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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 2 TO
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED: COMMISSION FILE NUMBER
DECEMBER 31, 1999 1-10588
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INTELLICALL, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 75-1993841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2155 CHENAULT, SUITE 410, CARROLLTON, TEXAS 75006-5023
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (972) 416-0022
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Securities registered pursuant to Section 12(b) of the Act:
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COMMON STOCK, $0.01 PAR VALUE AMERICAN STOCK EXCHANGE
(Title of Class) (Name of each exchange on which registered)
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Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the voting stock (which consists solely of
shares of Common Stock) held by non-affiliates of the registrant as of
September 8, 2000, computed by reference to the closing sales price of the
registrant's Common Stock on the American Stock Exchange on such date, was
approximately $14,717,125.
Number of shares of the registrant's Common Stock outstanding as of
September 8, 2000: 13,081,889.
EXPLANATORY NOTE
This filing amends certain information on the cover page and certain other
previously-filed information contained in Items 1, 7, and 8. No other items have
been amended.
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PART I
ITEM 1. BUSINESS.
BUSINESS REFOCUS
The Company's traditional business sells into a mature, highly competitive,
rapidly declining market with limited opportunity for growth and expansion. Due
to this unfavorable environment, management has discontinued certain product
lines and business segments (SEE PART 1, ITEM 1, GENERAL DEVELOPMENTS AND
NOTE 16 TO THE FINANCIAL STATEMENTS). This declining market also resulted in
Intellicall's Board determining that we should initiate efforts to identify and
explore alternate strategic growth alternatives for the Company. The initiative
to explore alternate opportunities includes possible mergers, acquisitions
and/or other business combinations with the goal of moving the Company into new,
high growth markets (SEE PART 1, ITEM 1, GENERAL DEVELOPMENTS).
Intellicall is considering exiting the payphone business. This exit would be
accomplished either by liquidation, sale or discontinuation subject to terms and
conditions unknown at this time. If and when this occurs, traditional revenue
and expense streams can be expected to materially change and certain material
transaction, transition and disposal costs can be expected. Furthermore,
depending upon the structure and nature of the transaction to refocus the
business into new markets, significant equity and/ or debt maybe issued as
consideration for the transaction.
A. GENERAL DEVELOPMENTS
Intellicall-Registered Trademark-, Inc. ("Intellicall" or the "Company")
designs, manufactures and sells public access telecommunications equipment, and
until October 21, 1999, provided billing services and automated operator
services ("Services"), principally to payphone owners and telephone companies in
the United States and in developing countries.
The Company's line of products consists of payphone products and
accessories, network equipment and software (the "Products"). In various
configurations, the Products permit their owners to provide traditional payphone
services to users of the Products and live or automated operator services for
operator-assisted calls. In addition, the Products may be used in international
gateway applications and to render prepaid or other long distance service to
callers using prepaid or other calling cards. The Company has historically sold
most of its Products to the U.S. private pay telephone industry. In recent
years, a portion of the Products has been sold in developing countries and in
the United States to regulated telephone companies.
Before 1998, the Company provided live operator services, prepaid calling
card and other long distance services principally to independent payphone
providers ("IPPs") either directly or through a then majority-owned subsidiary,
ILD Telecommunications, Inc. ("ILD"). ILD was formed by the Company in May 1996
to conduct the long distance resale and live operator service businesses
previously owned by the Company. After its formation, ILD grew rapidly and
diversified its business, principally through acquisitions of related businesses
which included the prepaid calling card operations of the Company. As a
consequence of ILD issuing its stock to sellers of acquired businesses and of
the Company's sales of a portion of its ILD equity investment to third parties,
the Company's ownership interest in ILD's equity declined to less than 50% in
the first quarter of 1998. (See NOTE 1 TO THE FINANCIAL STATEMENTS). Because of
the change in the Company's ownership of ILD, ILD's financial position and
results of its operations have not been consolidated with those of the Company
since December 31, 1997. Thus, ILD's revenues and associated costs and its
individual assets and liabilities are not shown in the Company's 1999 and 1998
financial statements. The Company utilizes the equity method of accounting for
its investment in ILD pursuant to which the Company records its prorata share of
ILD's net income and net assets as single line items in its 1999 and 1998
statements of income and balance sheets.
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On September 22, 1999, the Company elected to discontinue its billing
services operations segment effective October 21, 1999. The billing services
segment of the Company's business was determined to be unprofitable after taking
into account the administrative and support costs for the segment. The billing
services system is a combination of hardware and software that performs, without
human intervention, all the functions necessary for completing an operator
assisted payphone call (i.e. collect, calling card and credit card calls) and a
range of other payphone services and features. As a result of this decision, the
Company's revenues and operating expenses for the periods presented reflect only
the equipment operations with the net result of the billing services operations
reported on its statements of operations under the caption "Income (loss) from
discontinued operations" (See NOTE 16 TO THE FINANCIAL STATEMENTS).
On January 18, 2000, Intellicall entered into a definitive agreement to
acquire, through the exchange of common stock of Intellicall, Heads Up
Technologies, Inc. ("Heads Up") of Carrollton, Texas. Heads Up designs,
manufactures and markets interactive digital products for the aviation, mass
transit and entertainment industries. The company sells computerized products to
nearly 1,250 customers in more than 10 countries. Pursuant to the merger
agreement, Intellicall and Heads Up have agreed to an exchange ratio of
approximately (1.3) shares of Intellicall common stock for each share of Heads
Up common stock. This will result in the Heads Up shareholders being issued
approximately 11.7 million shares of Intellicall common stock, resulting in such
shareholders owning approximately 46.8% of the issued and outstanding
Intellicall common stock following such merger. The merger was subject to a
number of conditions, including without limitation, approval by Intellicall's
stockholders. 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. The Company's management is currently actively
pursuing other opportunities.
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% 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.
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 7 TO THE FINANCIAL STATEMENTS).
On August 30, 2000, the Company signed a definitive agreement to acquire
Wireless WebConnect!, Inc, a nationwide wireless Internet Service Provider. The
merger will allow Intellicall to enter into the rapidly growing high-speed
wireless mobile data access market and will provide Intellicall with expanded
technological capabilities in the public access market.
Pursuant to the Merger Agreement, Intellicall will issue to the shareholders
of Wireless WebConnect! 16,426,420 shares of common stock of Intellicall. In
addition, existing stock options of Wireless WebConnect! will be exchanged into
options to purchase 1,500,000 shares of Intellicall's common stock. The Merger
is subject to certain conditions, including approval by Intellicall's
stockholders and satisfactory completion of due diligence. There are no
assurances that the conditions precedent will be satisfied or that the merger
will be consummated. (SEE NOTE 19 TO THE FINANCIAL STATEMENTS).
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The Company is a Delaware corporation with its principal executive offices
located at 2155 Chenault, Suite 410, Carrollton, Texas 75006-5023. The Company's
telephone number at that address is (972) 416-0022.
B. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company has one reportable industry segment--the equipment segment. The
equipment segment manufactures and sells payphones, switches and related
software. The Services segment, which was discontinued effective October 21,
1999 (See NOTE 16 TO THE FINANCIAL STATEMENTS), provided billing and collection
services to owners of payphones who utilize the Company's automated operator
technology.
C. BUSINESS DESCRIPTION
INDUSTRY BACKGROUND. Prior to its breakup in 1984, payphone service in the
United States was provided solely by AT&T. In 1984, the Federal Communications
Commission ("FCC") authorized competition in the operation of payphones subject
to state and federal regulation. Since 1984 an industry comprised of IPPs has
emerged to compete with payphone networks owned and operated by local exchange
carriers ("LECs"). The principal difference between payphone equipment utilized
by IPPs and LECs can be found in the location of the payphone system's
intelligence. Since IPP payphones lacked the intelligence provided to LEC phones
by the LEC central office, IPPs moved to incorporate system intelligence in the
payphone itself. As a result, call rating, answer detection, operator service
and equipment status reporting were among the features designed into IPP
payphones. The IPP payphones in turn utilized telephone lines, which provide
little more than "dial-tone" from the LEC central office. The "smart phone", as
it came to be called, was the product of choice of the IPP. The Company
originated, and has extensively developed, smart phone technology.
DOMESTIC PAYPHONES. The Company's principal payphone product (available in
multiple configurations) offered for sale in the United States is the ASTRATEL
2-Registered Trademark-. This phone can be used to provide automated operator
service and to perform all functions customarily available in payphones. As
opposed to needing an external electric connection to operate, the ASTRATEL 2
utilizes electrical current provided through the telephone line. Because of its
unique design, functionality of the ASTRATEL 2 is principally provided through
software. Most older payphones (including those manufactured by the Company)
utilize a product design, which incorporates a far greater number of electronic
components and circuitry.
The "brain" of the ASTRATEL 2 payphone is an integrated circuit board (the
"Boardset") located in the payphone housing. From its inception, the ASTRATEL 2
Boardset was designed to sell at attractive prices and to easily fit most
payphone housings, including those sold by the Company's competitors. As a
result, the Boardset has accounted for an increasing percentage of the Company's
equipment sales since 1996. The Boardset is not manufactured by the Company, but
by a number of companies that possess the ability to manufacture the Boardset in
accordance with the Company's specifications. The Boardset's software intensity
and flexibility provide the Company's customers with considerable protection
against obsolescence.
The Company's payphones operate by means of advanced microprocessor
technology located in the Boardset. When a call is initiated, the microprocessor
automatically performs a series of functions, including, in the case of coin
generated phone calls, determining the applicable rate for the call and whether
the call has been answered. The Company's payphones communicate with a caller by
voice messages digitally synthesized and stored in memory chips located in the
Boardset.
Among the most important features of an Intellicall payphone is the ability
to reliably and accurately detect whether a call has been answered. This answer
detection capability is not dependent upon an electronic signal from the LEC
central office. Accurate answer detection is critical to the
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successful operation of a private payphone in order to ensure that all completed
calls are properly billed and that incomplete calls are not billed.
The ASTRATEL 2 possesses many programmable features that may be altered from
a remote location by means of the Company's proprietary software using a
personal computer. These programmable features include rate tables and various
management reporting capabilities that enable the owner to determine if and when
a payphone requires service or coin collection. In addition, a number of
enhancements may be added to the Company's payphones from a remote location.
Management believes the ASTRATEL 2 uses the highest speed modem in the payphone
industry (14.4 Kps) to communicate with a remote location and that such
high-speed modem constitutes a current competitive advantage.
INTERNATIONAL PAYPHONES. Since 1993, the Company has produced a line of
payphones targeted for sale outside the United States. These phones accommodate
a variety of payment systems including U.S. and international coinage, credit
cards and several types of prepayment cards, such as cards based on personal
identification numbers, magnetic stripe cards and integrated circuit cards.
Additionally, these telephones can be operated with auxiliary power sources,
including solar power or power supplied by telephone lines, and can be utilized
in wireless systems.
In 1997 and 1998, the Company modified the ASTRATEL 2 for sale in the
Canadian and Mexican markets and is working on further modifications to enhance
sales prospects in these and other countries. Because of its software reliance,
the ASTRATEL 2 can be economically modified to accommodate the different calling
patterns, coinage denominations, rating systems and languages of numerous
countries.
N-GENIUS SYSTEM. The Company's N-Genius-TM- System enables network
operators in the United States and abroad to provide enhanced, switched, public
access services. Public access services are of special importance to network
operators in developing countries where demand for publicly accessible telephone
service is high due to the expense of, and lengthy delays often involved in,
obtaining residential phone service.
Applications utilizing the N-Genius System permit network and payphone
system operators to offer prepaid calling services over wireline or cellular
networks. In addition, the N-Genius System can be used as a switched
international gateway that is transparent to the communications protocols, which
differ among countries. The system can be used as well to enhance the public
phone management capability of network and payphone system operators. Among its
other features, the N-Genius System can provide automated credit card
validation, calling card validation or voice recognition validation, and
protection against telephone fraud. The Company is developing applications for
the N-Genius, which allow payphone system operators to incorporate the Internet
to carry phone traffic. Specifically, the Company entered into a strategic
alliance with Netspeak Inc. in October 1998 to help facilitate the development
and delivery of these applications.
INTELLI*STAR. The Intelli*Star-Registered Trademark- system is an automated
operator product licensed to owners of the Company's payphones. The Company's
older UltraTel-Registered Trademark- line of payphones required the addition of
a separate integrated circuit board, commonly called the I*Star board, to
complete the system. This separate integrated circuit board was attached to the
payphone's operating circuitry.
In the ASTRATEL line of payphones, Intelli*Star is activated by means of a
software enhancement and requires no additional circuit board. Intelli*Star is
available on every payphone offered for sale by the Company in the United
States.
SALES AND MARKETING. The Company's U.S. sales of Products are made through
a combination of distributors, strategic partners and a direct sales force
consisting of three employees. International sales
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are generally made through in-country agents and distributors supported by the
Company's sales, engineering and technical support personnel.
The markets for the Company's Products consist of public access
telecommunications providers, principally providers of payphone services.
Included in this grouping are the payphone operations of IPPs and LECs in the
United States.
Receivables arising from domestic product sales are generally due within
30 days. Discounts are provided for prepayment or prompt payment. International
product sales are generally made pursuant to confirmed letters of credit or
payments prior to shipment.
MANUFACTURING AND ASSEMBLY. The Company's Products are principally
assembled at its manufacturing facility in McAllen, Texas. Boardsets are
currently assembled for the Company by an electronics manufacturer in McAllen,
Texas. After Products are assembled at the Company's manufacturing facility,
they are thoroughly tested before shipment to the purchaser. Once a payphone or
Boardset is shipped to a U.S. private payphone industry customer by the Company,
the Company is not responsible for ensuring that the Product is properly
installed, maintained or operated in accordance with applicable federal and
state regulations. The Company assists in the installation of N-Genius Systems
with respect to certain international customers and LECs.
The Company purchases certain components from single-source suppliers and as
a result of market factors, suppliers of certain components used in the
Company's equipment may occasionally place the Company on allocation for those
parts or discontinue those parts. The Company continues working to secure
alternate sources for single-source components and components subject to
allocation. There is a risk that the Company, in certain circumstances, will not
be able to procure certain parts and components and continue to manufacture
products key to the business segment.
WARRANTY, MAINTENANCE AND SERVICE. The Company provides the original
purchaser of Products (not including ASTRATEL electronic components) a limited
90-day or one-year warranty, depending on the kind of equipment involved. The
Company offers a two-year limited warranty on ASTRATEL 2 electronic components.
The Company's technical support staff at its corporate offices currently
provides support services over the telephone to customers who have installation
or operational questions. The Company currently offers a maintenance agreement
covering N-Genius Systems. Other non-warranty service is provided on a
per-repair basis. Warranty and non-warranty product repairs are generally
provided by the Company at its manufacturing facility in McAllen, Texas.
The Company holds classes to train its customers in the proper installation,
operation and maintenance of the Company's products.
PATENTS AND LICENSES. The Company holds 23 United States patents and has
numerous United States and foreign pending patent applications relating to the
Company's Intelli*Star and other technology. These patents cover the ability to
complete automated collect telephone calls, perform certain validity checks and
internally store and retrieve data files from telephones, as well as many other
features and structures of payphones. The Company considers its patents
important to its business.
Under an exclusive patent license agreement between Gateway Technologies,
Inc. ("Gateway") and the Company, the Company and Gateway have agreed to share
revenues received from sub-licensing certain of Gateway's and the Company's
patents pertaining to call processing. The Company and Gateway have entered into
sublicensing arrangements with certain manufacturers and users of call
processing equipment. The patent license agreement with Gateway expires in 2002.
In 1992, the Company entered into an agreement with MessagePhone, Inc.
("MPI"), pursuant to which the Company licenses MPI's automated voice messaging
patents. The license permits the Company to offer voice messaging services to
its Intelli*Star and call processing customers. The MPI
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agreement expires in 2008, however, it is effective until the expiration of the
MPI patents, including any continuations of such patents.
The Company licenses certain Voice over Internet Protocol ("VOIP") software
from Netspeak Corporation. The Company pays fees to Netspeak on products
manufactured by the Company which utilize the licensed technology.
TRADEMARKS. The Company has registered in the United States its trademarks
"Intellicall," "ASTRATEL," "UltraTel"-Registered Trademark-, "N-Genius", "World
Connect"-Registered Trademark-, "Intelli*Star" and "Easy*Star". The Company
considers its trademarks important to its business.
SEASONALITY. The Company's revenues from domestic phone equipment sales are
affected by seasonal weather conditions throughout the United States, which tend
to reduce the number and duration of pay telephone calls made in the winter
months, and which similarly reduces the number of outdoor payphone
installations.
MAJOR CUSTOMERS. The Company has several customers that represented more
than 10% of sales in the aggregate for the years ended December 31, 1999, 1998
and 1997. Management of the Company believes it has good relationships with
these customers which are as follows:
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FOR THE YEAR ENDED DECEMBER 31, 1999:
Paytel Canada, Inc........................................ $2.8 25.5%
Independent Technologies, Inc............................. 1.6 14.6
Universal Pay Phone, Inc.................................. 1.1 10.2
FOR THE YEAR ENDED DECEMBER 31, 1998:
Universal Pay Phone, Inc.................................. $1.5 11.1%
FOR THE YEAR ENDED DECEMBER 31, 1997:
Phonetel Technologies, Inc................................ $3.2 17.2%
Intelliphone, Inc......................................... 2.5 13.3
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MATERIAL PURCHASE COMMITMENTS. The Company has no material purchase
commitments.
COMPETITION. The Company competes directly with other payphone and
switching equipment manufacturers, and indirectly with providers of wireless
portable telephony, many of who are larger and better capitalized than the
Company. The Company's principal direct competitors in the U.S. private payphone
market are Elcotel, Inc. and Protel, Inc. (a subsidiary of Inductotherm
Industries, Inc.). Its indirect competitors include numerous service businesses
providing cellular, paging and personal communications services ("Wireless
Telecommunications") throughout the Company's markets. In many instances,
Wireless Telecommunications compete successfully with telecommunications
services offered through payphones to callers away from home. However, for
callers with limited needs to make calls while away-from-home, payphones offer a
convenient and economical alternative to Wireless Telecommunications devices.
The Telecommunications Act of 1996 (the "1996 Act") requires, among other
things, that LECs end subsidies to their own payphone services and provide
services to IPPs on the same rates, terms and conditions as they are made
available to their own payphone service operations. Effective April 15, 1997,
local telephone companies reclassified their payphone service from regulated to
non-regulated status, substantially changing many of the rates and terms upon
which payphone lines are available. These changes were required by the 1996
Act's explicit prohibition against the local telephone companies discriminating
between their own payphone operations and those of IPPs. Local telephone
companies generally must receive service under the same tariffs available to
IPPs for payphones. The Company expects these changes to benefit its IPP
customers. By equalizing the basis for competition between LECs and IPPs, the
1996 Act may create additional opportunities for existing payphone
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providers, or for new entrants, to compete with the LECs. The demand for
payphones may also be affected by the interconnection arrangements offered by
the local telephone operating companies to IPPs.
The 1996 Act contains provisions which, if not successfully challenged,
would permit Bell Operating Companies ("BOCs"), under certain circumstances, to
manufacture telecommunications equipment, including payphones and switched
network products. They may do so, however, only after the FCC finds that they
have completed actions necessary to open their local telecommunications markets
to competition. To date the FCC has made no such finding with respect to any of
the BOCs.
Numerous entities compete with the Company in the international public
communications markets, including many larger and better-capitalized companies
with experience in the marketing of products internationally. The Company has
adopted a strategy of focusing its marketing efforts on countries with a low
ratio of public communication lines to total population, where rapid growth in
sales of public communications equipment is projected. Many of the Company's
competitors have adopted a similar strategy. The market for international public
communications is highly competitive and subject to the risks of doing business
abroad. Consequently, there can be no assurances that the Company's efforts in
international markets will be successful.
Although the Company is encountering and expects to continue to encounter
intense competition, the Company believes that its products are competitive in
its markets based upon price, equipment capabilities and quality. Since the
telephone industry is subject to rapid technological change, the Company
believes that it will continue to be required to develop improved or additional
Products and to continue to reduce the cost of existing Products in order to
remain competitive. The Company's ability to develop additional Products will
depend generally in the foreseeable future on its ability to generate working
capital internally.
R&D EXPENDITURES. The Company spent, for the years 1999, 1998 and 1997
$.9 million, $1.6 million and $.7 million, respectively, for research and
development of new products, product enhancements and technique improvements.
The Company's research and development programs are focused on development of
new products and product enhancements for payphone systems operated by IPPs,
regulated telephone companies and international customers. The Company's focus
in 1999 was on the development of (a) additional application software to expand
the utility of N-Genius systems, and (b) modifications of ASTRATEL 2 payphones
which expand their functionality and (c) testing and modification of issues
related to Y2K.
In 2000, the Company intends to further modify the ASTRATEL 2 for use in new
markets and applications and continue development of the N-Genius to improve and
expand the switching platform product line.
The Company considers research and development to be important to the
continuation and enhancement of its competitive position. The Company's ability
to adequately fund future research and development costs will depend on its
ability to generate sufficient funds from operations or external sources.
ENVIRONMENTAL. Due to the nature of the business, the Company does not have
a significant environmental exposure in either the manufacturing or maintenance
of its products. Accordingly, there is no estimated capital expenditure for
environmental control facilities or clean up for the remainder of its fiscal
year and its succeeding fiscal year.
EMPLOYEES. As of December 31, 1999, the Company had 83 employees, of which
61 were employed in operations and 22 were employed in executive and
administrative capacities. The Company believes its employee relations are good.
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ITEM 2. PROPERTIES.
The Company leases approximately 32,000 square feet of space at 2155
Chenault, Carrollton, Texas, where its principal executive, sales and product
development offices are located. The lease expires May 31, 2002. The Company
leases approximately 26,500 square feet of manufacturing space on a
month-to-month basis in McAllen, Texas. The Company considers that its
properties are generally in good condition, well-maintained and suitable to
carry on the Company's business.
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to ordinary legal proceedings incidental to and
arising in the normal course of its business. It is the opinion of the
management of the Company that the ultimate disposition of these proceedings
will not have a material adverse effect on the Company's financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
STOCK PRICES
The Common Stock currently trades on the American Stock Exchange ("AMEX")
under the symbol ICL. Up to July 6, 1999 the Company's stock traded on the New
York Stock Exchange ("NYSE"). The following table sets forth, for each of the
periods indicated, the reported high and low sales price per share of the
Company's Common Stock on the AMEX and NYSE.
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COMMON
STOCK
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HIGH LOW
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1999
First Quarter........................................... $ 3 1/2 $ 2 1/8
Second Quarter.......................................... 2 1/2 1
Third Quarter........................................... 1 9/16 11/16
Fourth Quarter.......................................... 1 3/8 1/2
1998
First Quarter........................................... $ 5 7/16 $ 4 1/8
Second Quarter.......................................... 6 3/16 3 7/8
Third Quarter........................................... 4 5/16 2
Fourth Quarter.......................................... 2 7/16 1 3/8
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On March 17, 2000, the Company had approximately 1,043 stockholders of
record.
On June 11, 1999, Intellicall issued 200,000 warrants exercisable at $1.55
per share of common stock, to Banca del Gottardo as consideration in exchange
for $2 million in financing.
On December 30, 1999, Intellicall issued an additional 200,000 warrants
exercisable at $1.00 per share of common stock, to Banca del Gottardo as
consideration in exchange for the postponement of a put option.
Additionally, on December 30, 1999, Intellicall issued 1,000,000 shares of
common stock to Banca del Gottardo for $850,000.
All of these transactions are private placements that we believe are exempt
in reliance on Section 4(2).
DIVIDEND POLICY ON INTELLICALL'S COMMON STOCK
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain any future earnings for use in its business and
therefore does not expect to pay any cash dividends on Common Stock in the
foreseeable future. Any future determination to pay cash dividends will depend
upon the earnings and financial position of the Company and such other factors
as the Board of Directors of the Company may deem appropriate at that time.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial information for each of the five years in
the period ended December 31, 1999, is derived from the Company's Financial
Statements. The information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of
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Operations" and the Financial Statements and the notes thereto included
elsewhere in this Annual Report on Form 10-K.
