Company Name: Intellicall, Inc.
Public Availability Date: 08-10-1993
INQUIRY LETTERBAKER & BOTTS, L.L.P. 2001 ROSS AVENUE DALLAS, TEXAS 75201-2916 TELEPHONE(214) 953-6500 May 24, 1993 Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549 Dear Ladies and Gentlemen: On behalf of our client, Intellicall, Inc., a Delaware corporation (the
"Company"), we respectfully request the written advice of the staff (the
"Staff") of the Division of Corporation Finance (the "Division") that the Staff
will not recommend enforcement action to the Securities and Exchange Commission
(the "Commission") if the Company issues and distributes shares (the "Settlement
Shares") of its common stock, par value $.01 per share (the "Common Stock"),
without registration under the Securities Act of 1933, as amended (the "Act"),
in reliance on the exemption from registration contained in Section 3(a)(10) of
the Act, in partial settlement to members of the plaintiff class and their
counsel as part of a judicially approved settlement of related class-action
lawsuits against the Company and other individual defendants. In addition, we
respectfully request the written advice of the Staff that it will not recommend
enforcement action to the Commission if (i) members of the plaintiff class or
their counsel who are not deemed to be affiliates of the Company effect public
resales of Settlement Shares without registration under the Act and without
compliance with Rule 144 under the Act and (ii) members of the plaintiff class
or their counsel who are deemed to be affiliates of the Company effect public
resales of Settlement Shares in compliance with Rule 144 under the Act, without
regard to the holding period requirement contained in Rule 144(d). It is intended that no registration statement under the Act will be filed or
become effective as to the Settlement Shares and that the exemptions afforded
under Sections 3(a)(10) and 4(1) and Rule 144 of the Act will be available in
connection with the above-described transactions and on the basis of the facts
and circumstances described below. BACKGROUND The Company is a publicly held corporation whose Common Stock is listed and
traded on the New York Stock Exchange. Its principal executive offices are
located at 2155 Chenault, Suite 410, Carrollton, Texas 75006. As of the date
hereof, the Company has advised us that it has timely filed all required reports
and other documents required under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Company's Common Stock is registered pursuant
to Section 12(b) of the Exchange Act. Commencing in or around April 1991, several plaintiffs (the "Class Plaintiffs")
filed various proposed class actions in the United States District Court for the
Northern District of Texas, Dallas Division (the "Court"), against the Company
and B. Michael Adler, R. Stephen Polley and William J. Collinsworth (the
"Individual Defendants" and, together with the Company, the "Intellicall
Defendants"). Pursuant to Pretrial Order No. 1, dated August 15, 1991, the
various actions were consolidated in a single proceeding (the "Intellicall
Action"). On September 19, 1991, the Class Plaintiffs filed a Consolidated
Amended Complaint, which was subsequently superseded by the Second Consolidated
Amended Complaint deemed to be filed by Court order on April 6, 1992 (the
"Intellicall Complaint"). On April 10, 1992, the Class Plaintiffs filed a related class action against
Ernst & Young (the "E&Y Action" and, together with the Intellicall Action, the
"Action"). On or about June 12, 1992, the Class Plaintiffs filed a First Amended
Class Action Complaint in the E&Y Action (the "E&Y Complaint"). In the Intellicall Complaint, the Class Plaintiffs assert claims for alleged
violations of Sections 10(b) and 20(a) of the Exchange Act, Rule 10b-5
promulgated thereunder, and the common law. The Class Plaintiffs assert that in
various press releases and in other publicly issued statements, the Intellicall
Defendants made materially false and misleading statements, or failed to make
adequate disclosure, with respect to, among other things, the Company's
business, financial condition and future business prospects, including the
Company's projected earnings and revenues and the legitimacy and collectibility
of its sales and receivables. The Class Plaintiffs allege that, as a result of
these allegedly false and misleading statements or omissions, the market price
of the Company's Common Stock was artificially inflated during the period from
March 28, 1990 through March 30, 1992, inclusive (the "Settlement Class
Period"). The Class Plaintiffs allege that they and all other members of the
class were damaged as a result of the alleged misstatements and omissions. In the E&Y Action, which arose out of the same facts alleged in the Intellicall
Action, the Class Plaintiffs sought to recover damages purportedly sustained by
members of the class as a result of alleged violations by Ernst & Young, the
Company's outside auditors (together with the Intellicall Defendants, the
"Defendants"), of Sections 10(b) and 20(a) of the Exchange Act, Rule 10b-5
promulgated thereunder, and the common law. The Class Plaintiffs assert that
Ernst & Young, along with the Intellicall Defendants, participated in, aided and
abetted and conspired to effect the unlawful conduct discussed above in order to
inflate the market price of the Company's Common Stock during a portion of the
Settlement Class Period. Class Plaintiffs assert that they and all other members
of the class were damaged as a result of the alleged misstatements and
