SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission file number 1-10588
INTELLICALL, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-1993841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2155 Chenault, Suite 410, Carrollton, Texas 75006-5023
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 416-0022
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value New York Stock Exchange
(Title of Class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10- K. [ X ]
The aggregate market value of the voting stock (which consists solely
of shares of Common Stock) held by non-affiliates of the registrant as of March
18, 1997, computed by reference to the closing sales price of the registrant's
Common Stock on the New York Stock Exchange on such date, was approximately
$42,300,000
Number of shares of the registrant's Common Stock outstanding as of
March 18, 1997: 9,159,848
Documents Incorporated By Reference:
The information required by Part III of this Form 10-K Annual Report is
incorporated by reference from the registrant's definitive proxy statement to be
filed not later than 120 days after the end of the 1996 fiscal year.
PART I
ITEM 1. BUSINESS.
I. GENERAL
Intellicall(R), Inc. ("Intellicall" or the "Company") is a diversified
telecommunications services and equipment company. The Company provides two
primary services: (i) automated operator services for the private pay telephone,
hospitality, and inmate services industries, and (ii) prepaid calling services.
The Company also provides for resale of direct dial long distance services to
the private payphone industry, and live operator services through its majority
owned subsidiary, ILD Communications, Inc. ("ILD").
The Company's primary telecommunications equipment product offerings are: (i)
pay telephones, network equipment, and software for the United States market
which incorporate advanced technology for internally performing the functions
associated with placing a pay telephone call, including the completion of
automated operator assisted calls, (ii) network products and software for
regulated phone companies in the United States ("Local Exchange Carriers" or
"LECs"), (iii) pay telephones and network management systems compatible with
international telecommunications standards, and (iv) call processing systems for
hotels, inmate facilities and other multi-unit users.
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.
RECENT DEVELOPMENTS
Creation of ILD
On May 10, 1996 the Company entered into an agreement with certain investor
groups to create ILD, a new long-distance resale and operator services company.
Intellicall transferred ownership in its wholly-owned subsidiary, Intellicall
Operator Services, Inc. ("IOS"), to ILD in exchange for cash in the amount of
$2,000,000, a $1,000,000 subordinated convertible note, and preferred and common
stock representing approximately 72.5% of the voting stock of ILD. The other
investor groups, Morris Telecommunications, LLC and Triad-ILD Partners, L.P.,
collectively purchased $2,000,000, or 27.5% of the voting stock of ILD, and
$1,000,000 of ILD's subordinated convertible notes. Contemporaneously with its
creation, ILD issued Secured Promissory Notes in the aggregate principal amount
of $2,000,000 with warrants to purchase an aggregate of 7,239 shares of ILD
common stock at a price of $0.01 per share. Sirrom Capital
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Corporation purchased a note in the original amount of $1,500,000 with a warrant
to purchase 5,429 shares of common stock at a price of $.01 per share and Reedy
River Ventures Limited Partnership purchased a note in the original principal
amount of $500,000 with a warrant to purchase 1,810 shares of common stock at a
price of $.01 per share.
ILD was created to strategically position the business operations of IOS for
growth in the long-distance and operator services industries. The long-distance
industry has been growing at a compound rate of 9% to 10% per year for over ten
years. Much of this growth has occurred with lower-tier (generally companies
with less than $500 million in annual revenues) "long-distance resellers."
According to statistics published by the Federal Communications Commission
("FCC"), annual revenues in the reseller industry have grown from approximately
$3 billion in 1984 to over $12 billion recently. Industry revenues for operator
services revenues have also increased during this period.
Resellers generally compete with larger inter-exchange carriers on the basis of
price, customer service, and attention to the business needs of customers. The
Company believes that market conditions and the current structure of the
industry provide an opportunity for ILD to pursue a business strategy of
continued internal growth and acquisition of other resellers and operator
service companies. This strategy may require ILD to raise additional equity and
debt capital in the future which may ultimately reduce the Company's ownership
portion in ILD below fifty percent (50%) on a fully diluted basis. The Company
believes that such capital and funding sources are available to ILD, although no
assurances can be given that it will be successful in the pursuit of its
objectives.
Refinancing of Company Debt
On November 22, 1996 Intellicall entered into a Loan and Security Agreement (the
"Loan Agreement") with Finova Capital Corporation ("Finova") pursuant to which
Finova has agreed to loan the Company up to $12,000,000 (the "Loan") based on an
available borrowing base. The Loan is evidenced by a Secured Revolving Credit
Note (the "Note") payable to the order of Finova. Borrowings under the Loan bear
interest at the rate of prime plus 1.75%. The interest rate may be decreased
prospectively by up to 0.5% based on future profitability of the Company.
Also the Loan has an unused line fee equal to one quarter of one percent
(0.25%) per annum of the unused portion of the Total Facility and a facility fee
equal to one-half of one percent (0.50%) per annum of the amount of the Total
Facility payable on the first anniversary of the Agreement and one each
subsequent anniversary thereof.
The initial term of the Loan Agreement is three years at which time, unless
extended, all amounts then outstanding must be repaid. The Loan Agreement
contains prepayment penalties in the event it is terminated prior to expiration
of its initial term. The Loan is secured by first and prior liens and security
interests encumbering substantially all of the assets of the Corporation,
including inventory, equipment, accounts receivable, general intangibles,
trademarks and tradenames.
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Also on November 22, 1996 the Company completed the sale of $5,000,000 of 8.0%
convertible subordinated notes, due November 22, 2001 (the "Notes"), to Banca
del Gottardo in Lugano, Switzerland. The Notes were issued at face value of
$5,000,000. The Notes were issued with warrants to purchase 200,000 shares of
the Company's common stock, $.01 par value (the "Common Stock") at an exercise
price of $5.00 per share (the "Gottardo Warrants"). The notes are convertible
into 1,000,000 shares of the Company's Common Stock at a conversion price of
$5.00 per share.
In connection with the issuance of the Notes, the Company issued an additional
warrant to purchase 150,000 shares of Common Stock (the "Additional Warrant").
The exercise price for the Additional Warrant is the same as for the Gottardo
Warrants.
The Company used the proceeds from the Loan and Notes (net of placement fees of
$509,406) to repay the remaining balance of its Series A Notes due to Nomura
Holding America, Inc in the amount of $12.7 million.
Passage of Telecommunications Act of 1996
On February 8, 1996, Congress enacted the Telecommunications Act of 1996 (the
"1996 Act") instituting a number of fundamental changes in the regulation of the
telecommunications industry in the United States. Congress stated that its
intent is to create a "pro-competitive, de-regulatory national policy framework
designed to accelerate rapidly private sector deployment of advanced
telecommunications and information technologies and services to all Americans by
opening all telecommunications markets to competition." The 1996 Act generally
is designed to open local telecommunications markets to competition and thus may
increase alternatives for the use and installation of the Company's products and
services. In addition, the 1996 Act requires local telephone companies to
eliminate subsidies of its pay telephone services and to treat its own and
independent payphones in a nondiscriminatory manner. The 1996 Act is being
implemented through a number of separate proceedings before the Federal
Communications Commission (the "FCC") and the courts at this time.
Prior to October 1996, the Company's customers who own private pay telephones
were entitled to $6.00 per phone per month in compensation for calls made by
end-users dialing access codes to reach long-distance carriers other than the
one pre-subscribed to the payphone. In response to the 1996 Act, the FCC
replaced this compensation program with a revised plan that increases the
revenue pay telephone owners will receive from their payphones. The FCC set an
interim, flat- rate compensation amount of $45.85 per month per phone for the
period October 1996 to October 1997. After that, pay telephone owners are
entitled to receive compensation on a per-call basis for each of these completed
calls assuming appropriate methods for identifying and tracking such calls will
be readily available. As of February 24, 1997 a review of this order is pending
in the United States Court of Appeals for the D.C. District. The compensation
obligation applies to completed access code calls (such as 10ATT or 1
800-CALLATT) and for calls to toll-free 800 numbers when such calls originate
from pay telephones. The FCC also concluded that state limitations on the price
of a local coin call must be eliminated, effective in October 1997. After
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that date, pay telephone owners will be permitted to set whatever rate they
choose for local calls placed from their pay telephones.
II. TELECOMMUNICATIONS SERVICES
Principal Service Products
Automated Operator Services. Approximately 60% of the Company's 1996 service
revenues were generated by the provision of automated operator services. The
predominant proportion of these revenues is generated by the Company's own
proprietary automated operator technologies, Intelli*Star(R), Intelli*Max(R),
and Intelli*Serv(R).
An automated operator system is a combination of hardware and software that
performs, without human intervention, all of the functions necessary for
completing an operator assisted telephone call (i.e., collect, calling card, and
credit card calls) and a range of other pay telephone services and features.
Each system performs the functions previously performed by live operators. The
pay telephone, or multi-line system, provides callers with appropriate
instructions in a digitized human voice for entering billing information (i.e.,
a calling card number, or a terminating phone number for a collect call) and
completes the calls. For example, in the case of a collect call, a synthesized
voice directs the caller to speak his name into the pay telephone handset and
the caller's response is digitally recorded and played back when the call is
answered at its destination. The called party is instructed to press "1" on his
telephone, or, if the system is configured with voice recognition capability, to
say "yes", if he wishes to accept the call. The automated operator system
records all the appropriate call and billing information for later retrieval by
the telephone owner, all without human operator assistance. Calls requiring
human operator assistance, such as person-to-person calls, emergency calls and
calls billed to a third party, are routed to live operators selected by the pay
telephone or call processing system owner.
By performing most operator functions, Intellicall's systems substantially
reduce the need for (i) an operator-assisted call to be routed first to a live
operator service and then routed to the final destination, a process known as
"backhauling," and (ii) centralized switching equipment. As a result, these
systems generally allow the owner of a pay telephone to provide operator
services more efficiently and profitably than a centralized operator service
provider, and at a lower cost to the consumer.
The Company provides billing and collection services to owners of pay telephones
who use the Company's automated operator technology. Billing and collection is
the process whereby owners of pay telephones and multi-line call processing
systems receive payment for the non-coin calls processed by the Company's
automated operator systems. The billing and collection process includes the
accumulation of phone call billing information, editing and formatting of that
data, and processing the data for billing through LECs. Call data is accumulated
by both the periodic receipt of computer disks and by electronic data
transmission.
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Intellicall's principal automated operator technology is the Intelli*Star system
which is designed to operate in pay telephones. The Company also markets two
other automated operator systems, Intelli*Max and Intelli*Serv. Intelli*Max and
Intelli*Serv are multi-line systems designed to operate principally in hotels
and inmate facilities. The Company does not sell its automated operator system,
but licenses the technology to owners of pay telephones and multi-line call
processing systems through long-term license agreements.
Under its most common Intelli*Star license agreement, Intellicall owns and has
the exclusive right to process the stored call and billing information and to
bill and collect the related call revenues. The Company pays commissions to the
owners of the pay telephones, or multi-line call processing systems under two
basic billing and collection programs. These programs are the "Easy" programs
and the "Unbundled" program. A description of each program is set forth below.
"Easy" Programs. The automated operator system (i.e. the Intelli*Star
equipped pay telephone or the Intelli*Max or Intelli*Serv system) records
all pertinent call and billing information for all calls made from it. The
information is stored in the memory of the pay telephone, or multi-line
system, for retrieval by the owner, utilizing Company designed hardware and
software, and a personal computer. The owner transfers the information from
the system to his personal computer and stores it on a diskette. The call
information is forwarded to Intellicall via the diskette, or alternatively,
transmitted electronically to Intellicall. Intellicall edits the billing
information, rejects certain unbillable call records, reformats the
information and bills and collects the related call revenues through
third-party billing agents and ultimately through the regulated telephone
companies. Intellicall pays the owner a flat commission rate based on
historic traffic. The owner pays no call validation or billing and
collection charges but must maintain traffic levels consistent with
historic activity. Intellicall assumes responsibility for uncollected call
revenues under the Easy programs. These programs, known as "Easy*Star",
"Easy*Max(TM)" and "Jail*Star(R)", were initially introduced in 1993.
"Unbundled" Program. Intellicall has adopted a marketing program to provide
incentives in the form of reduced fees to owners of pay telephones or
systems who contract directly with third parties for billing and collection
services. Generally under these unbundling arrangements, the owner sends
the diskettes containing the call and billing information to the Company,
which reformats the information and submits it to an agreed-upon
third-party billing agent. The third-party billing agent then bills and
collects the revenues and, depending on the particular agreement, pays
amounts owed the Company by its customer directly or pays the pay telephone
or system owner, who then pays the Company amounts owed. The Company's
compensation includes a processing fee and a percentage of the call
revenues. Under this arrangement, Intellicall assumes no responsibility for
any uncollected telephone calls.
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As of December 31, 1996 the Company's customers were operating approximately
62,000 pay telephones and other equipment utilizing the Intelli*Star,
Intelli*Max, and Intelli*Serv technology.
Live Operator Services. ILD, through its wholly owned subsidiary IOS, provides
live operator services for pay telephones, hotels, and inmate facilities in
competition with the regulated telephone companies and other operator service
providers. IOS delivers its service through a third-party contract with another
operator service provider. IOS's operator services are accessed when calls
requiring operator assistance and/or alternate billing options are placed from
customer locations. Such services involve the use of live operators to receive,
validate, and complete the calls. The calls handled by IOS are billed according
to the instructions of the caller with charges for such calls appearing on the
billed party's monthly credit card statement or regulated telephone company
bill.
IOS pays fees based on the call traffic processed pursuant to the third-party
contract. In turn, IOS pays to owners of pay telephones and call processing
systems who subscribe to its operator services a commission based upon each
completed call. By programming the pay telephones and multi-line systems
utilizing this service to automatically connect the caller to an IOS operator
for operator assisted calls, owners of pay telephones are able to obtain revenue
from operator-assisted non-coin calls.
IOS provides intrastate, interstate and international long distance services. As
of January 31, 1997, IOS was certified as a provider of operator services in 34
states and provides services in four other states where certification is not now
required. In addition, IOS provides interstate-only operator services in 12
states where it is not certified to provide intrastate services.
IOS has filed informational tariffs and periodic reports as required by the FCC
and complies with all requirements imposed by the Telephone Operator Consumer
Services Improvement Act of 1990. IOS is certified by the FCC to provide the
international services it offers under a Section 214 Authority.