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<CAPTION>
YEAR ENDED DECEMBER 31,(1)
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1999 1998 1997 1996 1995
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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Statement of Operations Data:
Sales and Revenues:
Equipment sales............................. $11,131 $13,859 $ 19,313 $15,884 $19,944
Service revenues............................ -- -- 60,450 30,679 14,142
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11,131 13,859 79,763 46,563 34,086
Cost of Sales and Revenues:
Equipment sales............................. 13,174 11,600 21,929 17,690 21,454
Service revenues............................ -- -- 52,523 27,049 10,650
------- ------- -------- ------- -------
13,174 11,600 74,452 44,739 32,104
Gross profit (loss)......................... (2,043) 2,259 5,311 1,824 1,982
Selling, general and administrative
expenses.................................. (6,005) (7,363) (12,616) (7,861) (6,058)
Provision for doubtful accounts............. (592) (876) (1,006) (364) (820)
Research and development expenses........... (907) (1,587) (741) (608) (2,350)
------- ------- -------- ------- -------
Operating loss from continuing operations... (9,547) (7,567) (9,052) (7,009) (7,246)
Gain on sale of assets...................... 1,431 7,389 -- 572 1,607
Loss on investments......................... (338) -- -- -- --
Other income................................ 346 538 695 710 440
Interest expense............................ (1,717) (1,539) (2,660) (2,918) (3,310)
Subsidiary Loss............................. (982) (762) -- -- --
Minority interest........................... -- -- (382) (113) --
------- ------- -------- ------- -------
Loss before income taxes from continuing
operations................................ (10,807) (1,941) (11,399) (8,758) (8,509)
Income tax benefit.......................... 1,500 -- -- 1,303 --
Income tax expense.......................... -- -- (277) -- --
------- ------- -------- ------- -------
Net loss from continuing operations......... (9,307) (1,941) (11,676) (7,455) (8,509)
Income (loss) from discontinued
operations................................ (681) 85 585 2,460 2,370
------- ------- -------- ------- -------
Net loss.................................... $(9,988) $(1,856) $(11,091) $(4,995) $(6,139)
======= ======= ======== ======= =======
Basic and diluted net loss per share from
continuing operations..................... $ (.76) $ (0.20) $ (1.26) $ (.93) $ (1.11)
======= ======= ======== ======= =======
Basic and diluted net income (loss) per
share from discontinued operations........ $ (.06) $ 0.01 $ 0.06 $ 0.31 $ 0.31
======= ======= ======== ======= =======
Weighted average number of basic and diluted
shares outstanding........................ 12,132 9,927 9,268 8,024 7,672
Balance Sheet Data:
Total assets (restated for 1998 and 1997)... $12,117 $24,884 $ 84,789 $45,254 $48,644
Total long term obligations................. $ 2,337 $ 8,530 $ 23,008 $20,107 $10,796
Redeemable preferred stock.................. $ -- $ -- $ 13,196 $ -- $ --
Convertible preferred stock................. $ -- $ 1 $ 4 $ -- $ --
Stockholders' equity (deficit) (restated for
1998 and 1997)............................ $ (338) $ 8,526 $ 9,951 $12,669 $13,243
</TABLE>
------------------------
(1) Certain prior year amounts have been reclassified to conform to current year
presentation.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS--CAUTIONARY STATEMENTS
This Form 10-K contains certain "forward-looking statements" that we believe
are within the meaning of Section 27A of the Securities Act of 1933, as amended
(the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). Specifically, all statements other than
statements of historical facts included in this report regarding the Company's
financial position, business strategy and plans and objectives of management of
the Company for future operations are forward-looking statements. These
forward-looking statements are based on the beliefs of the Company's management,
as well as assumptions made by and information currently available to the
Company's management. When used in this report, the words "anticipate,"
"believe," "estimate," "expect," "intend", and words or phrases of similar
import, as they relate to the Company or Company management, are intended to
identify forward-looking statements. Such statements (the "cautionary
statements") reflect the current view of the Company with respect to future
events and are subject to risks, uncertainties and assumptions related to
various factors including, without limitation, competitive factors, general
economic conditions, customer relations, relationships with vendors, the
interest rate environment, governmental regulation and supervision, seasonality,
product introductions and acceptance, technological change, changes in industry
practices and one-time events. Although the Company believes that expectations
are reasonable, it can give no assurance that such expectations will prove to be
correct. Based upon changing conditions, should any one or more of these risks
or uncertainties materialize, or should any underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, expected or intended. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the applicable
cautionary statements. The Company's future operating results are subject to a
number of risks and uncertainties. Those believed by management of the Company
to be the most troublesome if they were to occur are set forth below in RISK
FACTORS RELATING TO FORWARD LOOKING STATEMENTS.
RISK FACTORS RELATING TO FORWARD-LOOKING STATEMENTS
REGULATORY CHANGES. The Company's sales and revenues are affected by
existing regulations and by changes in state and federal regulations to which
the Company's customers, equipment business and service business are subject.
The rate of change in proposed and promulgated regulations affecting operator
service businesses and payphone manufacturers has accelerated since passage of
the Telecommunications Act of 1996 in February of that year. In addition,
numerous parties affected by regulatory changes have sought modifications or
rescission of proposed or existing regulations, some of 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 ability to implement and execute an effective business
strategy for new products and services, will directly effect the Company's
ability to generate working capital and fund growth. Funds available to the
Company from external sources may be insufficient to finance growth in working
capital, and internally generated funds may be insufficient to finance desired
capital spending or research and development spending.
The Company has historically suffered from low gross margins on equipment
sales. Although provisions for inventory losses, bad debt, warranty reserves and
onetime write-offs of assets have
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resulted in negative gross margins through 1999, the Company's variable gross
margins on phone and network equipment products introduced since 1996 have
improved. Notwithstanding such improvement, increased equipment sales volume is
required in future periods to cover a variety of costs. Such costs include but
may not be limited to fixed manufacturing overhead expenses and selling, general
and administrative expenses associated with the production and sale of the
Company's products. There is no guarantee that the required increase in sales
will generate sufficient gross profit to finance the portion of working capital
growth not financed externally.
INTERNATIONAL ECONOMIC CONDITIONS. As a provider of payphone and network
switching equipment into developing countries, the Company is subject to
economic and political instability that may affect its ability to sell its
products into these markets and/or collect on accounts for products sold in
these markets.
YEAR 2000 DISCUSSION. The Company undertook a multi-year program (the "Y2K
Program") during 1997 to ensure that its operations, computer systems and
certain products were not functionally impaired as a result of a failure to
properly record in any electronic medium the correct time and date on and after
January 1, 2000.
In general, the Company's products currently produced or supported have been
Y2K certified. Through its evaluation of IT Systems used by the Company in its
manufacturing, accounting, administration and human resources departments, and
on the basis of letters of assurance obtained from third-party vendors, the
Company has concluded that the accounting, MRP and payroll systems are Y2K
compliant. Letters of assurance were requested from other key third-party
vendors concerning other equipment and systems utilized by the Company,
including outside billing agents used in the collection of customer call traffic
accounts receivable.
To date the Company has not encountered any material Y2K issues with respect
to the Companies products currently produced, supported or widely deployed, IT
Systems used by the Company in its manufacturing, accounting, administration and
human resources departments, or other key third-party vendors concerning other
equipment and systems utilized by the Company. Despite the fact the Year 2000
has commenced and we have experienced no material problems to date, the Company
cannot assure that the risks posed by Year 2000 issues will not materially
adversely affect its business in the future, either as a result of unanticipated
difficulties related to the Company's systems or to third parties.
The following discussion of the financial condition and results of
operations of the Company for 1999, 1998 and 1997 should be read in conjunction
with the Financial Statements of the Company, the Notes thereto and information
included elsewhere in this report. References in the following discussion to
annual periods refer to the Company's years ended December 31.
CHANGES IN PRESENTATION.
In 1997, ILD acquired the assets of WorldCom as well as all of the
outstanding common stock of Interlink (SEE NOTE 17 TO THE FINANCIAL STATEMENTS).
The issuance of stock by ILD to third parties in these transactions decreased
the Company's percentage of ownership in ILD and the value assigned to ILD
common stock issued under both of the aforementioned transactions was
substantially more than the Company's carrying amount per share of ILD stock,
thus triggering a change in the Company's interest in ILD. The Company has
restated its December 31, 1997 and December 31, 1998 financial statements in
accordance with Staff Accounting Bulletin ("SAB") Topic 5H, as amended by SAB
84, to reflect the change of interest in ILD which arose in 1997.
As previously stated, effective January 1, 1998, the Company changed its
method of accounting for its investment in ILD from consolidation to the equity
method, since its percentage ownership in ILD declined from 53.7% at
December 31, 1997 to 42.0% in 1998 and 30.0% in 1999. Under the equity
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method, an investment in common stock is generally shown in the balance sheet of
an investor as a single amount. Likewise, an investor's share of net earnings or
losses from its investment is ordinarily shown in its income statement as a
single amount. 1997 comparative financial information has not been restated to
the equity method and is presented as previously reported. In reviewing the
financial statements and discussion contained in this Form 10-K, the reader must
be aware that much of the information is not directly comparable as the
operating results and balance sheet of ILD were consolidated with those of the
Company in 1997.
On September 22, 1999 the Company elected to discontinue its billing
services operations effective October 21, 1999 (See NOTE 16 TO THE FINANCIAL
STATEMENTS). The billing services segment of the Company's business was
determined to be unprofitable after taking into account the administrative and
support costs for that segment. The Company's billing services system is a
combination of hardware and software that performs, without human intervention,
all the functions necessary for completing an operator assisted payphone call
(i.e., collect, calling card and credit card calls) and a range of other
payphone services and features. As a result of this action, the Company's
revenues and operating expenses for the periods presented herein reflect only
the equipment operations with the net results of the billing services operations
reported in its statements of operations under the caption "Income (loss) from
discontinued operations". Prior periods have been presented under the revised
format.
RESULTS OF OPERATIONS
1999 COMPARED TO 1998
EQUIPMENT SALES. Equipment sales declined from $13.9 million in 1998 to
$11.1 million in 1999 primarily due to reduced N-Genius system sales. Sales for
the N-Genius system declined from $2.6 million in 1998 to $.5 million in 1999,
and were impacted by the currency weakness of the Pacific Rim and certain Latin
American countries and the inability of the customer base to expand and grow
their switching systems. Phone equipment sales were relatively consistent in
1999 when compared to 1998, decreasing $.4 million in the current period from
$10.8 million in 1998 to $10.4 million in 1999.
GROSS PROFIT (LOSS). Gross profit declined $4.3 million from $2.3 million
in 1998 to a gross loss of $2.0 million in 1999, due primarily to a one-time
writeoff of goodwill and capitalized software costs of $3.2 million, as well as
excess capacity costs related to the McAllen manufacturing plant.
As of December 31, 1999, the Company reduced the net realizable value for
its goodwill related to the McAllen manufacturing plant ($.7 million) and
capitalized software costs related to products and services ($2.5 million) to
zero, pursuant to FAS 121 and FAS 86 (See NOTE 3 TO THE FINANCIAL STATEMENTS).
The change in Intellicall's manufacturing model from a full scale manufacturing
environment to an outsourced, light assembly operation led to the reduction of
goodwill. Similarly, the continued softness in the public payphone market,
coupled with the discontinuation of certain product lines and the billing
services segment, led to the reduction of capitalized software.
The Company performed an impairment analysis of the goodwill in accordance
with Statements of Financial Accounting Standards No. 121 "ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF"
("FAS 121"), which requires that long-lived assets held and used by an entity,
or to be disposed of, be reviewed for impairment whenever events or
circumstances indicate that the net book value of such assets may not be
recoverable.
During the fourth quarter of 1999, the Company calculated the estimated
future cash flows, undiscounted and before interest, from continuing operations
over a three-year period and determined the goodwill to be impaired.
Consequently, the Company estimated the fair value of the goodwill based on a
discounted cash flow analysis and concluded that the net book value of this
asset of $.7 million needed to be written-off.
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<PAGE>
During the fourth quarter of 1999, the Company also compared the unamortized
capitalized software costs to their net realizable value, as prescribed under
FAS 86. The Company determined the net realizable value of capitalized software
costs by estimating the future net profits from those assets over a three-year
period and concluded that the net book value of $2.5 million of capitalized
software costs as of December 31, 1999 was not recoverable.
Accordingly, the Company recorded a non-recurring, non-cash write-off of
goodwill and capitalized software costs of $3.2 million, which is presented in
cost of sales in the statement of operations for the year ended December 31,
1999.
Due to the down turn in the IPP market, which led to a significant reduction
in production, fixed costs associated with excess capacity in the McAllen
manufacturing facility resulted in an increase in cost of goods sold, thereby
reducing gross profit for the period by $.4 million.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative costs ("SG&A") declined in 1999 when compared to 1998 from
$7.4 million to $6.0 million, a $1.4 million or 19% decrease. Cost reduction
programs initiated during the year had a positive impact within this cost
category. Specifically, payroll costs (salaries, wages and benefits) declined
$.8 million or 15%, from 1998 to 1999 pursuant to head count reductions of 55
employees over the course of the year. Similarly, the Company experienced a
general reduction in other costs as management focused on decreasing the
Company's cost to meet current operating requirements, including outsourcing
Human Resources and certain MIS functions, as well as reducing travel, promotion
and consulting expenses.
PROVISION FOR DOUBTFUL ACCOUNTS. Provision expense for doubtful accounts
declined from $.9 million in 1998 to $.6 million in 1999. Improvement in the
quality of the Company's receivables and positive collection efforts on old and
outstanding accounts contributed to an overall reduction of $.7 million in the
expense. However, this reduction was partially offset by a bad debt expense of
$.4 million that was recorded for the write down of a $1.2 million note
receivable due from New York City Telecommunications ("NYCT"). The NYCT note,
due on December 31, 2001, provides for the monthly payment of interest and
principal of $34,238. Through June 1999, NYCT had serviced the note timely and
in full at which time the outstanding principal of the note was $1.2 million.
The Company has initiated legal action for the immediate collection of the
principal balance pursuant to NYCT being in default of the note agreement and
has reserved $.4 million against the note subject to the outcome of the
litigation (See NOTE 1 TO THE FINANCIAL STATEMENTS).
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased $.7 million from 1998 to 1999 due to the completion of all Y2K
compliance issues for products and services.
GAIN ON SALE OF ASSETS. On October 21, 1999 the Company sold to First
Avenue Partners, LP ("First Avenue") 5,000 shares of ILD Series A Convertible
Preferred Stock. First Avenue is an unrelated third party. The Company sold the
shares for $250.00 each, for a total of $1.3 million of which $1.1 million was
recognized as a gain. The Company used the proceeds to fund operations. The
transaction lowered the Company's ownership percentage in ILD to 31.0% as of
October 21, 1999 (See NOTE 1 TO THE FINANCIAL STATEMENTS).
In the fourth quarter of 1999 the Company recognized a $.3 million gain
relating to the sale of the Company's prepaid services operation to ILD.
LOSS ON INVESTMENTS. The Company maintains a 3% equity ownership position
in New York City Telecommunications ("NYCT") which prior to 1999 was recorded on
the balance sheet for $.5 million. The Company is currently engaged in legal
proceedings with NYCT for the collection of a note due from NYTC (See PROVISION
FOR DOUBTFUL ACCOUNTS within this section). Given the current legal situation
between Intellicall and NYCT and the lack of financial information on NYCT, the
Company has determined the current value of this investment to be $.1 million,
has reduced the
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<PAGE>
investment accordingly, recognizing a loss on investment of $.4 million (See
NOTE 1 TO THE FINANCIAL STATEMENTS).
INTEREST EXPENSE. Interest expense was $1.7 million for 1999 compared to
$1.5 million for 1998. The increase is attributable to the payment of interest
on higher loan principal balances for the period. (See NOTE 7 TO THE FINANCIAL
STATEMENTS).
EQUITY IN LOSS OF UNCONSOLIDATED SUBSIDIARY. The Company reported a
$1 million loss on the equity investment in ILD for 1999. This loss represents
Intellicall's proportionate share, based on ownership, of ILD's net loss for the
period. In 1998 the Company's proportionate share of the loss was $.8 million.
DISCONTINUED OPERATIONS. On September 22, 1999 the Company elected to
discontinue its billing services operations effective October 21, 1999 (See
NOTE 16 TO THE FINANCIAL STATEMENTS). The billing services segment of the
Company's business was determined to be unprofitable after taking into account
the administrative and support costs for the segment. The Company's billing
services system is a combination of hardware and software that performs, without
human intervention, all the functions necessary for completing an operator
assisted payphone call (i.e., collect, calling card and credit card calls) and a
range of other payphone services and features. As a result of this action the
net results of the billing services operations are reported on the statements of
operations under the caption "Income (loss) from discontinued operations." Net
revenues related to the billing services operations were $9.3 million and
$25.8 million for the years ended December 31, 1999 and 1998. During the years
ended December 31, 1999 and 1998, the Company reported a net loss of
$.7 million and a net income of $.08 million, attributable to billing service
operations, respectively.
Assets of the billing services operations discontinued consisted of
receivables of $.5 million, net of $1.8 million of allowance for doubtful
accounts as of December 31, 1999 and $3.6 million, net of $3.2 million of
allowance for doubtful accounts as of December 31, 1998. Liabilities of the
billing services operations discontinued consisted of payables of $.01 million
as of December 31, 1999 and $.9 million as of December 31, 1998.
The Company believes there is no tax impact resulting from the discontinued
operations as the Company has historically been in a net loss carryforward
position with a valuation allowance reserved against its deferred tax assets.
1998 COMPARED TO 1997
EQUIPMENT SALES. Equipment sales declined in 1998 by $5.5 million, or
28.2%, from $19.3 million in 1997. Demand for the Company's payphones and
related equipment from IPPs continued to be markedly weaker than in 1997 as
evidenced by a $6.2 million decline in equipment sales to IPPs from 1997 to
1998.
Delayed, sporadic and negligible payments to IPPs of dial-around
compensation appear to have diminished the incentives of IPPs to expand their
routes. In lieu of route expansion, many IPPs have chosen to rotate phones
within their routes from one location (where increased numbers of
undercompensated dial-around calls have rendered a location insufficiently
profitable) to another (where a higher rate of coin and lower rate of
dial-around calls promise profitability). Until the amount and timing of
dial-around compensation payments become adequate and reliable, management of
the Company believes that sales to IPP's will continue to be depressed.
Partially offsetting the weakness in the IPP market segment was the
increased demand for N-Genius systems from international customers and,
commencing in the 1998 third quarter, demand from a regulated telephone company
for ASTRATEL 2 kits. Although international sales were impacted by the currency
weakness of Pacific Rim and certain Latin American countries, Intellicall's
export sales
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<PAGE>
continued to expand in 1998. The Company's equipment sales in 1998 to the
international and regulated telephone company segments increased by $.7 million
as compared to 1997.
GROSS PROFIT. The Company's gross profit on 1998 equipment sales was $2.3
million, or 16.3% of equipment sales, compared to a $2.6 million negative gross
profit in 1997. In 1997, the Company provided $5.9 million for inventory losses
and the impairment of certain capitalized software costs (the "1997 Loss
Provision"), without which gross profit from equipment sales would have been
$3.3 million, or 17.0% of 1997 equipment sales. After excluding the effect of
the 1997 Loss Provision from the comparison, the change in gross margin from
17.0% in 1997 to 16.3% in 1998 resulted principally from the lower volume of
equipment sales in 1998, offset by a $.9 million reduction in 1998 of amortized
software development costs, receipt in 1998 of a $.5 million order cancellation
fee, reduced material costs and reduced overhead costs and labor efficiency.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. In 1997, ILD's and the
prepaid business' selling, general and administrative ("SG&A") expenses were
$6.1 million. Excluding ILD's and the prepaid business' SG&A expenses from the
comparison of annual expense levels, the Company's SG&A expenses increased by
$.9 million, or 13.8%, from $6.5 million in 1997 to $7.4 million in 1998. The
increased expenses resulted from increases in marketing, public relations and
customer service expenses, offset by a general reduction in payroll related
expenses.
DECONSOLIDATION OF ILD. In 1997 $60 million in service revenues and $53
million in cost of sales were reported as a result of the operator services
business related to ILD. In 1998 and 1999, these items, along with other
indirect costs, were reported as one line item on the Company's financial
statements (Equity in the loss of subsidiary), pursuant to the deconsolidation
of ILD (See CHANGES IN PRESENTATION of this discussion and NOTE 1 TO THE
FINANCIAL STATEMENTS).
DISCONTINUED OPERATIONS. On September 22, 1999, the Company elected to
discontinue its billing services operations effective October 21, 1999 (See NOTE
16 TO THE FINANCIAL STATEMENTS). Accordingly, the net results of operations for
billing services for 1998 and 1997 are reported as income from discontinued
operations of $.09 million and $.6 million, respectively.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts
declined from $1.0 million in 1997 to $.9 million in 1998. The $.1 million
decline is a result of the improved credit quality and lower level of the
Company's sales.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased $.8 million from 1997 to 1998 partially due to a $.3 million reduction
in the amount of software development costs capitalized in 1998, as compared to
1997, and an increase in research and development expenditures.
GAIN ON SALE OF ASSETS. During the first quarter of 1998, Intellicall
reported gains on sales of assets totaling $6.4 million resulting from the sale
of the Company's prepaid services operation to ILD and from a sale in March 1998
of a portion of the Company's ownership interest in the common stock of ILD to
an unrelated third party.
During the second quarter of 1998, the Company reported a $.5 million gain
from the sale of a portion of the Company's ownership interest in ILD to an
unrelated third party.
In the fourth quarter of 1998, the Company recognized a $.5 million gain
relating to the sale of the Company's prepaid services operation to ILD.
INTEREST EXPENSE. Interest expense was $1.5 million for 1998 compared to
$2.7 million for 1997. Excluding interest expense of $.8 million in 1997
relating to ILD, interest expense decreased from $1.9 million in 1997 to $1.5
million in 1998, primarily as a result of reduced debt.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Intellicall reported net cash used in operating activities of $0.2 million
for the year ended December 31, 1999, which consisted primarily of a net loss
from continuing operations of $9.3 million offset by net non-cash charges of
$4.2 million and net changes in operating assets and liabilities of
$4.9 million. Non-cash charges for the year ended December 31, 1999, consisted
principally of depreciation and amortization and minority interest loss offset
by a gain on sale of assets and income tax benefit. The net change in operating
assets and liabilities for same period represented a decrease in accounts
receivable and inventory from December 31, 1998. The decline in accounts
receivable resulted primarily from lower equipment and service sales, while
inventories decreased as a result of reduced inventory purchases and improved
inventory management.
Cash flows from investing activities for the year ended December 31, 1999
were $0.2 million which include $1.1 million incurred for purchases of
capitalized equipment and software development costs. Additionally, in October
1999 Intellicall received $1.3 million cash in consideration for its sale of
5000 shares of ILD Series A Convertible Preferred Stock to First Avenue.
Cash flows used in financing activities for the year ended December 31, 1999
were $0.9 million, which consisted of the $2.8 million repayment of the Finova
line of credit offset by net borrowings of $1.0 million and $0.8 million in
proceeds from issuance of stock. Net borrowings for the year consist of
$2.0 million from Banca del Gottardo and the repayment of a $1.0 million
convertible subordinated note due to T.J. Berthel Investments, L.P. At
March 31, 1999, Intellicall was required to retire the $1.0 million convertible
subordinated note due T.J. Berthel Investments, L.P. On April 9, 1999,
Intellical obtained bridge financing of $1.0 million from Banca del Gottardo for
the purpose of satisfying all obligations to T.J. Berthel Investments. On
June 11, 1999, Intellicall completed the sale of a $2.0 million of 7.0%
convertible subordinated note, due June 11, 2004, to Banca del Gottardo.
$1.0 million of the net proceeds from the sale of the note was used to repay the
bridge financing, with the balance utilized for working capital. The note was
issued with warrants to purchase 200,000 shares of Intellicall's Common Stock at
$1.55 per share. The note was convertible through June 11, 2004 in to 1,290,323
shares of Intellicall's Common Stock at a price of $1.55 per share. On
December 30, 1999, Intellicall sold 1 million shares of Common Stock to Banca
del Gottardo for $0.85 per share. The purchase price represented a 15% discount
to the closing price of Intellicall's Common Stock upon the agreed date of
December 22, 1999. The $0.8 million in proceeds from the sale were utilized for
working capital purposes.