disclosures. By agreed order, the parties to the Intellicall Action stipulated to the
certification of the Class Plaintiffs as class representatives of all purchasers
of Common Stock during the Settlement Class Period (the "Intellicall Class"). In
addition, by a separate agreed order, the parties to the E&Y Action stipulated
to the certification of the Class Plaintiffs as representatives of all
purchasers of the Company's Common Stock during the period from March 28, 1990
through April 11, 1991, inclusive (the "E&Y Class" and, together with the
Intellicall Class, the "Settlement Class"). The Settlement Class excludes any
class member who requests exclusion therefrom and excludes the Individual
Defendants, Intellicall, Ernst & Young, and each of their subsidiaries and
affiliates, other officers and directors of the Company and partners of Ernst &
Young during the applicable class period, members of the immediate families of
the Individual Defendants, and the legal representatives, heirs, successors or
assigns of Ernst & Young, Intellicall and/or the Individual Defendants. The Defendants have vigorously denied all liability and all allegations of
wrongdoing directed at them in the Action and have denied that they or any of
them are liable to the Class Plaintiffs or the Settlement Class. Counsel for the
Class Plaintiffs and counsel for all Defendants have entered into a Stipulation
of Class Settlement (the "Settlement Stipulation") dated as of May 4, 1993. The
parties to the Action have filed a joint motion with the Court to consolidate
the Intellicall Action and the E&Y Action for purposes of the Settlement
Stipulation. Once that motion is granted, the Settlement Stipulation will be
filed with the Court (a copy of the Settle Stipulation is enclosed herewith).
The Settlement Stipulation will be subject to Court approval, and a hearing
thereon (the "Settlement Hearing") will be scheduled. The purpose of the
Settlement Hearing will be to determine whether the terms and conditions of the
settlement are fair, reasonable and adequate to the Settlement Class. The Settlement Stipulation provides in part for the following: 1. In full settlement of any and all claims, individual and representative, that
are, could have been, or might in the future be asserted by any Class Plaintiff
or any member of the Settlement Class, the Company shall: (i) pay or cause to be paid $1,000,000 in cash (the "Settlement Cash") into an
interest-bearing escrow account (the "Escrow Account" or the "Settlement Fund"),
with Citizens Bank of Washington, as escrow agent for the Escrow Account (the
"Escrow Agent"); (ii) issue or cause to be issued a promissory note to "The Intellicall
Settlement Fund" in the principal sum of $900,000 (the "Settlement Note"),
payable on September 30, 1994, plus accrued interest; and (iii) issue or cause to be issued within 10 days after the Settlement Hearing
Settlement Shares having a market value of $6,100,000 based upon the average
published closing price of the Company's Common Stock for the 20 business days
preceding the Settlement Hearing, with the average closing price to be within a
certain specified range (in the event the actual average closing price is less
than the lowest price in the range, then the average closing price shall be
deemed to be such low price and the principal amount of the Settlement Note
shall be increased accordingly as provided in the Settlement Stipulation). The "Settlement Proceeds" shall consist of the Settlement Cash, the Settlement
Note (as adjusted, if applicable) and the Settlement Shares, except that if all
amounts due under the Settlement Stipulation are paid in full from the
Settlement Cash and the Settlement Shares, then the Escrow Agent shall mark the
Promissory Note "Paid-in-Full" and return it to the Company. 2. The costs of providing notice of the settlement to the Settlement Class,
locating members of the Settlement Class and administering and distributing the
Settlement Proceeds shall be paid out of the Settlement Proceeds. Any award of
attorneys' fees or reimbursement of expenses and costs to plaintiffs' counsel
that may be approved by the Court will be paid out of the Settlement Proceeds
(with expenses and costs being paid out of the Settlement Fund) before any
distributions to the Settlement Class. Plaintiffs' counsel may apply to the
Court for an award of attorneys' fees of up to 33 1/3% of the Settlement
Proceeds (with such application to seek a combination of Settlement Cash and
Settlement Shares). 3. The Settlement Proceeds, including the Settlement Shares, net of the payments
described above will be allocated and distributed to each member of the
Settlement Class who submits a valid proof of claim and release along with
proper documentation and who does not request exclusion. 4. The parties to the Settlement Stipulation shall request the Court to enter an
order (the "Implementing Order") (i) scheduling the Settlement Hearing pursuant
to Rule 23(e) of the Federal Rules of Civil Procedure to determine whether the
proposed settlement of the claims in the Action on the terms and conditions
provided in the Settlement Stipulation is fair, reasonable, and adequate and
should be approved by the Court, and to consider the applications for awards of
attorneys' fees, costs and disbursements and any awards to the Class Plaintiffs;
(ii) approving the form and manner of the notice to be provided to members of
the Settlement Class; (iii) directing that the notice of settlement of the
Action and the Settlement Hearing be mailed to all members of the Settlement