Prepaid Calling Services. The Company entered the prepaid telecommunications
services market in the second quarter of 1994. The prepaid services market has
experienced rapid growth and, according to industry sources, may already exceed
$1.0 billion in annual revenues. The long term use of prepaid services is
expected to be a competitive and convenient alternative to traditional
away-from-home calling methods such as payment by coin, billed collect or billed
to a calling card. As a result, prepaid calling cards are increasingly sold in
retail environments, and used by corporations as premiums in a variety of
marketing and promotional programs.
The Company's prepaid services are provided through a proprietary service
delivery platform implemented with the Company's internally developed
Intelligent Network Platform ("INP") technology. Calls are priced at postalized
rates and unlike the operator services industry, currently carry no operator
surcharges. Calls may be originated and terminated in all 50 states, Puerto Rico
and the U.S. Virgin Islands. Calls may also be terminated in over 200 foreign
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countries. Callers access the facility by dialing an "800" number from any
touch-tone telephone. Through a digitized voice, the system requests that the
caller enter a personal identification number ("PIN"), and the destination
telephone number before completing the call. Each PIN is allocated a certain
number of minutes for placing telephone calls. The Company's system monitors the
amount of time used and notifies users when their allotted time is expiring. The
principal advantages to users of prepaid calling services are: (i) the lower
cost of prepaid telephone calls, compared to the cost of placing calling card,
credit card, or collect calls, and (ii) the ease of use.
Since 1994 Intellicall has continued to refine its prepaid technology and
network to meet high volume market requirements, identify reliable sources for
volume production of a diversified range of both plastic and paper cards and
enhance and expand its customer service network. The Company has also focused
its marketing efforts on developing a strong base of retail customers and
expanding its base of corporate customers who use phonecards as
premiums/incentives for a variety of marketing programs. Management believes the
Company's technology and marketing strategy have positioned it to continue to
compete effectively with other providers of prepaid services with unique and
customized product offerings.
Long-Distance Resale. ILD offers switched and dedicated 1+ services under a
reseller agreement executed by the Company with Sprint. The Company buys such
services in bulk for its own use and for resale by ILD to its customers at rates
which are negotiated. The Company and ILD provide customers with periodic
reporting of telephone call detail in a form that assists customers in
controlling and monitoring telecommunications costs.
Sales and Marketing
All of the Company's services, except for Prepaid Calling Services, are sold
primarily to customers who purchase its telecommunications equipment. Operator
services and resale of long distance service are an integral part of the
operation of pay telephones and multi-line call processing systems. All of the
Company's sales and marketing personnel for the private pay telephone industry
are trained in the operation of the ancillary services which the Company offers
its customers. The Company markets itself as "The Full Service Public
Communications Company," which it believes is a competitive advantage over other
manufacturers of pay telephone and related equipment in the U.S. Private
Payphone Industry.
The Company markets its prepaid services with a dedicated marketing team focused
on retail and premium/incentive applications. Potential customers are identified
and qualified through referrals from existing customers, personal contacts,
trade shows and advertisements. The marketing staff provides in-depth proposals
that illustrate how prospective customers can achieve their financial and
marketing objectives by using the Company's services and after-sales support.
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Competition
The Company competes with a large number of long-distance and operator service
companies in the provision of automated and live operator services, prepaid
calling and long-distance services, many of which have superior technical and
financial resources than the Company. AT&T, MCI, and Sprint dominate the
operator services market and long-distance industry in general. Competition in
these markets is based upon price, commission programs, quality of service,
customer reporting and customer service.
In recent years, AT&T has intensified an aggressive marketing campaign designed
to recapture market share from its major competitors, including MCI and Sprint,
and from the operator services industry, including automated and live operator
services, such as those provided by the Company. The marketing campaigns include
increased emphasis on brand awareness, encouraging consumers to use AT&T's
proprietary calling card, which currently cannot be billed by other operator
service providers, and encouraging consumers to access AT&T when using another
carrier's system. This competition continues today with new "dial around"
offerings such as 1-800 COLLECT, 1-800-CALLATT and the growing prepaid calling
industry. Since their introduction, these factors have had a materially adverse
effect on the Company's and its customers' call revenues.
The combination of the above factors reduced the number of operator assisted
telephone calls which the Company could bill through its automated and live
operator service products, and from which the Company derives most of its
revenue and income.
The 1996 Act permits the Regional Bell Operating Companies ("RBOCs") to offer
long-distance services, including the provision of operator services, outside
their home telephone regions and establishes conditions upon which they would be
permitted to enter this market within their regions. It is expected that in 1997
one or more of the RBOCs will request authority to enter the long-distance
market within their regions.
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III. TELECOMMUNICATIONS EQUIPMENT
Industry Overview
The U.S. Public Telecommunications Industry. On June 15, 1984 the FCC authorized
competition in the operation of pay telephones and allowed pay telephones to be
regulated by the states. Since that date, substantially all states have
authorized the installation and operation of private pay telephones. Subject to
state and federal regulation, pay telephones may be placed in public areas and
commercial establishments such as airports, convenience stores, supermarkets,
hotels, hospitals, service stations and restaurants. Pay telephones may also be
placed in confinement facilities to provide collect-only services to inmate
populations. Owners of pay telephones collect all monies deposited in the
telephones, pay applicable telephone line charges and site commissions and are
responsible for telephone installation, maintenance, repair and compliance with
applicable regulations.
The largest networks of pay telephones in the United States are operated by
Local Exchange Carriers. Many of the pay telephones used in these public
telecommunications networks are not equipped with advanced technology. The local
telephone companies are recognizing the need to improve productivity and
profitability in their pay telephone operations, and that new services are being
demanded by users of public communications networks. As a result, many of these
companies have recognized the need for intelligent products and are seeking
technology that would enable the development of new service offerings. Many
local telephone companies have begun to install intelligent payphone technology
and to issue requests for information to equipment vendors for proposals to
upgrade the functionality of their networks.
The International Public Telecommunications Industry. Many foreign countries are
expanding their telecommunications infrastructure. These countries realize that
the installation of modern technology is integral to their continued economic
development and ability to attract foreign investment. Accordingly, many foreign
governments, particularly in newly industrialized countries, are privatizing and
deregulating their telecommunications operations.
The Company's management believes that one of the first areas of development for
many countries will be their public telecommunications infrastructure. Faced
with enormous investment requirements and limited financial resources, the
Company believes that developing countries will select telecommunications
technologies and strategies that are easily deployed, cost effective, and
operationally efficient. In April 1993, the Company introduced a new family of
products, including pay telephones and INP's, to address this new international
market.
Products
Pay Telephones. The Company designs, manufactures and markets pay telephones
which incorporate advanced technology that internally performs the functions
associated with placing a pay telephone call. The Company's two principal phones
are the UltraTel(R) and the line- powered AstraTel 2(R). The UltraTel phone is a
coin-operated, intelligent pay telephone sold in
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a number of housings familiar to users of pay telephones and requires electrical
power at the site of installation. The AstraTel 2 is an intelligent pay
telephone introduced by the Company late in 1996 and is powered by the
electrical current provided by the network.
The Company's telephones operate by means of advanced microprocessor technology
located within the housing. When a call is initiated, the microprocessor
automatically performs a series of functions that include determining the
applicable rate for the call, and determining whether the call has been
answered. The Company's pay telephones communicate with a caller by voice
messages digitally synthesized and stored in memory chips located in the pay
telephone.
Among the most important features of the Company's pay telephones is the ability
to reliably and accurately detect whether the call has been answered. This
answer detection capability is not dependent upon an electronic signal from the
central office of the regulated telephone company. Accurate answer detection is
important to the successful operation of a private pay telephone in order to
ensure that all completed calls are properly billed and that incomplete calls
are not billed.
All programmable features of the Company's pay telephones may be altered from a
remote location by means of the Company's proprietary software using a personal
computer. These programmable features include the rate tables and certain
management information capabilities that enable the owner to determine if the
pay telephone requires service or coin collection. These management information
and diagnostic capabilities eliminate unnecessary coin collection and service
trips to the pay telephone location. In addition, certain enhancements may be
added to the Company's pay telephones from a remote location. The Company
believes that this feature reduces the risk that its pay telephones will become
obsolete due to technological advances made after the pay telephones are
installed and permits rapid response to regulatory changes.
The Company's pay telephones are primarily available in either a Western
Electric or GTE style housing. Most models are solely coin operated, some accept
coins and are also equipped with a credit card reader and some only accept
credit cards. The Company also sells retrofit kits that give the Company's early
models of pay telephones or competitive private pay telephones the same
capability as the Company's more advanced models.
Intelli*Star. The Intelli*Star system is an automated operator product licensed
to owners of pay telephones. The Company's UltraTel line of pay telephones
requires the addition of a separate integrated circuit board, commonly called
the I*Star board, to complete the system. This separate integrated circuit board
is attached to the pay telephone's operating circuitry. In the Company's
AstraTel line of pay telephones, Intelli*Star is activated by means of a
software enhancement, and requires no additional integrated circuitry.
Intelli*Star is available on every pay telephone model intended for sale in the
United States.
Intelli*Max and Intelli*Serv. Intelli*Max and Intelli*Serv are multi-line call
processing systems targeted for large, multi-line institutions, primarily hotels
and inmate facilities. These multi-line call processing systems offer many
features similar to Intelli*Star, including automated calling
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card and collect calling and answer detection. The Company's multi-line call
processing systems enable the owner to control all forms of call rating and
provide consolidated reporting on all call activity.
International and Regulated Market Products. The Company designs, manufactures
and markets a family of products designed to provide advanced intelligent
network features to public communications networks in the United States and
internationally. These products include intelligent pay telephones and call
processing, network control and business management systems designed to
facilitate the deployment of intelligent public access telecommunications
systems in developing countries. Alternatively, these products can be utilized
by local telephone companies in the United States to upgrade the systems
management capability of existing pay telephone networks.
The telephones designed for these markets each contain a single integrated
circuit board. A significant advantage of these integrated circuit boards is
that they contain a common architecture for products utilized in all market
segments. As a result, the pay telephones can be configured for virtually any
environment principally by the implementation of software changes. The
telephones allow use of a variety of payment systems including U.S. and
international coinage, credit cards and several types of pre-payment cards,
including cards based on PINs, magnetic stripe cards and integrated circuit
cards ("chip cards"). Additionally, the telephones can be operated with
auxiliary power sources or power supplied by telephone lines. The products can
be utilized in a wireless, including cellular, environment and can operate using
solar power.
Sales and Marketing
U.S. Private Payphone Market Sales. Through its own direct sales force,
consisting of six persons, the Company sells, and licenses technology for, pay
telephones, multi-line systems and related services to its customers, who in
turn either sell the products to third parties or own and operate the products
on leased sites. Owners of the Company's products lease sites for the
installation of their equipment, operate and maintain the equipment, and pay
site commissions based upon the revenues generated from the equipment.
The private pay telephone market is largely based upon the ability of the
Company's customers to secure sites for telephones. Competition for sites
(either for locations having no pay telephone or call processing system or for
sites that are held by other providers, which may include, in the case of pay
telephones, the local telephone companies and in the case of call processing
systems, AT&T) is primarily based upon commissions offered to site owners.
International and U.S. Regulated Market Sales. The Company currently employs a
sales and sales support staff of six persons charged with sales to these
markets.
The Company augments its sales staff by contracting with international
distributors and marketing representatives. Distributors and/or agents are
subject to the requirements of the Company's
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distributor/agent agreements, and must agree to comply with all applicable
United States and international laws regarding the sale of products outside the
United States of America. The market defined by local telephone companies will
depend on the ability of the Company to demonstrate its advanced intelligent
network technology, and provide products to upgrade existing public
communications networks. The Company believes that its experience as a leader in
the public communications market since 1985 is an important factor in the
evaluation of its products for use by local telephone companies.
Manufacturing and Assembly
The Company's products are principally assembled at the Company's manufacturing
facility in McAllen, Texas. After the products are assembled at the Company's
manufacturing facility, they are tested before shipment to the purchaser. Once a
product 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 has agreed to assist in the installation of pay
telephones and network management systems with respect to certain international
and regulated market customers.
The Company purchases certain components from single-source suppliers. The
Company believes that alternative sources are available and that an interruption
in supply would not have an enduring impact on its results of operations. 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. The
Company continues working to secure alternate sources for single-source
components.
Warranty, Maintenance and Service
The Company provides free repair service on all Intelli*Star boards which are
properly licensed and used in UltraTel payphones. The Company provides the
original purchaser of its other products a limited one-year warranty on all
electronic components, and a limited 90-day warranty on all other parts and
equipment. The Company offers a two year warranty on AstraTel 2 electronic
components and a five year warranty to original owners of AstraTel 1 electronic
components. The Company's technical support staff at its corporate offices
currently provide support services over the telephone to customers who have
installation or operational questions. The Company does not currently offer a
maintenance agreement for its products but does provide non-warranty service.
Most warranty and non-warranty service is provided by the Company at its
manufacturing facility in McAllen, Texas.
The Company holds training classes for its customers on how to install, operate
and maintain the Company's products.
- 12 -
Competition
The Company competes against other private pay telephone manufacturers, call
processing system manufacturers, and software providers. The Company's principal
competitors in the U.S. private payphone market are Elcotel, Inc., Technology
Services Group, Inc. and Protel, Inc. (a subsidiary of Inductotherm Industries,
Inc.).
The 1996 Act requires, among other things, that LEC's end all subsidies to their
own pay telephone services and provide services to independent pay telephone
providers on the same rates, terms and conditions as they offer to their own pay
telephone services. By equalizing the basis for competition between the local
telephone company and independent pay providers, the 1996 Act may create
additional opportunities for existing pay telephone providers, or for new
entrants, to compete with the LEC's.
Numerous entities compete with the Company in the international public
communications markets, including many larger and better capitalized companies
with greater 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 the
greatest growth in sales of public communications equipment is projected. Many
of the Company's competitors have adopted a similar strategy.
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 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 the future 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.
The market for international public communications is highly competitive, and
numerous competitors are larger, are better capitalized and have greater
experience in marketing their products internationally. In addition, the
Company's international marketing efforts are 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.
IV. OTHER BUSINESS FACTORS
Research and Product Development
The Company's research and development programs are currently focused on
developing new products and product enhancements, improving product reliability
and reducing the manufacturing costs of the Company's products. For the fiscal
years ended December 31, 1996, 1995, and 1994, research and development
expenditures were approximately $2.8 million ($2.18 million of
- 13 -
which were capitalized software costs), $4.9 million ($2.55 million of which
were capitalized software costs), and $5.6 million ($2.6 million of which were
capitalized software costs) respectively. The Company believes that new products
and product enhancements will increase its market opportunities and are
essential to its long-term growth. The Company's ability to fund future research
and development costs will be dependent on its ability to generate cash in
excess of its operating needs.