On October 21, 1999, Intellicall received notice from Banca del Gottardo of
its intent to "put" to Intellicall the balance of the 8% convertible subordinate
notes due December 31, 2000. The agreement relating to such convertible debt
included a put option, giving Banca del Gottardo the right to tender for payment
for the outstanding balance of the notes on December 31, 1999. On December 30,
1999, Intellicall issued warrants to purchase 200,000 shares of its Common Stock
at a price of $1.00 per share to Banca del Gottardo. In consideration of the
warrants, Banca del Gottardo amended the December 29, 1995 note to postpone the
put on the notes from December 31, 1999 to June 30, 2000. The note was repaid in
April 2000.
The Company's debt structure as of December 31, 1999 consisted of
$2.6 million of 8% convertible subordinated notes due December 31, 2000,
$5.0 million of 8% convertible subordinated notes due November 22, 2001 and
$2.0 million of 7% convertible subordinated notes due June 11, 2004. Beginning
in January 2000 the Company entered into various investing and financing
transactions resulting in the retirement of $7.4 of this debt. These
transactions are discussed in the following paragraphs.
On January 4, 2000 the Company was notified by ILD of its intention to
redeem Intellicall's interest in ILD's Series B preferred convertible stock. ILD
is to redeem 5,000 shares for $100 per share plus accrued and unpaid dividends
by April 11, 2000. As of June 30, 2000, ILD had remitted $.3 million to the
Company, redeeming 1,975 shares of the Series B preferred convertible stock and
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<PAGE>
became current on all accrued and unpaid dividends. Proceeds from the sale were
used for general operating purposes (See NOTE 19 TO THE FINANCIAL STATEMENTS).
On February 11, 2000 the Company signed a $.5 million revolving promissory
note with Bank of America, N.A., due February 11, 2001. Interest is payable
monthly at its prime rate commencing on March 11, 2000 with the principal of the
note guaranteed by William O. Hunt, Chairman of the Board of Intellicall. The
Company may repay and re-borrow under the terms of the note at any time, up to a
maximum aggregate outstanding balance equal to the principal amount of the note.
Proceeds of the note were used for working capital purposes. On May 1, 2000 the
Company retired the note. (See NOTE 19 TO THE FINANCIAL STATEMENTS).
On April 11, 2000 the Company sold to Banca del Gottardo the Company's
remaining ownership in ILD, exclusive of 6,239 shares of Series A preferred
convertible stock the Company is required to hold pursuant to the ILD
organization agreement. The Company's ownership in ILD 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
informed ILD as of March 10, 2000 of it's election to convert the entire
principal balance of the Note into 11,111 shares on ILD common stock.
The terms of the ILD stock sale 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. This
offer has been communicated to ILD and ILD shareholders in accordance with the
ILD Shareholders' Agreement referencing ILD's and ILD shareholders' rights to
match the offer and exercise certain co-sale rights.
In addition to using asset sales and debt financings to fund net losses and
capital purchases, on January 27, 1999, Intellicall closed and commenced funding
under a Receivables Sale Agreement (the "RFC Agreement") with RFC Capital
Corporation, or RFC, pursuant to which RFC has agreed to purchase from
Intellicall certain telecommunication receivables generated by Intellicall in
the ordinary course of its business. The RFC Agreement calls for RFC to purchase
eligible receivables from Intellicall from time to time upon presentation
thereof for a purchase price equal to the net value of such receivables. Net
value is designed to yield RFC an effective interest rate of prime plus 2.75%,
plus allow RFC to retain a holdback of 5% of the face amount of the receivables,
net of collections, against future collection risk. Under the RFC Agreement,
Intellicall performs certain servicing, administrative and collection functions
with respect to the receivables sold to RFC. Also, pursuant to the terms of the
RFC Agreement, Intellicall has granted to RFC a security interest in and to
Intellicall's receivables not sold to RFC and Intellicall's customer base
relating to the generation of such accounts receivable. The initial term of the
RFC Agreement expires on December 21, 2000.
Management of the Company believes that the proceeds from the sale of the
Company's ownership in ILD will enable the Company to finance its operations for
the year ending December 31, 2000. Beyond 2000, the Company's ability to obtain
further funds from external sources will depend on its ability to find new
strategic partners and opportunities. Although management of the Company
believes that the Wireless Webconnect! acquisition will provide a strategic
partnership, there can be no assurance that the condition's precedent to the
merger will be satisfied or that the merger will be consummated. In the event of
the consummation of merger, there can be no assurance that under such
conditions, external funds would be available or, if available, would not
potentially dilute shareholders' interests or returns.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Index to Financial Statements located on page F-1 for a listing of
the financial statements included as a part of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
19
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors and executive officers of Company as of
April 27, 2000 is set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY DIRECTOR SINCE
---- -------- ----------------------------------------------- --------------
<S> <C> <C> <C>
William O. Hunt............... 66 Chairman of the Board of Directors 1992
B. Michael Adler.............. 53 Director 1984
Lewis E. Brazelton III........ 59 Director(1) 1992
Richard B. Curran............. 64 Director(3) 1992
Arthur Chavoya................ 52 Director(4) 1997
John J. McDonald, Jr.......... 50 President, Chief Executive Officer and Director 1997
R. Phillip Boyd............... 42 Chief Financial Officer and Secretary N/A
</TABLE>
------------------------
(1) Chairman of Organization and Compensation Committee and member of Audit
Committee of the Board of Directors.
(2) Member of Audit Committee and Organization and Compensation Committee of the
Board of Directors.
(3) Chairman of the Audit Committee and member of Organization and Compensation
Committee of the Board of Directors.
(4) Member of Organization and Compensation Committee of the Board of Directors
WILLIAM O. HUNT joined the Company in December 1992 as Chairman of the
Board, Chief Executive Officer and President. In May 1998 Mr. Hunt resigned his
position as Chief Executive Officer and President. From June 1986 to July 1992,
he was Chairman of the Board and Chief Executive Officer of Alliance
Telecommunications Corporation, a wireless telecommunications company. Mr. Hunt
serves on the boards of Optel, Inc., American Homestar Corporation and Internet
America, Inc.
B. MICHAEL ADLER is a founder of the Company and was Vice Chairman of the
Board of Directors of the Company from December 1992 until November 1993. Prior
to that time he was Chairman of the Board of Directors from the Company's
inception in November 1984. He served as Chief Executive Officer of the Company
from November 1984 to January 1988. From November 1984 to April 1987, he was
also President of the Company. For the last five years, Mr. Adler has been
Chairman of the Board of The Payphone Company Limited, a Sri Lankan company, and
Chief Executive Officer of WorldQuest Networks, L.L.C., a Delaware limited
liability company.
LEWIS E. BRAZELTON III is Senior Vice President of Dain Rauscher, Inc., an
investment banking company, and has been for over five years.
RICHARD B. CURRAN is a consultant and has been an investor in a number of
privately held companies since 1989, in which he has served as a director or in
senior management positions. Mr. Curran is also President and Executive Director
of Folkers Foundation for Biomedical & Clinical Research.
ARTHUR CHAVOYA is President of The Chavoya Group, Inc., a management
consulting firm. From September 1996 to October 1997, Mr. Chavoya was President
and Chief Executive Officer of Aegis Communications Group, Inc., a provider of
inbound and outbound telemarketing services. Prior to September 1996,
Mr. Chavoya spent ten years at Electronic Data Systems in a number of executive
positions culminating in the presidency of EDS' Global Travel Services Industry
strategic business unit.
20
<PAGE>
JOHN J. MCDONALD, JR. was appointed President and Chief Executive Officer in
May 1998. Prior to that time, he was Chief Operating Officer from July 1997 and
Senior Vice President--Sales and Marketing from February 1997. From June 1994 to
January 1997, Mr. McDonald was Senior Vice President of Intecom, Inc.
("Intecom"). Prior to his time at Intecom, he was Vice President, Business
Communications, of Ericsson Business Communications.
R. PHILLIP BOYD has been Chief Financial Officer and Secretary of the
Company since October 1998. Prior to such time, Mr. Boyd was Vice President of
Business Planning after joining the Company in November 1997 as Executive
Director of Finance. From November 1989 to August 1997, Mr. Boyd served in
various executive capacities with Kemper National Services, Inc. in Ft.
Lauderdale, Florida. Mr. Boyd is a Certified Management Accountant and a CPA.
TERMS OF OFFICE
The Company's officers are elected by the Board of Directors and serve at
the discretion of the Board. Directors are elected annually by the shareholders
to serve until the next annual meeting of shareholders and until their
respective successors are duly elected and qualified.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission and the New York Stock
Exchange. Officers, directors and 10% stockholders are required by regulations
promulgated by the Securities and Exchange Commission to furnish the Company
copies of all Section 16(a) reports they file.
Based solely on a review of the copies of Forms 3, 4 and 5, and all
amendments thereto, furnished to the Company, or written representations that no
Forms 5 were required, the Company believes all Section 16(a) filing
requirements applicable to its officers, directors and 10% beneficial owners
were complied with during 1999.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors has established two committees, the Organization and
Compensation Committee and the Audit Committee. The Organization and
Compensation Committee (the "Compensation Committee"), composed of
Messrs. Berthel, Brazelton, Chavoya and Curran, met two times (in addition to
actions undertaken by unanimous consent) during the fiscal year ended
December 31, 1999. Effective December 9, 1999, this committee was composed of
Messrs. Brazelton, Curran and Chavoya. This committee reviews and approves
salaries and bonuses of executive officers and administers the Company's stock
option and purchase plans. The Audit Committee, which was composed of
Messrs. Berthel, Curran and Brazelton, met two times during the fiscal year
ended December 31, 1999. Effective December 9, 1999, the Audit Committee
consisted of Messrs. Curran, Brazelton and Chavoya. This committee recommends to
the Board of Directors the appointment of independent auditors, reviews the plan
and scope of audits, reviews the Company's significant accounting policies and
internal controls, and has general responsibility for related matters. The
Company does not have a standing nominating committee of the Board of Directors.
The Board of Directors held nine meetings, either in person or by telephonic
conference, during the fiscal year ended December 31, 1999. None of the
Company's directors attended fewer than 75% of the meetings of (i) the Board of
Directors and (ii) the committees on which they served, during their tenure in
calendar year 1999.
21
<PAGE>
ORGANIZATION AND COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company's executive compensation plans have been designed to attract,
retain and reward high caliber executives who will formulate and execute the
business plans of the Company in a manner that will provide the stockholders of
the Company with a higher than average return on the Company's common stock
while ensuring that the Company's compensation levels are fair and appropriate
to both its executives and stockholders. With these goals in mind, the Company's
compensation plans and policies have been designed to have total compensation
linked significantly with the operating performance of the Company. Although the
Compensation Committee recognizes that the improvement of operating performance
of the Company and higher stock prices do not necessarily move in tandem over
the short term, the Compensation Committee believes that the two criteria will
correlate over the long term.
The Compensation Committee does not expect to pay above-average base
salaries to its executive officers, but does expect to utilize
performance-oriented and equity-based compensation to reward positive
performance and results. For the fiscal year 1999 the Company paid a bonus of
$25,000 to Mr. Boyd.
The Compensation Committee also supports the position that stock ownership
by the Company's executive officers, encouraged by equity-based compensation
plans, aligns the interests of the executive officers with the stockholders of
the Company. By using equity-based compensation over a period of time, the
executive officers of the Company should become larger holders of Company stock.
This is intended to strengthen their identification with the stockholders of the
Company and make increasing stockholder value an even more important focus for
the Company's management group. In addition, the Compensation Committee believes
that the use of equity-based compensation combined with a focus on the operating
performance of the Company will create a balance of these two long-term
objectives.
CEO COMPENSATION
John J. McDonald, Jr. is the President and Chief Executive Officer of the
Company. Mr. McDonald's compensation package was established by the Compensation
Committee and the Board of Directors in May 1998. The Compensation Committee and
the Board were advised by an independent compensation consulting firm. In
accordance with Mr. McDonald's stated goal of building stockholder value and
consistent with the Compensation Committee's compensation philosophy described
above, a compensation package involving a lower base salary, participation in a
performance-based bonus plan and a stock option grant was agreed upon.
Mr. McDonald's base salary in 1998 was set at $285,000 and it was agreed
that he would participate in a bonus plan. Based upon the advice of its
independent compensation consultant, the Compensation Committee concluded that
Mr. McDonald's proposed salary and bonus arrangements were reasonable and were
well within the range of similar arrangements made by comparable companies.
In 1998 Mr. McDonald was granted options to purchase 180,000 shares of the
Company's common stock under the Company's 1991 Stock Option Plan. The options
vest in accordance with the Company's standard vesting schedule under the 1991
Incentive Stock Option Plan. The Compensation Committee concluded that this
stock option grant was justified given Mr. McDonald's qualifications and the
Company's need to install a new chief executive who could build stockholder
value.
SUMMARY COMPENSATION TABLE
The following table sets forth information with respect to the compensation
to (i) the Company's chief executive officer at December 31, 1999 and (ii) the
other four most highly compensated executive
22
<PAGE>
officers of the Company during 1999, for services rendered during the fiscal
years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION (1)
-------------------------------------------------------------------------------------------------------------
STOCK ALL OTHER
NAME & PRINCIPAL POSITION YEAR SALARY($) BONUS($) OTHER OPTIONS COMPENSATION (2)
------------------------- -------- --------- -------- -------- -------- ----------------
(SHARES)
<S> <C> <C> <C> <C> <C> <C>
William O. Hunt.................... 1999 $ 13,963 -- -- -- $ 195
Chairman of the Board 1998 $ 99,908 -- -- -- $1,499
of Directors, and Chief Executive
Officer to May 1998 1997 $202,500 -- -- -- $1,012
John J. McDonald, Jr............... 1999 $285,000 -- -- -- $2,137
President and Chief 1998 $260,156 $71,250 -- $180,000 $2,500
Executive Officer from May 1998,
Senior Vice President--Sales and
Marketing
R. Phillip Boyd.................... 1999 $130,000 $25,000 -- -- $1,000
Chief Financial Officer and
Secretary from October 1998, Vice
President of Business Planning
</TABLE>
------------------------
(1) The compensation described in the table does not include the cost to the
Company of benefits furnished to certain officers, including premiums for
life and health insurance, and other personal benefits provided to such
individuals that are extended in connection with the conduct of the
Company's business. No executive officer named above received other
compensation in excess of the lesser of $50,000 or 10% of such officer's
salary and bonus compensation.
(2) All Other Compensation consists of matching payments by the Company pursuant
to its 401(k) Plan.
1999 OPTION GRANTS
The following table sets forth the number, percent of total options granted
to named employees, exercise price and duration of options granted to the named
executive officers, and the hypothetical gain that would result from assumed
annual rates of stock price appreciation over the term of the options.
<TABLE>
<CAPTION>
PERCENT POTENTIAL REALIZED
OF TOTAL VALUE AT ASSUMED
OPTIONS ANNUAL RATES OF
GRANTED TO APPRECIATION
EMPLOYEES EXERCISE FOR OPTION TERM
OPTIONS IN FISCAL YEAR PRICE EXPIRATION -------------------
NAME GRANTED(1) 1999 ($/SH) DATE 5% 10%
---- ---------- -------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
William O. Hunt................... -- -- -- -- -- --
John J. McDonald, Jr.............. -- -- -- -- -- --
R. Phillip Boyd................... -- -- -- -- -- --
</TABLE>
------------------------
(1) Options granted are exercisable generally for a period of ten years at the
price of the Company's common stock on the date of grant. The options vest
as follows: 50% on December 31 of the year of grant and 25% on December 31
of each following year.
23
<PAGE>
1999 YEAR-END VALUE OF STOCK OPTIONS
The following table sets forth information with respect to the named
executive officers concerning the exercise of options during 1999 and
unexercised options held as of December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
SHARES AT DECEMBER 31, 1999 AT DECEMBER 31, 1999(1)
ACQUIRED ON VALUE ------------------------------ ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William O. Hunt............ -- -- 670,000 -- $0 $0
John J. McDonald, Jr....... -- -- 255,000 45,000 $0 $0
R. Phillip Boyd............ -- -- 23,750 6,250 $0 $0
</TABLE>
------------------------
(1) Market value of underlying securities at December 31, 1999 less the exercise
price.
DIRECTOR COMPENSATION
During 1998 each member of the Board of Directors who was not an officer or
employee of the Company received an annual $13,500 director's retainer for
serving on the board. Additionally each director was paid a fee of $675 for each
directors' meeting he attended and a $675 fee for each committee meeting he
attended other than committee meetings held on the same day as a directors'
meeting. Directors were also reimbursed for expenses relating to attendance at
meetings.
INDEMNIFICATION ARRANGEMENTS
The Company's Bylaws provide for the indemnification of its executive
officers and directors, and the advancement to them of expenses in connection
with proceedings and claims, to the fullest extent permitted by the Delaware
General Corporation Law. The Company has also entered into indemnification
agreements with its executive officers and directors that contractually provide
for indemnification and expense advancement and include related provisions meant
to facilitate the indemnitees' receipt of such benefits.
STOCK OPTION PLANS
Prior to 1991 the stock option plans described below were administered as
separate plans. In 1991 the plans were restated in their entirety in a single
document and are known as the "Intellicall, Inc. 1991 Stock Option Plan". Each
separate plan was previously approved by the Company's stockholders.
INCENTIVE STOCK OPTION PLAN. The Board of Directors of the Company adopted
the Incentive Stock Option Plan for key employees of the Company and its
subsidiaries. The Incentive Stock Option Plan has been approved by the
stockholders of the Company. Up to 1,995,000 shares of common stock are
authorized to be issued under the Incentive Stock Option Plan. The purpose of
the Incentive Stock Option Plan is to provide a means whereby the Company may,
through the grant of options, attract and retain persons of ability as
employees. The Incentive Stock Option Plan is also intended to motivate such
persons to exert their best efforts on behalf of the Company.
The Incentive Stock Option Plan is administered by the Compensation
Committee. Options for the purchase of common stock under the Incentive Stock
Option Plan may be granted to key employees selected from time to time by the
Compensation Committee. Only directors who are employees are eligible to receive
options under the Incentive Stock Option Plan. The Compensation Committee
determines the exercise price of such options at the time of grant. The exercise
price of any options granted pursuant to the Incentive Stock Option Plan will be
at least equal to the fair market value of the common stock on the date the
options are granted. Each option has a term of up to 10 years and is exercisable
only at such times as the Compensation Committee determines at the time of
grant. The
24
<PAGE>
option period automatically terminates three months following the date the
holder ceases to be an employee of the Company for any reason. No cash
consideration is paid by the employee upon the grant of an option to him. To
exercise the options, grantees must pay the exercise price in cash or common
stock, or any combination of cash and common stock.
Options granted under the Incentive Stock Option Plan may be "Incentive
Stock Options" within the meaning of Section 422 of the Internal Revenue Code of
1986 (the "Code"), non-qualified options (options which do not meet the
requirements of Section 422 of the Code), or both. The Incentive Stock Option
Plan contains various provisions to ensure that Incentive Stock Options comply
with Section 422.
At April 26, 2000, the Company and its subsidiaries had approximately 67
employees who were eligible to participate in the Incentive Stock Option Plan.
At present, such persons hold options granted under the Incentive Stock Option
Plan to purchase an aggregate of 926,755 shares of common stock.
NON-QUALIFIED STOCK OPTION PLAN. The Board of Directors of the Company
adopted the Non-Qualified Stock Option Plan for officers, directors and key
employees of the Company and its subsidiaries. The Non-Qualified Stock Option
Plan has been approved by the stockholders of the Company. Up to 600,000 shares
of common stock are authorized to be issued under the Non-Qualified Stock Option
Plan. The purpose of the Non-Qualified Stock Option Plan is to provide a means
whereby the Company may, through the grant of options, attract and retain
persons of ability as officers, directors and employees. The Non-Qualified Stock
Option Plan is also intended to motivate such persons to exert their best
efforts on behalf of the Company.
The Non-Qualified Stock Option Plan is administered by the Compensation
Committee of the Board of Directors. Options for the purchase of common stock
under the Non-Qualified Stock Option Plan may be granted to key individuals
selected from time to time by the Compensation Committee. No director is
eligible to receive options under the Non-Qualified Stock Option Plan while such
director is a member of the Compensation Committee. Furthermore, only directors
who are employees are eligible to receive options under the Non-Qualified Stock
Option Plan. The exercise price for any options granted pursuant to the
Non-Qualified Stock Option Plan is determined by the Compensation Committee on
the date the options are granted and must be at least equal to 85% of the fair
market value of the common stock on the date of grant. Each option has a term of
up to 10 years and is exercisable only at such times as the Compensation
Committee determines at the time of grant. The option period automatically
terminates three months following the date the holder ceases to be an employee
of the Company for any reason. No cash consideration is paid by the employee
upon the grant of an option to him. To exercise the options, grantees must pay
the exercise price in cash, common stock, a promissory note or any combination
of the foregoing.
At April 26, 2000 the Company and its subsidiaries had approximately 67
employees who were eligible to participate in the Non-Qualified Stock Option
Plan. At present, William O. Hunt holds options granted under the Non-Qualified
Stock Option Plan to purchase an aggregate of 430,000 shares of common stock,
and B. Michael Adler holds options granted under the Non-Qualified Stock Option
Plan to purchase an aggregate of 170,000 shares of common stock.
DIRECTORS' STOCK OPTION PLAN. The Board of Directors of the Company adopted
the Directors' Stock Option Plan for non-employee directors of the Company. Up
to 350,000 shares are authorized to be issued under the Director's Stock Option
Plan. The purpose of the Directors' Stock Option Plan is to provide a means
whereby the Company may, through the grant of options, attract, motivate and
retain qualified, non-employee directors.
The Directors' Stock Option Plan is administered by the Compensation
Committee of the Board of Directors. Options for the purchase of common stock
under the Directors' Stock Option Plan are
25
<PAGE>
automatically granted to each non-employee director. In December 1992, the Board
of Directors amended the Directors' Stock Option Plan to provide the automatic
grant as follows:
(i) each non-employee director as of February 1, 1993, who had not
previously received Director Options was granted an option to purchase
20,000 shares of common stock on February 1, 1993, and was automatically
entitled to receive a grant of an option to purchase 10,000 shares of
common stock as of February 1, 1994; and
(ii) each person who becomes a non-employee director subsequent to February
1, 1993 will receive an option to purchase 20,000 shares of common stock
on the first business day of February after he becomes a director and an
option to purchase 10,000 shares of common stock on the first business
day of the next succeeding February.
The exercise price for all options granted pursuant to the Directors' Stock
Option Plan will be at least equal to the fair market value of the common stock
on the date the options are granted. Each option has a term of up to ten years.
The options granted vest in four equal installments. No cash consideration is
paid by the grantee upon the grant of an option to him. To exercise the options,
grantees must pay the exercise price in cash or common stock of the Company.
At December 31, 1999, the Company and its subsidiaries had 6 directors who
were eligible to participate in the Directors' Stock Option Plan. At present,
such persons hold options granted under the Directors' Stock Option Plan to
purchase an aggregate of 245,000 shares of common stock.
EMPLOYEE STOCK PURCHASE PLAN. The Board of Directors of the Company adopted
the 1995 Employee Stock Purchase Plan for employees of the Company and its
subsidiaries. The stockholders of the Company approved the plan in 1996. Up to
300,000 shares of common stock are authorized to be issued under the Employee
Stock Purchase Plan. The purpose of the Employee Stock Purchase Plan is to
provide employees of the Company and its designated subsidiaries with an
opportunity to purchase common stock of the Company at a discount through
accumulated payroll deductions. The Employee Stock Purchase Plan is also
intended to motivate such persons to exert their best efforts on behalf of the
Company.
The Employee Stock Purchase Plan is administered by the Compensation
Committee of the Board of Directors. Participating employees are entitled to
enroll during one or both of two six month offering periods during each calendar
year. Eligible employees may elect to have payroll deductions made on each
payday during each offering period in an amount not exceeding ten percent (10%)
of the compensation which he or she receives on each such payday. At the end of
each offering period the accumulated payroll deductions are utilized to purchase
shares of common stock from the Company pursuant to the exercise of options
granted at the beginning of each offering period. The purchase price for the
shares purchased with the payroll deductions is equal to eighty-five percent
(85%) of the fair market value of a share of common stock on the first trading
day or the last trading day of each offering period, whichever is lower.
