<PAGE>
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-10588
INTELLICALL, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-1993841
(State or other jurisdiction of (I.R.S. Employer Identification number)
incorporation or organization)
2155 Chenault, Suite 410
Carrollton, TX 75006
(Address of Principal Executive Offices)
(972) 416-0022
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
----- ----
Indicate the number of shares outstanding of each of the issuer's classes of on
stock, as of the latest practicable date.
Outstanding at
Class April 14, 2000
- - ------------------------------ ---------------
Common Stock $.01 par value 13,080,894
EXPLANATORY NOTE
This form 10-Q/A is filed to amend the Form 10-Q for the period ended March
31, 2000 (the "Original Form 10-Q") to restate the Financial Statements (Item
1) and make the corresponding changes to the Financial Data Schedule.
Subsequent to the issuance of the Company's financial statements in the
Original Form 10-Q, we discovered a misclassification error in the
calculation of current portion of notes payable. This error had the effect of
understating current portion of notes payable and overstating long-term debt
by $5.0 million as of March 31, 2000 and December 31, 1999. This report
continues to speak as of the date of the Original For 10-Q, and we have not
updated the disclosures in this report to speak to any later date.
--------------------------------------------------------------------------------
<PAGE>
INDEX
INTELLICALL, INC.
<TABLE>
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Balance Sheets at March 31, 2000 (Unaudited) and December 31, 1999.............1
Statements of Operations for each of the three month periods
ended March 31, 2000 and 1999 (Unaudited).....................................3
Statements of Cash Flows for each of the three month periods
ended March 31, 2000 and 1999 (Unaudited) .....................................4
Notes to Financial Statements (Unaudited) .....................................5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................10
Part II. Other Information
Item 1. Legal Proceedings ............................................................17
Item 6. Exhibits and Reports on Form 8-K..............................................17
Signatures ..............................................................................18
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INTELLICALL, INC.
UNAUDITED BALANCE SHEETS
ASSETS
(in thousands)
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Current assets
Cash and cash equivalents ........................................ $ 582 $ 694
Receivables, net of allowance for doubtful accounts
of $820 and $764............................................. 1,488 1,455
Inventories, net.................................................. 2,701 3,088
Receivables from related party, net .............................. 1,137 1,258
Deferred tax asset................................................ 1,500 1,500
Other current assets.............................................. 215 157
------- -------
Total current assets........................................... 7,623 8,152
Fixed assets, net...................................................... 861 980
Investment in unconsolidated subsidiary................................ 1,739 1,835
Other assets, net...................................................... 586 637
Assets of discontinued operations...................................... 482 513
------- -------
Total Assets...................................................... $11,291 $12,117
======= =======
</TABLE>
See notes to financial statements.
-1-
<PAGE>
<TABLE>
<CAPTION>
INTELLICALL, INC.
UNAUDITED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
(in thousands, except share information)
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Current liabilities
Accounts payable.......................................... $ 1,398 $ 1,798
Advance payment received on sale of assets............... 1,000 --
Accrued liabilities....................................... 782 610
Current portion of long-term debt ........................ 8,130 7,630
---------- ---------
Total current liabilities................................. 11,310 10,038
Long-term debt ................................................ 1,621 1,557
Deferred gain on sale of assets................................ 730 730
Other liabilities.............................................. 50 50
Liabilities of discontinued operations......................... 78 80
---------- ---------
Total liabilities........................................ 13,789 12,455
---------- ---------
Commitments and contingent liabilities......................... -- --
Stockholders' equity (deficit)
Common stock, $.01 par value; 20,000,000 shares
Authorized; 13,080,894 and 13,080,175 shares issued,
Respectively......................................... 131 131
Additional paid-in capital................................ 61,486 61,486
Less common stock in treasury, at cost;
24,908 shares........................................ (258) (258)
Accumulated deficit....................................... (63,857) (61,697)
------- ---------
Total stockholders' deficit.......................... (2,498) (338)
---------- ---------
$ 11,291 $ 12,117
========== =========
</TABLE>
See notes to financial statements.
-2-
<PAGE>
INTELLICALL, INC.