Patents, Trademarks and Licenses
Patents
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 pay telephones. The Company considers its patents important to its
business.
Prior to 1993 the Company had never granted to third parties a license to
manufacture or market competing pay telephones or call processing equipment that
performs the critical public telephone and automated operator functions patented
by the Company. During 1993, however, certain other manufacturers began to
market pay telephones and call processing equipment that perform functions the
Company believes are covered by its patents. In 1994, as a result of litigation
commenced by one such manufacturer seeking a declaratory judgment that their
products did not infringe on the Company's products, the Company licensed
certain of its patents for its store and forward technology for an initial
licensing fee and various ongoing fees.
Trademarks
The Company has registered in the United States its trademarks "Intellicall,"
"AstraTel," "UltraTel," "Intelli*Serv," "Intelli*Max," "VICS," "Intelli-Pro,"
"Intelli-Pro Plus," "Jail*Star," and "Intelli*Star". The Company also owns the
trademarks "Intelli*Mate," "E*Z Collect," "Relay," "Check*Mate," "Star*Message,"
"Turbo*Star", "Easy*Star" and "Easy*Max". The Company considers its trademarks
important to its business.
Licenses
In April 1993 the Company obtained an exclusive patent license from Gateway
Technologies, Inc. ("Gateway") under which the Company received rights to use
and sub-license certain call processing technology. The license arrangements
with Gateway were modified in June 1994. Under the modified arrangements, the
Company licensed certain of its patents to Gateway, the Company received a
license from Gateway to use certain of its patents, and Gateway is obliged to
share revenues received from sub-licensing certain of Gateway's and the
Company's patents. The license is effective until June 1997 subject to renewal
rights.
- 14 -
Effective January 1, 1992 the Company entered into an amended and restated
patent license agreement with MessagePhone, Inc. ("MPI") pursuant to which the
Company licenses MPI's automated voice messaging patents. The license allows the
Company to offer voice messaging services to its Intelli*Star and call
processing customers. Pursuant to this agreement, the Company makes quarterly
payments to MPI. The license currently expires on July 30, 2008; however, it is
effective until the expiration of the MPI patents, including any continuations
of such patents.
The Company licenses voice recognition products used in Intelli*Max and in
certain pay telephone locations, pursuant to a license agreement with Voice
Control Systems. The Company pays monthly license fees to Voice Control Systems
on voice recognition products manufactured and sold as part of its automated
operator technology.
Regulation
Telecommunications services and equipment offered by the Company are subject to
varying degrees of regulation at both the federal and state levels. There can be
no assurances that changes in such regulation, if proposed and adopted, would
not have an adverse impact on the operations of the Company and its customers.
Federal. The Communications Act of 1934 (the "1934 Act"), as amended, governs
the provision of interstate services offered by the Company and its customers.
The FCC has enacted rules governing the provision of interstate operator
services that include, among other things, filing informational tariffs,
providing notices to end-users of the identity of the service provider in the
form of postings and verbal announcements, and providing rate quotes upon
request of the calling party. A verbal announcement identifying the service
provider also must be given to recipients of collect calls from pay telephones,
and rate quotes must be provided to them upon request. Other requirements
include a prohibition on blocking access to alternative telecommunications
carriers via certain access codes. The FCC has declined to impose such
requirements on operator services offered in connection with pay telephones in
confinement facilities.
The Company issues and relies upon tariffs filed pursuant to the 1934 Act to
govern its provision of interstate prepaid services. The FCC has the authority
to review these tariffs and may reject or prescribe rates or terms if it
concludes the Company's tariffed provisions are not just and reasonable. All of
the tariffs for prepaid services filed with the FCC have gone into effect
without opposition. However, the FCC recently concluded that non-dominant
providers of interstate interexchange services (which include the Company) must
withdraw their tariffs on file at the FCC by September 1997 and rely instead on
contracts or other arrangements with their customers in the future. This
decision is under review in the United States Court of Appeals for the D.C.
Circuit. The court has stayed the effectiveness of the FCC's rule pending the
completion of its review, which is not expected until the end of 1997 at the
earliest.
- 15 -
The Company complies with the FCC's regulations governing the provision of
operator and prepaid services to international destinations and has obtained
Section 214 authority from the FCC to provide its international services.
The Company's private pay telephones and call processing systems must comply
with technical requirements contained in Parts 15 and 68 of the FCC's rules in
order to operate and/or be connected to the public telephone network. The
Company has performed those tests necessary to assure compliance with these
technical and operational requirements and has obtained the proper registrations
and/or certifications from the FCC for all its products. The Company updates
these registrations and/or certifications periodically and the Company believes
that such registrations and/or certifications will be routinely granted.
The Company's customers who own private pay telephones earn revenues from calls
placed from their telephones, and at present receive compensation from end-users
on a per-call basis for coin- sent-paid calls, and from long distance carriers
for certain non-sent-paid calls. Prior to October 1996, such owners of private
pay telephones were entitled to $6.00 per phone per month in compensation for
calls made by end-users dialing access codes to reach long-distance carriers
other than the one pre-subscribed to the payphone. In response to the 1996 Act,
the FCC replaced this compensation program with a revised plan that
substantially increases the revenue pay telephone owners will receive from their
payphones. The FCC also concluded that state limitations on the price of a local
coin call must be eliminated, effective in October 1997. After that date, pay
telephone owners will be permitted to set whatever rate they select for local
calls placed from their pay telephones.
In addition, the FCC concluded that pay telephone owners should receive
compensation from interexchange carriers for certain calls originated at their
pay telephones. The compensation obligation applies to completed access code
calls (such as 10ATT or 1 800-CALLATT) and for calls to toll-free 800 numbers
when such calls originate from their pay telephones. The FCC set an interim,
flat-rate compensation amount of $45.85 per month per phone for the period
October 1996 to October 1997. After that, pay telephone owners are entitled to
receive compensation on a per-call basis for each of these completed calls
assuming appropriate methods for identifying and tracking such calls will be
readily available. As of February 24, 1997 a review of this order is pending in
the United States Court of Appeals for the D.C. District. The Company does not
participate in revenues derived from any of these compensation plans, and may be
required to pay all or a portion of these amounts for completed calls placed at
pay telephones by users of its prepaid calling cards. If the FCC's order is
upheld on appeal, the financial impact, if any, of such payments on the
Company's prepaid calling card business cannot be determined with specificity
until the number of calls placed from pay telephones is known, the amount of
compensation per call is determined by the Court of Appeals and the availability
of real-time call tracking mechanisms is in place and generally available.
It is anticipated that the interconnection arrangements and regulations under
which the local telephone operating companies and private pay telephone owners
have provided pay telephone services will be modified next year, as the 1996 Act
expressly precludes the local telephone
- 16 -
operating companies from discriminating between their pay telephones and private
pay telephones. The FCC recently ordered the local telephone companies to
reclassify their pay telephone service from regulated to non-regulated status by
April 15, 1997. The manner in which the local telephone companies provide pay
telephone services to confinement facilities will also change, as they are now
required by the FCC to offer their confinement facility pay telephones unbundled
from their basic local exchange services. The Company expects these changes to
benefit its private pay telephone owner customers.
The FCC has had under consideration for several years proposals that would
require most interstate long distance calls initiated by dialing "0" from pay
telephones to be completed using one or more predetermined long distance
carriers rather than through the automated pay telephone or operator service
provider to whom the private pay telephones are pre-subscribed ("Billed Party
Preference"). Some proposals would also extend Billed Party Preference to most
intrastate calls initiated by dialing 0 as well as 0+ calls initiated from
confinement facilities. The Company, AT&T, certain other interexchange carriers,
certain local exchange operating companies, and certain penal institutions,
among others, are opposing this proposal. Although the Company believes it is
unlikely that such a proposal will ultimately be implemented, if it were to be
adopted and implemented as currently proposed, it could have an adverse impact
on the Company's business.
The FCC also has under consideration three alternatives to Billed Party
Preference. In the first alternative, the FCC requested comment on whether a cap
or ceiling on 0+ call rates should be adopted in lieu of Billed Party
Preference. The FCC indicated that the issue of rate caps for inmate phones may
be considered as part of this alternative. In the second alternative, the FCC
solicited comment on a proposal that operator service providers (which include
the Company's customers who operate pay telephones equipped with the
Intelli*Star technology) be required to disclose the exact amount that they will
charge prior to each call. The FCC is considering whether to apply this rate
disclosure requirement to all operator service providers or only to providers
whose rates are above a specified benchmark level. The FCC's proposal was
opposed by most operator service providers as unwarranted and technically
infeasible. Finally, in November 1996 the Competitive Telecommunications
Association proposed as an alternative that all operator service providers be
required to state that rates are available on request, but not to provide an
exact rate quote unless the caller specifically requests it. The Company
believes that both the rate disclosure and rate availability proposals, if
adopted, may require additional development to modify its Intelli*Star equipped
pay telephone products, and may require the Company's pay telephone provider
customers to retrofit and/or replace existing pay telephones that they have
installed. The Company believes that any modifications required could be
developed and incorporated into its products.
Although Billed Party Preference and its alternatives have been under
consideration since 1987, the Company now believes that the FCC may issue an
order addressing these proposals, at least in part, sometime during 1997. The
Company cannot predict whether the FCC will adopt any rate cap or rate
disclosure proposal, or if adopted, whether a rate cap or rate disclosure will
be reasonable, and thus have no material adverse impact on the Company. However,
the Company,
- 17 -
in principle, is in favor of an alternative to Billed Party Preference, and has
been advocating that the FCC adopt a reasonable ceiling on rates for 0+ calls
since 1993. The Company is still evaluating the feasibility of rate disclosure
proposals, but has indicated it tentatively supports some form of a statement
that rates are available upon request.
State. State regulatory commissions in all but one state have established rules
and regulations governing the provision of private pay telephone services. Such
rules typically include certification or registration; notice to end users of
the identity of the service provider in the form of postings and verbal
announcements; requirements for rate quotes on request; call routing
restrictions; and maximum rates. While not necessarily uniform, these rules and
regulations generally establish minimum technical and operational requirements
to assure that public interest considerations are addressed. Most states
regulate rates for local and intrastate toll calls placed from pay telephones.
Initially established to regulate only services paid for by coin, such
regulations have been modified in a number of states to include the provision of
automated operator services and thus also apply to pay telephone providers using
the Company's Intelli*Star technology. Other states have chosen to regulate the
provision of automated operator services through rules established for operator
service providers rather than those established for pay telephone owners. The
FCC recently ordered that states must eliminate any barriers to competition in
pay telephone services and pre-empted, effective October 1997, state regulations
limiting the rates charged for local coin calls.
The Commonwealth of Pennsylvania has adopted rules which, if determined to be
applicable to private pay telephones, would require modification to the
Company's products if currently installed or offered for sale in the
Commonwealth. The modification would permit users of private pay telephones to
enter a code that signals the local telephone operating company to block
transmission of the originating telephone number to called parties who have
subscribed to Caller ID from their local telephone operating company. In
response to the Company's petition seeking clarification from the Pennsylvania
Public Utility Commission on the extent to which such rules apply to non-local
telephone operating company pay telephones, the Commission rescinded the rules
with respect to such phones pending further consideration. The Company can
comply with such rules if ultimately determined to be applicable.
Although many state regulatory commissions regulate the provision of inmate
telecommunications services by private providers through waivers of applicable
portions of their pay telephone rules, a growing number of states have adopted
separate regulations governing the provision of such services. In some
instances, states that do not otherwise permit private pay telephone owners to
compete with regulated telephone companies have authorized such competition with
respect to confinement facilities.
The Company is currently certified to provide intrastate prepaid services in 37
states and is seeking certification in seven other states. Six states in which
the Company provides intrastate prepaid services do not require the prior
approval of the respective state regulatory commissions in order to provide
services. Most states in which the Company provides intrastate prepaid services
appear to have concluded that providers of prepaid services are subject to the
same types
- 18 -
of regulations, including that of entry and rates, to which traditional long
distance carriers are subject. Additionally, several states have required
prepaid service providers to post bonds, and in some cases, pay local access
charges. Several other states have instituted hearings and/or proceedings to
consider what, if any, regulations should be adopted to assure proper disclosure
of terms, rates and conditions for consumer protection. The Company knows of no
proposed requirement with which it could not comply if adopted in any state in
which it is not currently certified. There can be no assurances, however, that
the Company can obtain the appropriate authorizations, or that states will not
adopt regulations with which the Company either cannot or may choose not to
comply, and thus preclude the Company's ability to offer certain or all
intrastate prepaid services in those states. A petition before the FCC
requesting that it preempt state regulation of certain prepaid services has been
denied, thus permitting the states to continue to regulate certain prepaid
services to the extent permitted under their own enabling statutes.
The Company has obtained, where necessary, the proper intrastate operator
services authorizations including, where applicable, certificates of public
convenience and necessity (or similar certificates), and approval and acceptance
of its tariffs, in those states in which it provides operator services. The
Company complies with applicable state regulations governing the provision of
operator services.
Although most states now allow the competitive provision of operator services,
prepaid services, and private pay telephones, there can be no assurances that
states will continue to allow competition in these areas or that states will not
adopt regulations that make competitive entry uneconomic.
- 19 -
Employees
As of December 31, 1996 the Company had 221 employees, of which 174 were
employed in operations and 47 were employed in executive and administrative
capacities. The Company believes its employee relations are good.
Major Customers
One single customer accounted for 10.5% or $9.7 million of the Company's
consolidated revenues in 1996. No single customer accounted for more than 10% of
the Company's consolidated revenues during 1995 and 1994.
Seasonality
The Company's call revenues and domestic equipment sales are affected by
seasonal weather conditions throughout the United States, which tend to reduce
the number and duration of pay telephone calls made in the winter months, and
which similarly reduces the number of outdoor payphone installations.
ITEM 2. PROPERTIES.
The Company leases approximately 32,000 square feet of space at 2155 Chenault,
Carrollton, Texas, where its principal executive, sales and product development
offices are located. The lease expires December 31, 2001. The Company leases
approximately 42,000 square feet of manufacturing space in McAllen, Texas. The
manufacturing facility lease expires in October, 1997.