Class who can be identified through reasonable effort and summary notice be
published once in the national edition of The Wall Street Journal; and (iv)
setting forth the procedures for the filing by members of the Settlement Class
of requests for exclusion from the Settlement Class or objections to the
proposed settlement, and providing that any member of the class who has not
requested exclusion and has filed timely written objections may appear at the
Settlement Hearing to show cause why the proposed settlement of the Action
should or should not be approved as fair, reasonable and adequate and why all
class counsel should or should not be awarded attorneys' fees, costs and
disbursements. At the Settlement Hearing, the Court will be informed that, if it approves the
proposed settlement, the Settlement Shares issued as part of the Settlement will
not be required to be registered under the Act pursuant to the exemption
contained in Section 3(a)(10) of the Act. DISCUSSION A. The Section 3(a)(10) Exemption. Section 3(a)(10) of the Act provides an exemption from registration under the
Act for ". . . any security which is issued in exchange for one or more bona
fide outstanding securities, claims or property interests, or partly in such
exchange and partly for cash, where the terms and conditions of such issuance
and exchange are approved, after a hearing upon the fairness of such terms and
conditions at which all persons to whom it is proposed to issue securities in
such exchange shall have the right to appear, by any court. . . ." The principle that the Section 3(a)(10) exemption is available for securities
distributed by an issuer pursuant to the settlement of a class action which has
been approved by a court as fair and reasonable in accordance with the Federal
Rules of Civil Procedure is well established. See, e.g.,
Medical Imaging Centers
of America, Inc. (March 12, 1993);
Newbridge Networks Corporation (July 27,
1992); Windmere Corporation (May 20, 1992); Riverbend International Corporation
(March 30, 1990); Pacific Scientific Company (July 31, 1989); Memory Metals,
Inc. (December 9, 1988); Cavanagh Communities Corporation (July 22, 1987);
Anacomp Inc. (July 24, 1985); and Koracorp Industries, Inc. (July 22, 1976). The Division has articulated the following four requirements that must be met in
order for the Section 3(a)(10) exemption to be available to an issuer that
issues securities in settlement of pending class-action litigation: (i) the
court must hold a hearing on the fairness of the terms and conditions of the
issuance of all such securities; (ii) the persons to whom such securities are to
be issued must receive notice of the hearing and of the right to be heard; (iii)
the court must be advised prior to the hearing that if the terms and conditions
of the settlement are approved, registration of the securities will not be
required under the Act by virtue of the court's approval; and (iv) the court
must approve the fairness of the terms and conditions of the settlement. See,
e.g., Cavanagh Communities Corporations (July 22, 1987) and Koracorp Industries,
Inc. (July 22, 1976). The circumstances under which the Settlement Shares will be issued by the
Company in connection with the proposed settlement will fulfill all of these
requirements. First, pursuant to Rule 23(e) of the Federal Rules of Civil
Procedure the Court will hold the Settlement Hearing to determine whether the
terms and conditions of the proposed settlement (including the issuance of the
Settlement Shares to the Settlement Class) are fair, reasonable and adequate.
Second, the Settlement Class will have received notice of the Settlement Hearing
and will have the right to appear at the Settlement Hearing. Notice of the
Settlement Hearing will be given by mail to anyone who can be identified through
reasonable effort and will also be given by publication in The Wall Street
Journal. Pursuant to Rule 23(e) of the Federal Rules of Civil Procedure, these
notification procedures will be approved by the Court in the Implementing Order.
Third, the Court will be informed that, if it approves the proposed settlement,
the Settlement Shares will not be required to be registered under the Act
pursuant to the Section 3(a)(10) exemption. Finally, in order for the Settlement
Stipulation to be binding, the Court must find that the terms and conditions of
the proposed settlement are fair, reasonable and adequate and in the best
interests of all those who will be affected by it. Based upon the foregoing, and assuming that the settlement is approved by the
Court in accordance with the procedures described herein, it is our opinion that
the issuance of the Settlement Shares by the Company in connection with the
settlement would be exempt from the registration requirements of the Act under
Section 3(a)(10). B. Public Resale of Settlement Shares. The Division has also taken the position that securities issued without
registration pursuant to Section 3(a)(10) are not "restricted securities" under
Rule 144 and, accordingly, (i) in the case of securities issued to persons who
are not affiliates of the issuer, may be resold without registration under the
Act in reliance on the exemption contained in Section 4(1) of the Act and
without compliance with Rule 144 under the Act and (ii) in the case of
securities issued to persons who are affiliates of the issuer, may be resold in
compliance with Rule 144 under the Act, without regard to the holding period
requirement of that Rule. See, e.g.,
Medical Imaging Centers of America, Inc.