UNAUDITED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---- ----
<S> <C> <C>
Equipment sales.................................................. $ 929 $ 4,831
Cost of sales and revenues....................................... 1,052 4,269
-------- ---------
Gross profit (loss).............................................. (123) 562
Selling, general and administrative expenses..................... 1,468 1,805
Provision for doubtful accounts.................................. 19 (246)
Research and development expenses................................ 328 224
-------- ---------
Operating loss from continuing operations........................ (1,938) (1,221)
Gain on sale of stock............................................ 111 --
Other income..................................................... 26 9
Interest income.................................................. 27 61
Interest expense................................................. (335) (469)
Equity in the loss of unconsolidated subsidiary.................. (51) (358)
-------- --------
Loss from continuing operations.................................. (2,160) (1,978)
Loss from discontinued operations................................ -- (251)
-------- ---------
Net loss available to common shareholders........................ $ (2,160) $ (2,229)
======== =========
Basic and diluted net loss per share from continuing operations $ (0.17) $ (0.16)
======== =========
Basic and diluted net loss per share from discontinued
operations....................................................... $ -- $ (0.02)
======== ========
Basic and diluted net loss per share............................. $ (0.17) $ (0.18)
======== ========
Weighted average number of basic and diluted
shares outstanding.......................................... 13,056 12,029
======== ========
</TABLE>
See notes to financial statements.
-3-
<PAGE>
INTELLICALL, INC.
UNAUDITED STATEMENTS OF CASH FLOWS (in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---- ----
<S> <C> <C>
Cash flows from continuing operating activities:
Net loss from continuing operations........................ $ (2,160) $ (1,978)
Adjustments to reconcile net loss from continuing operations to net
Cash provided by operating activities:
Gain on sale of stock................................... (111) --
Depreciation and amortization........................... 234 407
Provision for doubtful accounts......................... 19 (246)
Provision for inventory losses.......................... 95 (103)
Equity in loss of unconsolidated subsidiary............. 51 358
Changes in operating assets and liabilities:
Receivables......................................... (54) 3,271
Inventories......................................... 292 731
Receivables from related party, net................. 70 60
Other current assets................................ (58) 73
Notes receivable.................................... -- 92
Accounts payable ................................... (401) 877
Accrued liabilities................................. 172 25
Other............................................... 10 (18)
--------- --------
Net cash (used in) provided by continuing operating activities (1,841) 3,549
Cash flows from investing activities:
Capital expenditures....................................... -- (25)
Capitalized software....................................... -- (316)
Cash received on sale of stock............................. 200 --
--------- --------
Net cash provided by (used in) investing activities 200 (341)
Cash flows from financing activities:
Borrowings on notes payable................................ 500 --
Advance payment received on sale of stock.................. 1,000 --
Net repayments on line of credit........................... -- (2,811)
--------- --------
Net cash provided by (used in) financing activities 1,500 (2,811)
Net cash flows from discontinued operations..................... 29 (388)
--------- --------
Net (decrease) increase in cash and cash equivalents........... (112) 9
Cash and cash equivalents at beginning of period................ 694 16
--------- --------
Cash and cash equivalents at end of period...................... $ 582 $ 25
========= ========
Supplemental cash flow information:
Interest paid................................................. $ 20 $ 120
========= ========
Supplemental non cash flow information:
Conversion of debt to equity.................................. $ -- $ 510
========= ========
</TABLE>
See notes to financial statements.
-4-
<PAGE>
INTELLICALL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements, in the opinion of the
Company's management, contain all material, normal and recurring adjustments
necessary to present accurately the financial condition of the Company and the
results of its operations for the periods indicated. The results of operations
for the interim periods reported are not necessarily indicative of the results
to be experienced for the entire year.
These unaudited financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999. Significant
accounting policies followed by the Company were disclosed in the notes to the
Company's Annual Report on Form 10-K. The year-end balance sheet data included
within was derived from the audited financial statements, but does not include
all of the disclosures required by generally accepted accounting principles.
Business: Intellicall, Inc. ("Intellicall" or the "Company") designs,
engineers, manufactures and sells pay telephones and retrofit kits, parts and
intelligent network platforms in the United States and internationally.
Creation of ILD Telecommunications, Inc.("ILD"): On May 10, 1996, the
Company entered into an agreement with certain investor groups to create ILD, a
new long-distance re-sale and operator services company. At that time the
Company transferred ownership in its wholly owned subsidiary, Intellicall
Operator Services, Inc. ("IOS"), to ILD.
As of March 31, 2000 and December 31, 1999, the Company's ownership
percentage in ILD was 30.0%.