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to various legal proceedings arising in the ordinary
course of its business. It is the opinion of the management of the Company that
the ultimate disposition of these proceedings will not have a material adverse
effect on the Company's financial position or results from operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
- 20 -
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Stock Prices
The Common Stock currently trades on the New York Stock Exchange
("NYSE") under the symbol ICL. The following table sets forth, for each of the
periods indicated, the reported high and low sales price per share on the NYSE
of the Common Stock.
<TABLE>
<CAPTION>
Common Stock
------------
High Low
---- ---
<S> <C> <C> <C>
1996
First Quarter................................$ 5 3/4 $ 3 1/4
Second Quarter............................... 8 1/4 4 1/2
Third Quarter................................. 5 1/2 2 7/8
Fourth Quarter ............................... 6 3 7/8
1995
First Quarter................................$ 4 5/8 $ 3
Second Quarter............................... 6 7/8 3 7/8
Third Quarter................................ 7 1/4 3 3/4
Fourth Quarter............................... 4 5/8 3 1/4
</TABLE>
On December 31, 1996, the Company had approximately 1,230 stockholders of
record.
Dividend Policy
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 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. The Company's
agreement with its secured lender prohibits the Company from paying dividends.
See Note 2 to the Consolidated Financial Statements.
- 21 -
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial information for each of the
five years in the period ended December 31, 1996, is derived from the Company's
Consolidated Financial Statements. The information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the notes thereto
included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Year Ended December 31,(1)
--------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues and Sales:
Service revenues....................... $ 76,905 $ 54,558 $ 60,059 $ 69,187 $ 135,249
Equipment sales ....................... 15,884 19,944 23,322 15,939 19,268
------ ------ ------ ------ ------
92,789 74,502 83,381 85,126 154,517
------ ------ ------ ------ -------
Cost of Revenues and Sales:
Service revenues....................... 68,078 45,318 49,692 54,457 112,991
Equipment sales ....................... 17,690 21,454 27,221 13,068 16,043
------ ------ ------ ------ ------
85,768 66,772 76,913 67,525 129,034
------ ------ ------ ------ -------
Gross profit........................... 7,021 7,730 6,468 17,601 25,483
Selling, general and administrative
expenses............................. (10,598) (9,436) (12,473) (13,932) (24,484)
Provision for doubtful accounts........ (364) (820) (3,517) (1,853) (18,472)
Research and development expenses...... (608) (2,350) (2,965) (4,118) (3,568)
--------- -------- -------- --------- ----------
Operating loss......................... (4,549) (4,876) (12,487) (2,302) (21,041)
Gain on sale of assets................. 572 1,607 -- 1,051 --
Other income........................... 710 440 1,100 2,295 3,745
Interest expense....................... (2,918) (3,310) (3,079) (2,338) (4,029)
Litigation settlement.................. -- -- -- -- (8,300)
Minority interest...................... (113) -- -- -- --
----- ----- ----- ----- -----
Loss before income taxes................ (6,298) (6,139) (14,466) (1,294) (29,625)
Income tax benefit...................... 1,303 -- -- -- 4,733
----- ----- ----- ----- -----
Net loss................................ $ (4,995) $ (6,139) $ (14,466) $ (1,294) $(24,892)
========= ========= ========= ========= ========
Net loss per common and common
equivalent share........................ $ (0.62) $ (0.80) $ (1.91) $ (0.17) $ (3.71)
========= ========= ========= ========= ========
Shares used in computing per share amount 8,024 7,672 7,571 7,660 6,717
Balance Sheet Data:
Total assets............................. $ 45,254 $ 48,644 $ 58,799 $ 72,851 $ 77,142
Total long term obligations.............. $ 20,107 $ 10,796 $ 25,894 $ 2,346 $ 13,594
Stockholders' equity (2)................. $ 12,669 $ 13,243 $ 19,322 $ 33,435 $ 34,418
<FN>
(1) Certain prior year amounts have been reclassified to conform to current
year presentation.
(2) The Company has never paid cash dividends on its Common Stock.
</FN>
</TABLE>
- 22 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Forward-Looking Statements - Cautionary Statements
This Annual Report contains certain "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Specifically, all statements other than statements
of historical facts included in this report regarding the Company's financial
position, business strategy and plans and objectives of management of the
Company for future operations are forward-looking statements. These
forward-looking statements are based on the beliefs of the Company's management,
as well as assumptions made by and information currently available to the
Company's management. When used in this report, the words "anticipate,"
"believe," "estimate," "expect," and "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 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, one-time events
and other factors described herein ("cautionary statements"). 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.
General
The following is a discussion of the consolidated financial condition
and results of operations of the Company for 1996, 1995 and 1994. The discussion
should be read in conjunction with the Consolidated Financial Statements of the
Company, the Notes thereto and the other financial information included
elsewhere in this report. For purposes of the following discussion, references
to year periods refer to the Company's years ended December 31. For purposes of
the following discussion, references to quarterly periods refer to the Company's
quarters ended March 31, June 30, September 30, and December 31.
- 23 -
Results of Operations
The following table sets forth certain items in the Company's
Consolidated Statements of Operations as a percentage of total revenues and
sales and as a percentage of related sales for the years indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues and Sales:
Service Revenues 82.9% 73.2% 72.0% 81.3% 87.5%
Equipment Sales 17.1% 26.8% 28.0% 18.7% 12.5%
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== =====
Gross Profit Percentage:
Service Revenues 11.5% 16.9% 17.3% 21.3% 16.5%
===== ===== ===== ===== =====
Equipment Sales (11.4)% (7.6)% (16.7)% 18.0% 16.7%
===== ==== ===== ==== ====
</TABLE>
1996 Compared to 1995
---------------------
Service Revenues. Service revenues were $76.9 million for the year ended
December 31, 1996, compared to $54.6 million for the year ended December 31,
1995. The table below provides a detailed analysis of service revenues by type
for the years ended December 31, 1996 and 1995 (in thousands).
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Call Traffic Revenue.................. $46,581 $40,417
Long-distance Resale.................. 5,068 3,567
Validation Services................... -- 2,567
Operator Services..................... 21,609 6,722
Prepaid Calling Services.............. 3,647 1,285
-------- --------
$76,905 $54,558
======= =======
</TABLE>
Call traffic revenues increased $6.2 million for the year ended December 31,
1996 compared to the year ended December 31, 1995. The favorable revenue
variance reflects primarily (i) a 10.7% increase in the number of phones using
the Company's Intelli*Star automated operator technology from 55,755 phones at
December 31, 1995 to 61,728 phones at December 31, 1996 and (ii) increased
participation by the Company's customers in the "Jail*Star" program resulting in
significantly higher revenues for inmate facilities providers. The Jail*Star
program was first introduced in November 1995. Because of the continuing effects
of dial-around competition, there was a deterioration in the average number of
calls per day per phone, partially offsetting the increased number of reporting
boards. The Company anticipates that the number of calls made per day per phone
will continue declining in the future at rates similar to prior years.
- 24 -
Gross profit from call traffic revenues was $5.2 million or 11.3% of related
sales for 1996, compared to $5.7 million or 14.1% for 1995. The absolute and
proportionate gross profit in 1996 was lower than in 1995 primarily because of a
change in the mix of call traffic revenue, most significantly the increase in
Jail*Star traffic processed. The Jail*Star program generally realizes a lower
gross margin than the Easy*Star and bundled programs. In 1996, 27.8% of call
traffic revenue resulted from Jail*Star compared to 1.1% in 1995. Other factors
affecting gross profit margins included: (i) a decline in customers entering
into so-called "Lone-Star transactions" (a transaction by which a customer makes
a one time payment for a paid-up license to use the Intelli*Star technology)
which caused a reduction of gross profit from $242,000 in 1995 to $33,000 in
1996, and (ii) a $418,000 reduction in unbundled revenues and gross profit in
1996 compared to 1995.
Long-distance resale revenues increased $1.5 million for the year ended December
31, 1996 over the year ended December 31, 1995. Higher revenues in 1996
principally resulted from an increase in the number of customers buying
long-distance services. Gross profit on long-distance revenues for 1996 was
$585,000 or 11.6% of related sales as compared to $378,000 or 10.6% of related
sales in 1995.
Lower validation service revenues compared to 1995 resulted from the sale of the
Company's call validating assets in June of 1995.
Operator service revenues increased approximately $14.9 million for the year
ended December 31, 1996 compared to the year ended December 31, 1995. The higher
revenue resulted primarily from the addition of new customers in 1996. In
addition, on April 1, 1996, the Company entered into a new operating arrangement
with its third-party operator service provider. The new agreement gives the
Company greater control of its customer base, and contractually changes the
methods by which the Company receives payment for call traffic and by which it
pays for services rendered. Historically, the Company recorded revenue net of
amounts withheld by the service provider as the operating contract provided for
the Company receiving a commission on call traffic. Based on the terms of the
new contract, beginning April 1, 1996, the Company began recording operator
services call traffic at its gross amount, and recording the costs for services
provided as cost of sales. The Company believes the new contractual arrangements
warrant the gross presentation of revenues. The effect of the change on the year
ended 1996 was to increase reported revenue approximately $4.1 million.
Gross profit derived from operator service revenues was $1.5 million or 7.2% of
related sales for the year ended December 31, 1996 as compared to $1.5 million
or 21.6% of related sales for the year ended December 31, 1995. The contractual
change with the third party operator service provider described above and lower
gross profit margins from new customers account for the decreased gross profit
percentages.
Prepaid calling revenues were $2.4 million higher in 1996 as compared to 1995.
Revenues increased primarily because of growth in the number of retail outlets
from which the Company's prepaid calling card services are sold, and from higher
revenues in the Company's private label calling card program. At the end of
1996, the Company's customers sold cards in 641 grocery and convenience stores
compared to 179 stores at the end of 1995. A significant proportion of the 179
outlets selling
- 25 -
cards in 1995 were added late in that year. Of the new outlets selling cards in
1996, 150 were added during the last two months of the year.
Gross profit for the year ended December 31, 1996 for prepaid calling revenues
was $1.2 million or 31.5% of related sales as compared to $320,000 or 21.5% of
related sales in the same period in 1995. The proportionate gross profit for
1996 was higher than 1995 because near the end of 1995, the Company began
marketing directly to retailers rather than through distributors, and due to a
higher volume of calls processed in 1996.
Equipment Sales. The Company's equipment sales were $15.9 million and $19.9
million in the years ended December 31, 1996 and 1995, respectively. The
following table presents an analysis of sales to the Company's primary markets
(in thousands):
<TABLE>
<CAPTION>
For the year ended For the year ended
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Independent Payphone Providers........ $11,529 $15,623
International....................... 3,933 3,506
Regulated .......................... 422 815
------- -------
Total equipment sales............. $15,884 $19,944
======= =======
</TABLE>
In 1996, the continued negative effects of dial-around on operations of the
Company's independent payphone customers reduced the cash flow of such customers
available for expansion of their operations and the economic returns available
from expansion locations. When coupled with unusually harsh winter weather in
the first quarter of 1996, and the fact that the Company did not introduce a
commercially successful line-powered payphone to the independent payphone
provider market until the fourth quarter of 1996, these factors are believed to
account for reduced demand for the Company's family of payphone products. In
September 1996, the FCC released new rules requiring the payment, commencing in
April 1997, of additional dial-around compensation to independent payphone
providers. The amount of such additional compensation, approximately $40 per
payphone per month, will significantly enhance economic returns on existing
payphone locations and on new locations commencing in April 1997, assuming the
effective date of the FCC order is not delayed by currently pending court
action.
In 1995 and 1996, the Company provided $1.7 million and $2.7 million,
respectively, for inventory losses which represents excess of cost over market.
Were it not for these loss provisions, the Company would have recorded gross
profit on equipment sales of $200,000 in 1995 and $900,000 in 1996. This
improvement in gross margin from 1995 to 1996 occurred, even though the volume
of equipment sales declined by 20% from year to year, as a result of an improved
sales mix and reductions in certain variable product costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.2 million for the year ended December 31,
1996 over the year ended December 31, 1995. Due to a reorganization of the
Company's engineering department at the beginning of 1996, employees who were
formally and principally engaged in new product development were reassigned
- 26 -
to application engineering and customer support functions, giving rise to a
reclassification of expenses associated with these employees. The effect of this
change increases selling expense and decreases research and development expense
by $1.6 million for the year ended December 31, 1996 as compared to the amounts
that would have been reported had this reorganization of the engineering
department not taken place. The combined selling, general and administrative
expenses and research and development expenses decreased $580,000 in 1996 as
compared to 1995.
Provision for Doubtful Accounts. The provision for doubtful accounts decreased
$456,000 for the year ended December 31, 1996 as compared to the year ended
December 31, 1995.
Research and Development Expenses. Gross spending for research and development
decreased $1.7 million for the twelve months ended December 31, 1996 as compared
to the same period in 1995. The Company capitalized $2.18 million in 1996
compared to $2.55 million in 1995 of internally developed software costs as
permitted by generally accepted accounting principles.
Income Tax Refund. In September 1996, the Company received a net federal income
tax refund in the amount of $1.3 million and approximately $259,000 of related
interest earned on the claim. The Company recorded the income tax benefit and
related interest income when the refund was received.
1995 Compared to 1994
Service Revenues. The Company's service revenues were $54.6 million for the year
ended December 31, 1995, compared to $60.1 million for the year ended December
31, 1994. The table below provides a detailed analysis of service revenues by
type for the years ended December 31, 1995 and 1994 (in thousands).
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Call Traffic Revenue........................ $40,417 $46,738
Long-distance Resale........................ 3,567 4,433
Validation Services......................... 2,567 4,101
Operator Services........................... 6,722 4,668
Prepaid Calling Services.................... 1,285 119
------- -------
$54,558 $60,059
======= =======
</TABLE>
The lower service revenues for the year ended December 31, 1995 as compared to
the year ended December 31, 1994 are attributable to several factors. The most
significant impact resulted from a decline in the average number of calls made
per payphone using the Company's automated operator technologies. The decline in
telephone calls caused a combined decrease in bundled, unbundled, and
long-distance resale revenues of $7.2 million when compared to the year ended
December 31, 1994. Call volumes per pay telephone declined each year since 1991,
primarily as a result of increased competition from AT&T, MCI, and Sprint. Each
of these companies, through mass market advertising and direct marketing to its
customers, has encouraged consumers to use their own proprietary calling cards,
which cannot be billed by the Company. In addition, marketing programs such as
"1-800-COLLECT", and "1-800-CALLATT" have further adversely impacted the average
- 27 -
number of billable calls per pay telephone. Partially offsetting this decline
was an increase in the number of phones using the Company's automated operator
technology.