At April 26, 2000, the Company and its subsidiaries had approximately 67
employees who are eligible to participate in the Employee Stock Purchase Plan,
of which one (1) employee is actually participating in the Employee Stock
Purchase Plan.
STOCK PERFORMANCE CHART
The following chart compares the yearly percentage change in the cumulative
total stockholder return on Intellicall's Common Stock during the five years
ended December 31, 1999, with the cumulative total return of (1) Standard &
Poors 500 Stock Index, (2) the Standard & Poors Small Cap 600 Index and (3) the
Standard & Poors Telephone Manufacturers Index. The comparison assumes $100 was
invested on December 31, 1994 in Intellicall's common stock and in each of the
other indices and assumes reinvestment of dividends. Intellicall paid no
dividends during the five year period.
26
<PAGE>
COMPARISON OF FIVE YEAR CUMULATIVE RETURN AMONG INTELLICALL,
S&P 500 INDEX, S&P SMALL CAP 600 INDEX, AND
S&P TELEPHONE MANUFACTURER'S INDEX.*
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
S&P SMALL TELEPHONE MANUFACTURER'S
<S> <C> <C> <C> <C>
Intellicall S&P 500 Index Cap 600 Composite Index
12/31/94 $100 $100 $100 $100
12/31/95 $100 $138 $130 $151
12/31/96 $157 $169 $158 $152
12/31/97 $137 $226 $198 $212
12/31/98 $58 $290 $195 $312
12/31/99 $30 $351 $220 $330
</TABLE>
* TOTAL RETURN BASED ON $100 INITIAL INVESTMENT & REINVESTMENT OF
DIVIDENDS.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 17, 2000, the number and
percentage of outstanding shares of common stock beneficially owned by (i) each
of the executive officers named in the Summary Compensation Table on page 30,
(ii) each person known by the Company to be the beneficial owner of
27
<PAGE>
more than 5% of the Company's common stock, (iii) each director and each person
nominated to be elected a director of the Company, and (iv) all officers and
directors as a group.
<TABLE>
<CAPTION>
SHARES OF
NAME AND ADDRESS COMMON STOCK PERCENTAGE
OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) OF CLASS
---------------------- --------------------- ----------
<S> <C> <C>
William O. Hunt(3).............................. 962,000 7.0%
2155 Chenault, Suite 450
Carrollton, Texas 75006
Banca Del Gottardo(4)........................... 4,165,948 29.5%
viale S. Franscini 8
6901 Lugano
Switzerland
B. Michael Adler(5)............................. 659,313 5.0%
2155 Chenault, Suite 450
Carrollton, Texas 75006
Neuberger & Berman, LLC(6)...................... 769,430 5.9%
605 Third Avenue
New York, New York 10158
Lewis E. Brazelton III(7)....................... 116,373 *
Arthur Chavoya(8)............................... 30,000 *
Richard B. Curran(9)............................ 103,600 *
John J. McDonald, Jr.(10)....................... 263,800 2.0%
R. Phillip Boyd(11)............................. 27,250 *
All officers and directors as a 15.1%
group (7 persons)(12)......................... 2,162,336
</TABLE>
------------------------
* less than one percent
(1) The persons named in the table have sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by them,
subject to community property laws, where applicable, and the information
contained in the footnotes to the table.
(2) Includes shares issuable upon the conversion of subordinated debt or shares
issuable upon exercise of options or warrants that have vested or will vest
within 60 days.
(3) Includes 175,825 shares as to which Mr. Hunt has shared voting and
investment power and 670,000 shares of common stock issuable upon exercise
of options.
(4) Includes 3,990,663 shares of common stock issuable upon conversion of
subordinated debt and exercise of a warrant.
(5) Includes (i) 37,000 shares held in the name of Adler Computer Systems, Inc.,
a company wholly owned by Mr. Adler and (ii) 182,500 shares of common stock
issuable upon exercise of options.
(6) Includes shares of common stock held in numerous accounts of clients of
Neuberger & Berman, LLC over which Neuberger & Berman, LLC has shared
dispositive power. Also includes 234,000 shares of common stock held by
principals of Neuberger & Berman, LLC in their personal securities account
over which Neuberger & Berman, LLC disclaims beneficial ownership.
(7) Includes 5,091 shares owned by Mr. Brazelton's wife, as to which
Mr. Brazelton disclaims beneficial ownership, and 30,000 shares of common
stock issuable upon exercise of options.
28
<PAGE>
(8) Includes 30,000 shares of common stock issuable upon exercise of options.
(9) Includes 53,600 shares held by Mr. Curran's wife and a trust of which
Mr. Curran's wife is a beneficiary, as to which Mr. Curran disclaims
beneficial ownership, and 30,000 shares of common stock issuable upon
exercise of options.
(10) Includes 255,000 shares of common stock issuable upon exercise of options.
(11) Includes 23,750 shares of common stock issuable on exercise of options.
(12) Includes 1,221,250 shares of common stock issuable upon exercise of
options.
CHANGE IN CONTROL ARRANGEMENTS.
Pursuant to the Company's 1991 Stock Option Plan, in the event of an
impending merger, liquidation, sale of all or substantially all of the Company's
assets, or if at any time, two-thirds of the Company's directors are not
"Continuing Directors" as defined in the Plan, 100% of the options granted
pursuant to the Incentive, Non-Qualified and Directors' Stock Option Plans
automatically become immediately and fully exercisable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of December 31, 1999, The Payphone Company, Ltd. ("Payphone") owed the
Company $269,887 for trade receivables. In December 1998, management of the
Company completed the establishment of a full reserve for such amount. B.
Michael Adler is a director of Payphone and of the Company. Mr. Adler and other
members of Mr. Adler's family own the majority of Payphone's stock.
On February 15, 1994 the Company issued a $1 million, 10% convertible
subordinated note to T.J. Berthel Investments, L.P., an affiliate of Thomas J.
Berthel, a director of the Company. An amended and restated note was issued on
August 9, 1994. On April 9, 1999 the Company paid the entire principal amount
due, including accrued interest of $18,858.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements.
The financial statements filed as a part of this Annual Report on Form 10-K
are listed in the "Index to Financial Statements" on page F-1 hereof.
(2) Financial Statement Schedules.
The financial statement schedules filed as part of this Annual Report on
Form 10-K are listed in the "Index to Financial Statements" on page F-1 hereof.
(3) Exhibits.
29
<PAGE>
The following exhibits are filed as a part of this Annual Report on Form
10-K.
<TABLE>
<C> <S>
(a)3.1 Certificate of Incorporation of the Company and all
amendments thereto through December 31, 1992.
(c)3.2 Amendment to Certificate of Incorporation raising the
authorized common stock from 10,000,000 shares to
50,000,000 shares.
(f)3.3 Amendment to Certificate of Incorporation lowering the
authorized common stock from 50,000,000 shares to
20,000,000 shares.
(b)3.4 Bylaws of the Company, as amended.
(a)4.1 Specimen certificate for Common Stock of the Company.
(f)10.1 Intellicall, Inc. 1991 Stock Option Plan, as amended.
(b)10.2 Form of Incentive Stock Option Agreement.
(b)10.3 Form of Nonqualified Stock Option Agreement.
(b)10.4 Form of Director Stock Option Agreement.
(f)10.5 Form of 1995 Employee Stock Purchase Plan.
(b)10.6 ADREC Development and License Agreement, dated as August 2,
1990, between VCS Industries, Inc. d/b/a Voice Control
Systems and the Company.
(b)10.7 Amended and Restated Patent License Agreement dated as of
January 1, 1992, between the Company and
MessagePhone, Inc.
(d)10.8 Amended and Restated 10% Convertible Subordinated Note Due
1999 dated August 11, 1994 with T.J. Berthel Investments,
L.P.
(c)10.9 Registration Rights Agreement dated February 14, 1994,
between the Company and T.J. Berthel Investments, L.P.
(e)10.10 Note and Warrant Purchase, Paying and Conversion/Exercise
Agency Agreement entered into on December 22, 1995 between
Banca Del Gottardo and the Company.
(e)10.11 Form of 8% Convertible Subordinated Note executed by the
Company to Banca Del Gottardo dated December 22, 1995.
(e)10.12 Form of Warrants issued with Notes.
(g)10.13 Note and Warrant Purchase, Paying and Conversion/Exercise
Agency Agreement dated November 22, 1996 and executed with
Banca del Gottardo.
(g)10.14 Form of 8% Convertible Subordinated Notes executed by the
Company to Banca Del Gottardo dated November 22, 1996
(included within Exhibit 10.13).
(g)10.15 Form of Warrants issued with Notes (included within Exhibit
10.13).
(h)10.16 Receivable Sale Agreement executed with RFC Capital
Corporation.
(i)10.17 Organization Agreement dated May 10, 1996 between the
Company, Triad-ILD Partners, L.P., Morris
Telecommunications LLC and ILD Communications.
++21.1 Subsidiaries of the Company.
++23.1 Consent of Independent Accountants.
++27.1 Financial Data Schedule.
</TABLE>
------------------------
++ Previously filed.
(a) Incorporated by Reference from the Company's Form S-1 filed August 28, 1987,
file no. 33-15723.
(b) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991.
(c) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993.
(d) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994.
30
<PAGE>
(e) Incorporated by reference from the Company's Current Report on Form 8-K
(Date of Earliest Event Reported--December 28, 1995).
(f) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
(g) Incorporated by reference from the Company's Current Report on Form 8-K
(Date of Earliest Event Reported--November 22, 1996).
(h) Incorporated by reference from the Company's Current Report on Form 8-K
(Date of Earliest Event Reported--January 27, 1999).
(i) Filed herewith.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last fiscal quarter of 1999.
The following undertaking set forth herein relates to the Company's
Registration Statement on Form S-8 (No. 33-60235), and on Form S-8
(No. 33-64583):
"Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue."
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
September 12, 2000 INTELLICALL, INC.
By: /s/ JOHN J. MCDONALD, JR.
-----------------------------------------
John J. McDonald, Jr.
(PRINCIPAL EXECUTIVE OFFICER)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, on September 12, 2000.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ JOHN J. MCDONALD, JR. President and Chief Executive
--------------------------------- Officer
John J. McDonald, Jr. and Director
/s/ R. PHILLIP BOYD
--------------------------------- Vice President of Finance, Chief
R. Phillip Boyd Financial Officer
/s/ WILLIAM O. HUNT
--------------------------------- Chairman of the Board
William O. Hunt
--------------------------------- Director
B. Michael Adler
/s/ LEWIS E. BRAZELTON, III
--------------------------------- Director
Lewis E. Brazelton, III
/s/ ARTHUR CHAVOYA
--------------------------------- Director
Arthur Chavoya
/s/ RICHARD B. CURRAN
--------------------------------- Director
Richard B. Curran
</TABLE>
<PAGE>
INTELLICALL, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants........................... F-2
Financial Statements:
Balance Sheets............................................ F-3
Statements of Operations.................................. F-5
Statements of Stockholders' Equity........................ F-6
Statements of Cash Flows.................................. F-7
Notes to Financial Statements............................. F-8
Financial Statement Schedules (Note A):
Valuation and Qualifying Accounts................... F-32
</TABLE>
------------------------
Note A: All other schedules are omitted, since the required information is not
present or is not present in amounts sufficient to require submission of
the schedule, or because the information required is included in the
financial statements and notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Intellicall, Inc.
In our opinion, the financial statements listed in the accompanying index
appearing on page F-1 present fairly, in all material respects, the financial
position of Intellicall, Inc. at December 31, 1999 and 1998, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999 in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule listed
in the accompanying index appearing on page F-1 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related financial statements. These financial statements and the financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in NOTE 2, the Company has restated its December 31, 1997 and
December 31, 1998 financial statements.
While management believes it will be able to fund the December 31, 2000
operations from the $15.5 million proceeds received in the sale of the Company's
ownership in ILD, it has experienced recurring losses from operations,
continuous decline in revenues as well as difficulty in funding its operations
in recent years. Management's plans with respect to these matters beyond 2000
are discussed in NOTE 4.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
April 11, 2000
except as to Note 4,
Note 7, and Note 19
which are as of
September 11, 2000
F-2
<PAGE>
INTELLICALL, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
-------- ----------
(RESTATED)
(IN THOUSANDS)
<S> <C> <C>
Current assets
Cash and cash equivalents............................... $ 694 $ 16
Receivables, net of allowance for doubtful accounts of
$764 and $442......................................... 1,455 4,263
Inventories, net........................................ 3,088 5,177
Receivables from related party, net..................... 1,258 1,658
Deferred Tax Asset...................................... 1,500 --
Other current assets.................................... 157 197
------- ----------
Total current assets................................ 8,152 11,311
Fixed assets, net........................................... 980 1,425
Capitalized software costs, net of accumulated amortization
of $2,652 in 1998......................................... -- 2,481
Notes receivable............................................ -- 1,074
Intangible assets, net of accumulated amortization of $1,118
in 1998................................................... -- 749
Investment in unconsolidated subsidiary..................... 1,835 2,971
Other assets, net........................................... 637 1,286
Assets of discontinued operations........................... 513 3,587
------- ----------
Total Assets............................................ $12,117 $ 24,884
======= ==========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
INTELLICALL, INC.
BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
-------- ----------
(RESTATED)
(IN THOUSANDS, EXCEPT
SHARE INFORMATION)
<S> <C> <C>
Current liabilities
Accounts payable........................................ $ 1,798 $ 2,085
Accrued liabilities..................................... 610 1,052
Current portion of long-term debt....................... 7,630 3,811
-------- ----------
Total current liabilities............................... 10,038 6,948
Long-term debt.............................................. 1,557 7,312
Deferred gain on sale of assets............................. 730 968
Other liabilities........................................... 50 250
Liabilities of discontinued operations...................... 80 880
-------- ----------
Total liabilities..................................... 12,455 16,358
-------- ----------
Commitments and contingent liabilities (See Notes 14 and
18)....................................................... -- --
Stockholders' equity (deficit)
Preferred stock, $.01 par value; 1,000,000 shares
authorized; zero and 510 shares issued and
outstanding, respectively............................. -- 1
Common stock, $.01 par value; 20,000,000 shares
authorized; 13,080,175 and 11,738,001 shares issued,
respectively.......................................... 131 117
Additional paid-in capital.............................. 61,486 60,375
Less common stock in treasury, at cost; 24,908 shares... (258) (258)
Accumulated deficit..................................... (61,697) (51,709)
-------- ----------
Total stockholders' equity (deficit)................ (338) 8,526
-------- ----------
$ 12,117 $ 24,884
======== ==========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
INTELLICALL, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Sales and Revenues:
Equipment sales......................................... $ 11,131 $13,859 $ 19,313
Services revenues....................................... -- -- 60,450
-------- ------- --------
11,131 13,859 79,763
Cost of sales and revenues:
Equipment sales, including writeoffs of $.7 million in
goodwill and $2.5 million in capitalized software
costs in 1999 and $1.6 million of capitalized software
costs in 1997 (See Note 3)............................ 13,174 11,600 21,929
Services revenues....................................... -- -- 52,523
-------- ------- --------
13,174 11,600 74,452
-------- ------- --------
Gross profit (loss)......................................... (2,043) 2,259 5,311
Selling, general and administrative expenses................ (6,005) (7,363) (12,616)
Provision for doubtful accounts............................. (592) (876) (1,006)
Research and development expenses........................... (907) (1,587) (741)
-------- ------- --------
Operating loss from continuing operations................... (9,547) (7,567) (9,052)
Gain on sale of assets...................................... 1,431 7,389 --
Loss on investments (See Note 1)............................ (338) -- --
Other income................................................ 346 538 695
Interest expense............................................ (1,717) (1,539) (2,660)
Equity in the loss of unconsolidated subsidiary............. (982) (762) --
Minority interest........................................... -- -- (382)
-------- ------- --------
Loss before income taxes from continuing operations......... (10,807) (1,941) (11,399)
Income tax benefit (expense)................................ 1,500 -- (277)
-------- ------- --------
Net loss from continuing operations......................... (9,307) (1,941) (11,676)
Income (loss) from discontinued operations.................. (681) 85 585
-------- ------- --------
Net loss.................................................... $ (9,988) $(1,856) $(11,091)
======== ======= ========
Basic and diluted net loss per share from continuing
operations................................................ $ (0.76) $ (0.20) $ (1.26)
======== ======= ========
Basic and diluted net income (loss) per share from
discontinued operations................................... $ (0.06) $ 0.01 $ 0.06
======== ======= ========
Basic and diluted net loss per share........................ $ (0.82) $ (0.19) $ (1.20)
======== ======= ========
Weighted average number of basic and diluted shares
outstanding............................................... 12,132 9,927 9,268
======== ======= ========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
INTELLICALL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TREASURY
COMMON STOCK PREFERRED STOCK ADDITIONAL STOCK
------------------- -------------------- PAID-IN ------------------- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES COST DEFICIT
-------- -------- --------- -------- ---------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1996......................... 8,646 $ 87 -- $-- $51,602 (25) $(258) $(38,762)
Exercise of stock options.... 65 1 -- -- 268 -- -- --
Employee stock purchase
plan....................... 17 -- -- -- 74 -- -- --
Issuance of stock............ 430 4 -- -- 481 -- -- --
Conversion of subordinated
notes...................... 314 3 -- -- 1,237 -- -- --
Issuance of preferred
stock...................... -- -- 4 1 3,824 -- -- --
Effect of change in Interest
of unconsolidated
Subsidiary (Restated), (See
Note 2).................... -- -- -- -- 2,480 -- -- --
Net loss..................... -- -- -- -- -- -- -- (11,091)
------ ---- --------- --- ------- --- ----- --------
Balances at December 31, 1997
(Restated)................... 9,472 95 4 1 59,966 (25) (258) (49,853)
Exercise of stock options.... 47 -- -- -- 183 -- -- --
Employee stock purchase
plan....................... 8 -- -- -- 30 -- -- --
Conversion of subordinated
notes...................... 50 1 -- -- 200 -- -- --
Conversion of preferred
stock...................... 2,149 21 (3) -- (12) -- -- --
Issuance of stock............ 12 -- -- -- 8 -- -- --
Net loss..................... -- -- -- -- -- -- -- (1,856)
------ ---- --------- --- ------- --- ----- --------
Balances at December 31, 1998
(Restated)................... 11,738 117 1 1 60,375 (25) (258) (51,709)
Conversion of preferred
stock...................... 336 4 (1) (1) (2) -- -- --
Employee stock purchase
plan....................... 6 -- -- -- 6 -- -- --
Issuance of warrants......... -- -- -- -- 532 -- -- --
Unearned Warrants............ -- -- -- -- (265) -- -- --
Issuance of stock............ 1,000 10 -- -- 840 -- -- --
Net loss..................... -- -- -- -- -- -- -- (9,988)
------ ---- --------- --- ------- --- ----- --------
Balances at December 31,
1999......................... 13,080 $131 -- $-- $61,486 (25) $(258) $(61,697)
====== ==== ========= === ======= === ===== ========
<CAPTION>
TOTAL
--------
<S> <C>
Balances at December 31,
1996......................... $ 12,669
Exercise of stock options.... 269
Employee stock purchase
plan....................... 74
Issuance of stock............ 485
Conversion of subordinated
notes...................... 1,240
Issuance of preferred
stock...................... 3,825
Effect of change in Interest
of unconsolidated
Subsidiary (Restated), (See
Note 2).................... 2,480
Net loss..................... (11,091)
--------
Balances at December 31, 1997
(Restated)................... 9,951
Exercise of stock options.... 183
Employee stock purchase
plan....................... 30
Conversion of subordinated
notes...................... 201
Conversion of preferred
stock...................... 9
Issuance of stock............ 8
Net loss..................... (1,856)
--------
Balances at December 31, 1998
(Restated)................... 8,526
Conversion of preferred
stock...................... 1
Employee stock purchase
plan....................... 6
Issuance of warrants......... 532
Unearned Warrants............ (265)
Issuance of stock............ 850
Net loss..................... (9,988)
--------
Balances at December 31,
1999......................... $ (338)
========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
INTELLICALL, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from continuing operating activities:
Net loss from continuing operations..................... $(9,307) $ (1,941) $(11,676)
Adjustments to reconcile net loss from continuing
operations to net cash provided by operating
activities:
Gain on sale of assets.............................. (1,431) (7,389) --
Depreciation and amortization....................... 5,236 1,760 5,845
Provision for doubtful accounts..................... 592 876 1,393
Provision for inventory losses...................... 310 333 4,382
Equity in loss of unconsolidated subsidiary......... 982 762 --
Minority interest................................... -- -- 382
Income Tax Benefit.................................. (1,500) -- --
Changes in operating assets and liabilities:
Restricted cash................................. -- -- (2,473)
Receivables..................................... 2,766 (1,929) (12,718)
Inventories..................................... 1,779 (757) (1,451)
Receivables from related party, net............. 400 673 --
Other current assets............................ 40 233 (308)
Notes receivable................................ 525 160 446
Accounts payable................................ (287) (4,187) 4,611
Transmission, customer commissions and billing
charges....................................... -- (939) 9,143
Accrued liabilities............................. (442) (153) 1,600
Deferred gain on sale of assets................. -- 938 (361)
Other........................................... 143 (123) (2,051)
Net cash used in continuing operating
activities............................... (194) (11,683) (3,236)
Cash flows from investing activities:
Capital expenditures.................................... (122) (478) (2,082)
Capitalized software.................................... (966) (1,031) (1,322)
Cash received on sale of assets......................... 1,252 8,463 --
Capital lease obligation................................ -- -- 1,000
Acquisition of WorldCom and Interlink assets............ -- -- (20,542)
Net cash provided by (used in) investing
activities............................... 164 6,954 (22,946)
Cash flows from financing activities:
Net proceeds from (repayments on) line of credit........ (2,811) (1,303) 9,517
Net borrowings (repayments) on notes payable............ 1,000 (28) --
Proceeds from issuance of stock......................... 856 223 4,653
Proceeds from issuance of stock in unconsolidated
subsidiary............................................. -- -- 6,088
Net cash provided by (used in) financing
activities............................... (955) (1,108) 20,258
Net cash flows from discontinued operations................. 1,663 5,787 3,719
Net increase (decrease) in cash and cash equivalents........ 678 (50) (2,205)
Cash and cash equivalents at beginning of period............ 16 66 2,271
Cash and cash equivalents at end of period.................. $ 694 $ 16 $ 66
------- -------- --------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................. $ 988 $ 1,141 $ 2,056
------- -------- --------
SUPPLEMENTAL NON CASH FLOW INFORMATION:
Issuance of stock warrants................................ $ 267 $ -- $ --
------- -------- --------
Conversion of debt to equity.............................. $ -- $ 210 $ 1,320
------- -------- --------
Stock issued to purchase WorldCom and Interlink assets.... $ -- $ -- $ 13,196
------- -------- --------
Redeemable preferred stock dividend declared.............. $ -- $ -- $ 186
------- -------- --------
</TABLE>
See notes to financial statements.
F-7
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS: Intellicall, Inc. (the "Company") designs, engineers,
manufactures and sells pay telephones and retrofit kits, parts and intelligent
network platforms ("equipment sales") in the United States and internationally.
PRINCIPLES OF CONSOLIDATION: For the year ended December 31, 1997, the
consolidated financial statements include the accounts of the Company and its
then majority owned subsidiary, ILD Telecommunications, Inc. ("ILD"), formed on
May 10, 1996. All significant intercompany accounts and transactions were
eliminated in consolidation. As of December 31, 1999 and 1998, and for the years
then ended, the Company's investment in ILD is presented under the equity method
of accounting.
CREATION OF ILD TELECOMMUNICATIONS, INC.: On May 10, 1996, the Company
entered into an agreement with certain investor groups to create ILD, a new
long-distance re-sale and operator services company. The Company transferred
ownership in its wholly owned subsidiary, Intellicall Operator Services, Inc.
("IOS"), to ILD in exchange for cash in the amount of $2.0 million, a $1.0
million subordinated convertible note, and preferred and common stock
representing approximately 72.5% of the voting stock of ILD.
In September 1997, ILD acquired the Operator Services Division of
WorldCom, Inc. ("WorldCom") (See NOTE 17). The assets acquired by ILD include
the operator services and long distance customer contracts, operator service
centers, switching facilities, billing and collection operations and inmate
operator services businesses. This acquisition by ILD lowered the Company's
ownership percentage to 59.26%.