On January 4, 2000 the Company was notified by ILD of its intention to
redeem Intellicall's interest in ILD's Series B preferred convertible stock.
ILD is to redeem 5,000 shares for $100 per share plus accrued and unpaid
dividends. As of March 31, 2000, ILD had remitted $.2 million to the Company,
redeeming 1,487 shares of the Series B preferred convertible stock and becoming
current on all accrued and unpaid dividends. As a result of the transaction,
the Company recorded a $.1 million gain on the sale of the stock to ILD.
Proceeds from the sale were used for general operating purposes.
On April 11, 2000 the Company sold to Banca del Gottardo the Company's
remaining ownership in ILD, exclusive of 6,239 shares of Series A preferred
convertible stock the Company is required to hold pursuant to the ILD
Organization Agreement (See Note 8).
Software Development Costs: Effective January 1, 2000 and as a result
of the impairment charge on capitalized software costs recorded by the Company
on December 31, 1999, the Company decided to expense as incurred all future
costs related to the development of software products for payphone equipment.
The amounts of software development costs capitalized for the quarters
ended March 31, 2000 and 1999 was zero and $.3 million. The Company recorded
zero and $.2 million of software amortization expense for the quarters ended
March 31, 2000 and 1999. $.1 million of software development costs were
expensed as incurred during the three months ended March 31, 2000.
-5-
<PAGE>
INTELLICALL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Reclassifications: Certain prior year amounts have been reclassified
to conform with the current year presentation.
NOTE 2 - SUMMARIZED INCOME STATEMENT INFORMATION FOR UNCONSOLIDATED
SUBSIDIARY
The Company accounts for its investment in ILD under the equity method of
accounting. Summarized income statement information for ILD is presented below
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
---- ----
<S> <C> <C>
Revenues .................................................................. $28,604 $25,953
Gross profit ................................................................ 9,204 7,516
Income from operations......................................................... 1,078 (157)
Net Loss available to common shareholders...................................... $ (165) $ (840)
</TABLE>
NOTE 3 - INVENTORIES
The components of inventories are (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Raw materials ................................................................ $ 3,335 $ 3,362
Work in process................................................................ 122 133
Finished goods ................................................................ 802 1,003
------- -------
4,259 4,498
Less reserves for obsolescence................................................. (1,558) (1,410)
------- -------
Net inventory $ 2,701 $ 3,088
======= =======
</TABLE>
-6-
<PAGE>
INTELLICALL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 4 - FIXED ASSETS
<TABLE>
<CAPTION>
The components of fixed assets are (in thousands): March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Office equipment.............................................................. $3,404 $3,404
Tooling and other equipment................................................... 5,001 5,001
------ -----
8,405 8,405
Less accumulated depreciation................................................. (7,544) (7,425)
------ ------
$ 861 $ 980
====== ======
</TABLE>
NOTE 5 - LONG-TERM DEBT
The Company's debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<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 2,000
Prime rate promissory note, due 2001 500 --
-------- --------
10,130 9,630
Less: Unamortized debt discount (379) (443)
-------- -------
9,751 9,187
-------- -------
Less: Current portion of long-term debt (8,130) (7,630)
-------- -------
Total long-term debt $ 1,621 $ 1,557
-------- -------
</TABLE>
On February 11, 2000 the Company signed a $.5 million revolving
promissory note with Bank of America due February 11, 2001. Interest is payable
monthly at Prime commencing on March 11, 2000 with the principal of the note
guaranteed by Bill Hunt, Chairman of the Board of Intellicall. The Company may
repay and re-borrow under the terms of the note at any time, up to a maximum
aggregate outstanding balance equal to the principal amount of the note.
Proceeds of the note were used for working capital purposes. As of March 31,
2000, the outstanding balance on the note is $.5 million. On May 1, 2000 the
Company paid off the $.5 million note.
-7-
<PAGE>
INTELLICALL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
On April 27, 2000 the Company received the remaining proceeds from the
sale of its ownership in ILD (See Note 9). A portion of the proceeds were used
to retire the remaining $2.6 million 8.0% convertible subordinated notes due
December 31, 2000 and $4.8 million of the 8.0% convertible subordinated notes
due November 22, 2001, both due to Banca del Gottardo. Additionally, on May 1,
2000 the Company paid off the $.5 million note due to Bank of America.
The total remaining debt outstanding at May 15, 2000 is $2.2 million and is
comprised of $.2 million 8% convertible subordinated notes due November 22,
2001 and $2 million 7% convertible subordinated notes due June 11, 2004.