The Company sold its call validating assets in June of 1995 comprising the
principal reason that revenues from validation services declined approximately
$1.5 million in 1995.
Operator service revenues increased approximately $2.0 million in 1995 compared
to 1994. The increase resulted from an expansion in the number of customers
utilizing the Company's services.
Revenues from prepaid calling services increased $1.2 million for the year ended
December 31, 1995. The increase is due to growth in the number of customers, and
the Company's entry, in the fourth quarter of 1995, into the retail market
segment for prepaid card sales.
Gross profit from services revenues was $9.2 million or 16.9% of revenue,
compared to $10.4 million or 17.3% of revenue, for the years ended December 31,
1995 and 1994, respectively. The $1.2 million decline in gross profit was due
principally to the decline in call traffic revenues and the sale of the
Company's call validating assets. The lower gross profit percentage is due to a
change in the mix of service revenues with less unbundled revenue in 1995 than
1994. Gross profits from unbundled programs approximate the amounts recorded as
revenues.
Equipment Sales. Telephone and related sales were $19.9 million for the year
ended December 31, 1995 as compared to $23.3 million for the year ended December
31, 1994. The following table breaks down the equipment sales into their markets
(in thousands):
<TABLE>
<CAPTION>
For the year ended For the year ended
December 31, 1995 December 31, 1994
----------------- -----------------
<S> <C> <C>
Independent Payphone Providers....... $15,623 $16,004
International........................ 3,506 6,763
Regulated............................ 815 555
------- -------
Total equipment sales............. $19,944 $23,322
======= =======
</TABLE>
The $3.4 million or 14.5% decrease in 1995 equipment sales from the year ended
December 31, 1994 was principally the result of a $3.3 million decline in
international shipments. Equipment sales to Independent Payphone Providers
declined $381,000 in 1995 compared to 1994. Sales to regulated telephone
companies increased approximately $260,000 in 1995 compared to 1994.
International sales were lower in 1995 because of the fulfillment, early in
1995, of the Company's order to supply payphones to Argentina. The Company did
not replace the order in sufficient volume to replace the lost sales.
Gross loss from equipment sales was $1.5 million (7.6% of related sales) for the
year ended December 31, 1995, compared to a loss of $3.9 million (16.7% of
related sales) for the year ended December 31, 1994. Results in 1995 included
$1.7 million of additional pretax charges to establish inventory reserves.
Results in 1994 included $3.4 million of inventory provisions. During both 1995
- 28 -
and 1994, the Company established reserves to adjust the carrying value of
inventories to their estimated net realizable value. The gross loss in each year
is principally attributable to these adjustments. In addition, however, the
losses have resulted from manufacturing inefficiencies and product design
deficiencies. During 1995, the Company took several steps to correct such
problems. The Company has completed cost reductions on many of its international
products, and is in the process of cost reducing its line powered phone
(Astratel) sold in the United States.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses declined $3.0 million for the year ended December 31,
1995 as compared to the year ended December 31, 1994. This decline consisted
primarily of a $1.6 million decrease in compensation related expenses.
Consulting and legal expenditures were $939,000 lower in 1995 than in 1994, and
operational improvements accounted for $461,000 of lower costs.
Research and Development Expenses. Gross spending for research and development
decreased $600,000 in 1995 from 1994. In 1995, the Company capitalized $2.5
million of software development costs, as compared to $2.6 million in 1994. The
principal development efforts in 1995 were for (i) the Company's line powered
pay telephones, including development of an enhanced version for the private
payphone market, and (ii) continued development of international and U.S.
regulated market products.
Provision for Doubtful Accounts. The provision for doubtful accounts was
$820,000 and $3.5 million for the years ended December 31, 1995 and 1994,
respectively. The lower expenses in 1995 compared to 1994 were due to provisions
of $800,000 and $1.6 million recorded in the third and fourth quarters of 1994,
respectively. Such provisions for losses were recorded on accounts receivable
from certain customers whose collective financial condition deteriorated
significantly late in 1994. Exclusive of the $2.4 million of loss provisions in
1994, the provision for doubtful accounts decreased $297,000 from 1994 to 1995.
The decrease correlates to the overall decline in revenue levels.
Gain on Sale of Call Validating Assets. In June 1995, the Company recorded a
gain of $1.6 million in connection with the sale of certain call validating
assets. The Company sold its validating business to TNS. The Company also
entered into a long term agreement under which it provides billing services to
TNS related to Intellicall's customers that use the TNS validation service.
Liquidity and Capital Resources
The Company's consolidated cash balances increased to approximately $2.3 million
at December 31, 1996 from approximately $613,000 at December 31, 1995. This
increase is essentially attributable to the creation of ILD Communications, Inc.
(See Part I, Item 1. BUSINESS, RECENT DEVELOPMENTS) in May 1996. Since
inception, and as a result of its initial capitalization and funding, ILD has
maintained cash balances approximating $2.0 million. These cash balances are
intended to support ILD's planned acquisition and growth strategy and are
segregated from the accounts of Intellicall. Pursuant to agreements between
Intellicall and ILD, both companies are self- funded and neither company may use
the other's cash balances for any purposes.
- 29 -
Net cash provided by operating activities was $4.9 million. Trade receivables
increased approximately $1.1 million. The increase is primarily attributable to
increased call traffic revenues for both Intellicall and ILD, and the expansion
of the Company's prepaid calling services, partially offset by slightly lower
equipment sales to Independent Payphone Providers in the fourth quarter of 1996
compared to the fourth quarter of 1995. License fees receivable and investments
in sales-type leases declined $1.3 million during 1996 compared to the end of
1995. During 1994, 1995 and 1996 amounts charged for licensing the Company's
Intelli*Star technology have been lowered and are now due on terms similar to
payphone equipment sales. Investment in sales-type leases are declining because
the Company now generally refers customers who desire long-term financing to
third-party leasing agents. Inventories declined $1.3 million due to management
improvements and simplification of the Company's product lines. Notes receivable
declined $1.7 million due to collections and certain reclassifications.
Accounts payable and accrued liabilities increased $3.1 million primarily due to
higher call traffic revenues and the expansion of ILD causing an increase in
year-end commissions payable to customers, and a generally higher level of trade
accounts payable. Deferred revenues increased $1.4 million from an increase in
the number of prepaid calling cards sold, but unused at December 31, 1996
compared to the end of 1995.
Capital expenditures amounted to approximately $790,000 during 1996. These
expenditures were related primarily to the purchase of computer and computer
related equipment and software, enhancements to the Company's management
information systems, and to improvements in the Company's manufacturing facility
and processes. The Company anticipates capital expenditures of similar amounts
in 1997, and for generally the same purposes. Capital expenditures in 1997 are
expected to be financed principally by cash flow from operations, and to a
lesser extent by long-term leases (primarily for renovation and space reduction
of the Company's corporate headquarters).
Software development costs capitalized in accordance with Statement of Financial
Accounting Standards No. 86, amounted to $2.2 million in 1996. The principal
software development projects for 1996 related to the completion and
introduction of the Company's new line-powered pay telephone AstraTel 2, and
enhancements to the Company's intelligent network platform products and
international pay telephones. Based on its current plans for software and
product development in 1997, the Company expects such capitalized amounts will
decline by approximately 20% to under $1.8 million. The principal software
development activities will revolve around enhancements to the AstraTel 2
management systems, the introduction of new features for the AstraTel 2, and
continued enhancements to the Company's intelligent network platform and
international payphone technologies.
In November 1996, the Company repaid in full its Variable Rate Senior Bridge
Notes, Series A, to Nomura Holding America, Inc. through a combination of new
agreements. 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 $12,000,000 (the "Loan") based on an available
borrowing base. The borrowing base consists primarily of call traffic and trade
equipment receivables, and inventory, subject to eligibility requirements
determined by Finova. Amounts loaned subject to the borrowing base are
determined by percentages established in the Loan Agreement, but are within the
discretion of Finova. Such percentages are subject to change based
- 30 -
on experience and Finova's expectations regarding future collectibility of
receivables and usage of inventory.
The Loan is evidenced by a Secured Revolving Credit Note (the "Note") payable to
the order of Finova. Borrowings under the Loan bear interest at the rate of
prime plus 1.75%. The interest rate may be decreased prospectively by up to 0.5%
based on future profitability of the Company. Also the Loan has an unused line
fee equal to one quarter of one percent (0.25%) per annum of the unused portion
of the Total Facility and a facility fee equal to one-half of one percent
(0.50%) per annum of the amount of the Total Facility payable on the first
anniversary of the Agreement and one each subsequent anniversary thereof.
The initial term of the Loan Agreement is three years at which time, unless
extended, all amounts then outstanding must be repaid. The Loan Agreement
contains prepayment penalties in the event it is terminated prior to expiration
of its initial term. The Loan is secured by first and prior liens and security
interests encumbering substantially all of the assets of the Corporation,
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). As of December 31, 1996 the Company was in compliance with all
required covenants.
Contemporaneous with signing the Loan Agreement, the Company completed the sale
of $5,000,000 of 8.0% convertible subordinated notes, due November 22, 2001 (the
"Notes"), to Banca del Gottardo in Lugano, Switzerland. The Notes were issued at
face value of $5,000,000. The Notes were issued with warrants to purchase
200,000 shares of the Company's common stock, $.01 par value (the "Common
Stock") at an exercise price of $5.00 per share (the "Gottardo Warrants"). The
notes are convertible into 1,000,000 shares of the Company's Common Stock at a
conversion price of $5.00 per share.
In connection with the issuance of the Notes, the Company issued an additional
warrant to purchase 150,000 shares of Common Stock (the "Additional Warrant").
The exercise price for the Additional Warrant is the same as for the Gottardo
Warrants.
The Company used the proceeds from the Loan and Notes (net of placement fees of
$509,406) to repay the remaining balance of its Series A Notes due to Nomura
Holding America, Inc in the amount of $12.7 million.
Management believes that the combination of cash flow from operations, and
availability of borrowing amounts under the Loan Agreement will be sufficient to
provide for future liquidity. However, should expected improvements in demand
from the independent payphone industry either accelerate or diminish, and should
expected increases in international shipments fail to materialize, the Company
could be required to seek new financing to fund operations. Management believes
that the Company, if necessary, could place additional debt, or could sell
equity or assets to supplement operations.
- 31 -
In May 1996 ILD completed the sale of $1.0 million of 10.0% convertible
subordinated notes, due May 2001 to the holders of 27.5% of the voting interest
of the Company. ILD further issued secured promissory notes in the aggregate
principal amount of $2.0 million with warrants to a third party. A description
of these arrangements is more fully included in footnote 2 of the Notes to
Consolidated Financial Statements.
By prior arrangement and subject to an agreement between the companies, neither
Intellicall nor ILD guarantees or has any financial responsibility for the debt
of the other company. No assets of either company are encumbered by liens or
security interests of the other. However, Intellicall has pledged its stock
ownership in ILD to Finova.
ILD continually evaluates business opportunities, including potential
acquisitions. The primary focus of the Company's acquisition activities is to
grow its direct dial long-distance and operator services business. In keeping
with that strategy, on March 5, 1997 the Company announced that ILD had entered
into a definitive agreement to purchase the operator services business and
related assets from WorldCom Inc. headquartered in Jackson, Mississippi. Terms
of the purchase and the purchase price were not disclosed by the Company. The
acquisition is subject to the completion of financing by ILD, obtaining
necessary regulatory approvals and other standard closing conditions.
If completed, the acquisition will result in a substantial change in the
operations and financial condition of ILD. The success of the acquisition will
depend on, among other things, the availability of financing to conclude the
transaction, the approval of numerous state regulatory authorities, and the
availability of management resources to oversee the operations.
As consideration for this, and any future acquisitions, ILD may issue common
stock, preferred stock, convertible debt or other securities, in addition to or
in lieu of the payment of cash, that could result in dilution of the percentage
ownership of Intellicall.
- 32 -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Index to Consolidated 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.
- 33 -
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Items 10, 11, 12 and 13 of this Annual
Report on Form 10-K is omitted pursuant to General Instruction G(3) and will be
included in the Registrant's Definitive Proxy Statement to be filed with the
Commission not later than 120 days after the end of the fiscal year covered by
this Annual Report on Form 10-K.
- 34 -
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) (1) Financial Statements.
The financial statements filed as a part of this
Annual Report on Form 10- K are listed in the "Index to
Financial Statements" on page F-1 hereof.
(2) Financial Statement Schedules.
The financial statement schedules filed as part of
this Annual Report on Form 10-K are listed in the "Index to
Financial Statements" on page F-1 hereof.
(3) Exhibits.
The following exhibits are filed as a part of this
Annual Report on Form 10-K.
(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 By-laws 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.
(b)10.8 Registration Rights Agreement dated as of
July 31, 1992, between the Company and The
Prudential Insurance Company of America.
(d)10.9 Amended and Restated 10% Convertible Subordi-
nated Note Due 1999 dated August 11, 1994 with
T.J. Berthel Investments, L.P.
- 35 -
(c)10.10 Registration Rights Agreement dated February
14, 1994, among between the Company and T.J.
Berthel Investments, L.P.
(e)10.11 Note and Warrant Purchase, Paying and
Conversion/Exercise Agency Agreement
entered into on December 22, 1995 between
Banca Del Gottardo and the Company.
(e)10.12 Form of 8% Convertible Subordinated Note
executed by the Company to Banca Del
Gottardo dated December 22, 1995.
(e)10.13 Form of Banca Del Gottardo Warrants entered
into on December 22, 1995 between Banca Del
Gottardo and the Company.
(g) 10.14 Loan and Security Agreement executed with
Finova Capital Corporation.
(g) 10.15 Secured Revolving Credit Note made
payable to Finova Capital Corporation in
the original principal amount of
$12,000,000.
(g) 10.16 Note and Warrant Purchase, Paying and Conver-
sion/Exercise Agency Agreement executed with
Banca del Gottardo.
(g) 10.17 Form of 8% Convertible Suborginated Notes
(included within Exhibit 10.16).
(g) 10.18 Form of Warrants issued with Notes (included
within Exhibit 10.16).
++21.1 Subsidiaries of the Company.
++23.1 Consent of Independent Accountants.
++27.1 Financial Data Schedule.
++ Filed herewith.
(a) Incorporated by Reference from the Company's Form S-1 filed August
28, 1987, file no. 33-15723.
(b) Incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1991.