In December 1997, ILD acquired all of the outstanding common stock of
Interlink Telecommunications, Inc. ("Interlink") (see NOTE 17), a switched
reseller of long distance services and provider of enhanced services including
operator services, prepaid debit cards and prepaid local service. This
acquisition by ILD lowered the Company's ownership percentage to 53.7%.
In March 1998, the Company sold to SMCO, LLP 18,348.62 shares of ILD common
stock. SMCO is an unrelated third party, and there were no additional
obligations or elements of financial consideration relating to the sale
transaction. The Company sold the shares for $325 each and recorded a gain on
the sale in the amount of $5.6 million. This transaction lowered the Company's
ownership percentage to 42.9% as of March 31, 1998.
On April 3, 1998 the Company sold 1,539 shares of its Series A preferred
stock in ILD Telecommunications, Inc. to SMCO Investments, LLC. This transaction
lowered the Company's ownership percentage to 42.0% as of April 3, 1998.
On October 21, 1999 the Company sold to First Avenue Partners, LP ("First
Avenue") 5,000 shares of ILD Series A Convertible Preferred Stock. First Avenue
is an unrelated third party. The Company sold the shares for $250.00 each for an
aggregate of $1.3 million and recorded a gain on the sale in the amount of
$1.1 million. There were no additional obligations or elements of financial
consideration relating to the sale transaction. The transaction lowered the
Company's ownership percentage in ILD to 31.0% as of October 21, 1999.
During November 1999, ILD issued additional shares of its stock to unrelated
third parties. As a result, the Company's ownership percentage in ILD was
reduced to 30.0%.
F-8
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EQUIPMENT REVENUE RECOGNITION: Revenues from sales of telephones and
related products are recognized upon shipment to customers.
In December 1999, the Securities & Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS", which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosure related to revenue recognition policies. Management
believes that SAB 101 will not have a material effect on the financial
statements.
SERVICE REVENUE RECOGNITION: For 1997, prepaid debit card revenue was
deferred and recognized as calling services were used. The portion of the
business related to the prepaid calling card services was sold to ILD in January
1998 (See NOTE 17), accordingly no debit card revenue was recorded in 1999 or
1998.
In 1997, call revenues from customer microautomated operator systems are
recognized based on the amounts charged to billed parties for calls processed
and billed by the Company. Additionally, ILD's call revenues were recognized at
the time the calls were placed.
ADVERTISING: The Company's advertising expenditures, which consist
primarily of advertisements placed in trade publications and participation in
trade shows, are expensed as incurred. The Company incurred $.4 million,
$.7 million and $.3 million of advertising expenses for the years ended
December 31, 1999, 1998 and 1997, respectively.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include short-term
liquid investments purchased with remaining maturities of three months or less.
SOFTWARE DEVELOPMENT COSTS: The Company capitalizes costs related to the
development of certain software products. In accordance with STATEMENT OF
FINANCIAL ACCOUNTING STANDARDS NO. 86, "ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED" ("FAS 86"), capitalization
of costs begins when technological feasibility has been established and ends
when the product is available for general release to customers. Amortization is
computed on an individual product basis based on the product's estimated
economic life using the straight line method. Effective January 1, 2000 and as a
result of the impairment charge on capitalized software costs recorded by the
Company on December 31, 1999 (See NOTE 3), the Company decided to expense as
incurred all future costs related to the development of software products for
payphone equipment.
The amounts of software development costs capitalized for the years ended
December 31, 1999, 1998 and 1997 were $1.0 million, $1.0 million and
$1.3 million, respectively. The Company recorded $.9 million, $.6 million and
$1.7 million of software amortization expense for the years ended December 31,
1999, 1998 and 1997, respectively. For the years ended December 31, 1999 and
1997, the Company recognized an impairment in value of capitalized software
development costs of $2.5 million and $1.6 million, which is included in cost of
sales in the statement of operations for those years (See NOTE 3).
RECEIVABLES: Receivables consist of trade accounts receivable and a note
receivable. Trade accounts receivable represents amounts owed by various
customers for equipment sales. The amount of trade accounts receivable as of
December 31, 1999 and 1998 is $1.1 million and $4.4 million. The
F-9
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
allowance for doubtful accounts related to the trade accounts receivable as of
December 31, 1999 and 1998 is $.4 million and $.4 million, respectively. The
Company's credit department determines collectibility based on customer contact
and financial information made available to the Company.
Also included in receivables for the year ended December 31, 1999 is a
$1.2 million note receivable due from New York City Telecommunications ("NYCT').
The NYCT note, due on December 31, 2001, provides for the monthly payment of
interest and principal of $34,238. Through June 1999, NYCT had serviced the note
timely and in full at which time the outstanding principal of the note was
$1.2 million. Since that time no payments have been received. The Company has
initiated legal action for the immediate collection of the principal balance
pursuant to NYCT being in default of the note agreement and has reserved
$.4 million against the note subject to the outcome of the litigation.
Receivables for the year ended December 31, 1998 include the current portion of
the NYCT notes of $.3 million with the remaining portion of the note recorded as
long term notes receivable. As of December 31, 1999, the note principal and its
related reserve of $0.4 million are presented in current assets as receivables.
The receivables from related party are presented net of reserve of
uncollectible accounts of $0.3 million as of December 31, 1999 and 1998. These
receivables consist of amounts due for management and administrative services
provided to ILD Telecommunications.
CREDIT CONCENTRATIONS: Certain financial instruments, consisting primarily
of accounts receivable, potentially subject the Company to concentrations of
credit risk. The Company's customers range from individuals with small pay
telephone routes to large corporations, and reflect a large customer base with
much geographic diversity. The Company believes it has provided adequate
reserves for potential uncollectible accounts.
MAJOR CUSTOMERS: The Company had three customers who accounted for 25.5% or
$2.8 million, 14.6% or $1.6 million, and 10.2% or $1.1 million of the Company's
revenues in 1999, one single customer who accounted for 11.1%, or $1.5 million
of the Company's revenues in 1998, and two customers who accounted for 17.2% or
$3.2 million and 13.3% or $2.5 million of the Company's revenues in 1997.
INFORMATION ABOUT GEOGRAPHIC AREAS: For the years ended December 31, 1999,
1998 and 1997, the Company had sales, to customers in the United States of
$7.7 million, or 69% of total sales, $11.1 million, or 80% of total sales and
$16.7 million, or 87% of total sales, respectively.
The Company's sales to foreign countries represented $3.4 million, or 31% of
total sales, $2.8 million, or 20% of total sales and $2.6 million, or 13% of
total sales, for the years ended December 31, 1999, 1998 and 1997, respectively.
Sales to Canadian companies represented $2.8 million or 82% of sales to foreign
countries in 1999. There were no sales to Canadian companies in 1998 or 1997.
INVENTORIES: Inventories are stated at the lower of cost or market with
cost determined on a first-in, first-out method. Costs include acquisition costs
of purchased components, freight costs, labor and overhead.
DEBT ISSUANCE COSTS: The stock purchase warrants issued in connection with
the issuance of debt obligations are valued by the Company based on the
Black-Scholes model and are recorded in
F-10
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accordance with Accounting Principals Based Opinion No. 14 "Accounting for
convertible Debt and Debt issued with Stock Purchase Warrants" ("APB14").
Accordingly, the Company defers costs incurred directly in connection with the
issuance of debt obligations and charges such costs to interest expense based on
the interest method, over the terms of the respective debt agreements (See
NOTE 7).
FIXED ASSETS: Fixed assets are recorded at cost. Depreciation expense is
computed by the straight-line method over the estimated useful lives of the
related assets, where the useful lives range from three to five years.
Maintenance and repairs are expensed as incurred while replacements and
betterments are capitalized.
INTANGIBLE ASSETS: Intangible assets consisted primarily of the cost in
excess of net assets of acquired businesses. These assets were amortized using
the straight-line method over 20 to 25 years. Based on its most recent analysis,
the Company determined that its goodwill existing at December 31, 1999 was fully
impaired and accordingly, the Company has written off goodwill in the amount of
$.7 million (See NOTE 3).
OTHER ASSETS: Other assets include investments in stock of third parties of
$.3 million and $.6 million as of December 31, 1999 and 1998. Included in these
investments is a 3% equity ownership position in New York City
Telecommunications ("NYCT") which prior to 1999 was recorded on the balance
sheet for $.5 million. Given the current legal situation between Intellicall and
NYCT and the lack of financial information on NYCT, the Company has determined
the current value of this investment to be $.1 million and has reduced the
investment accordingly, recognizing a loss on investment of $.4 million.
INCOME TAXES: Income taxes are accounted for using the asset and liability
method pursuant to STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 109,
"ACCOUNTING FOR INCOME TAXES" ("FAS 109"). Deferred taxes are recognized for the
tax consequences of temporary basis differences by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities.
The effect on deferred taxes for a change in tax rates is recognized in income
in the period that includes the enactment date. In addition, FAS 109 requires
the recognition of future tax benefits to the extent that realization of such
benefits is more likely than not. A valuation allowance is provided for a
portion or all of the deferred tax assets when there is sufficient uncertainty
regarding the Company's ability to recognize the benefits of the assets in
future years.
NET INCOME/LOSS PER SHARE: In February 1997, STATEMENT OF FINANCIAL
ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE" ("FAS 128") was issued. The
Company has adopted FAS 128, which establishes standards for computing and
presenting earnings per share ("EPS"). This statement requires dual presentation
of basic and diluted EPS on the face of the income statement for entities with
complex capital structures and requires a reconciliation of the numerator and
the denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation.
COMPREHENSIVE INCOME: Effective December 31, 1998, the Company adopted
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130, "REPORTING COMPREHENSIVE
INCOME" which establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general-purpose financial statements. It requires all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a
F-11
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
financial statement that is displayed with the same prominence as other
financial statements. There were no items of comprehensive income for the years
ended December 31, 1999, 1998 and 1997.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION: The Company has one
reportable industry segment the equipment segment. The equipment segment
manufactures and sells payphones, switches and related software. The Services
segment, which was discontinued effective October 21, 1999 (See NOTE 16),
provided billing and collection services to owners of payphones who utilize the
Company's automated operator technology.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS: In June 1998, STATEMENT OF FINANCIAL
ACCOUNTING STANDARDS NO. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES" ("FAS 133"), which, as amended, is effective for fiscal years
beginning after June 15, 2000 was issued. Earlier application for certain
provisions of this standard is permitted. FAS 133 establishes accounting and
reporting standards for derivative instruments. The Statement requires that an
entity recognize all derivatives as either assets or liabilities in the
financial statements and measure those instruments at fair value, and it defines
the accounting for changes in the fair value of the derivatives depending on the
intended use of the derivative. Management is evaluating FAS 133 and does not
believe that adoption of the Statement will have a material impact on its
results of operations, financial position or cash flows.
ACCOUNTING FOR STOCK BASED COMPENSATION: In October 1995, STATEMENT OF
FINANCIAL ACCOUNTING STANDARDS NO. 123, "ACCOUNTING FOR STOCK BASED
COMPENSATION" ("FAS 123") was issued. This statement requires the fair value of
stock options and other stock-based compensation issued to employees to either
be included as compensation expense in the income statement or the pro forma
effect on net income and earnings per such of such compensation expense to be
disclosed in the footnotes to the Company's financial statements. The Company
has elected to follow ACCOUNTING PRINCIPLES BOARD OPINION NO. 25, "ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES" ("APB 25") and related interpretations in
accounting for its employee stock options, and accordingly, applies FAS 123 on a
disclosure basis only as permitted under FAS 123 (See NOTE 8). As such, FAS 123
does not impact the Company's balance sheet or results of operations.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to
conform with the current year presentation.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2--EFFECT OF RESTATEMENT
In 1997, ILD acquired the assets of WorldCom as well as all of the
outstanding common stock of Interlink (see Note 17). The issuance of stock by
ILD to third parties in these transactions decreased the Company's percentage of
ownership in ILD and the value assigned to ILD common stock issued under both of
the aforementioned transactions was substantially more than the Company's
carrying amount per share of ILD stock, thus triggering a change in the
Company's interest in ILD. The Company has restated its December 31, 1997 and
December 31, 1998 financial statements in
F-12
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--EFFECT OF RESTATEMENT (CONTINUED)
accordance with Staff Accounting Bulletin ("SAB") Topic 5H, as amended by
SAB 84, to reflect the change of interest in ILD which arose in 1997.
The effects of the restatement at December 31, 1997 and 1998, were: (1) to
increase the investment in ILD by $1.5 million; (2) to recognize a $1.0 million
note receivable from ILD; and (3) to increase additional paid-in capital (and
stockholders' equity) by $2.5 million.
There was no impact to the Company's income statement and cash flows for the
year ended December 31, 1997 or 1998.
NOTE 3--ASSET IMPAIRMENT
The continued decline in the public payphone equipment market during 1999
coupled with the discontinuation of certain product lines and the billing
services segment, led the Company to review the goodwill and capitalized
software costs for impairment.
As a result, the Company performed an impairment analysis of the goodwill in
accordance with STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NO. 121 "ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF" ("FAS 121"), which requires that long-lived assets held and used by an
entity, or to be disposed of, be reviewed for impairment whenever events or
circumstances indicate that the net book value of such assets may not be
recoverable.
During the fourth quarter of 1999, the Company calculated the estimated
future cash flows, undiscounted and before interest, from continuing operations
over a three-year period and determined the goodwill to be impaired.
Consequently, the Company estimated the fair value of the goodwill based on a
discounted cash flow analysis and concluded that the net book value of this
asset of $.7 million needed to be written-off.
During the fourth quarter of 1999, the Company also compared the unamortized
capitalized software costs to their net realizable value, as prescribed under
FAS 86. The Company determined the net realizable value of capitalized software
costs by estimating the future net profits from those assets over a three-year
period and concluded that the net book value of $2.5 million of capitalized
software costs as of December 31, 1999 was not recoverable.
Accordingly, the Company recorded a non-recurring, non-cash write-off of
goodwill and capitalized software costs of $3.2 million, which is presented in
cost of sales in the statement of operations for the year ended December 31,
1999.
During the third quarter of 1997, the Company evaluated the recoverability
of its capitalized switching software costs, as prescribed under FAS 86. After
comparing the net book value of the capitalized switching software costs to the
estimated future net profits from those assets, the Company recognized a
non-recurring, non-cash write-down of capitalized software costs to net
realizable value of $1.6 million.
NOTE 4--RECURRING LOSSES FROM OPERATIONS, WORKING CAPITAL FUNDING
For the year ended December 31, 1999, the Company has continued to
experience significant losses from operations, resulting primarily from a
continuous decrease in revenues due to the decline in the payphone equipment
industry. As a result, the Company has faced difficulty in funding its
operations from internal sources and meeting its cash obligations. During the
year, significant cost-
F-13
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--RECURRING LOSSES FROM OPERATIONS, WORKING CAPITAL FUNDING (CONTINUED)
cutting measures have been undertaken by the Company. In addition, the Company
has consistently looked for external financial support or has sold existing
assets in order to meet these cash obligations.
Additionally, during the fourth quarter of 1999, the Company received a
letter from Banca del Gottardo ("Banca") stating its intention to "Put" to the
Company its option to require repayment of the $2.6 million 8% convertible
subordinated notes (originally due on December 31, 2000) in December 1999. The
Company was able to negotiate an extension of the "Put" option up to June 30,
2000 (See NOTE 7).
In order to address their current liquidity needs, management sold to Banca
del Gottardo the Company's ownership in ILD (See NOTE 19). The proceeds from
this transaction were $15.5 million. A portion of the proceeds was used to pay
down existing debt, including the "Put" due June 30, 2000. The remainder of the
proceeds will be used to fund future operations. Such reduction in debt is
expected to deleverage the Company and put management in a better position to
move forward with their current business plan.
Management of the Company believes that the proceeds from the sale of the
Company's ownership in ILD will enable the Company to finance its operations for
the year ending December 31, 2000. Beyond 2000, the Company's ability to obtain
further funds from external sources will depend on its ability to find new
strategic partners and opportunities. Although management of the Company
believes that the Wireless Webconnect! acquisition will provide a strategic
partnership, there can be no assurance that the condition's precedent to the
merger will be satisfied or that the merger will be consummated. In the event of
the consummation of merger, there can be no assurance that under such
conditions, external funds would be available or, if available, would not
potentially dilute shareholders' interests or returns.
NOTE 5--INVENTORIES
The components of inventories are (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Raw materials............................................... $ 3,362 $ 3,629
Work in process............................................. 133 428
Finished goods.............................................. 1,003 3,150
------- -------
4,498 7,207
Less reserves for obsolescence.............................. (1,410) (2,030)
------- -------
Net inventory............................................... $ 3,088 $ 5,177
======= =======
</TABLE>
Results of operations for the years ended December 31, 1998 and 1997 also
include a charge of $.1 million and $4.4 million which represents the excess of
cost over market.
F-14
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--FIXED ASSETS
The components of fixed assets are (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Office equipment.......................................... $ 3,404 $ 3,351
Tooling and other equipment............................... 5,001 5,010
------- -------
8,405 8,361
Less accumulated depreciation............................. (7,425) (6,936)
------- -------
$ 980 $ 1,425
======= =======
</TABLE>
Depreciation expense for the years ended December 31, 1999, 1998 and 1997
was $.5 million, $.7 million and $1.3 million, respectively.
NOTE 7--LONG-TERM DEBT AND LINE OF CREDIT
The Company's debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
8% Convertible subordinated notes, due 2000................ $ 2,630 $2,630
8% Convertible subordinated notes, due 2001................ 5,000 5,000
7% Convertible subordinated notes, due 2004................ 2,000 --
Convertible subordinated note, due 1999.................... -- 1,000
Asset-based note collateralized by certain assets, due
1999..................................................... -- 2,811
------- ------
9,630 11,441
Less: Unamortized debt discount............................ (443) (318)
------- ------
9,187 11,123
------- ------
Less: Current portion of long-term debt.................... (7,630) (3,811)
------- ------
Total long-term debt................................. $ 1,557 $7,312
======= ======
</TABLE>
On February 15, 1994 the Company issued a $1.0 million, 10.0%, convertible,
subordinated note to T.J. Berthel Investments, L.P., whose ownership also
controls 3.9% of the Company's outstanding common stock. Interest was payable
quarterly and commenced March 31, 1994. The Company paid the entire principal
amount, including any accrued interest, on April 9, 1999.
On December 29, 1995 the Company completed the sale of $7.5 million of 8.0%
convertible subordinated notes, due December 31, 2000, to Banca Del Gottardo
with the proceeds used to repay the previous lender and for working capital
purposes. The notes were issued with warrants to purchase 300,000 shares of the
Company's common stock at $4.20 per share. As a result of activating certain
anti-dilution provisions, the warrants entitle the holder to purchase 418,507
shares of common stock, exercisable at $3.01 per share. The unamortized portion
of the deferred debt costs recorded by the Company in connection with those
warrants was $42,081 and $84,161 as of December 31, 1999 and 1998. Additionally,
a third party holds an additional warrant to purchase 313,500 shares of common
stock exercisable at $2.68 per share. The notes are convertible into 1,785,714
shares of the Company's
F-15
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--LONG-TERM DEBT AND LINE OF CREDIT (CONTINUED)
common stock at a price of $4.20 per share. As of December 31, 1998, $4.87
million of the Banca Del Gottardo Notes were converted to 1,159,517 shares of
the Company's common stock. Interest is payable semi-annually and commenced June
30, 1996.
On November 22, 1996 the Company completed the sale of $5.0 million of 8.0%
convertible subordinated notes, due November 22, 2001, to Banca Del Gottardo,
with the proceeds used to repay a portion of the previous lender's debt and for
working capital purposes. These notes contain an optional redemption clause
("Put") where, on November 22, 2000, at the holder's discretion, the holder can
Put to the Company the balance of the notes at 106% of the outstanding principal
amount. The notes were issued with warrants to purchase 200,000 shares of the
Company's common stock at $5.00 per share. As a result of activating certain
anti-dilution provisions, the warrants entitle the holder to purchase 255,643
shares of Common Stock, exercisable at $3.91 per share. The unamortized portion
of the deferred debt costs recorded by the Company in connection with those
warrants was $153,334 and $233,333 as of December 31, 1999 and 1998. In
addition, a third party holds an additional warrant to purchase 209,473 shares
of common stock at $3.58 per share. The notes are convertible into one million
shares of the Company's common stock at a price of $5.00 per share. Interest is
payable semi-annually beginning May 1997.
Total interest paid to Banca del Gottardo for the year ended December 31,
1999 was $.7 million.
On November 22, 1996 the Company entered into a Loan and Security Agreement
(the "Loan Agreement") with Finova Capital Corporation ("Finova) pursuant to
which Finova agreed to loan the Company up to $12.0 million (the "Loan") based
on an available borrowing base. The borrowing base consisted primarily of call
traffic and trade equipment receivables and inventory, subject to eligibility
requirements determined by Finova. Amounts loaned subject to the borrowing base
were determined by percentages established in the Loan Agreement.
The initial term of the Loan Agreement was three years. The Loan was secured
by first and prior liens and security interests encumbering substantially all of
the assets of the Company, including inventory, equipment, accounts receivable,
general intangibles, trademarks and tradenames. The Loan Agreement contains
various restrictions (including a prohibition against the payment of dividends,
limitations on capital expenditures, and restrictions on investments) and
financial ratio maintenance requirements (including minimum working capital and
net worth requirements). On January 28, 1999, the Company retired all of its
obligations to Finova.
On January 27, 1999, the Company closed and commenced funding under a
Receivable Sale Agreement (the "RFC Agreement") with RFC Capital Corporation
("RFC") pursuant to which RFC has agreed to purchase from the Company certain
telecommunication receivables generated by the Company in the ordinary course of
the Company's business. The proceeds from the initial sale of receivables were
used to pay all of the Company's obligations to Finova and for working capital
purposes. The RFC Agreement calls for RFC to purchase eligible receivables from
the Company from time to time upon presentation thereof for a purchase price
equal to the net value of such receivables. Net value is designed to yield RFC
an effective rate of prime plus 2.75% plus allow RFC to retain a holdback of
5.00% in the face amount of the receivables, net of collections, against future
collection risk. For the year ended December 31, 1999, the Company incurred $.2
million of interest expense relating to this agreement.
F-16
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--LONG-TERM DEBT AND LINE OF CREDIT (CONTINUED)
Under the RFC Agreement, the Company performs certain servicing,
administrative and collection functions with respect to the receivables sold to
RFC. Also, pursuant to the terms of the RFC Agreement, the Company has granted
to RFC a security interest in and to the Company's receivables not sold to RFC
and the Company's customer base relating to the generation of such accounts
receivable.
The initial term of the RFC Agreement expires on December 21, 2000.
On April 9, 1999 the Company obtained bridge financing of $1.0 million from
Banca del Gottardo for the purpose of satisfying all obligations to T.J. Berthel
Investments.
On June 11, 1999 the Company completed the sale of $2.0 million of a 7.0%
convertible subordinated note, due June 11, 2004, to Banca del Gottardo. $1.0
million of the net proceeds from the sale of the note was used to repay the
bridge financing, with the balance utilized for working capital. The note was
issued with warrants to purchase 200,000 shares of the Company's common stock at
$1.55 per share. The stock purchase warrants were valued at $160,456 and
recorded as deferred debt costs by the Company. The unamortized portion of those
deferred debt costs was $141,779 as of December 31, 1999. The note is
convertible into 1,290,323 shares of the Company's common stock at a price of
$1.55 per share. Interest is payable semi-annually beginning December 1999. In
connection with issuing the notes, the Company collateralized the note with
35,000 shares of ILD Series A preferred stock.
On October 21, 1999 the Company received notice from Banca del Gottardo of
its intent to "Put" to the Company the balance of the 8.0% convertible
subordinated notes due December 31, 2000. The agreement, relating to such
convertible debt includes a Put option, giving Banca del Gottardo the right to
tender payment for the outstanding balance of the notes on December 31, 1999.
On December 30, 1999 the Company issued warrants to purchase 200,000 shares
of its Common Stock at a price of $1.00 per share to Banca del Gottardo. In
consideration of the warrants, Banca del Gottardo amended the 8% convertible,
subordinated notes due December 31, 2000 to postpone the Put on the notes from
December 31, 1999 to June 30, 2000. The stock purchase warrants were valued at
$106,200 and recorded as deferred debt costs by the Company.
