UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1997
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 1-12571
INTELLICELL CORP.
DELAWARE 95-4467726
(State of incorporation or organization) (IRS Employer Identification No.)
6929 Hayvenhurst Ave., Van Nuys California 91406
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (818) 906-7777
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___
As of July 31, 1997, there were 4,415,902 shares of the registrant's Common
Stock outstanding.
<PAGE>
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements
Intellicell Corp.
Balance Sheets
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
----------------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets;
Accounts receivable, net of allowance for
doubtful accounts of $428,000 and $491,000 $ 6,287,000 $ 10,430,000
Inventories, net of reserve of $442,000 and $483,000 6,437,000 5,087,000
Notes receivable 337,000 490,000
Other receivables 500,000 3,740,000
Deposits for purchases of inventory 1,443,000 15,000
Deferred tax asset 353,000 644,000
Prepaid expenses and other current assets 268,000 341,000
----------------------------
Total current assets 15,625,000 20,747,000
----------------------------
Property and equipment, net of accumulated
depreciation of $36,000 and $60,000 156,000 188,000
Goodwill, net of accumulated amortization of $13,000
and $18,000 87,000 82,000
Deferred financing costs, net of accumulated
amortization of $58,000 and $116,000 118,000 60,000
Other asset 39,000 44,000
----------------------------
Total assets $ 16,025,000 $ 21,121,000
============================
Liabilities and Stockholders' Equity
Current liabilities:
Bank overdraft $ 1,012,000 $ 50,000
Revolving credit facility -- 3,010,000
Accounts payable 5,994,000 8,212,000
Accrued expenses 187,000 99,000
----------------------------
Total current liabilities 7,193,000 11,371,000
Deferred tax liability 23,000 31,000
----------------------------
Total liabilities 7,216,000 11,402,000
Commitments and contingencies
Stockholders' equity
Preferred stock -$.01 par value, 1,000,000 shares
authorized and none issued
Common stock - $.01 per value, 15,000,000 shares
authorized, 4,217,464 and 4,415,902 shares issued
and outstanding 42,000 44,000
Additional paid-in capital 8,925,000 9,809,000
Retained earnings (deficit) 296,000 (134,000)
Due from officer (454,000) --
----------------------------
Total stockholders' equity 8,809,000 9,719,000
----------------------------
Total liabilities and stockholders' equity $ 16,025,000 $ 21,121,000
============================
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
Intellicell Corp.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For The 6 Months Ended
June 30,
----------------------------
1996 1997
----------------------------
<S> <C> <C>
Net Sales $ 42,470,000 $ 40,993,000
Cost of sales 40,595,000 38,521,000
----------------------------
Gross profit 1,875,000 2,472,000
Selling, general and administrative expenses 1,171,000 1,993,000
Non-recurring legal and auditing fees 1,024,000
----------------------------
Income (loss) from operations 704,000 (545,000)
Other income (expenses)
Interest (90,000) (180,000)
Other income 3,000 13,000
----------------------------
Income (loss) before income tax benefit 617,000 (712,000)
Income tax benefit -- 282,000
----------------------------
Net income (loss) $ 617,000 $ (430,000)
============================
Pro forma amounts:
Income (loss) before income taxes $ 617,000 $ (712,000)
Income tax (expense) benefit (249,000) 282,000
----------------------------
Net income (loss) $ 368,000 $ (430,000)
============================
Earnings (loss) per share $ 0.17 $ (0.10)
============================
Weighted average number of common shares outstanding 2,195,810 4,486,680
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
Intellicell Corp.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For The 3 Months Ended
June 30,
----------------------------
1996 1997
----------------------------
<S> <C> <C>
Net Sales $ 20,182,000 $ 19,211,000
Cost of sales 19,259,000 18,031,000
----------------------------
Gross profit 923,000 1,180,000
Selling, general and administrative expenses 520,000 1,026,000
Non-recurring legal and accounting fees 124,000
----------------------------
Income from operations 403,000 30,000
Other income (expenses):
Interest (35,000) (113,000)
Other income (1,000) 7,000
----------------------------
Income (loss) before income tax benefit 367,000 (76,000)
Income tax benefit -- 28,000
----------------------------
Net income (loss) $ 367,000 $ (48,000)
============================
Pro forma amounts:
Income (loss) before income taxes $ 367,000 $ (76,000)
Income tax(expense) benefit (149,000) 28,000
----------------------------
Net income (loss) $ 218,000 $ (48,000)
============================
Earnings (loss) per share $ 0.10 $ (0.01)
============================
Weighted average number of common shares outstanding 2,195,810 4,466,125
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
Intellicell Carp
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Increase (Decrease) in Cash For the 6 Months Ended
June 30,
--------------------------
1996 1997
--------------------------
<S> <C> <C>
Cash flows from operating activities:
Net Income (loss) $ 617,000 $ (430,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 16,000 87,000
Provision for doubtful accounts 161,000 63,000
Provision for inventory reserves 2,000 41,000
Change in net deferred tax asset -- (283,000)
Changes in operating assets and liabilities:
(Increase) in accounts receivable (3,077,000) (4,206,000)
(Increase) decrease in inventory (2,309,000) 1,309,000
Decrease in deposits for purchases of inventory -- 1,428,000
(Increase) in other receivables -- (3,240,000)
(Increase) in prepaid expenses and
other current assets (76,000) (73,000)
(Increase) in other assets (14,000) (5,000)
Increase in accounts payable and
accrued expenses 2,734,000 2,129,000
--------------------------
Net cash used in operating activities (1,946,000) (3,180,000)
--------------------------
Cash flows from investing activities
Loans to employees and third parties 174,000 --
Repayments (increase) of note receivable 211,000 (153,000)
Acquisition of fixed assets (13,000) (56,000)
--------------------------
Net cash provided by investing activities 372,000 (209,000)
--------------------------
Cash flows from financing activities:
(Decrease) in Bank overdraft (96,000) (962,000)
Deferred financing costs (176,000) --
Deferred registration costs (180,000) --
Proceeds from line of credit, net 4,145,000 3,010,000
Proceeds from the sale of common stock -- 1,341,000
Payments on loan payable (1,301,000) --
--------------------------
Net cash provided by financing activities 2,392,000 3,389,000
--------------------------
Net increase in cash $ 818,000 --
Cash - beginning of period -- --
--------------------------
Cash - end of period $ 818,000 --
==========================
Supplemental Dislosures of Cash Flow Information
Cash paid during the period for:
Interest $ 90,000 $ 180,000
Income taxes $ 222,000
Non-cash financing activities:
Common stock reacquired from officer as settlement
of balance due from officer and retirement of such
shares $ 454,000
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
INTELLICELL CORP.