(c) Incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993.
(d) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1994.
(e) Incorporated by reference from the Company's Current Report on Form
8-K (Date of Earliest Event Reported - December 28, 1995).
(f) Incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995.
(g) Incorporated by reference from the Company's Current Report on Form
8-K (Date of Earliest Event Reported - November 22, 1996).
(b) Reports on Form 8-K.
One report on Form 8-K was filed during the last fiscal
quarter of 1996 (Date of Report - November 22, 1996) reporting
on Item 5. Other Events.
- 36 -
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."
- 37 -
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.
March 27, 1997 INTELLICALL, INC.
signed 3/27/97 /s/ William O. Hunt
By: William O. Hunt
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated, on March 27, 1997.
Name Office
---- ------
/s/ William O. Hunt 3/27/97 Date
William O. Hunt Chairman of the Board, President
(Principal Executive Officer) and Chief Executive Officer
/s/ Michael H. Barnes 3/27/97 Date
Michael H. Barnes Chief Financial Officer
(Principal Financial Senior Vice President, Corporate
and Accounting Officer) Staff
B. Michael Adler Director
/s/ Lewis E. Brazelton III 3/27/97 Date
Lewis E. Brazelton III Director
/s/ Richard B. Curran 3/27/97 Date
Richard B. Curran Director
Hugh E. Humphrey, Jr. Director
/s/ Richard E. Hanlon 3/27/97 Date
Richard E. Hanlon Director
/s/ Thomas J. Berthel 3/27/97 Date
Thomas J. Berthel Director
- 38 -
INTELLICALL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants..........................................F-2
Consolidated 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 Consolidated Financial Statements..............................F-8
Financial Statement Schedules (Note A):
Valuation and Qualifying Accounts.................................F-29
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
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Intellicall, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index on page F-1 present fairly, in all material respects, the financial
position of Intellicall, Inc. and its subsidiary at December 31, 1996 and 1995,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion expressed above.
PRICE WATERHOUSE LLP
Dallas, Texas
February 26, 1997
F-2
INTELLICALL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(in thousands)
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Current assets
Restricted cash ................................ $ 15 $ 492
Cash and cash equivalents ...................... 2,271 613
Receivables:
Trade...................................... 24,160 24,035
License fees............................... 1,045 1,432
Investment in sales-type leases ........... 533 1,073
--------- ---------
25,738 26,540
Less allowance for doubtful accounts....... 3,239 3,260
--------- ---------
22,499 23,280
Inventories..................................... 7,902 11,939
Other current assets............................ 1,684 587
--------- ----------
Total current assets....................... 34,371 36,911
Fixed assets, net.................................... 1,964 2,089
License fees receivable, net......................... -- 253
Investment in sales-type leases, net................. -- 96
Notes receivable, net................................ 992 2,695
Intangible assets, net............................... 928 1,018
Capitalized software costs, net...................... 4,904 4,352
Other assets, net.................................... 2,095 1,230
------- -------
$ 45,254 $ 48,644
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
INTELLICALL, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
(in thousands, except share information)
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Current liabilities
Accounts payable.......................................... $ 6,064 $ 4,195
Dealer payable............................................ 3,737 2,211
Deferred debit card revenue............................... 1,028 717
Accrued liabilities....................................... 1,451 2,008
Current portion of long-term debt ........................ 85 15,474
--------- -------
Total current liabilities................................. 12,365 24,605
Long-term debt ................................................ 19,312 8,620
Deferred revenue............................................... 595 1,976
Other liabilities.............................................. 200 200
Minority interest.............................................. 113 --
Commitments and contingent liabilities......................... -- --
-------- --------
Total liabilities 32,585 35,401
-------- --------
Stockholders' equity
Preferred stock, $.01 par value ; 1,000,000 shares
none issued.......................................... -- --
Common stock, $.01 par value; 20,000,000 shares
authorized; 8,646,278 and 7,702,951 shares issued,
respectively......................................... 87 77
Additional paid-in capital................................ 51,602 47,191
Less common stock in treasury, at cost;
24,908 shares........................................ (258) (258)
Accumulated deficit....................................... (38,762) (33,767)
------- -------
Total stockholders' equity........................... 12,669 13,243
------- -------
$ 45,254 $ 48,644
======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
INTELLICALL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues and sales:
Service revenues............................. $ 76,905 $ 54,558 $ 60,059
Equipment sales.............................. 15,884 19,944 23,322
------- ------- -------
92,789 74,502 83,381
------- ------- -------
Cost of revenues and sales:
Service revenues............................. 68,078 45,318 49,692
Equipment sales.............................. 17,690 21,454 27,221
------- ------- -------
85,768 66,772 76,913
------- ------- -------
Gross profit................................. 7,021 7,730 6,468
Selling, general and administrative expenses...... (10,598) (9,436) (12,473)
Provision for doubtful accounts................... (364) (820) (3,517)
Research and development expenses................. (608) (2,350) (2,965)
------- ------- -------
Operating loss... (4,549) (4,876) (12,487)
Gain on sale of assets............................ 572 1,607 --
Other income. 710 440 1,100
Interest expense.................................. (2,918) (3,310) (3,079)
Minority interest................................. (113) -- --
------- -------- ---------
Loss before income taxes.......................... (6,298) (6,139) (14,466)
Income tax refund................................. 1,303 -- --
------- -------- ---------
Net loss.......................................... $(4,995) $(6,139) $(14,466)
======= ======= ========
Net loss per common and common
equivalent share ............................ $ (0.62) $ (0.80) $ (1.91)
======= ======= =======
Weighted average number of common and common
equivalent shares outstanding................ 8,024 7,672 7,571
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-5
INTELLICALL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Treasury Stock (Accumulated
Shares Amount Capital Shares Cost Deficit) Total
------ ------ ------- ------ ---- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 7,572 $ 76 $46,779 (25) $( 258) $(13,162) $33,435
Exercise of stock options 1 -- 5 -- -- -- 5
Exercise of warrants 93 1 -- -- -- -- 1
Issuance of stock 20 -- 107 -- -- -- 107
Issuance of warrants -- -- 240 -- -- -- 240
Net loss -- -- -- -- -- (14,466) (14,466)
-------- -------- -------- ------- -------- ------- -------
Balances at December 31, 1994 7,686 77 47,131 (25) (258) (27,628) 19,322
Exercise of stock options 17 -- 60 -- -- -- 60
Net loss -- -- -- -- -- (6,139) (6,139)
-------- -------- -------- -------- -------- ------- -------
Balances at December 31, 1995 7,703 77 47,191 (25) (258) (33,767) 13,243
Exercise of stock options 31 -- 148 -- -- -- 148
Issuance of warrants -- -- 760 -- -- -- 760
Employee stock purchase plan 16 -- 48 -- -- -- 48
Issuance of stock 100 2 123 -- -- -- 125
Conversion of subordinated notes 796 8 3,332 -- -- -- 3,340
Net loss -- -- -- -- -- (4,995) (4,995)
-------- -------- -------- -------- -------- ------- --------
Balances at December 31, 1996 8,646 $ 87 $51,602 (25) $ (258) $ (38,762) $12,669
===== ====== ======= ===== ====== ======== =======
</TABLE>
See notes to consolidated financial statements.
F-6
INTELLICALL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................. $ (4,995) $ (6,139) $ (14,466)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization..................... 3,810 3,669 3,125
Provision for doubtful accounts................... 364 820 3,517
Provision for inventory losses.................... 2,772 1,772 3,169
Minority interest in income of ILD................ 113 -- --
Changes in operating assets and liabilities:
Restricted cash............................... 477 1,526 (2,018)
Trade receivables............................. (1,093) 761 (881)
Inventories................................... 1,265 (776) 4,034
Other current assets.......................... (1,242) (453) 11
License fees receivable....................... 640 2,551 5,911
Investment in sales-type leases............... 636 2,275 2,422
Related party receivable...................... -- 526 (506)
Notes receivable.............................. 1,749 1,014 544
Accounts payable ............................. 3,395 (3,727) (5,327)
Accrued liabilities........................... (246) 220 409
Deferred revenues............................. (1,381) 1,976 --
Other......................................... (1,344) (135) (1,146)
--------- -------- --------
Net cash provided by (used in) operating activities 4,920 5,880 (1,202)
--------- ------- --------
Cash flows from investing activities:
Capital expenditures................................. (790) (845) (721)
Capitalized software................................. (2,175) (2,550) (2,621)
-------- ------- --------
Net cash (used in) investing activities.. (2,965) (3,395) (3,342)
-------- ------- --------
Cash flows from financing activities:
Proceeds from borrowings on long-term debt........... 22,101 9,160 73,086
Repayments on long-term debt......................... (22,719) (11,900) (67,822)
Proceeds from issuance of stock under
stock option plans................................ 321 60 5
-------- -------- ---------
Net cash (used in) provided by financing
activities.............................. (297) (2,680) 5,269
------- -------- --------
Net increase(decrease) in cash and cash equivalents....... 1,658 (195) 725
Cash and cash equivalents at beginning of period.......... 613 808 83
------- -------- ---------
Cash and cash equivalents at end of period................ $ 2,271 $ 613 $ 808
======== ========= =========
Supplemental cash flow information:
Interest paid........................................... $ 2,387 $ 3,521 $ 2,362
======== ========= =========
Supplemental non cash flow information:
Issuance of warrant..................................... $ 760 $ -- $ --
======== ========= =========
Conversion of debt to equity............................ $ 3,340 $ -- $ --
======== ========= =========
</TABLE>
See notes to consolidated financial statements.
F-7
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 1 - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business: The Company provides live and automated operator services for the
independent pay telephone, hospitality, and inmate services industries, resale
of direct dial long distance services to the private pay telephone industry, and
prepaid calling services ("service revenues"). The Company designs, engineers,
manufactures and sells pay telephones and retrofit kits, parts and intelligent
network platforms in the United States and internationally ("equipment sales").
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its 72.5% owned and controlled Subsidiary (the
"Subsidiary") formed on May 10, 1996. Prior to that date the Subsidiary was
wholly owned. All significant intercompany accounts and transactions are
eliminated in consolidation. Certain reclassifications have been made to prior
year amounts to conform with current year presentation.
Creation of ILD Communications: On May 10, 1996, the Company entered into an
agreement with certain investor groups to create ILD Communications, Inc.
("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. The other
investor groups collectively purchased $2.0 million, or 27.5% of the voting
stock of ILD, and $1.0 million of ILD's subordinated convertible notes. ILD also
has a secured loan in the amount of $2.0 million. The Company recorded a
$572,000 gain from the transaction.
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.
Revenue Recognition: Revenues from sales of telephones and related products
are recognized upon shipment to customers. Revenues relating to the licensing of
automated operator systems are recognized upon shipment of licensed technology
to licensees.
Customers purchase their license fees at a one time fee at the onset of the
license agreement. Prior to 1995, customers were able to finance their license
fees over a five year period. Fees which were paid at the onset of license
agreements were $485,000, $863,000 and $748,000 in 1996, 1995 and 1994,
respectively. Such amounts are included in equipment sales.
Call revenues are recognized at the time that calls are placed. Call
revenues from customer- licensed microautomated operator systems, human operator
services and Company-owned call
F-8
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
processing systems are recognized based on the amounts charged to billed parties
for calls processed and billed by the Company. Revenues associated with
customer-owned call processing systems and customers utilizing licensed
microautomated operator systems who have agreed to submit call traffic to a
third party billing service, instead of the Company, for processing consist of
the fees charged to customers for use of the technology.
Prepaid debit card revenue is deferred and recognized as calling services
are used.
Cash and Cash Equivalents: For purposes of the statements of cash flows and
consolidated balance sheet, 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", 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, not to exceed four years.
The amounts of software development costs capitalized for the years ended
1996, 1995 and 1994 were $2.18 million, $2.55 million and $2.6 million,
respectively. The Company recorded $1.62 million, $745,332 and $341,000 of
software amortization expense for the years ended December 31, 1996, 1995 and
1994, respectively.
Receivables: Receivables (current and long-term) consist of amounts owed by
various telephone companies for processed call traffic and amounts owed by
customers relating to uncollected call traffic and equipment sales, leases and
license fees. Approximately 78.0% and 72.0% of trade receivables relate to call
traffic due from various telephone companies and customers as of December 31,
1996 and 1995, respectively. The Company advances cash to a majority of its
customers prior to the time such cash is collected from end users, and generally
bears the risk of collection and bad debt. Such amounts previously advanced but
uncollected represent significant portions of the call traffic receivables.
Equipment receivables are subject to right of offset against payments due to
customers related to call revenues. The Company believes it has provided
adequate reserves for potential uncollectible accounts.
Lease Receivables: The Company has leased equipment and related retrofit
kits to its customers under various agreements with terms varying from one to
five years and with interest rates ranging from 11.0% to 18.0%. Such leases are
accounted for as sales-type leases. The lessees are responsible for taxes and
insurance and are required to provide for general maintenance.
F-9
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
Credit Concentrations: Certain financial instruments potentially subject the
Company to concentrations of credit risk. These financial instruments consist
primarily of accounts receivable. 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.
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.
The components of inventories net of the related reserves (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Raw materials......................... $ 4,850 $ 6,083
Work in process....................... 511 898
Finished goods........................ 2,541 4,958
-------- --------
$ 7,902 $11,939
======= =======
</TABLE>
Reserves in 1996, 1995 and 1994 were $3.0 million, $3.9 million and $3.1
million, respectively. Inventories in 1996 have been written down to estimated
net realizable value, and results of operations include a charge of $2.7 million
which represents the excess of cost over market. In 1995 and 1994, the Company
established $1.7 million and $2.7 million of reserves for the excess of cost
over the estimated realizable value of slow moving and obsolete inventories,
respectively. Total charges for inventory reserves were $2.8 million, $1.8
million and $3.2 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
F-10
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
Fixed Assets: Fixed assets are recorded at cost. Depreciation expense is
computed by the straight-line method over the estimated useful lives of the
related assets, where the useful lives range from three to five years.
The components of fixed assets are (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Office equipment............................ $ 6,550 $ 6,098
Tooling and other equipment................. 4,153 4,047
------- --------
10,703 10,145
Less accumulated depreciation............... (8,739) (8,056)
-------- --------
$ 1,964 $ 2,089
======== ========
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1995 and 1994
was $901,000, $1,064,000 and $1,142,000, respectively.
Intangible Assets: Intangible assets consist primarily of the cost in excess
of net assets of acquired businesses. The assets are amortized using the
straight-line method over 20 years. In March 1995, FASB issued 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").