Aggregate maturities of long-term debt in the next five years are $2.6
million, $5.0 million, $0, $0 and $2.0 million.
NOTE 8--STOCK-BASED COMPENSATION
As permitted under FAS 123, the Company applies APB 25, and related
interpretation, in accounting for its employee stock options. In accordance with
APB 25, no compensation expense or unearned compensation was recorded for the
years ended December 1999, 1998 and 1997. As discussed in NOTE 1, the Company
has adopted the disclosure-only provisions of FAS 123. Had compensation cost for
the Company's stock option plans been determined based on the fair value
provisions of
F-17
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCK-BASED COMPENSATION (CONTINUED)
FAS 123, the Company's net loss per share would have been increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
----------- ---------- -----------
<S> <C> <C> <C>
Net loss
As reported.......................................... $ 9,988,000 $1,856,000 $11,091,000
Pro forma............................................ $10,320,000 $2,410,000 $12,179,000
Basic and diluted net loss per share
As reported.......................................... $ 0.82 $ 0.19 $ 1.20
Pro forma............................................ $ 0.85 $ 0.24 $ 1.31
</TABLE>
The pro forma disclosures provided are not likely to be representative of
the effects on reported net income or loss for future years due to future grants
and the vesting requirements of the Company's stock option plans. The fair value
of each grant is estimated on the date of grant using the Black-Scholes Option
pricing model with the following weighted-average assumptions used for grants
during the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Dividend yield.......................................... -- -- --
Expected volatility..................................... 51.20% 46.85% 66.95%
Risk free interest rate................................. 4.94% 5.59% 5.96%
Option term............................................. 10 years 10 years 9 years
</TABLE>
The weighted average fair value for all options granted in 1999, 1998 and
1997 was $2.03, $2.86 and $3.53 respectively.
F-18
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--STOCK OPTION PLANS
The Company maintains a Nonqualified Stock Option ("NSO") Plan, an Incentive
Stock Option ("ISO") Plan (as amended), a Directors' Stock Option Plan ("DSO")
(adopted in 1991) and Other Directors Options Plan. The number of shares which
may be granted under the NSO, ISO Plans, DSO Plans and other Directors' Option
Plan may not exceed 600,000, 1,304,400, 350,000 and 67,500, respectively. ISO's
and NSO's are exercisable at such times and in such installments as the
Organization and Compensation Committee of the Board of Directors (the
"Committee") shall determine at the time of grant. In the case of ISO's and
DSO's, the option price of the shares cannot be less than the fair market value
of the underlying common stock at the date of the grant. In the case of NSO's,
the option price is determined by the Committee and cannot be less than 85% of
the fair market value of the underlying common stock. Options expire at such
time as the Committee shall determine at the time of grant, but in the case of
ISO's and DSO's no later than ten years from the grant date. Options vest as
follows: 50% on December 31 of the year of grant and 25% on December 31 of the
following two years. All options granted under all plans in 1999, 1998 and 1997
were issued at the fair market value of the Company's common stock.
NSO, ISO, DSO PLANS
Stock option activity under the NSO, ISO, DSO and Other Directors' Options
Plans was:
<TABLE>
<CAPTION>
OTHER DIRECTORS'
NSO ISO DSO OPTIONS
------------------- -------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
OPTION OPTION OPTION OPTION
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------- -------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at December 31, 1996.... 600,000 $4.61 1,141,615 $5.24 200,000 $5.70 60,000 $11.08
Granted............................. -- -- 239,880 $4.62 -- -- -- --
Exercised........................... -- -- (63,925) $4.21 -- -- -- --
Canceled............................ -- -- (120,065) $5.28 (30,000) $6.04 -- --
------- --------- ------- -------
Outstanding at December 31, 1997.... 600,000 $4.61 1,197,505 $5.17 170,000 $5.64 60,000 $11.08
Granted............................. -- -- 207,500 $4.27 30,000 $4.56 -- --
Exercised........................... -- -- (46,715) $3.96 -- -- -- --
Canceled............................ -- -- (129,085) $5.49 -- -- (15,000) $ 7.56
------- --------- ------- -------
Outstanding at December 31, 1998.... 600,000 $4.61 1,229,205 $5.03 200,000 $5.48 45,000 $12.25
Granted............................. -- -- 6,500 $3.00 -- -- -- --
Canceled............................ -- -- (308,950) $5.32 (80,000) $5.23 (32,500) $11.87
------- --------- ------- -------
Outstanding at December 31, 1999.... 600,000 $4.61 926,755 $4.92 120,000 $5.64 12,500 $13.25
======= ========= ======= =======
</TABLE>
At December 31, 1999, 1998 and 1997, there were no shares available to be
granted under the NSO plan.
At December 31, 1999, 1998 and 1997, there were 4,305, 392,455 and 870
shares, respectively, available for grant under the ISO Plan.
F-19
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--STOCK OPTION PLANS (CONTINUED)
At December 31, 1999, 1998 and 1997, there were 180,000, 100,000 and 130,000
shares, respectively, available for grant under the DSO Plan.
At December 31, 1999, 1998 and 1997, there were 47,500, 15,000 and zero
shares, respectively, available for grant under the Other Directors' Options
Plan.
The following table summarizes options exercisable under each plan at the
end of each year:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED AVERAGE
EXERCISABLE EXERCISE PRICE
----------- ----------------
<S> <C> <C>
At December 31, 1997:
NSO Plan.................................................. 600,000 $4.61
ISO Plan.................................................. 1,052,971 $5.24
DSO Plan and other Director's Options..................... 230,000 $7.06
At December 31, 1998:
NSO Plan.................................................. 600,000 $4.61
ISO Plan.................................................. 1,071,580 $5.12
DSO Plan and other Director's Options..................... 235,000 $6.81
At December 31, 1999:
NSO Plan.................................................. 600,000 $4.61
ISO Plan.................................................. 873,255 $4.96
DSO Plan and other Director's Options..................... 132,500 $6.36
</TABLE>
The following tables summarize information about the fixed-price stock
options outstanding at December 31, 1999:
NSO PLAN
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------------------
WEIGHTED-AVERAGE
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/99 CONTRACTUAL LIFE EXERCISE PRICE
--------------- ----------- ---------------- ----------------
<S> <C> <C> <C>
$3.625 430,000 2.9 years $3.63
$6.625 100,000 1.1 years $6.63
$7.750 70,000 0.6 years $7.75
-------
$3.625 -
7.750.......... 600,000 2.3 years $4.61
=======
</TABLE>
F-20
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--STOCK OPTION PLANS (CONTINUED)
ISO PLAN
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------------------
WEIGHTED-AVERAGE
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/99 CONTRACTUAL LIFE EXERCISE PRICE
--------------- ----------- ---------------- ----------------
<S> <C> <C> <C>
$1.688 25,000 9.0 years $1.69
$3.00 - 4.50... 470,875 4.5 years $3.81
$4.625 -
6.625.......... 308,880 7.2 years $5.09
$7.75 -
10.375......... 122,000 3.2 years $9.42
-------
$1.688 -
10.375......... 926,755 5.4 years $4.92
=======
</TABLE>
DSO PLAN & OTHER DIRECTORS' OPTIONS
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------------------
WEIGHTED-AVERAGE
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/99 CONTRACTUAL LIFE EXERCISE PRICE
--------------- ----------- ---------------- ----------------
<S> <C> <C> <C>
$3.50 30,000 6.1 years $ 3.50
$4.56 30,000 8.1 years $ 4.56
$6.25 40,000 3.2 years $ 6.25
$9.25 20,000 4.1 years $ 9.25
$13.25 12,500 0.2 years $13.25
-------
$3.50 - 13.25.. 132,500 4.8 years $ 6.36
=======
</TABLE>
NOTE 10--EMPLOYEE STOCK PURCHASE PLAN
On November 16, 1995 the Company adopted the Intellicall Employee Stock
Purchase Plan (the "ESPP"). After the offering period ending December 31, 1999,
there remain authorized and available for sale to employees an aggregate of
250,560 shares of the Company's common stock. The maximum number of shares
available for sale under the ESPP is determined on the date of grant and equals
the sum of the payroll deductions authorized by each participating employee (up
to 10.0% of regular pay) divided by 85.0% of the lower of the fair market value
of a share of common stock on either the first or last trading day of each
offering period. Each offering period is approximately six months in duration
and commences on the first trading day on or after January 1 and terminates on
the last trading day ending the following June 30, or commences on the first
trading day on or after July 1 and terminates on the last trading day ending the
following December 31. Under the ESPP, 8,190 shares were issued at $3.936 for
the offering period ended June 30, 1997; 4,911 shares at $3.825 for the offering
period ended December 31, 1997; 3,335 shares at $3.347 for the offering period
ended June 30, 1998; 1,603 shares at $1.859 for the offering period ended
December 31, 1998; 5,790 shares at $1.06 for the offering period ended June 30,
1999; and 719 shares at $.956 for the offering period ended December 31, 1999.
F-21
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--STOCKHOLDERS' EQUITY
COMMON STOCK: On December 30, 1999 the Company sold 1.0 million shares of
its common stock to Banca del Gottardo for $.85 per share. The purchase price
represented a 15% discount to the closing price of the Company's common stock
upon the agreed upon date of December 22, 1999. Proceeds from the sale of the
Company's stock of $.9 million were utilized for working capital purposes.
At December 31, 1999, there were 3,256,378 shares of common stock reserved for
options and warrants. At December 31, 1999, there were 250,560 shares of common
stock reserved for the Company's Employee Stock Purchase Plan.
PREFERRED STOCK: On July 21, 1997 (the "Closing Date") the Company entered
into a Securities Purchase Agreement (the "Purchase Agreement") with four
institutional investors (the "Investors") pursuant to which the Investors
purchased $4,000,000 of the Company's Series A Convertible preferred stock (the
"preferred stock"). The Company utilized the net proceeds from the sale of the
preferred stock (approximately $3,800,000) to pay down indebtedness to Finova.
As of December 31, 1999, all of the Company's Series A convertible preferred
stock had been converted for 2.5 million shares of common stock.
COMMON STOCK PURCHASE WARRANTS: In connection with the December 29, 1995
subordinated debt issuance discussed in NOTE 7, and a result of activating
certain anti-dilution provisions, Banca Del Gottardo holds warrants entitling
the holder to purchase 418,507 shares of common stock, exercisable at $3.01 per
share. These warrants vested immediately and expire upon the date of maturity of
the underlying debt.
In connection with the issuance of the subordinated debt, a third party
holds an additional Warrant to purchase 313,500 shares of common stock
exercisable at $2.68 per share. These warrants vested immediately and expire
upon the date of maturity of the underlying debt.
On November 22, 1996, the Company issued additional subordinated debt to
Banca Del Gottardo as discussed in NOTE 7, and as a result of activating certain
anti-dilution provisions, Banca Del Gottardo holds warrants entitling the holder
to purchase 255,643 shares of common stock at $3.91 per share. In addition, a
third party holds an additional warrant to purchase 209,473 shares at $3.58.
These warrants vested immediately and expire upon the date of maturity of the
underlying debt.
On June 11, 1999, the Company issued additional subordinated debt to Banca
del Gottardo as discussed in NOTE 7. The notes were issued with warrants to
purchase 200,000 shares of the Company's common stock at $1.55 per share.
On August 10, 1999 the Company issued a warrant, effective June 21, 1999 to
Paytel Canada, Inc. (the "Holder") entitling the holder to subscribe for and
purchase, during the period specified in the warrant, 500,000 shares of common
stock. This warrant has been granted to the Holder in exchange for its
commitment to purchase up to $30.0 million of products and services from the
Company. For each $1.0 million actually received by the Company from the Holder
for payment of purchases of products and services from the Company from and
after the date of this warrant, there shall vest in the Holder the right to
purchase 12,500 shares of common stock at a price of $1.30 per share.
In addition, upon receipt by the Company from the Holder of aggregate
payments equal to $30.0 million, there shall vest in the Holder the right to
purchase an additional 125,000 shares of common stock at a price of $1.30 per
share.
F-22
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--STOCKHOLDERS' EQUITY (CONTINUED)
The warrant is effective June 21, 1999 and expires on January 19, 2004. As
of December 31, 1999, the Holder has yet to accrue a vested interest in the
issued warrant, as the Company has not received $1.0 million worth of payments
from Paytel since June 22, 1999.
On December 30, 1999 the Company issued warrants to purchase 200,000 shares
of its Common Stock at a price of $1.00 per share to Banca del Gottardo (See
NOTE 7).
NOTE 12--INCOME TAXES
The components of the income tax benefit are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.............................................. $ 0 $0 $0
State................................................ 0 0 0
-------- -- --
Total Current.......................................... $ 0 $0 $0
-------- -- --
Deferred
Federal.............................................. $ (1,500) $0 $0
State................................................ 0 0 0
-------- -- --
Total Deferred......................................... (1,500) 0 0
-------- -- --
Total Income Tax Benefit............................... $ (1,500) $0 $0
======== == ==
</TABLE>
Differences between the expected income tax benefit calculated using the
statutory federal income tax rate and the actual income tax provision are (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Expected income tax benefit at the statutory rate........... $(3,905) $(631) $(3,759)
Amortization of cost in excess of net assets of acquired
businesses................................................ 255 31 31
Other
Minority interest......................................... -- -- 277
Other..................................................... 2 (1) 6
Operating loss not benefited.............................. 2,148 601 3,722
------- ----- -------
Income tax (benefit) provision.............................. $(1,500) $ -- $ 277
======= ===== =======
</TABLE>
The tax effect of temporary differences that give rise to a significant
portion of deferred tax assets and deferred tax liabilities consisted primarily
of timing differences in the recognition of license fee revenues and related
costs, provisions for doubtful accounts in excess of write-offs, warranty costs,
inventory reserves, gain or loss on sale of assets, software development and
operator services costs, and excess tax depreciation.
F-23
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and deferred tax
liabilities under FAS 109 are (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Bad debt reserves......................................... $ 239 $ --
Investment in subsidiary.................................. 1,100 824
Other reserves and accruals............................... 654 974
Net operating loss carryforwards.......................... 18,228 16,238
Unused alternative minimum tax credits.................... 127 127
Deferred revenue........................................ 420 86
Depreciation and amortization........................... 363 --
Total gross deferred tax assets............................. 21,131 18,249
Deferred tax liabilities:
Bad debt reserves......................................... -- (183)
Depreciation and amortization............................. -- (584)
Total gross deferred tax liabilities........................ -- (767)
Less valuation allowance.................................... (19,631) (17,482)
Net deferred tax assets..................................... $ 1,500 $ --
------- -------
</TABLE>
The valuation allowance on deferred tax assets reflects the Company's
uncertainty regarding realization of such assets due to recent operating loss
trends. The Company expects that the sale of the ILD stock (See Note 19) will
give rise to taxable income in the year 2000 and accordingly has reduced its
valuation allowance.
At December 31, 1999 the Company has net operating loss carryforwards of
approximately $53.6 million for federal income tax reporting purposes. Such
carryforwards, which may provide future tax benefits, expire as follows:
<TABLE>
<S> <C>
2007............................................... $ 4,600
2008............................................... $16,000
2009............................................... $11,000
2010............................................... $ 2,000
2011............................................... $ 8,000
2018............................................... $ 7,000
2019............................................... $ 5,000
-------
$53,600
</TABLE>
Additionally, in conjunction with the Alternative Minimum Tax ("AMT") rules,
the Company has available an AMT credit carryforward for tax purposes of
$126,541. Such credit may be carried forward indefinitely as a credit against
regular tax liability.
F-24
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss per share has been computed in accordance with
FAS 128 and is based on the weighted average number of common shares outstanding
during 1999, 1998 and 1997. The weighted average shares of common stock
outstanding were 12,132,000, 9,927,000 and 9,268,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
The diluted per share calculation gives effect to all dilutive potential
common shares that were outstanding during the period. The Company had a net
loss for each of the three years ended December 31, 1999, 1998 and 1997; the
shares of Series A preferred stock, convertible into common stock (See
NOTE 11), the options (See NOTE 9), the warrants outstanding (See NOTE 7 and
NOTE 11) and the shares of common stock to be issued upon conversion of debt to
equity (See NOTE 7) at each of the period ends were excluded from the diluted
net loss per share calculation for the years ended December 31, 1999, 1998, and
1997, as they were anti-dilutive.
NOTE 14--COMMITMENTS
The Company leases its office space, manufacturing facility, and certain
office equipment under operating leases.
Future minimum rental commitments under noncancelable operating leases are
(in thousands):
<TABLE>
<S> <C>
2000........................................................ $429
2001........................................................ 365
2002........................................................ 155
2003........................................................ --
2004 and thereafter......................................... --
----
$949
====
</TABLE>
Total operating lease expense was $591,000, $610,000, and $1,011,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents,
accounts receivable, receivables from related party, notes receivable, accounts
payable and long-term debt. Because of their short maturity, the carrying values
of cash and cash equivalents, accounts receivable, receivables from related
party, notes receivable and accounts payable approximate their fair values. The
fair value of long-term debt was determined by discounting expected cash flows
at discount rates currently available to the Company for debt with similar terms
and remaining maturities.
F-25
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying values and estimated fair values of the Company's financial
instruments at December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents.............................. $ 694 $ 694 $ 16 $ 16
Accounts receivable.................................... $1,455 $1,455 $ 4,263 $ 4,263
Receivables from related party......................... $1,258 $1,258 $ 1,658 $ 1,658
Notes receivable....................................... $ -- $ -- $ 1,074 $ 1,074
Accounts payable....................................... $1,798 $1,798 $ 2,085 $ 2,085
Long-term debt......................................... $9,187 $8,389 $11,123 $10,404
</TABLE>
NOTE 16--DISCONTINUED OPERATIONS
On September 22, 1999 the Company elected to discontinue its billing
services operations effective October 21, 1999. The billing services segment of
the Company's business was determined to be unprofitable after taking into
account the administrative and support costs for the segment. The Company's
billing services system is a combination of hardware and software that performs,
without human intervention, all the functions necessary for completing an
operator assisted payphone call (i.e., collect, calling card and credit card
calls) and a range of other payphone services and features. During the years
ended December 31, 1999, 1998 and 1997, the Company reported a net loss from
discontinued operations of $.7 million, a net income of $.01 million, and a net
income of $.6 million, respectively. As a result of this action, the Company's
revenues and operating expenses for the periods presented herein reflect only
the equipment operations with the net results of the billing services operations
reported on its statements of operations under the caption "Income (loss) from
discontinued operations." Net revenues related to the discontinued billing
services operations were $9.3 million, $25.8 million and $37.2 million for the
years ended December 31, 1999, 1998 and 1997, respectively.
Assets of the billing services operations disposed of consisted of
receivables of $.5 million, net of $1.8 million of allowance for doubtful
accounts as of December 31, 1999 and $3.6 million, net of $3.2 million of
allowance for doubtful accounts as of December 31, 1998.
Liabilities of the billing services operations disposed of consisted of
payables of $.01 million as of December 31, 1999 and $.9 million as of
December 31, 1998.
The Company expects to dispose of the net assets from discontinued
operations through collection of the remaining receivables and payment of
outstanding payables.
The Company believes there is no tax impact resulting from the discontinued
operations as the Company has historically been in a net loss carryforward
position, and has a valuation allowance reserved against its deferred tax
assets.
NOTE 17--ACQUISITIONS MADE BY ILD TELECOMMUNICATIONS
On September 2, 1997 the Company announced that its majority owned
subsidiary, ILD, purchased the operator services business and related assets
from WorldCom. The assets acquired by ILD include the operator services and
related long distance customer contracts, operator service centers in San
F-26
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--ACQUISITIONS MADE BY ILD TELECOMMUNICATIONS (CONTINUED)
Antonio, Texas, Las Vegas, Nevada and Boca Raton, Florida and switching
facilities in Dallas, Texas and Los Angeles, California as well as WorldCom's
billing and collection operations and inmate operator services businesses. ILD
also entered into a long-term operator services agreement with WorldCom to
handle the international and domestic operator services requirements of
WorldCom. In addition, ILD entered into a network services contract with
WorldCom.
The acquisition was accounted for under the purchase method as prescribed by
Accounting Principles Board No. 16 "Business Combinations". The results of
operations of the acquired business are included in the consolidated financial
statements from the date of acquisition through December 31, 1997. The purchase
price was $21.4 million net of $1.2 million of liabilities assumed. ILD
accomplished the acquisition of WorldCom's net assets through issuance of the
following:
(i) $.6 million in cash;
(ii) 111,960 shares of redeemable preferred stock at $100 per share;
(iii) 34,403.67 shares of its common stock valued at $3.7 million; and
(iv) loan agreements with NationsBank in the amount of $6.2 million
(including $.3 million of debt costs.
Approximately $15.5 million was assigned to the excess of purchase price
over the fair value of net assets of the business acquired. The asset is
amortized using the straight-line method over 25 years. Also, $2.5 million was
assigned to contracts acquired and are being amortized over 6 years.
The following unaudited proforma consolidated results of operations for the
year ended December 31, 1997 is presented as if the WorldCom acquisition had
been made at the beginning of the period presented. The unaudited proforma
information is not necessarily indicative of either the results of operations
that would have occurred had the purchase been made during the period presented
or the expected future results of the combined operations. The Company's
financial statements have not been consolidated with those of ILD's for the
years ended December 31, 1999 or 1998, and therefore, have not been included in
the following table.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------
(IN THOUSANDS, EXCEPT PER
SHARE)
<S> <C>
Net sales.................................................. $168,862
Net loss available to common shareholders.................. (11,027)
Basic and diluted net loss per common share................ (1.19)
</TABLE>
On December 15, 1997 ILD also acquired all of the outstanding common stock
of Interlink, a switched reseller of long distance services and provider of
enhanced services including operator services, prepaid calling cards and prepaid
local service. Interlink is located in Atlanta, Georgia and principally serves
the southeastern United States.
The acquisition was accounted for as a purchase whereby the excess purchase
price over net assets acquired was recorded based upon the fair values of assets
acquired and liabilities assumed. The results of operations of the acquired
business were included in the consolidated financial statements from the date of
acquisition through December 31, 1997. The purchase price was $11.4 million. ILD
F-27
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--ACQUISITIONS MADE BY ILD TELECOMMUNICATIONS (CONTINUED)
accomplished the acquisition of the Interlink common stock through issuance of
the following consideration:
(i) $2.0 million in cash;
(ii) $2.7 million in the form of a promissory note;
(iii) $1.0 million in the form of a promissory note;
(iv) 16,117 shares of ILD's common stock valued at $175 per share;
(v) 6,667 shares of ILD's Series B-3 Redeemable Preferred Stock valued at
$300 per share which is mandatorily redeemable; and
(vi) $.9 million, payable $.5 million on June 1, 1998 and $.4 million on
June 1, 1999, for a five year consulting agreement.
Approximately $10.6 million has been assigned to the excess of purchase
price over the fair value of net assets of the business acquired. The asset is
amortized using the straight-line method over 25 years. Also $2.0 million was
assigned to the non-compete agreement and is being amortized over 5 years.
On January 1, 1998 the Company sold its prepaid services operation to ILD in
exchange for:
(i) $2.0 million in cash;
(ii) forgiveness of the Company's promissory note in the original principal
amount of $2 million which had previously been executed and delivered to
ILD to purchase 18,348.62 shares of ILD common stock valued at $109 a
share; and
(iii) a $1.0 million promissory note due at the earlier of the date of ILD's
public offering or December 31, 1998.
The cash proceeds were used to further reduce the Company's indebtedness to
Finova. The Company recorded a $.8 million gain on the sale of the prepaid
services operation with the balance recorded as deferred gain on sale of assets
to an unconsolidated investee. As of December 31, 1999, the Company had
$.7 million of deferred gain.
F-28
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 18--LITIGATION AND CONTINGENCIES
The Company is subject to ordinary legal proceedings incidental to and
arising in the normal course of its business. It is the opinion of the
management of the Company that the ultimate disposition of these proceedings
will not have a material adverse effect on the Company's financial position or
results of operations.