NOTE 6 - DISCONTINUED OPERATIONS
On September 22, 1999 the Company elected to discontinue its billing
services operations effective October 21, 1999. The billing services segment of
the Company's business was determined to be unprofitable after taking into
account the administrative and support costs for the segment. The Company's
billing services system is a combination of hardware and software that
performs, without human intervention, all the functions necessary for
completing an operator assisted payphone call (i.e., collect, calling card and
credit card calls) and a range of other payphone services and features. During
the quarters ended March 31, 2000 and 1999, the Company reported a loss from
discontinued operations of zero and $.25 million. As a result of this action,
the Company's revenues and operating expenses for the periods presented herein
reflect only the equipment operations with the net results of the billing
services operations reported on its statements of operations under the caption
"Income (loss) from discontinued operations." Net revenues related to the
discontinued billing services operations were zero and $3.2 million for the
quarters ended March 31, 2000 and 1999.
NOTE 7 - BUSINESS COMBINATION
On January 18, 2000, Intellicall entered into a definitive agreement
to acquire, through the exchange of common stock of Intellicall, Heads Up
Technologies, Inc. ("Heads Up") of Carrollton, Texas. Heads Up designs,
manufactures and markets interactive digital products for the aviation, mass
transit and entertainment industries. Heads Up sells computerized products to
nearly 1,250 customers in more than 10 countries. Pursuant to the merger
agreement, Intellicall and Heads Up have agreed to an exchange ratio of
approximately (1.3) shares of Intellicall common stock for each share of Heads
Up common stock. This will result in the Heads Up shareholders being issued
approximately 11.5 million shares of Intellicall common stock, resulting in
such shareholders owning approximately 46.8 % of the issued and outstanding
Intellicall common stock following such merger. The merger is subject to a
number of conditions, including without limitation, approval by Intellicall's
stockholders. The merger is scheduled to be completed in the third quarter of
2000. There can be no assurance, however, that this merger will be consummated.
-8-
<PAGE>
INTELLICALL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 8 - SUBSEQUENT EVENTS
On April 11, 2000 the Company sold to Banca del Gottardo the Company's
remaining ownership in ILD, exclusive of 6,239 shares of Series A preferred
convertible stock the Company is required to hold pursuant to the ILD
Organization Agreement. The Company's ownership in ILD includes approximately
58,772 shares of ILD Series A convertible stock, 725 shares of ILD Common stock
and 11,111 shares of ILD Common stock obtainable upon conversion of the $1.0
million subordinated convertible note (the "Note") due from ILD to Intellicall,
dated May 10, 1996. Pursuant to the sale to Banca del Gottardo, Intellicall, as
of March 10, 2000, elected to convert the entire principal balance of the Note
into 11,111 shares of ILD Common stock.
The terms of the offer include the purchase of the ownership of ILD
(70,608 combined shares of Series A and Common shares) for $220 per share or
$15.5 million. The Company also has a right of first refusal, should Banca del
Gottardo transfer or sell the ILD stock to a third party.
The Company received $1.0 million on March 13, 2000 from Banca del
Gottardo as an advance payment toward the ILD stock sale. On April 27, 2000, the
Company received the remaining proceeds from Banca del Gottardo.
Proceeds of the stock sale have been used to pay off all of the $2.6
million, 8% convertible subordinated noted due December 31, 2000, $4.8 million
of the $5.0 million, 8% convertible subordinated noted due November 22, 2001,
and the $.5 million revolving promissory note due February 11, 2001 (See Note
5). The remainder of the proceeds will be used for working capital purposes.
-9-
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The accompanying unaudited financial statements, in the opinion of the
Company's management, contain all material, normal and recurring adjustments
necessary to present accurately the financial condition of the Company and the
results of its operations for the periods presented. The results of operations
for the periods reported are not necessarily indicative of the results to be
experienced for the entire year.
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements of the Company, the Notes thereto and information included elsewhere
in this report. References in the following discussion to annual periods refer
to the Company's years ended December 31, 1999.
Forward-Looking Statements - Cautionary Statements
This Form 10-Q contains certain "forward-looking statements" 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.