Effective January 1, 1996, the Company adopted FAS 121 which requires that
long-lived assets (primarily goodwill) held and used by an entity, or to be
disposed of, be reviewed for impairment whenever events or changes in
circumstances indicate that the net book value of the asset may not be
recoverable. An impairment loss will be recognized if the sum of the expected
future cash flows (undiscounted and before interest) from the use of the asset
is less than the net book value of the asset. The amount of the impairment loss
will generally be measured as the difference between the net book value of the
assets and the estimated fair value of the related assets. Based on its most
recent analysis, the Company believes that no impairment of goodwill existed at
December 1996.
Dealer Payable: The dealer payable consists of monies owed to customers for
calls processed and billed. Payments are made within 15-90 days based on the
customer agreement.
Income Taxes: Income taxes are accounted for using the asset and liability
method pursuant to Statement of Financial Accounting Standards, "Accounting for
Income Taxes" ("FAS 109"). Deferred taxes are recognized for the tax
consequences of "temporary 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
F-11
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
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.
Disclosures about Fair Value of Financial Instruments: The following methods
and assumptions were used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value:
Restricted Cash and Cash equivalents. The carrying amount approximates fair
value because of the short maturity of those instruments.
Long-term debt. Based on the borrowing rates and terms of secured and
subordinated loans which the Company believes are currently available, the fair
value of long-term debt is $19.3 million ($8.6 million in 1995).
Short-term debt. Based on the borrowing rates and terms of secured and
subordinated loans which the Company believes are currently available, the fair
value of short-term debt is $85,000 ($15.5 million in 1995).
Major Customers One single customer accounted for 10.5% or $9.7 million of
the Company's consolidated revenues in 1996. No single customer accounted for
more than 10% of the Company's consolidated revenues during 1995 and 1994.
F-12
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
NOTE 2 - LONG-TERM DEBT AND LINE OF CREDIT
The Company's debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Intellicall, Inc.
Variable rate senior bridge notes due 1996, Series A $ -- $ 15,375
8% Convertible subordinated notes, due 2000 4,160 7,500
8% Convertible subordinated notes, due 2001 5,000 --
Note collateralized by certain leases -- 219
Convertible subordinated note, due 1999 1,000 1,000
Asset-based note collateralized by certain assets, due 1999 6,862 --
Installment note, due 1998 113 --
-------- --------
17,135 24,094
Less unamortized debt discount (660) --
-------- --------
16,475 24,094
-------- --------
ILD Communications, Inc.
Senior secured debt, due 2001 2,000 --
Convertible subordinated notes, due 2001 1,000 --
-------- --------
3,000 --
Less unamortized debt discount (78) --
-------- --------
2,922 --
-------- --------
Total debt 19,397 24,094
Less: Current portion of long-term debt (85) (15,474)
-------- --------
Total long-term debt $ 19,312 $ 8,620
======== ========
</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 7.2% of the Company's outstanding common stock. Interest
is payable quarterly and commenced March 31, 1994. The entire principal amount
matures on March 31, 1999. The note may be converted by the holder into 160,000
shares of the Company's Common Stock at any time.
On August 11, 1994 the Company issued its Variable Rate Senior Bridge
Notes Due 1996, Series A ("Series A Notes") and 12.5% Senior Bridge Notes Due
1996, Series B ("Series B Notes") to Nomura Holding America Inc. ("Nomura"). The
Series B Notes were repaid in full in December of 1995 and the Series A Notes
were repaid in November of 1996. The Company issued a warrant which entitled
Nomura to purchase 551,954 shares of the Company's common stock, $.01 par value
at $4.50 per share (the "Common Stock"). As consideration for extending the
maturity date on the Series A Notes the Company lowered the warrant strike price
on September 25, 1996 to the then current market value of $3.50. On February 26,
1997, Nomura exercised their warrant in a cashless
F-13
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
transaction permitted by the warrant agreement. Accordingly the number of shares
that Nomura received in exchange for all of its warrants was 260,356.
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 in Lugano, Switzerland with the proceeds used to repay the Series B
Notes and for working capital purposes. The notes were issued with warrants to
purchase 300,000 shares of the Company's Common Stock. The notes are convertible
into 1,785,714 shares of the Company's Common Stock at a price of $4.20 per
share. As of December 31, 1996, $3.34 million of the Banca Del Gottardo Notes
were converted to 795,233 shares of the Company's Common Stock. In January 1997
an additional $945,000 of the Notes were converted into 224,999 shares of the
Company's common stock. Interest is payable semi-annually and commenced June 30,
1996.
On May 10, 1996 a majority-owned subsidiary of the Company, ILD
Communications, Inc. ("ILD") completed the sale of $1.0 million of 10.0%
convertible subordinated notes, due May 10, 2001, to Triad-ILD Partners, L.P.
and Morris Telecommunications, LLC in the amounts of $666,666.67 and
$333,333.33, respectively. The notes can be converted at the rate of one (1)
share of common stock of ILD for each $90.00 of principal then due the holder.
Interest is paid quarterly.
On May 10, 1996 ILD issued Secured Promissory Notes in the aggregate
principal amount of $2.0 million with warrants to purchase an aggregate of 7,239
shares of ILD common stock at a price of $0.01 per share. Sirrom Capital
Corporation purchased a note in the original amount of $1.5 million with a
warrant to purchase 5,429 shares of common stock and Reedy River Ventures
Limited Partnership purchased a note in the original amount of $500,000 with a
warrant to purchase 1,810 shares of common stock at a price of $0.01 per share.
The notes are payable on May 10, 2001 and bear interest at 13.5% annually.
Interest is paid quarterly.
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 in Lugano, Switzerland with the proceeds used to repay a portion of the
Nomura Series A Notes, and for working capital purposes. The notes were issued
with warrants to purchase 200,000 shares of the Company's Common Stock at $5.00
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.
F-14
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
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 $12,000,000 (the
"Loan") based on an available borrowing base. The borrowing base consists
primarily of call traffic and trade equipment receivables, and inventory,
subject to eligibility requirements determined by Finova. Amounts loaned subject
to the borrowing base are determined by percentages established in the Loan
Agreement, but are within the discretion of Finova. Such percentages are subject
to change based on experience and Finova's expectations regarding future
collectibility of receivables and usage of inventory.
The Loan is evidenced by a Secured Revolving Credit Note (the "Note")
payable to the order of Finova. Borrowings under the Loan bear interest at the
rate of prime plus 1.75%. The interest rate may be decreased prospectively by up
to 0.5% based on future profitability of the Company. The Company used the
proceeds from the Finova Loan and Gottardo Notes (net of placement fees of
$509,406) to repay the remaining balance of its Series A Notes due to Nomura
Holding America, Inc in the amount of $12.7 million. Also the Loan has an unused
line fee equal to one quarter of one percent (0.25%) per annum of the unused
portion of the Total Facility and a facility fee equal to one-half of one
percent (0.50%) per annum of the amount of the Total Facility payable on the
first anniversary of the Agreement and one each subsequent anniversary thereof.
Interest is paid monthly.
The initial term of the Loan Agreement is three years at which time,
unless extended, all amounts then outstanding must be repaid. The Loan Agreement
contains prepayment penalties in the event it is terminated prior to expiration
of its initial term. The Loan is secured by first and prior liens and security
interests encumbering substantially all of the assets of the Corporation,
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). As of December 31, 1996 the Company was in compliance with all
required covenants.
Aggregate maturities of long-term debt in the next few years are
$85,000, $28,000, $7.86 million, $4.16 million, and $8.0 million.
F-15
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
NOTE 3 - STOCKHOLDERS' EQUITY
Accounting for Stock-based Compensation: In October 1995, Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation" ("SFAS No. 123") was issued by the Financial Accounting Standards
Board. The 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 statements of companies 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 beginning in
1996. The Company has elected to adopt SFAS No. 123 on a disclosure basis only.
Had compensation cost for the Company's stock option plans been determined based
on the fair market value at the grant dates for awards those plans consistent
with the method provided by SFAS No. 123, the Company's net loss and net loss
per share would have been reflected by the following proforma amounts for the
years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995
---- ----
<S> <C> <C> <C>
Net loss As reported $4,995,000 $6,139,000
Proforma $5,877,000 $6,500,000
Primary net loss per As reported $ .62 $ .80
share Proforma $ .74 $ .85
</TABLE>
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, 1996 and 1995:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Dividend yield -- --
Expected volatility 65.49% 62.47%
Risk free interest rate 6.55% 6.55%
Option term 9 years 9 years
</TABLE>
The weighted average fair value for all options granted in 1996 and 1995
was $4.06 and $2.89, respectively.
Stock Option Plans: The Company maintains a Nonqualified Stock Option
("NSO") Plan, an Incentive Stock Option ("ISO") Plan and a Directors' Stock
Option ("DSO") Plan (adopted in 1991). The number of shares which may be granted
under the NSO and ISO Plans (as amended) and the DSO
F-16
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
Plan may not exceed 600,000, 1,525,000, and 350,000, 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 each following year.
All options granted under the plan in 1994, 1995 and 1996 were issued at fair
market value.
NSO PLAN
Stock option activity under the NSO Plan was:
<TABLE>
<CAPTION>
Weighted Average
Shares Option Price
------ ------------
<S> <C> <C>
Outstanding at December 31, 1993.................... 600,000 $4.61
Activity............................................ -- --
--------
Outstanding at December 31, 1994................... 600,000 $4.61
Activity........................................... -- --
-------
Outstanding at December 31, 1995................... 600,000 $4.61
Activity........................................... --
-------
Outstanding at December 31, 1996................... 600,000 $4.61
=======
</TABLE>
At December 31, 1996 and 1995, there were no shares available to be granted
under the NSO plan.
F-17
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
ISO PLAN
Stock option activity under the ISO Plan was:
<TABLE>
<CAPTION>
Weighted Average
Shares Option Price
------ ------------
<S> <C> <C>
Outstanding at December 31, 1993................... 654,340 $5.22
Granted............................................ 501,900 $7.59
Exercised.......................................... (1,250) $4.38
Canceled........................................... (128,675) $8.01
--------
Outstanding at December 31, 1994................... 1,026,315 $6.02
Granted............................................ 231,080 $3.95
Exercised.......................................... (16,500) $3.59
Canceled........................................... (67,575) $6.44
-------
Outstanding at December 31, 1995................... 1,173,320 $5.63
Granted............................................ 142,000 $4.57
Exercised.......................................... (32,200) $4.61
Canceled........................................... (141,505) $7.85
--------
Outstanding at December 31, 1996................... 1,141,615 $5.24
=========
</TABLE>
At December 31, 1996 and 1995, there were 120,685 and 115,180 shares,
respectively, available for grant under the ISO Plan.
DSO PLAN
Stock option activity under the DSO Plan was:
<TABLE>
<CAPTION>
Weighted Average
Shares Option Price
------ ------------
<S> <C> <C>
Outstanding at December 31, 1993................... 120,000 $6.21
Granted............................................ 20,000 $9.25
--------
Outstanding at December 31, 1994................... 140,000 $6.65
Activity........................................... --
-------
Outstanding at December 31, 1995................... 140,000 $6.65
Granted............................................ 60,000 $3.50
-------
Outstanding at December 31, 1996................... 200,000 $5.70
=======
</TABLE>
There were 100,000 shares available for grant at December 31, 1996 and 1995,
under the DSO Plan.
F-18
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
OTHER DIRECTORS' OPTIONS
The Company issued to certain members of the Board of Directors options
prior to the establishment of the DSO Plan.
Stock option activity pursuant to these options was:
<TABLE>
<CAPTION>
Weighted Average
Shares Option Price
------ ------------
<S> <C> <C>
Outstanding at December 31, 1993................... 82,500 $11.40
Canceled........................................... (22,500) $12.25
-------
Outstanding at December 31, 1994................... 60,000 $11.08
Activity........................................... --
-------
Outstanding at December 31, 1995................... 60,000 $11.08
Activity........................................... --
Outstanding at December 31, 1996................... 60,000 $11.08
======
</TABLE>
F-19
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
The following tables summarize information about the fixed-price stock
options outstanding at December 31, 1996:
NSO PLAN
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- ----------------------------------------
Shares Weighted-Average Weighted- Shares Weighted-
Range of Outstanding Remaining Average Exercisable at Average
Exercise Prices at 12/31/96 Contractual Life Exercise Price 12/31/96 Exercise Price
--------------- ----------- ---------------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C>
$3.625 430,000 6 years $3.625 430,000 $3.625
6.625 100,000 5 years 6.625 100,000 6.625
7.75 70,000 4 years 7.75 70,000 7.75
------ ------
$3.625 - 7.75 600,000 5.6 years $4.61 600,000 $4.61
======= =======
</TABLE>
ISO PLAN
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- ----------------------------------------
Shares Weighted-Average Weighted- Shares Weighted-
Range of Outstanding Remaining Average Exercisable at Average
Exercise Prices at 12/31/96 Contractual Life Exercise Price 12/31/96 Exercise Price
--------------- ----------- ---------------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C>
$3.375 - 4.50 642,455 7.5 years $3.894 562,455 $3.903
4.625 - 5.75 207,660 7 years 5.279 172,660 5.247
6.625 - 8.00 216,500 4.8 years 7.416 216,500 7.416
10.375 75,000 7 years 10.375 75,000 10.375
------ ------
$3.375 - 10.375 1,141,615 6.9 years $5.239 1,026,615 $5.342
========= =========
</TABLE>
F-20
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
DSO PLAN & OTHER DIRECTORS OPTIONS
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- ----------------------------------------
Shares Weighted-Average Weighted- Shares Weighted-
Range of Outstanding Remaining Average Exercisable at Average
Exercise Prices at 12/31/96 Contractual Life Exercise Price 12/31/96 Exercise Price
--------------- ----------- ---------------- -------------- -------- -------------
<S> <C> <C> <C> <C> <C>
$3.50 60,000 10 years $3.50 60,000 $3.50
5.75 40,000 6 years 5.75 40,000 5.75
6.25 40,000 7 years 6.25 40,000 6.25
6.625 40,000 6 years 6.625 40,000 6.625
7.56 15,000 2 years 7.56 15,000 7.56
9.25 20,000 8 years 9.25 20,000 9.25
11.00 20,000 3 years 11.00 20,000 11.00
13.25 25,000 4 years 13.25 25,000 13.25
------ ------
$3.50 - 13.25 260,000 6.6 years $6.94 260,000 $6.94
======= =======
</TABLE>
Stock Option Plans for ILD Communications, Inc.: ILD Communications, Inc.
maintains a Non- incentive Stock Option ("NSO") Plan and an Incentive Stock
Option ("ISO") Plan. The number of shares which may be granted under the NSO and
ISO Plans may not exceed 27,500 shares at an exercise price of $24.20.