In April 1997, U.S. Long Distance, Inc. ("USLDI") filed a Second Amended
Complaint against the Company, the ("Lawsuit"). The complaint sought actual
damages of $4.0 million, exemplary damages, attorney's fees and interest for the
Company's alleged tortious interference of USLDI's existing and prospective
contractual relationships with PhoneTel Technologies, Inc. ("PhoneTel"). The
Second Amended Complaint alleged the Company and its then subsidiary,
Intellicall Operator Services, Inc., interfered with USLDI's existing
contractual relationship with PhoneTel, another defendant, when PhoneTel
executed an operator services agreement with the Company and its subsidiary. On
July 24, 1998, the Company, Intellicall Operator Services and ILD settled the
Lawsuit with USLDI through the collective payment of $225,000 (of which $112,500
was paid by the Company) and execution of a mutual release of all claims.
NOTE 19--SUBSEQUENT EVENTS
On January 4, 2000 the Company was notified by ILD of its intention to
redeem Intellicall's interest in ILD's Series B preferred convertible stock. ILD
is to redeem 5,000 shares for $100 per share plus accrued and unpaid dividends
by April 11, 2000. As of June 30, 2000, ILD had remitted $.3 million to the
Company, redeeming 1,975 shares of the Series B preferred convertible stock and
becoming current on all accrued and unpaid dividends. Proceeds from the sale
were used for general operating purposes.
On January 18, 2000, Intellicall entered into a definitive agreement to
acquire, through the exchange of common stock of Intellicall, Heads Up
Technologies, Inc. ("Heads Up") of Carrollton, Texas. Heads Up designs,
manufactures and markets interactive digital products for the aviation, mass
transit and entertainment industries. Heads Up sells computerized products to
nearly 1,250 customers in more than 10 countries. Pursuant to the merger
agreement, Intellicall and Heads Up have agreed to an exchange ratio of
approximately (1.3) shares of Intellicall common stock for each share of Heads
Up common stock. This will result in the Heads Up shareholders being issued
approximately 11.7 million shares of Intellicall common stock, resulting in such
shareholders owning approximately 46.8% of the issued and outstanding
Intellicall common stock following such merger. The merger was subject to a
number of conditions, including without limitation, approval by Intellicall's
stockholders. 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. The Company's management is currently actively
pursuing other opportunities.
On February 11, 2000 the Company signed a $.5 million revolving promissory
note with Bank of America due February 11, 2001. Interest is payable monthly at
the Prime Rate commencing on March 11, 2000 with the principal of the note
guaranteed by Bill Hunt, Chairman of the Board of Intellicall. The Company may
repay and re-borrow under the terms of the note at any time, up to a maximum
aggregate outstanding balance equal to the principal amount of the note.
Proceeds of the note were used for working capital purposes.
F-29
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 19--SUBSEQUENT EVENTS (CONTINUED)
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 due from ILD to Intellicall, dated
May 10, 1996. Pursuant to the sale to Banca del Gottardo, Intellicall informed
ILD as of March 10, 2000 of it's election to convert the entire principal
balance of the Note into 11,111 shares on ILD Common stock.
The terms of the offer 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 also has a right of first refusal, should Banca del
Gottardo transfer or sell the ILD stock to a third party. This offer has been
communicated to ILD and ILD shareholders in accordance with the ILD
Shareholders' Agreement referencing ILD's and ILD shareholders' rights to match
the offer and exercise certain co-sale rights.
The Company received $1.0 million on March 13, 2000 from Banca del Gottardo
as an advance payment toward the ILD stock sale with the balance of the proceeds
received on April 27, 2000. A portion of the proceeds was 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 NOTE 7). The remaining
proceeds will be used for general operating purposes.
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% 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.
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 7).
On August 30, 2000, the Company signed a definitive agreement to acquire
Wireless WebConnect!, Inc, a nationwide wireless Internet Service Provider. The
merger will allow Intellicall to enter into the rapidly growing high-speed
wireless mobile data access market and will provide Intellicall with expanded
technological capabilities in the public access market.
Pursuant to the Merger Agreement, Intellicall will issue to the shareholders
of Wireless WebConnect! 16,426,420 shares of common stock of Intellicall. In
addition, existing stock options of Wireless WebConnect! will be exchanged into
options to purchase 1,500,000 shares of Intellicall's common stock. The Merger
is subject to certain conditions, including approval by Intellicall's
stockholders and satisfactory completion of due diligence. There are no
assurances that the conditions precedent will be satisfied or that the merger
will be consummated.
F-30
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 20--SUMMARIZED FINANCIAL INFORMATION FOR UNCONSOLIDATED SUBSIDIARY
As of December 31, 1999 and 1998, and for the years then ended, the Company
accounted for its investment in ILD under the equity method. The Company's
ownership percentage in ILD was 30% and 42% as of December 31, 1999 and 1998,
respectively. As ILD's fiscal year end is September 30, the summarized financial
information for ILD is presented as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Total assets.............................................. $90,855 $82,102
Total liabilities......................................... $65,055 $63,081
Redeemable preferred stock................................ $12,224 $12,224
Stockholder's equity...................................... $13,576 $ 6,797
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
Net loss. ) (3,181 ) (1,802
<S> <C> <C>
</TABLE>
F-31
<PAGE>
INTELLICALL, INC.
NOTES TO FINANCIAL STATEMENTS
INTELLICALL, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT -------------------------------------
BEGINNING CHARGED TO COSTS CHARGED TO OTHER DEDUCTIONS-- BALANCE AT END
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS--DESCRIBE DESCRIBE OF PERIOD
----------- ---------- ---------------- ------------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1999:
Allowance for doubtful
accounts................ $ 442 $ 233 $ -- $ (270)(a) $ 405
====== ====== ===== ======= ======
Allowance for doubtful
accounts--notes
receivable.............. $ -- $ 359 $ -- $ -- $ 359
====== ====== ===== ======= ======
Reserve for inventory
obsolescence............ $2,030 $ 310 $ -- $ (930)(c) $1,410
====== ====== ===== ======= ======
Year Ended December 31, 1998:
Allowance for doubtful
accounts................ $1,574 $ 876(b) $ -- $(2,008)(a) $ 442
====== ====== ===== ======= ======
Reserve for inventory
obsolescence............ $2,700 $ 333 $ -- $(1,003)(c) $2,030
====== ====== ===== ======= ======
Year Ended December 31, 1997:
Allowance for doubtful
accounts................ $1,607 $1,006 $ -- $(1,039)(a) $1,574
====== ====== ===== ======= ======
Allowance for doubtful
accounts--notes
receivable.............. $1,762 $ -- $ -- $(1,762)(a) $ --
====== ====== ===== ======= ======
Reserve for inventory
obsolescence............ $3,026 $4,382 $ -- $(4,708)(c) $2,700
====== ====== ===== ======= ======
</TABLE>
--------------------------
(a) Write-off of uncollectible accounts.
(b) Includes $94,000 reserved from a related party receivable.
(c) Write-off/write-down of inventory.
F-32
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants for the years ended
September 30, 1999 and September 30, 1998................. S-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 1999 and
1998.................................................... S-3
Consolidated Statements of Operations for the years ended
September 30, 1999 and September 30, 1998............... S-4
Consolidated Statements of Stockholders' Equity for the
years ended September 30, 1999 and September 30, 1998... S-5
Consolidated Statements of Cash Flows for the years ended
September 30, 1999 and September 30, 1998............... S-6
Notes to Consolidated Financial Statements................ S-7
</TABLE>
S-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of ILD Telecommunications, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of ILD
Telecommunications, Inc. and its subsidiaries at September 30, 1999 and 1998,
and the results of their operations and their cash flows for the years ended
September 30, 1999 and 1998 in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
February 25, 2000, except as
to Note 6 which is as of May 31, 2000
S-2
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 1,857 $ 744
Restricted cash......................................... -- 3,718
Accounts receivable, net of allowance for doubtful
accounts of $3,063 and $3,198, respectively........... 23,223 18,673
Accounts receivable from related parties................ 3,750 5,184
Prepaid and other current assets........................ 4,321 2,629
------- -------
Total current assets.................................. 33,151 30,948
Property and equipment, net................................. 14,599 10,768
Excess of cost over net assets acquired, net................ 42,110 39,567
Other assets, net........................................... 995 819
------- -------
Total assets.......................................... $90,855 $82,102
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and other accrued liabilities.... $10,023 $11,155
Accrued telecommunication costs (includes $2,469 and
$2,749 payable to related parties in 1999 and 1998,
respectively)......................................... 10,234 11,886
Deferred revenue........................................ 4,138 2,618
Accrued salaries, wages and other employee expenses..... 692 1,053
Accrued payables to related parties..................... 4,388 1,976
Acquisition obligations................................. 66 1,079
Current maturities of long-term obligations............. 6,630 4,600
------- -------
Total current liabilities............................. 36,171 34,367
Long-term obligations, less current maturities (includes
$5,275 and $8,286 face amount payable to related parties
in 1999 and 1998, respectively)........................... 28,884 28,714
Commitments and contingencies
Series B-2 Redeemable Preferred Stock, $.01 par value; $100
stated value; 150,000 shares authorized; 102,243 shares
issued and outstanding.................................... 10,224 10,224
Series B-3 Redeemable Preferred Stock, $.01 par value; $300
stated value; 10,000 shares authorized; 6,667 shares
issued and outstanding.................................... 2,000 2,000
Stockholders' equity:
Series A and B Convertible Preferred Stock, $.01 par
value; 105,000 shares authorized; 103,461 shares
issued and outstanding................................ 1 1
Common Stock, $.01 par value; 300,000 shares authorized;
110,168 and 72,828 shares issued and outstanding,
respectively.......................................... 1 1
Additional paid-in capital.............................. 20,684 10,724
Retained deficit........................................ (7,110) (3,929)
------- -------
Total stockholders' equity............................ 13,576 6,797
------- -------
Total liabilities and stockholders' equity.......... $90,855 $82,102
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
S-3
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Telecommunications revenues................................. $116,526 $117,700
-------- --------
Costs and expenses:
Cost of revenues (exclusive of items shown separately
below).................................................. 83,310 89,812
Selling, general and administrative....................... 18,928 13,430
Provision for doubtful accounts........................... 7,588 8,380
Depreciation and amortization............................. 6,196 3,793
Provision for restructuring costs, net.................... 250 --
Write-off of deferred offering costs...................... -- 1,197
-------- --------
Total costs and expenses................................ 116,272 116,612
-------- --------
Income from operations...................................... 254 1,088
Other income (expense):
Interest expense.......................................... (3,313) (2,215)
Interest income........................................... 194 173
-------- --------
Total other expense..................................... (3,119) (2,042)
-------- --------
Loss before provision for income taxes...................... (2,865) (954)
Provision (benefit) for income taxes:
Current................................................... (136) 136
Deferred.................................................. (579) (358)
-------- --------
Total benefit for income taxes.......................... (715) (222)
-------- --------
Net loss.................................................... (2,150) (732)
Preferred dividend requirements............................. (1,031) (1,070)
-------- --------
Net loss applicable to common stockholders.................. $ (3,181) $ (1,802)
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
S-4
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK
------------------- ------------------- ------------------- PAID-IN SUBSCRIPTION RETAINED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT
-------- -------- -------- -------- -------- -------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
September 30, 1997.... 100 $ 1 5 $ -- 55 $ 1 $ 7,810 $(2,000) $(2,127)
Issuance of common
stock................. -- -- -- -- 16 -- 2,914 -- --
Conversion of preferred
stock................. (2) -- -- -- 2 -- -- -- --
Preferred dividend
requirements.......... -- -- -- -- -- -- -- -- (1,070)
Cancellation of stock
subscription
receivable............ -- -- -- -- -- -- -- 2,000 --
Net loss................ -- -- -- -- -- -- -- -- (732)
--- --- -- ------ --- --- ------- ------- -------
Balances at
September 30, 1998.... 98 1 5 -- 73 1 10,724 -- (3,929)
Issuance of common
stock................. -- -- -- -- 29 -- 7,274 -- --
Conversion of
subordinated notes.... -- -- -- -- 8 -- 2,686 -- --
Preferred dividend
requirements.......... -- -- -- -- -- -- -- -- (1,031)
Net loss................ -- -- -- -- -- -- -- -- (2,150)
--- --- -- ------ --- --- ------- ------- -------
Balances at
September 30, 1999.... 98 $ 1 5 $ -- 110 $ 1 $20,684 $ -- $(7,110)
=== === == ====== === === ======= ======= =======
<CAPTION>
TOTAL
--------
<S> <C>
Balances at
September 30, 1997.... $ 3,685
Issuance of common
stock................. 2,914
Conversion of preferred
stock................. --
Preferred dividend
requirements.......... (1,070)
Cancellation of stock
subscription
receivable............ 2,000
Net loss................ (732)
-------
Balances at
September 30, 1998.... 6,797
Issuance of common
stock................. 7,274
Conversion of
subordinated notes.... 2,686
Preferred dividend
requirements.......... (1,031)
Net loss................ (2,150)
-------
Balances at
September 30, 1999.... $13,576
=======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
S-5
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................ $ (2,150) $ (732)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization....................... 6,196 3,793
Provision for doubtful accounts..................... 7,588 8,380
Provision for restructuring costs, net.............. 250 --
Other............................................... 189 127
Changes in operating assets and liabilities, net of
effect of acquisitions:
(Increase) decrease in restricted cash.......... 3,718 (3,718)
Increase in accounts receivable................. (12,437) (15,641)
(Increase) decrease in accounts receivable from
related parties............................... 1,434 (3,296)
Increase in other current assets................ (1,603) (2,647)
Increase in other assets........................ (380) (375)
Increase (decrease) in trade accounts payable
and other accrued liabilities................. (2,250) 4,695
Increase (decrease) in accrued telecommunication
costs......................................... (1,652) 4,142
Increase in accrued payables to related
parties....................................... 2,412 1,559
Increase in deferred revenue.................... 1,520 553
Increase (decrease) in accrued salaries, wages,
and other employee expenses................... (361) 367
-------- --------
Net cash provided by (used in) operating
activities................................ 2,474 (2,793)
-------- --------
Cash flows from investing activities:
Purchase of Comdata..................................... (2,800) --
Purchase of other prepaid operations.................... (965) (5,475)
Purchases of property and equipment..................... (4,078) (5,970)
Sale of assets.......................................... 1,000 2,750
Purchase of WorldCom Assets............................. -- (235)
Purchase of Interlink, net of cash...................... -- (5,743)
Purchase of Intellicall Prepaid Operations.............. -- (2,026)
-------- --------
Net cash used in investing activities....... (6,843) (16,699)
-------- --------
Cash flows from financing activities:
Net proceeds from credit facility....................... 1,466 16,449
Proceeds from borrowing on long-term debt............... 1,500 3,521
Repayments of borrowings on long-term debt.............. (2,892) (1,134)
Payments on capital leases.............................. (704) (263)
Dividends paid.......................................... (1,031) (1,073)
Proceeds from issuance of stock......................... 7,143 --
Proceeds from sales--leaseback of equipment............. -- 2,378
-------- --------
Net cash provided by financing activities... 5,482 19,878
-------- --------
Net increase in cash and cash equivalents................... 1,113 386
Cash and cash equivalents at beginning of period............ 744 358
-------- --------
Cash and cash equivalents at end of period.................. $ 1,857 $ 744
======== ========
</TABLE>
See Notes 3, 6, 9 and 10 for supplementary disclosures
The accompanying notes are an integral part of these consolidated financial
statements.
S-6
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND ORGANIZATION
ILD Telecommunications, Inc. and its subsidiaries ("ILD" or the "Company")
is a nationwide facilities-based provider of prepaid phone services and
telecommunications outsourcing services. The Company offers prepaid services
through prepaid calling cards to individual consumers nationwide through vending
and over-the-counter retail outlets and the Internet. ILD offers a broad range
of outsourcing services including operator services, billing and collection
services and traditional long distance services. The core of ILD's outsourced
services is operator services consisting of operator assisted (auto and live)
calls and long-distance services that are processed through its state-of-the-art
call centers and switch-based network. Customers served are generally grouped in
the following categories: hospitality, payphone, correctional, interexchange
carriers ("IXCs"), Regional Bell Operating Companies ("RBOCs") and other
long-distance providers.
In May 1999, the Company acquired all of the outstanding common stock of
Calling Products & Debit Cards, L.L.C. ("Comdata") (see Note 3), a provider of
prepaid long distance calling cards. The acquisition expanded the Company's
prepaid calling card vending distribution primarily in the trucking industry.
In January 1998, the Company acquired the prepaid service operations of
Intellicall, Inc. ("Intellicall") (see Note 3). This acquisition expanded the
Company's prepaid calling card distribution channels and increased the volume of
minutes over ILD's network.
In December 1997, the Company acquired all of the outstanding common stock
of Interlink Telecommunications, Inc. ("Interlink") (see Note 3), a
facilities-based reseller of long distance services and provider of enhanced
services including prepaid calling cards, prepaid local service and operator
services. Interlink provided the Company with the infrastructure for offering
prepaid phone services.
The Company was formed in April 1996 and commenced operations on May 10,
1996 when Intellicall entered into an agreement with certain investor groups to
create ILD. Intellicall transferred ownership in its wholly-owned subsidiary,
Intellicall Operator Services, Inc. ("IOS") and the activities of the long
distance resale division of Intellicall to the Company in exchange for
$2,000,000 cash, a $1,000,000 convertible subordinated note, and Series B
Preferred and Common Stock representing approximately 72.5% of the voting stock
of the Company. The consideration was treated as a dividend to Intellicall and
was reflected as a reduction of retained earnings. The other investor groups
collectively purchased $2,000,000 of Common Stock, representing approximately
27.5% of the voting stock of the Company, and purchased $1,000,000 of the
Company's subordinated convertible notes. At September 30, 1999, Intellicall
holds stock representing 34.3% of the voting stock of the Company. The decrease
in Intellicall's ownership in the Company is primarily related to issuance of
the Company's stock in connection with acquisitions and the sale of a portion of
the Company's stock held by Intellicall to third-party investors.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
S-7
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS
The fair market value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate. The Company
believes that the fair values of financial instruments at September 30, 1999 and
1998 approximate their recorded values. The fair values of cash and cash
equivalents, restricted cash, accounts receivable, accounts receivable from
affiliates, trade accounts payable and other accrued liabilities, accrued
telecommunication costs, accrued salaries, wages and other employee expenses,
and accrued payables to affiliates approximate cost because of the immediate or
short-term maturity of these financial instruments. The fair value of long-term
obligations, including current maturities, with no quoted market prices has been
estimated based on the current rates offered to the Company for similar types of
borrowing arrangements with comparable terms and maturities. The fair values of
the Series B-2 and B-3 Redeemable Preferred Stock and the Series A and B
Convertible Preferred Stock are estimated at the related carrying values as such
stock is not traded in the open market and market prices are not readily
available.
BUSINESS AND CREDIT CONCENTRATIONS
In the normal course of business, the Company extends unsecured credit to
its customers. Management has provided an allowance for doubtful accounts to
provide for amounts which may eventually become uncollectible and to provide for
any disputed charges. One customer accounted for approximately 13% of total
consolidated revenues for the year ended September 30, 1999, and two customers
accounted for approximately 13% and 11%, respectively, of total consolidated
revenues for the year ended September 30, 1998.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and investments with
purchased original maturities of three months or less. The Company has not
experienced any losses on its cash and cash equivalents.
RESTRICTED CASH
Restricted cash represents collections from local exchange carriers ("LECs")
which are contractually owed to the Company's billing and collections customers
but have not been remitted due to timing. A corresponding liability is recorded
in the Company's balance sheet.
The balance in restricted cash is affected by the timing of LEC receipts as
well as the timing of customer advances. Customer advances at September 30, 1999
and 1998, were approximately $2,600,000 and $850,000, respectively. This
increase in advances, as well as delayed receipts from the Company's largest
LEC, affected the balance of restricted cash at September 30, 1999.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization for
financial statement purposes are provided by the straight-line method over the
estimated useful lives of the depreciable assets. Maintenance and repairs are
expensed as incurred while replacements and betterments are capitalized.
S-8
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EXCESS OF COST OVER NET ASSETS ACQUIRED
Excess of cost over net assets acquired reflects the acquired cost of
goodwill, customer contracts, noncompete agreements, other intangibles, and
related items. These items are being amortized by the straight-line method over
their estimated useful lives, ranging from 2 to 25 years. In accordance with the
provisions of Statement of Financial Accounting Standards No. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF ("FAS 121"), it is the Company's policy to review long-lived assets and
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In the event that total assets (including property and equipment)
are found to be stated at amounts in excess of estimated future cash flows, the
assets are adjusted for impairment to a level commensurate with a discounted
cash flow analysis of the underlying assets. The Company's policy with respect
to intangible assets, including goodwill, is to compare the carrying value of
such assets to the estimated fair market value of these assets. In cases where
the carrying value exceeds the estimated fair market value, impairment charges
are taken.
Based on its most recent analysis, the Company believes no impairment of
such assets existed at September 30, 1999.
DEBT ISSUANCE COSTS
The Company defers costs incurred directly in connection with the issuance
of debt obligations and charges such costs to interest expense on a
straight-line basis over the terms of the respective debt agreements.
REVENUE RECOGNITION
The Company recognizes revenue as services are performed based on end user
usage, net of an estimate for uncollectible revenue. The Company sells its
services to its customers primarily on a measured time basis.
The Company recognizes revenue from its billing and collection services upon
processing records that are to be billed and collected by the Company.
The Company records deferred revenue on prepaid calling cards when the
customer is invoiced or the cards are purchased by the end user. The Company
recognizes the deferred revenue as revenue when the end user utilizes calling
time or upon expiration of the card.
CUSTOMER COMMISSIONS
The Company pays commissions based on call traffic to payphone owners and
hospitality facilities (referred to by the Company as "customers", although such
persons are not the end users of the Company's service) for call traffic
originating at such customers' phones that is processed by the Company. Such
commissions are included in cost of revenues in the period the traffic
originates, and such payments are generally made within thirty days of the end
of the processing month.
The Company pays commissions to certain locations where prepaid calling
cards are sold through vending machines. Such commissions are included in cost
of revenues in the period the prepaid calling card is sold.
S-9
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
Advertising costs are expensed in the period incurred. Advertising expense
for the years ended September 30, 1999 and 1998 were $958,000 and $287,000,
respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION ("FAS 123"), requires the fair value of stock options
and other stock-based compensation issued to employees to either be included as
compensation expense in the income statement, or the pro forma effect on net
income and earnings per share of such compensation expense to be disclosed in
the footnotes to the Company's financial statements. The Company has adopted
FAS 123 on a disclosure basis only. The Company has elected to continue to
account for stock-based compensation using the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES ("APB 25"), and related interpretations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
INCOME TAXES
In accordance with Statement of Financial Accounting Standards No. 109,
ACCOUNTING FOR INCOME TAXES ("FAS 109"), deferred income taxes are calculated
utilizing an asset and liability approach whereby deferred taxes are provided
for tax effects of basis differences for assets and liabilities arising from
differing treatments for financial and income tax reporting purposes. Valuation
allowances against deferred tax assets are provided where appropriate.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
3. ACQUISITIONS
Effective May 15, 1999, the Company acquired all of the outstanding common
stock of Calling Products & Debit Cards, L.L.C. ("Comdata"), a provider of
prepaid calling cards. Comdata is located in Nashville, Tennessee and
principally serves the southeastern United States. The acquisition of Comdata
common stock was accomplished by payment of the following consideration:
(i) $2,400,000 in cash and (ii) $3,120,000 in the form of a promissory note
payable due $100,000 monthly from July 1999 through December 1999, $1,470,000 in
December 1999, and $1,050,000 in December 2000 with interest at 7.5% per annum.
The Company capitalized $40,000 of transaction costs related to the acquisition
in excess of cost over net assets acquired.
The financial statements reflect the preliminary allocation of the purchase
price. The Company has contingencies in the amount of $980,000 which could be
payable to the seller if certain customer
S-10
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
contracts are renewed, or if certain revenue levels are attained. Accordingly,
in fiscal year 2000, goodwill associated with the acquisition may increase.
Effective January 1, 1998, the Company acquired the prepaid service
operations of Intellicall, Inc. ("Intellical Prepaid Operations") by payment of
the following consideration: (i) $2,000,000 in cash, (ii) cancellation of a note
receivable in the original principal amount of $2,000,000 reflected as stock
subscription receivable as of September 30, 1997, which amount was recorded upon
the sale of 18,349 shares of Common Stock at $109 per share in September 1997,
and (iii) $1,000,000 in the form of a promissory note due no later than
December 31, 1998.