-10-
<PAGE>
Risk Factors Relating to Forward-Looking Statements
Regulatory Changes. The Company's sales and revenues are affected by existing
regulations and by changes in state and federal regulations to which the
Company'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 long-term financial welfare will depend on deeper and
more profitable penetration within these markets. Furthermore, the Company's
ability to implement and execute an effective business strategy for new products
and services, will directly effect the Company's ability to generate working
capital and fund growth. Funds available to the Company from external sources
may be insufficient to finance growth in working capital, and internally
generated funds may be insufficient to finance desired capital spending or
research and development spending.
The Company has historically suffered from low gross margins on
equipment sales. Although provisions for inventory losses, bad debt and warranty
reserves have resulted in negative gross margins until 1998, the Company's
variable gross margins on phone and network equipment products introduced since
1996 have improved. Notwithstanding such improvement, increased equipment sales
volume is required in future periods to cover a variety of costs. Such costs
include but may not be limited to fixed manufacturing overhead expenses and
selling, general and administrative expenses associated with the production and
sale of the Company's products. There is no guarantee that the required increase
in sales will generate sufficient gross profit to finance the portion of working
capital growth not financed externally.
International Economic Conditions. As a provider of payphone 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.
-11-
<PAGE>
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 no material problems have been experienced 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.
Changes in Presentation
On September 22, 1999 the Company elected to discontinue its billing
services operations effective October 21, 1999 (See Note 6 to the unaudited
Financial Statements). The billing services segment of the Company's business
was determined to be unprofitable after taking into account the administrative
and support costs for that segment. The Company's billing services system is a
combination of hardware and software that performs, without human intervention,
all the functions necessary for completing an operator assisted payphone call
(i.e., collect, calling card and credit card calls) and a range of other
payphone services and features. As a result of this action, the Company's
revenues and operating expenses for the periods presented herein reflect only
the equipment operations with the net results of the billing services operations
reported in its statements of operations under the caption "Income (loss) from
discontinued operations". Prior periods have been presented under the revised
format.
-12-
<PAGE>
Recent Developments
On January 4, 2000 the Company was notified by ILD Telecommunications,
Inc. ("ILD") of its intention to redeem Intellicall's interest in ILD's Series B
preferred convertible stock. ILD is to redeem 5,000 shares for $100 per share
plus accrued and unpaid dividends. As of March 31, 2000, ILD had remitted $.2
million to the Company, redeeming 1,487 shares of the Series B preferred
convertible stock and became current on all accrued and unpaid dividends.
Proceeds from the sale were used for general operating purposes (See Note 1 to
the unaudited Financial Statements).
On January 18, 2000, Intellicall entered into a definitive agreement to
acquire, through the exchange of common stock of Intellicall, Heads Up
Technologies, Inc. ("Heads Up") of Carrollton, Texas. Heads Up designs,
manufactures and markets interactive digital products for the aviation, mass
transit and entertainment industries (See Note 7 to the unaudited Financial
Statements).
On April 11, 2000 the Company sold to Banca del Gottardo the Company's
remaining ownership in ILD, exclusive of 6,239 shares of Series A preferred
convertible stock the Company is required to hold pursuant to the ILD
organization agreement. The Company received $1.0 million on March 13, 2000 from
Banca del Gottardo as an advance payment toward the stock sale. The Company's
ownership in ILD includes approximately 58,772 shares of ILD Series A preferred
convertible stock, 725 shares of ILD common stock and 11,111 shares of ILD
common stock obtainable upon conversion of the $1.0 million subordinated
convertible note due from ILD to Intellicall, dated May 10, 1996. Pursuant to
the sale to Banca del Gottardo, Intellicall, as of March 10, 2000, elected to
convert the entire principal balance of the Note into 11,111 shares of ILD
common stock.
The terms of the ILD stock sale include the purchase of the Company's
ownership in ILD (70,608 combined shares of Series A and Common shares) for $220
per share or $15.5 million. The Company also has a right of first refusal,
should Banca del Gottardo transfer or sell the ILD stock to a third party.
On April 27, 2000 the Company received the remaining proceeds from the
sale of its ownership in ILD. A portion of the proceeds were used to retire the
remaining $2.6 million 8.0% convertible subordinated notes due December 31, 2000
and $4.8 million of the 8.0% convertible subordinated notes due November 22,
2001, both due to Banca del Gottardo. Additionally, On May 1, 2000 the Company
retired the $.5 million note due to Bank of America. The remaining proceeds will
be used for general operating purposes and to fund expansion into new markets
subsequent to the acquisition of Heads Up (See Note 7 to the unaudited Financial
Statements).