NSO PLAN
Stock option activity under the NSO Plan was:
<TABLE>
<CAPTION>
Weighted Average
Shares Option Price
------ ------------
<S> <C> <C>
Outstanding at May 10, 1996.......................... -- --
Granted.............................................. 2,325 $24.20
-----
Outstanding at December 31, 1996..................... 2,325 $24.20
=====
</TABLE>
F-21
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
ISO PLAN
Stock option activity under the ISO Plan was:
<TABLE>
<CAPTION>
Weighted Average
Shares Option Price
------ ------------
<S> <C> <C>
Outstanding at May 10,1996........................... -- $24.20
Granted.............................................. 19,350 $24.20
------
Outstanding at December 31, 1996..................... 19,350 $24.20
======
</TABLE>
All options granted were exercisable at December 31, 1996. At December 31,
1996 there were 5,825 shares available to be granted. Options granted vested
immediately.
EMPLOYEE STOCK PURCHASE PLAN FOR INTELLICALL
On November 16, 1995 the Company adopted the Intellicall Employee Stock
Purchase Plan (the "ESPP"). After the offering period ending December 31, 1996,
there remain authorized and available for sale to employees an aggregate of
275,108 shares of the Company's common stock. The maximum number of shares
subject to each option 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, 5,967 shares were issued at
$2.87 per share for the offering period ended December 31, 1995, 9,927 shares at
$3.08 for the offering period ended June 30, 1996 and 8,998 shares at $4.675 for
the offering period ended December 31, 1996.
Common Stock: At December 31, 1996, there were 3,664,254 shares of common
stock reserved for options and warrants.
Preferred Stock: There was no preferred stock outstanding at December 31,
1996 or 1995. Shares of preferred stock can be issued at any time upon
authorization by the Board of Directors, with preferences, rights, dividends and
voting powers to be determined by the Board of Directors.
Common Stock Purchase Warrants: In July 1992, the Company issued to a
senior note lender a common stock purchase warrant entitling the holder to
purchase 93,023 shares of the Company's common stock, exercisable at $.01 per
share. On November 14, 1994, the senior note lender exercised the warrant to
purchase 93,023 shares of the Company's common stock. In connection with the
August 11, 1994 refinancing discussed in Note 2, the Company issued a warrant to
Nomura entitling the holder
F-22
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
to purchase 551,954 shares of the Company's common stock, exercisable at $4.50.
As consideration for extending the maturity date on the Series A Notes the
Company lowered the warrant strike price on September 25, 1996 to the then
current market value of $3.50. On February 26, 1997, Nomura exercised their
warrant in a cashless transaction permitted by the warrant agreement.
Accordingly the number of shares that Nomura received in exchange for all of its
warrants was 260,356.
In connection with the December 29, 1995 subordinated debt issuance
discussed in Note 2, the Company issued a Warrant to Banca Del Gottardo
("Gottardo") entitling the holder to purchase 300,000 shares of common stock,
exercisable at $4.20 per share.
In connection with the issuance of the Notes the Company issued an
additional Warrant to purchase 200,000 shares of common stock (the "Additional
Warrant"). The exercise price for the Additional Warrant is the same price as
for the Gottardo Warrants.
In November 1996, the Company issued additional subordinated debt to Banca
Del Gottardo ("Gottardo") with warrants to purchase 200,000 shares of common
stock at $5.00 per share. In addition to the 200,000 shares an additional
warrant to purchase 150,000 shares at $5.00 was also issued.
At the completion of the sale of convertible subordinated notes, ILD issued
a warrant to the holder of the note to purchase 7,239 shares of common stock at
$.01 per share. Also, ILD issued a warrant of 6,000 shares to Triad to purchase
at $90.00 per share.
F-23
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 4 - INCOME TAXES
Differences between the income tax benefit calculated using the statutory
federal income tax rate and the actual income tax benefit are (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income tax benefit at the statutory rate........... $(1,731) $ (2,087) $ (4,918)
Amortization of cost in excess of net assets
of acquired businesses........................ 31 31 31
Other:
Refund of federal income taxes.................. (622) -- --
Income from non-consolidated subsidiary......... (101) -- --
Operating loss not benefitted................... 2,423 2,056 4,887
-------- -------- --------
Income tax benefit................................. $ -- $ -- $ --
======== ======== ========
</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,
legal fees, gain or loss on sale of assets, software development and operator
services costs, and excess tax depreciation.
At December 31, 1996 the Company has net operating loss carryforwards of
$36.6 million for federal income tax reporting purposes. Such carryforwards,
which may provide future tax benefits, do not expire before 2007. Additionally,
in conjunction with the Alternative Minimum Tax ("AMT") rules, the Company has
available minimum tax credit carryforwards for tax purposes of $125,000, which
may be used indefinitely to reduce regular Federal Income taxes.
The Company received no income tax refunds in 1995 or 1994. The Company
received a net tax refund of $1.3 million in 1996. The Company received the
refund as a result of a ten-year carryback claim under Section 172(f) of the
Internal Revenue Code. The refund was associated with a claim of $4,534,487 of
Net Operating Loss. The Company also used $448,459 of its Alternative Minimum
Tax ("AMT") credit, the result of being subject to AMT in the fiscal year ended
June 30, 1989.
F-24
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
Significant components of the Company's deferred tax assets and
deferred tax liabilities under SFAS 109 are (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Other reserves and accruals..................... $1,628 $2,522
Net operating loss carryforwards................ 12,791 11,524
Unused alternative minimum credits.............. 125 575
------ ------
Total gross deferred tax assets..................... 14,544 14,621
------ ------
Deferred tax liabilities:
Bad debt reserves............................... (421) (307)
Deferred revenue................................ (12) (320)
Depreciation and amortization................... (1,226) (1,263)
------ ------
Total gross deferred tax liabilities................. (1,659) (1,890)
------ ------
Less valuation allowance............................. (12,885) (12,731)
======= =======
Net deferred tax assets.............................. $ -- $ --
======== ========
</TABLE>
The valuation allowance on deferred tax assets reflects the Company's
uncertainty regarding realization of such assets due to recent operating loss
trends.
NOTE 5 - NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE
Net loss per common and common equivalent share is based on the weighted
average number of common shares outstanding during 1996, 1995 and 1994. The
weighted average common and common equivalent shares outstanding were 8,024,000,
7,672,000 and 7,571,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Primary per share amounts have been computed by dividing net loss by the
weighted average number of common and common equivalent shares outstanding
during each period. Outstanding common stock options and warrants were
considered a common stock equivalent for purposes of computing weighted average
shares outstanding. In loss periods, common stock equivalents have been excluded
from the per share calculation since they are anti-dilutive. Although the total
number of common shares obtainable upon exercise of outstanding options and
warrants exceeds 20% of the number of common shares outstanding at December 31,
1996, the treasury stock method was not used
F-25
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
for purposes of computing weighted average shares outstanding since the effect
was anti-dilutive.
NOTE 6 - COMMITMENTS
The Company leases its office space and manufacturing facility under
operating leases. The manufacturing facility lease contains a renewal option for
an additional 60 months at the market rental rate upon expiration of the initial
lease term.
Future minimum rental commitments under noncancelable operating leases are
(in thousands):
1997........................................................... $ 540
1998........................................................... 420
1999........................................................... 420
2000........................................................... 398
2001........................................................... 329
---
$2,107
======
Total operating lease expense was $840,000, $765,000 and $1,242,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
F-26
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 7 - LICENSE FEES RECEIVABLE
License fees for automated operator systems are prepaid. Prior to 1994, the
Company generally financed license fees over five years and recorded such fees
upon shipment of systems at an amount discounted to reflect market rates of
interest ranging from 9.75% to 11.25%. Interest income is recognized using the
effective yield method.
Information pertaining to the license fees receivable is (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Gross license fees receivable.............................. $ 1,630 $ 2,397
Less: Unearned income..................................... (215) (298)
Allowance for doubtful accounts, non-current...... (370) (414)
------ ------
Net license fees receivable................................ 1,045 1,685
Less: Current portion..................................... (1,045) (1,432)
------ ------
Net license fees receivable, non-current................... $ -- $ 253
======= =======
</TABLE>
The decline in future minimum license fees receivable is due to the decline
in the licensing of microautomated operator systems since the initial peak
during 1989 and 1990, and efforts by the Company to accelerate the receipt of
license payments by establishing certain incentives to prepay license fees.
F-27
INTELLICALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 8 - LITIGATION AND CONTINGENCIES
The Company is subject to various legal proceedings arising out of the
ordinary conduct 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 condition and results of
operations.
F-28
<TABLE>
<CAPTION>
INTELLICALL, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
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, 1996:
Allowance for doubtful
accounts - receivable......... $ 718 $ 172 $ -- $ (830)(a) $ 60
========= ======== ========= ======== =======
Allowance for doubtful
accounts - license fees receivable
non-current................... $ 414 $ -- $ -- $ (44)(a) $ 370
========= ======== ========= ======== =======
Allowance for doubtful accounts
notes - receivable.............. $ 2,718 $ -- $ -- $ (956)(a) $ 1,762
======== ======== ========= ======== =======
Allowance for doubtful accounts
call traffic.................... $ 2,542 $ 3,621 $ -- $ 2,983(a)(e) $ 3,180
======== ======== ========= ======== =======
Year Ended December 31, 1995:
Allowance for doubtful
accounts - receivable........... $ 2,570 $ 714 $ -- $ 2,566(a) $ 718
======== ======== ========= ======== =======
Allowance for doubtful
accounts - license fees receivable
non-current..................... $ 523 $ 412 $ -- $ 521(a) $ 414
======== ======== ========= ======== =======
Allowance for doubtful
accounts - investment in sales-type
leases, non-current............. $ 14 $ -- $ -- $ 14(a) $ --
======== ======== ========= ======== =======
Allowance for doubtful accounts
call traffic.................... $ 2,550 $ 2,530 $ 231(b) $ 2,769(a) $ 2,542
======== ======== ========= ======== =======
Allowance for doubtful accounts
notes - receivable.............. $ 2,683 $ -- $ 1,190(d) $ 1,155(a)(b) $ 2,718
======== ======== ========= ======== =======
Year Ended December 31, 1994:
Allowance for doubtful
accounts - receivable......... $ 3,968 $ 3,171 $ -- $ 4,569(a) $ 2,570
======== ======== ========= ======== =======
Allowance for doubtful
accounts - license fees receivable
non-current................... $ 548 $ 645 $ -- $ 670(a) $ 523
======== ======== ========= ======== =======
Allowance for doubtful
accounts - investment in sales-type
leases, non-current........... $ 102 $ 17 $ -- $ 105(a) $ 14
======== ======== ========= ======== =======
Allowance for doubtful accounts
call traffic.................. $ 3,688 $ 3,146 $ -- $ 4,284(a) $ 2,550
======== ======== ========= ======== =======
Allowance for doubtful accounts
notes - receivable............ $ -- $ 1,500 $ 1,183(c) $ -- $ 2,683
======== ======== ========= ======== =======
<FN>
(a) Write-off of uncollectible accounts.
(b) Includes $231,000 reclassified to allowance for doubtful accounts call traffic.
(c) Includes $924,000 charge to contra-asset and $259,000 charge from a liability account.
(d) Includes $1.1 million reserved directly against another asset and $89,000 of
interest payments used to build reserve instead of recognizing as revenue.
(e) Includes $912,000 reserved directly against another asset.
</FN>
</TABLE>
F-29
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 13 (d) OF THE SECURITIES ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996,
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
__________ TO ___________.
Commission file number 1-0588
INTELLICALL, INC.
(Exact name of registrant as specified in its charter)
EXHIBITS
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
(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 By-laws 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.
(b)10.8 Registration Rights Agreement dated as of
July 31, 1992, between the Company and The
Prudential Insurance Company of America.
(d)10.9 Amended and Restated 10% Convertible Subordi-
nated Note Due 1999 dated August 11, 1994 with
T.J. Berthel Investments, L.P.
(c)10.10 Registration Rights Agreement dated February
14, 1994, among between the Company and T.J.
Berthel Investments, L.P.
(e)10.11 Note and Warrant Purchase, Paying and
Conversion/Exercise Agency Agreement
entered into on December 22, 1995 between
Banca Del Gottardo and the Company.
(e)10.12 Form of 8% Convertible Subordinated Note
executed by the Company to Banca Del
Gottardo dated December 22, 1995.
(e)10.13 Form of Banca Del Gottardo Warrants entered
into on December 22, 1995 between Banca Del
Gottardo and the Company.
(g)10.14 Loan and Security Agreement executed with
Finova Capital Corporation.
(g)10.15 Secured Revolving Credit Note made
payable to Finova Capital Corporation in
the original principal amount of
$12,000,000.
(g)10.16 Note and Warrant Purchase, Paying and Conver-
sion/Exercise Agency Agreement executed with
Banca del Gottardo.
(g)10.17 Form of 8% Convertible Suborginated Notes
(included within Exhibit 10.16).
(g)10.18 Form of Warrants issued with Notes (included
within Exhibit 10.16).
++21.1 Subsidiaries of the Company.
++23.1 Consent of Independent Accountants.
++27.1 Financial Data Schedule.
++ Filed herewith.
(a) Incorporated by Reference from the Company's Form S-1 filed August
28, 1987, file no. 33-15723.
(b) Incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1991.
(c) Incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993.
(d) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1994.
(e) Incorporated by reference from the Company's Current Report on Form
8-K (Date of Earliest Event Reported - December 28, 1995).
(f) Incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995.
(g) Incorporated by reference from the Company's Current Report on Form
8-K (Date of Earliest Event Reported - November 22, 1996).
(b) Reports on Form 8-K.
One report on Form 8-K was filed during the last fiscal
quarter of 1996 (Date of Report - November 22, 1996) reporting
on Item 5. Other Events.
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Intellicall Operator Services, Inc.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 of Intellicall, Inc. of our report dated February 29, 1997
appearing on page F-2 of this Form 10-K.
/s/ Price Waterhouse LLP 3/27/97
Date
PRICE WATERHOUSE LLP
Dallas, Texas
March 27, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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