Effective December 15, 1997, the Company acquired all of the outstanding
common stock of Interlink Telecommunications, Inc. ("Interlink"), a
facilities-based reseller of long distance services and provider of enhanced
services including prepaid calling cards, prepaid local service and operator
services. Interlink was located in Atlanta, Georgia and principally serves the
southeastern United States.
The acquisition of Interlink common stock was accomplished by payment of the
following consideration: (i) $2,000,000 in cash, (ii) $2,700,000 in the form of
a promissory note payable due $1,800,000 on December 31, 1997 and $900,000 on
March 31, 1998 bearing no interest, (iii) $1,000,000 in the form of a promissory
note payable due $250,000 on a quarterly basis commencing September 30, 1998
with interest at 9% per annum also payable quarterly, (iv) 16,117 shares of the
Company's Common Stock valued at $175 per share, (v) 6,667 shares of the
Company's Series B-3 Redeemable Preferred Stock which has a stated value of
$300, and (vi) a five year consulting agreement for $850,000 payable $425,000 on
June 1, 1998 and $425,000 on June 1, 1999. The consulting agreement is being
amortized on a straight-line basis over a period of five years. The Company
capitalized $371,000 of transaction costs related to the acquisition in excess
of cost over net assets acquired.
The Company has acquired several smaller prepaid operations in 1999 and 1998
for aggregate purchase prices of approximately $735,000 and $6,653,000,
respectively. The purchase prices in 1999 include $285,000 of cash, and $450,000
of notes payable due $50,000 on April 19, 1999 and $400,000 payable quarterly
with interest commencing on June 15, 1999. The purchase prices in 1998 include
286 shares of the Company's Common Stock valued at $325 per share, a contingent
earn-out agreement that was settled by the payment of $425,000 and issuance of
500 shares of the Company's Common Stock valued at $325 per share, and a
$250,000 note payable due January 1, 1999.
The acquisitions were accounted for using the purchase method of accounting
whereby the excess purchase price over the net assets acquired has been recorded
based upon the fair values of assets acquired and liabilities assumed. The
excess of cost over net assets acquired are being amortized on a straight-line
basis over the respective estimated useful lives assigned. The Company's
consolidated statements of operations include the results of the operations of
the acquisitions since their respective effective acquisition dates.
The approximate fair values of accounts receivable, property and equipment
and other assets acquired and current and long-term liabilities assumed at the
effective dates of all of the acquisitions combined were $624,000, $1,348,000,
$75,000, $113,000 and $0, respectively in 1999, and were $1,716,000, $2,182,000,
$940,000, $5,158,000 and $928,000, respectively in 1998.
S-11
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
A summary of the acquisitions excess of cost over net assets acquired for
financial reporting purposes is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 1998 LIFE
-------- -------- --------
<S> <C> <C> <C>
Goodwill........................................ $36,941 $32,936 15-25 yr
Customer contracts.............................. 6,169 5,447 2-6 yr
Noncompete agreements........................... 3,726 2,000 2-5 yr
Other........................................... 1,100 1,449
------- -------
47,936 41,832
Accumulated amortization........................ (5,826) (2,265)
------- -------
Total excess of cost over net assets acquired... $42,110 $39,567
======= =======
</TABLE>
The following unaudited pro forma combined results of operations of the
Company assume that the Interlink and Comdata acquisitions were completed on
October 1, 1997. These pro forma amounts represent historical operating results
of these acquisitions combined with those of the Company with appropriate
adjustments to give effect to interest expense, depreciation and amortization
expense and preferred dividend requirements. These pro forma amounts are not
necessarily indicative of consolidated operating results which would have been
included in the operations of the Company during the periods presented, or which
may result in the future, because those amounts do not reflect full transmission
and switched service cost optimization, and the synergistic effect on operating,
selling, general and administrative expenses nor do the amounts reflect any
higher costs associated with unanticipated integration or other organizational
activities the Company may be forced to undertake as a result of the
acquisitions (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues................................................ $119,981 $125,621
Net loss................................................ $ (2,101) $ (855)
Net loss applicable to common stockholders.............. $ (3,132) $ (1,950)
</TABLE>
The revenue and net income (loss) provided by the other smaller prepaid
acquisitions are not significant to the Company's operations.
S-12
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 1998 LIFE
-------- -------- --------
<S> <C> <C> <C>
Switching and other network equipment.................... $ 6,360 $ 3,838 5 years
Computer equipment and software.......................... 3,123 2,277 5 years
Prepaid calling card vending machines.................... 5,104 3,343 5 years
Furniture, fixtures and other equipment.................. 3,675 2,806 5 years
------- -------
18,262 12,264
Accumulated depreciation and amortization................ (3,663) (1,496)
------- -------
Total property and equipment............................. $14,599 $10,768
======= =======
</TABLE>
Switching and other network equipment totaling $1,989,000 and $2,687,000
were acquired under capital leases in the year ended September 30, 1999 and
1998, respectively. Accumulated amortization for switching and other network
equipment under capital leases was $869,000 and $265,000 at September 30, 1999
and 1998, respectively. The Company has the option to purchase this equipment
upon expiration of the leases. Total depreciation and amortization expense
related to property and equipment, including equipment under capital leases,
charged to income for the years ended September 30, 1999 and 1998 was $2,624,000
and $1,446,000, respectively.
5. ACCRUED TELECOMMUNICATION COSTS
Accrued telecommunication costs consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Transmission.............................................. $ 5,869 $ 6,100
Customer commissions payable.............................. 2,273 2,955
Other..................................................... 2,092 2,831
------- -------
Total accrued telecommunications costs.................... $10,234 $11,886
======= =======
</TABLE>
S-13
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Senior secured notes to investors due in May 2001 with
interest payable monthly at 13.5% per annum............... $2,000 $2,000
Convertible subordinated notes to investors due in May 2001
with interest payable quarterly at 10% per annum.......... 2,000 2,000
Senior secured term note payable to a bank.................. 2,700 3,900
Senior secured revolving credit facility payable to a
bank...................................................... 18,479 17,013
Subordinated promissory note to related party due December
31, 1998.................................................. 850 1,000
Capital lease obligations................................... 3,909 2,498
Promissory note secured by equipment, payable in monthly
installments to July 2003 with interest at 11% per
annum..................................................... 805 950
Promissory note secured by equipment, payable in monthly
installments to June 2003 with interest at 12% per
annum..................................................... 1,426 --
Subordinated promissory note to acquiree with interest
payable at 7.5%........................................... 2,720 --
Subordinated promissory note to acquiree payable in
quarterly installments to March 15, 2000 with interest at
7% per annum.............................................. 200 --
Subordinated promissory note to officer due on June 30, 1999
with interest due quarterly at 9% per annum............... -- 750
Subordinated convertible notes to shareholders with interest
due quarterly at 15% per annum............................ -- 2,536
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Other..................................................... $ 425 $ 690
------- -------
35,514 33,337
Less current maturities:
Long term debt.......................................... (5,145) (3,250)
Capital lease obligations............................... (1,060) (660)
Other................................................... (425) (690)
Less unamortized debt discount............................ -- (23)
------- -------
Long-term portion......................................... $28,884 $28,714
======= =======
</TABLE>
S-14
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM OBLIGATIONS (CONTINUED)
On August 29, 1997, the Company obtained a $5,000,000 senior secured term
loan facility and a $20,000,000 senior secured revolving credit facility
(subject to borrowing availability) from Bank of America (formerly NationsBank)
to facilitate acquisitions and to provide working capital for operations. At
September 30, 1999, $2,700,000 of the senior secured term loan facility was
outstanding and $18,479,272 of the $20,000,000 senior secured revolving credit
facility was outstanding. Unused borrowing availability under the senior secured
revolving credit facility was approximately $690,000 at September 30, 1999. The
borrowings under these credit facilities are secured by principally all of the
assets of the Company.
The senior secured term loan facility bears interest at prime plus 2.5%
(10.75% at September 30, 1999) per annum and is payable monthly. Principal
payments are due in quarterly installments of $300,000 through December 31,
1999, quarterly installments of $420,000 through September 30, 2000, and a final
payment of $840,000 on October 31, 2000.
The senior secured revolving credit facility has a maximum availability of
$20,000,000, with borrowings based on 85% of eligible receivables minus certain
reserves. This facility matures on October 31, 2000. Borrowings under this
facility bear interest at a floating rate from the bank's prime rate to .5%
above the bank's prime rate (8.75% at September 30, 1999) depending upon the
ratio of senior funded debt to earnings before interest, taxes, depreciation and
amortization ("EBITDA"). At the Company's option, the interest rate on
additional advances may be fixed at a floating rate ranging from 2.25% to 2.75%
above the London Interbank Offered Rate ("LIBOR"), subject to certain minimum
amounts and duration of borrowings, which is also dependent upon the ratio of
senior funded debt to EBITDA. There were no LIBOR borrowings outstanding at
September 30, 1999.
The credit facilities agreement contains covenants which, among other
restrictions, (i) require the Company to satisfy certain financial ratios
related to senior funded debt to EBITDA, minimum net worth and minimum fixed
charge coverage; (ii) limit the Company's ability to incur indebtedness;
(iii) limit investments and capital expenditures; (iv) limit operating leases;
(v) limit mergers, consolidation or sale of assets; (vi) limit liens;
(vii) require the Company to maintain minimum availability under the revolving
credit facility of not less than $500,000; (viii) require the Company to
maintain a positive net income in the 1997 fiscal year; and (ix) prohibit the
payment of dividends without the prior written consent of the lender when
dividends paid, together with interest paid on the convertible subordinated
debt, exceed $1,900,000 in the aggregate in any fiscal year.
At September 30, 1999, the Company was not in compliance with the senior
funded debt to EBITDA ratio and fixed charge coverage ratio contained in the
senior credit agreement. On March 31, 2000 and May 31, 2000, the Company entered
into amendments with the bank whereby the bank waived any covenant violation
that existed through and including December 31, 1999. The Company was in
compliance with all covenant requirements at March 31, 2000 and expects to be in
compliance with all future measurement dates. Under these amendments, the
Company was required to pay one-time amendment fees to the bank of $50,000 and
an additional $25,000 fee for each 60-day period subsequent to May 31, 2000
during which the credit facilities remain outstanding. Additionally, the bank
amendments eliminated the Company's option to fix interest rates on the senior
secured revolving credit facility at LIBOR plus an applicable margin and
extended the maturity date of the credit facilities to October 31, 2000. At that
date, the Company must either negotiate an additional extension with the bank or
secure a new credit facility from another lender.
S-15
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM OBLIGATIONS (CONTINUED)
In 1996, $2,000,000 of senior secured notes were issued with a Common Stock
purchase warrant exercisable into 7,239 shares of stock at $0.01 per share.
These notes are subordinated to the senior secured term loan and senior secured
revolving credit facility. Under the terms of the senior secured notes, the
Company may not pay dividends without the prior written consent of the lenders,
although dividends may be paid to the holders of the Series B Convertible
Preferred Stock as long as the Company is not in default under the notes.
The $2,000,000 of convertible subordinated notes are convertible into Common
Stock at the rate of one share of Common Stock of the Company for each $90 of
principal then due the holder. In March 2000, $1,000,000 of the convertible
subordinated notes were converted into 11,111 shares of Common Stock of the
Company.
The $2,536,000 subordinated convertible notes to shareholders were issued to
facilitate the acquisition of a prepaid operations company. The notes were
converted at December 31, 1998 into Common Stock at the rate of one share of
Common Stock of the Company for each $325 of principal plus accrued interest
then due the holder.
The subordinated promissory note to a related party was issued as a portion
of the consideration paid in the acquisition of the Intellicall Prepaid
Operations. The remaining balance of this note is classified as current as the
Company intends to repay the obligation during fiscal 2000.
The $2,720,000 subordinated promissory note to acquiree was issued as a
portion of the consideration paid in the acquisition of Comdata. The note
requires monthly principal payments of $100,000 (with interest) from July 1999
to December 1999. In addition to the monthly payments, two additional principal
payments of $1,470,000 and $1,050,000 are due on December 31, 1999 and December
31, 2000, respectively.
The aggregate maturities of long-term obligations over the next five years
as adjusted for the March 2000 and May 2000 credit agreement amendments are (in
thousands) $6,630, $25,939, $1,807, $1,087 and $52, respectively. Interest paid
during the years ended September 30, 1999 and 1998 was $3,085,000 and
$2,151,000, respectively.
7. CAPITAL STOCK
Each share of the Series A Convertible Preferred Stock has a stated value of
$72.69 and entitles the holder to convert it into one share of Common Stock.
Voting rights are the same as for common stockholders, no preferences exist
except over Common Stock, and holders are not entitled to receive dividends. In
1998, the holder of the Series A Convertible Preferred Stock converted 1,539
shares into 1,539 shares of the Company's Common Stock.
Each share of the Series B Convertible Preferred Stock has a stated value of
$100 and entitles the holder to receive an annual cumulative dividend of 9%,
payable quarterly. The Company has the right to call the Series B Convertible
Preferred Stock at its discretion and if not called within three years of
issuance, the shares are convertible at the option of the holder into Common
Stock at the rate of $90 per common share. The Series B Convertible Preferred
Stock has a put provision providing the holder the right to force repurchase if
the Company raises at least $5,000,000 through either a debt or equity public
offering. Series B Convertible Preferred Stock is nonvoting, but has preference
over Common Stock and Series A Convertible Preferred Stock with respect to
liquidation and dividend rights. In
S-16
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. CAPITAL STOCK (CONTINUED)
January 2000, the Company redeemed 2,000 shares of Series B Convertible
Preferred Stock for $200,000.
Each share of the Series B-2 Redeemable Preferred Stock has a stated value
of $100 and entitles the holder to receive an annual cumulative dividend of
8.50%, payable semiannually. The redemption amount of the Series B-2 Redeemable
Preferred Stock is equivalent to the stated value plus any additional dividends
accrued at the date of redemption. Subject to certain restrictions in loan
agreements, each holder has the right, commencing on the fifth anniversary date
after issuance, to require the Company to purchase the holder's shares at the
stated value of $100 per share plus any additional dividends accrued at the date
of redemption, making it mandatorily redeemable. The Company, at its discretion,
has the right to purchase the holder's shares at the stated value of $100 per
share for all shares not previously purchased. Series B-2 Redeemable Preferred
Stock is nonvoting, but has preference over Common Stock and Series A
Convertible Preferred Stock with respect to liquidation and dividend rights.
Each share of the Series B-3 Redeemable Preferred Stock has a stated value
of $300 and entitles the holder to receive an annual cumulative dividend of
6.00%, payable quarterly. The redemption amount of the Series B-3 Redeemable
Preferred Stock is equivalent to the stated value plus any additional dividends
accrued at the date of the redemption. Subject to certain restrictions in loan
agreements, each holder has the right, commencing on the fifth anniversary date
after issuance, to require the Company to purchase the holder's shares at the
stated value of $300 per share plus any additional dividends accrued at the date
of redemption, making it mandatorily redeemable. The Company, at its discretion,
has the right to purchase the holder's shares at the stated value of $300 per
share for all shares not previously purchased. Series B-3 Redeemable Preferred
Stock is nonvoting, but has preference over Common Stock and Series A
Convertible Preferred Stock with respect to liquidation and dividend rights.
In 1996, the Company issued the holders of the convertible subordinated
notes a common stock purchase warrant exercisable into 7,239 shares of Common
Stock at $.01 per share which expires on June 30, 2001, unless exercised
earlier. The Company also issued a stockholder a common stock purchase warrant
exercisable into 6,000 shares of Common Stock at $90 per share which expires on
June 30, 2001, unless exercised earlier.
8. STOCK OPTIONS
The Company maintains an Incentive Stock Option ("ISO") Plan and a
Nonincentive Stock Option ("NSO") Plan under which 66,900 options to purchase
shares of Common Stock may be granted to directors, officers and employees.
Options under the plans have a five-year term. Options granted in 1996 vested
immediately. Options granted in 1997 vest ratably over a three-year period.
Options granted in 1998 vest from immediately upon issuance to over a three-year
period. The exercise price of the options granted under the plans is not less
than the fair market value of the stock on the dates the options were granted.
Accordingly, no compensation expense is recognized by the Company with respect
to such grants.
Pro forma information regarding net income (loss) is required by FAS 123 and
has been determined as if the Company had accounted for its directors, officers
and employee stock options under the fair value method of that statement. There
were no options granted or exercised in 1999. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option
S-17
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTIONS (CONTINUED)
pricing model with the following weighted average assumptions used for grants in
1998: no dividend yield; expected volatility of 21.72%; risk-free interest rates
of 5.54%; and expected lives of five years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The Company's
pro forma information for the years ended September 30 is as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
----------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net loss applicable to common
stockholders............................ $(3,181) $(3,754) $(1,802) $(2,909)
======= ======= ======= =======
</TABLE>
The effects of applying FAS 123 in this pro forma disclosure are not
indicative of future amounts as FAS 123 does not consider additional awards
anticipated in the future.
A summary of options granted and outstanding under the plans for the years
ended September 30 is summarized below:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of period........................ 56,650 $125.50 35,400 $ 53.84
Granted................................................. -- -- 21,550 243.91
Exercised............................................... -- -- -- --
Forfeited............................................... (500) 175.00 (300) 175.00
------ ------- ------ -------
Outstanding at end of period.............................. 56,150 $125.06 56,650 $125.50
====== ======
Exercisable at end of period.............................. 44,192 $110.11 32,483 $ 85.93
====== ======
Weighted average fair value of options granted during
period.................................................. $ -- $ 76.58
</TABLE>
The following table summarizes information about options outstanding under
the plans at September 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------ OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$24.20........ 20,900 1.63 $ 24.20 20,900 $ 24.20
$90.00-109.00.. 14,500 2.81 $ 96.55 9,667 $ 96.55
$175.00....... 10,850 3.08 $175.00 6,675 $175.00
$325.00....... 9,900 3.75 $325.00 6,950 $325.00
</TABLE>
S-18
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RESTRUCTURING COSTS
In the fourth quarter of fiscal 1999, the Company initiated restructuring
plans to consolidate two operator call center facilities into a single facility
in San Antonio, Texas, to reorganize its management information systems ("MIS")
operations to eliminate duplicate tasks and personnel, and to consolidate
switching facilities. As a result of these actions, the Company incurred a net
restructuring charge of $250,000 in 1999. The restructuring charge includes
approximately $675,000 primarily for severance and termination benefits for 64
operator center and MIS employees and $150,000 for physical facility abandonment
net of a $575,000 gain on disposition of certain assets.
At September 30, 1999, the accompanying consolidated financial statements
reflect $825,000 of accrued restructuring costs classified in accounts payable
and accrued liabilities.
10. INCOME TAXES
The components of the income tax provision (benefit) were (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Current provision (benefit):
Federal............................................. $(121) $ 121
State............................................... (15) 15
----- -----
(136) 136
----- -----
Deferred provision (benefit):
Federal............................................. (611) (338)
State............................................... 32 (20)
----- -----
(579) (358)
----- -----
Provision (benefit) for income taxes........................ $(715) $(222)
===== =====
</TABLE>
The following is a reconciliation of the provision (benefit) for income
taxes at the statutory federal income tax rate to the income taxes reflected in
the consolidated statements of operations (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Income tax expense at the statutory rate (34%).............. $(974) $(324)
Permanent differences....................................... 183 106
State income taxes, net of federal income tax benefit....... 21 (3)
Other....................................................... 55 (1)
----- -----
Provision (benefit) for income taxes........................ $(715) $(222)
===== =====
</TABLE>
S-19
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
The components of the net deferred tax assets were (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Bad debt reserves....................................... $ 349 $ 788
Net operating loss carryforwards........................ 1,187 252
Other reserves and accruals............................. 355 236
AMT credit carryforwards................................ 56 176
------ -----
Total gross deferred tax assets......................... 1,947 1,452
Deferred tax liabilities:
Depreciation and amortization........................... 919 1,000
------ -----
Total gross deferred tax liabilities.................. 919 1,000
------ -----
Net deferred tax assets..................................... $1,028 $ 452
====== =====
</TABLE>
The Company files a consolidated tax return and reports on a calendar year
basis the results of its operations for federal and state income tax purposes.
The Company has requested and received permission from the Internal Revenue
Service to change its tax year-end to September 30.
At September 30, 1999 and 1998, the Company had net operating loss
carryforwards of approximately $3,500,000 and $741,000, respectively, for
federal income tax purposes of which approximately $482,000 represents net
operating losses acquired as a result of the acquisition of a prepaid operations
company. The net operating loss carryforwards begin to expire in 2010.
Utilization of the net operating loss carryforwards may be limited by the
separate return loss year rules and could be affected by ownership changes which
have occurred or could occur in the future. In addition, at September 30, 1999
and 1998, the Company has a minimum tax credit carryforward of $56,000 and
$176,000, respectively, of which approximately $13,000 and $13,000, respectively
represents credits acquired as a result of the acquisition of a prepaid
operations company. This credit may be carried forward indefinitely.
A valuation allowance has not been established, as management believes it is
more likely than not that the net deferred tax asset will be realized.
Income tax paid during the years ended September 30, 1999 and 1998 was $0
and $460,000, respectively.
11. BENEFIT PLAN
The Company adopted a 401(k) Retirement Plan (the "401(k) Plan") effective
September 1, 1997. Employees may elect to reduce their compensation and
contribute to the 401(k) Plan provided they have completed six consecutive
months of employment and reached the age of twenty and one-half. Each employee
may defer up to 15% of their salary not to exceed the limit allowable by law in
any one year. The Company matches up to 100% of the first 3% of the employee's
annual compensation contributed to the 401(k) Plan. Vesting is 25% per year of
service and the employee is credited with a year of service if they have
completed at least 1,000 hours of service. Employer contributions totaled
$166,000 and $147,000 for the years ended September 30, 1999 and 1998,
respectively. Distributions
S-20
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. BENEFIT PLAN (CONTINUED)
from the 401(k) Plan are not permitted before the age of 65 except in the event
of death, disability, or termination of employment, except in the case of early
retirement.
12. LEASES
The Company leases office space and certain equipment under operating
leases. Future minimum rental commitments under noncancelable operating leases
are (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------
<S> <C>
2000........................................................ $1,159
2001........................................................ 1,145
2002........................................................ 1,146
2003........................................................ 1,100
2004........................................................ 225
Thereafter.................................................. 48
------
$4,823
======
</TABLE>
Total operating lease expense was $1,231,000 and $686,000 for the years
ended September 30, 1999 and 1998, respectively.
13. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
normal course of business. Management believes it is unlikely that the final
outcome of any of the claims or proceedings to which the Company is a party
would have a materially adverse effect on the Company's financial position, or
results of operations or cash flows.
14. RELATED PARTY TRANSACTIONS
At September 30, 1999 and 1998, the Company owed Intellicall $437,000 and
$492,000, respectively, primarily related to the acquisition of the Intellicall
Prepaid Operations. At September 30, 1999 and 1998, Intellicall owed ILD
$1,175,000 and $743,000, respectively, mainly related to collections made on
ILD's behalf.
MCI WorldCom, Inc. ("WorldCom"), a wholesale network provider to the
Company, owns 4,587 shares of the Company's Common Stock and 102,243 shares of
the Company's Series B-2 Redeemable Preferred Stock. The Company recorded
revenue from WorldCom of approximately $5,273,000 and $5,772,000 for the years
ended September 30, 1999 and 1998, respectively, for services provided by the
Company. At September 30, 1999 and 1998, the Company owed WorldCom approximately
$2,469,000 and $2,749,000, respectively, for transmission services and
$3,952,000 and $1,484,000, respectively, for collections made on WorldCom's
behalf. WorldCom owed ILD approximately $2,575,000 and $4,441,000, respectively,
for billing of nonrelated party customers and fees charged for billing and
collection services.
15. WRITE-OFF OF DEFERRED OFFERING COSTS
On June 9, 1999, the Company withdrew its Registration Statement on Form S-1
for an initial public offering ("IPO") of stock and recorded a one-time charge
of $1,197,000 at September 30, 1998. This one-time charge included printing,
legal and accounting costs incurred in the IPO.
S-21