-13-
<PAGE>
Results of Operations
Equipment Sales. Equipment sales for the quarter ended March 31, 2000 were $.9
million compared to $4.8 million for the same period last year. The $3.9 million
decrease is partially due to a reduction of shipments into the Canadian market
and an overall reduction in demand for payphones and their related parts.
Gross Profit (Loss). Gross loss for the quarter ended March 31, 2000 was $.1
million compared to a gross profit of $.6 million for the same period last year.
The $.7 million decline in gross profit is primarily due to the down turn in the
Independent Payphone Provider ("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
relative to sales, thereby reducing gross profit for the period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") for the quarter ended March 31, 2000 were $1.5
million compared to $1.8 million for the same period last year. The $.3 million
decline is primarily due to cost cutting measures undertaken by the Company,
including a reduction in personnel in the corporate and administrative areas of
the Company. Similarly, the Company experienced a general reduction in other
costs as management focused on decreasing the Company's cost to meet current
operating requirements, including outsourcing Human Resources and certain MIS
functions, as well as reducing travel and advertising expenses.
Provision for Doubtful Accounts. Provision for doubtful accounts expense for the
quarter ended March 31, 2000 was $.02 compared to a gain of $.25 million for the
same period last year. The $.27 million increase is primarily due to a
reclassification provision for doubtful accounts expense of $.34 million during
the first quarter of 1999 between the equipment segment and the billing services
segment, which was discontinued on October 12, 1999 (See Note 6 to the unaudited
Financial Statements). Exclusive of this reclassification, provision for
doubtful accounts expense decreased $.07 million from the quarter ended March
31, 1999 due to an improvement in the quality of the Company's receivables and
positive collection efforts on old and outstanding accounts, as well as an
overall reduction in sales volume.
Research and Development Expenses. Research and development expenses expense for
the quarter ended March 31, 2000 was $.3 million compared to $.2 million for the
same period last year. The $.1 million increase is primarily due to the
Company's decision to discontinue capitalizing software development, partially
offset by a reduction of salaries due to a reduction in head count and other
costs associated with research and development.
Gain on Sale of Assets. On January 4, 2000 the Company was notified by ILD of
its intention to redeem Intellicall's interest in ILD's Series B preferred
convertible stock. ILD is to redeem 5,000 shares for $100 per share plus accrued
and unpaid dividends. As of March 31, 2000, ILD had remitted $.2 million to the
Company, redeeming 1,487 shares of the Series B preferred convertible stock and
becoming current on all accrued and unpaid dividends. As a result, the Company
recorded a gain on
-14-
<PAGE>
the sale of the 1,487 shares of $.1 million. Proceeds from the sale were used
for general operating purposes (See Note 1 to the unaudited Financial
Statements).
Interest Income. Interest income for the quarter ended March 31, 2000 was $.3
million compared to $.6 million for the same period last year. The $.3 decrease
is primarily resulting from New York City Telecom discontinuing the service of
its note payable to the Company.
Interest Expense. Interest expense for the quarter ended March 31, 2000 was $.3
million, or $.1 less than the same period last year. The $.1 million decrease is
primarily a result of lower interest rates in the Company's debt due to the
retirement of the $1 million, 10% note payable to T.J. Berthel Investments, L.P.
on April 9, 1999 and the retirement of the Company's obligations to Finova on
January 28, 1999.
Equity in Loss of Unconsolidated Subsidiary. The Company reported a $.05 million
loss on the equity investment in ILD for the quarter ended March 31, 2000
compared to $.4 million for the same period last year. This loss represents
Intellicall's proportionate share, based on ownership, of ILD's net loss for the
period.
Discontinued Operations. On September 22, 1999 the Company elected to
discontinue its billing services operations effective October 21, 1999 (See Note
6 to the unaudited Financial Statements). The billing services segment of the
Company's business was determined to be unprofitable after taking into account
the administrative and support costs for the segment. The Company's billing
services system is a combination of hardware and software that performs, without
human intervention, all the functions necessary for completing an operator
assisted payphone call (i.e., collect, calling card and credit card calls) and a
range of other payphone services and features. As a result of this action the
net results of the billing services operations are reported on the statements of
operations under the caption "Income (loss) from discontinued operations." Net
revenues related to the discontinued billing services operations were zero and
$3.2 million for the quarters ended March 31, 2000 and 1999 Net loss related to
the discontinued billing services operations was zero and $.3 million for the
quarters ended March 31, 2000 and 1999.
