.1 million. 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 convertible preferred
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
recorded a gain on the sale of $13.8 million. Proceeds from the sale were
used to retire a significant portion of the Company's debt (See Note 4 to the
unaudited Financial Statements) and for general operating purposes.
Interest Income. Interest income for the quarter ended June 30, 2000 was $.07
million compared to $.06 million for the same period last year. The $.01 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 six months ended
June 30, 2000 was $.09 million compared to $.12 million for the same period last
year. The $.03 decrease is primarily a result of the Company discontinuing to
accrue interest income on certain notes receivable that are no longer serviced
by the debtor.
Interest Expense. Interest expense for the quarter ended June 30, 2000 was $.4
million compared to $.5 million for the same period last year. The $.1 million
decrease is mainly a result of the Company retiring the remaining $2.6 million
8.0% convertible subordinated notes due December 31, 2000, $4.8 million of the
8.0% convertible subordinated notes due November 22, 2001 and the $.5 million
note to Bank of America due February 11, 2001 during the quarter ended June 30,
2000 (See Note 4 to the unaudited Financial Statements). Interest expense for
the six months ended June 30, 2000 was $.7 million compared to $1.0 million for
the same period last year. The $.3 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 $.1 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 June 30, 2000 as mentioned above (See Note 4 to the unaudited Financial
Statements).
Equity in Gain/Loss of Unconsolidated Subsidiary. For the quarters ended June
30, 2000 and 1999, the Company reported a zero and $.26 million loss the equity
investment in ILD. For the six months ended June 30, 2000, the Company reported
a $.05 million loss on the equity investment in ILD compared to $.6 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.
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 convertible preferred
stock the Company is required to hold pursuant to the ILD Organization. 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 and has
prospectively
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reported its investment in ILD with its other investments under
the caption "Other Assets" as of the quarter ended June 30, 2000. Accordingly,
the Company no longer reports a portion of the gains and losses from ILD in its
financial statements (See Notes 1 and 8 to the unaudited Financial Statements).
Discontinued Operations. 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 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 discontinued billing services operations were zero and
$3 million for the quarters ended June 30, 2000 and 1999 and zero and $6.1
million for the six months ended June 30, 2000 and 1999. Net loss related to the
discontinued billing services operations were zero and $.1 million for the
quarters ended June 30, 2000 and 1999 and zero and $.4 million for the six
months ended June 30, 2000 and 1999.
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 preferred
convertible 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 Note 1 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 $4.1 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)
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 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. Proceeds of the note were used for working capital purposes.
On May 1, 2000 the Company retired the $.5 million note (See Note 4 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. The terms of the offer included the purchase of the
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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. The Company has a right
of first refusal should Banca del Gottardo transfer or sell the ILD stock
to a third party. The Company received $15.5 million from the sale, of which 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 (See Notes 4 and 8 to the unaudited
Financial Statements). The remaining proceeds will be used for general
operating purposes.
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. As a result of the cancellation of the merger with
Heads Up (See Note 6 to the unaudited Financial Statements), the Company's
ability to successfully implement its current business plan is dependent upon
its ability to find new strategic partners and/or opportunities. 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.
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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.
*10.2 Amendment to Stock Purchase Agreement
* Filed herewith.
(b) Reports on Form 8-K: None.
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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: August 14, 2000
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