(March 12, 1993); Newbridge Networks Corporation (July 27, 1992); Riverbend
International Corporation (March 30, 1990); Pacific Scientific Company (July 31,
1989); Memory Metals, Inc. (December 9, 1988); Cavanagh Communities Corporation
(July 22, 1987); and Anacomp, Inc. (July 24, 1985). The Settlement Stipulation provides that counsel for the Class Plaintiffs may
apply to the Court for an award of attorneys' fees in an amount of up to 33 1/3%
of the Settlement Proceedings, to be paid in a combination of Settlement Cash
and Settlement Shares. The exact amount of the award of attorneys' fees that
will be made in this case is not known at this time. However, the Division has
taken the position that, in situations where plaintiffs' counsel receives up to
one-third of the securities issued in connection with a settlement, such
securities are not "restricted securities" for purpose of Rule 144 and may be
freely resold without registration, although any person receiving securities in
a settlement, including counsel, who is deemed to be an affiliate must make
resales in compliance with Rule 144, without regard to the holding period
requirement of that Rule. See
Newbridge Networks Corporation (July 27, 1992) and Riverbend International Corporation (March 30, 1990). Based upon the foregoing, and assuming that the settlement is approved by the
Court in accordance with the procedures described herein, it is also our opinion
that the Settlement Shares to be issued to the members of the Settlement Class,
or to counsel for the Class Plaintiffs, in the settlement will not be
"restricted securities" as defined in Rule 144(a)(3) under the Act and that,
accordingly, (i) members of the Settlement Class, or counsel for the Class
Plaintiffs, who acquire the Settlement Shares and who are not deemed to be
affiliates of the Company may freely resell such shares without registration
under the Act in reliance on the exemption contained in Section 4(1) of the Act
and without compliance with Rule 144 under the Act and (ii) members of the
Settlement Class, or counsel for the Class Plaintiffs, who are deemed to be
affiliates of the Company may resell such shares in compliance with Rule 144
under the Act, without regard to the holding period requirement of that Rule. REQUEST FOR ADVICE We respectfully request the concurrence of the Staff in the foregoing opinions,
and the written advice of the Staff that it will not recommend enforcement
action to the Commission under the Act in the event of the issuance and
distribution of the Settlement Shares and the subsequent public resale under the
Act by members of the Settlement Class or counsel for the Class Plaintiffs
receiving such shares in the manner described herein and in the absence of an
effective registration statement under the Act. In the event the Division should reach a preliminary conclusion that it will be
unable to take the no-action position we are requesting, we would appreciate an
opportunity to discuss the matter further prior to the issuance of a formal
response. If you have any questions in connection with this matter or if additional
information is required, please do not hesitate to call the undersigned at (214)
953-6832. In accordance with Release No. 33-6269, seven additional copies of
this letter are enclosed. Very truly yours, BAKER & BOTTS, L.L.P. By
Mark A. Kopidlansky L2256/1643/01BX15 STAFF REPLY LETTERAugust 10, 1993 RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF CORPORATION FINANCE RE: Intellicall, Inc. (the "Company")
Incoming letter dated May 24, 1993 Based upon the facts presented in your letter and contingent upon approval of
the Settlement Agreement by the Court, the Division will not recommend any
enforcement action to the Commission if the Company, in reliance upon your
opinion as counsel that registration is not required, issues shares of the
Company's common stock (the "Settlement Shares") in connection with the
settlement of the class action pending against the Company, as described in your
letter, without registration under the Securities Act of 1933. Recipients of
Settlement Shares who are not affiliates of the Company may resell such
Settlement Shares of such for their own accounts without regard to Rule 144.
Recipients of such Settlement Shares who are affiliates of the Company may
resell pursuant to Rule 144. Because the Settlement Shares will not be
restricted securities, the holding period requirement of Rule 144(d) is
inapplicable. Because these positions are based on the representations made to the Division in
your letter, it should be noted that any different facts or conditions might
require other conclusions. Further, this response only expresses the Division's
position on enforcement action and does not purport to express any legal
conclusion on the questions presented. Sincerely, William H. Carter
Special Counsel
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