Liquidity and Capital Resources
The Company reported a net loss from continuing operations of $2.2
million during the quarter ended March 31, 2000. This loss included non-cash
charges of $.4 million for depreciation and amortization, provisions for
doubtful accounts, provisions for inventory losses and the equity in loss of an
unconsolidated subsidiary, ILD. Adding depreciation and amortization of $.2
million and interest charges of $.3 million to the net loss results in a loss
before interest, taxes, depreciation and amortization (EBITDA) of approximately
$1.7 million. Net changes in operating assets and liabilities during the quarter
ended March 31, 2000 provided a source of cash of $1.0 million. Inventories
decreased $.3 million and accounts payable decreased $.4 as a result of reduced
inventory purchases and improved inventory management.
-15-
<PAGE>
Cash flows from investing activities include receipts of $.2 million
from ILD representing the redemption of 1,487 shares of ILD's Series B preferred
convertible stock. (See Note 1 to the unaudited Financial Statements).
Cash flows from financing activities include a $.5 million revolving
promissory note with Bank of America (See Note 5 to the unaudited Financial
Statements) and a $1.0 million prepayment from Banca del Gottardo toward the ILD
stock sale (See Note 8 to the unaudited Financial Statements).
On February 11, 2000 the Company signed a $.5 million revolving
promissory note with Bank of America, N.A., due February 11, 2001. Interest is
payable monthly at its prime rate commencing on March 11, 2000 with the
principal of the note guaranteed by Bill Hunt, Chairman of the Board of
Intellicall. The Company may repay and re-borrow under the terms of the note at
any time, up to a maximum aggregate outstanding balance equal to the principal
amount of the note. Proceeds of the note were used for working capital purposes.
The outstanding balance on the note as of March 31, 2000 was $.5 million. On May
1, 2000 the Company paid off the $.5 million note (See Note 5 to the unaudited
Financial Statements).
On April 11, 2000 the Company sold to Banca del Gottardo the
Company's remaining ownership in ILD, exclusive of 6,239 shares of Series A
preferred convertible stock the Company is required to hold pursuant to the ILD
organization agreement. (See Note 8 to the unaudited Financial Statements).
On April 27, 2000, the Company received the remaining proceeds from
the sale of the ILD stock to Banca del Gottardo. A portion of the proceeds were
used to retire the remaining $2.6 million 8.0% convertible subordinated notes
due December 31, 2000 and $4.8 million of the 8.0% convertible subordinated
notes due November 22, 2001, both due to Banca del Gottardo. Additionally, On
May 1, 2000 the Company retired the $.5 million note due to Bank of America (See
Note 5 to the unaudited Financial Statements). The remaining proceeds will be
used for general operating purposes and to fund expansion into new markets
subsequent to the acquisition of Heads Up.
Beyond 2000, the Company's ability to obtain further funds from
external sources will depend in part on its ability to generate operating
profits, or to substantially reduce its operating losses, through the execution
of its current business plan and the implementation of the new business strategy
related to the Heads Up acquisition. Although management of the Company believes
that the Company's sales will grow in 2000 and that profitability will improve
with sales, there can be no assurance that the events necessary for such sales
growth will occur as or when expected, or that future sales growth will be
sufficiently large or profitable to permit the Company to finance its activities
without recourse to continuing sales of assets or external funding sources.
There can be no assurance that under such conditions, external funds would be
available or, if available, would not potentially dilute shareholders' interests
or returns.
-16-
<PAGE>
Part II. Other Information
ITEM 1. Legal Proceedings.
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as a part of this Quarterly
Report on Form 10-Q.
*10.1 Agreement and Plan of Merger and Amendments
*10.2 Stock Purchase Agreement
* Previously filed as an exhibit to the Registrant's
Form 10-Q for the quarter ended March 31, 2000,
which was filed on May 15, 2000
(b) Reports on Form 8-K: None.
-17-
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
INTELLICALL, INC.
/s/ John J. McDonald, Jr.
--------------------------------------
John J. McDonald, Jr.
President and
Chief Executive Officer
/s/ R. Phillip Boyd
--------------------------------------
R. Phillip Boyd
Vice President Finance
and Chief Financial Officer
Date: May 15, 2000
-18-