Notes to Financial Statements
(Unaudited)
Note 1. Company's Quarterly Report Under Form 10-Q
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
statements and with the instructions set forth in the Securities and Exchange
Commission's ("SEC") regulations. In the opinion of Management, the accompanying
financial statements include all adjustments consisting of normal recurring
accruals necessary to present fairly the financial statements of Intellicell
Corp. for the periods presented. The accompanying financial information should
be read in conjunction with the Company's Annual Report on Form 10-K for the
year ended December 31, 1996. Footnote disclosures that substantially duplicate
those in the Company's Annual Audited Report on Form 10-K, including significant
accounting policies, have been omitted. The results of operations for the six
months and three months ended June 30, 1996, and June 30, 1997, are not
necessarily indicative of the results to be expected for the full fiscal year.
Note 2. Non-recurring Legal and Auditing Fees
During 1997 and in connection with the audit of the Company's financial
statements for the year ended December 31, 1996, (see, SEC Form 10-K, Item 9),
the Company incurred non-recurring expenses of $1,024,000 consisting primarily
of professional fees, including the fees of its prior and current independent
auditor, fees of special counsel and a special auditor retained by the Company's
Audit Committee. Such fees were estimated to be $900,000 and expensed in the
quarter ended March 31, 1997. The additional $124,000 was expensed in the
quarter ended June 30, 1997.
Note 3. Contingent Liabilities
In October 1996, an action was filed against the Company seeking a judgment
to cancel the Company's trademark registration for the name "Intellicell". The
action is in a preliminary stage and the Company is unable to determine the
outcome of the action. Although the Company intends to vigorously defend this
action, there can be no assurance that such action will be resolved in a manner
favorable to the Company. The probability of an unfavorable outcome and range of
possible loss, if any, cannot be determined.
Note 4. Common Stock
In December 1996, the Company consummated an initial public offering of
2,000,000 shares of Common Stock and received proceeds of $8,047,000 (net of
underwriting discounts and commissions and expenses of the offering). In January
1997, the managing underwriter exercised an over-allotment option (the
"Over-allotment Option") to purchase an additional 300,000 shares, resulting in
net proceeds of $1,341,000.
In December 1996, $1,000,000 principal amount of a note payable was
converted into 223,464 shares of Common Stock. In addition, the Company
repurchased 36,000 shares of Common Stock from the Company's President in
cancellation of $180,000 due from such officer. In May 1997, the President
repaid excess S corporation distributions in the amount of $454,000 by
delivering 101,562 shares of Common Stock to the Company for cancellation (the
"Stock Cancellation"). The Company reflected the $454,000 as a "Due from
officer" at December 31, 1996.
6
<PAGE>
Note 5. Pro forma Income Taxes (Benefit)-Unaudited
As a result of the Company's S corporation status which terminated in
December 1996, the financial statements do not include a provision for federal
and state income taxes for the period ended June 30, 1996. As a result of the
initial public offering the S corporation election was terminated and the
Company became subject to federal and state income taxes. Accordingly, pro forma
net income in the accompanying statements of operations includes pro forma
adjustments for income taxes which would have been provided had the S
corporation election not been in effect.
Note 6. Credit Facility
In June 1996, the Company entered into a revolving line of credit agreement
with a finance company, which expires in June 1998 and provides for borrowings
of up to a maximum of $7,500,000 based on a maximum of 82% of eligible accounts
receivable and 50% of eligible inventory as defined in the agreement. Borrowings
under the agreement bear interest at prime rate plus one and three-quarters
percent (1.75%) per annum. At December 31, 1996 and June 30, 1997 the Company
was paying interest on advances at a rate of 10% and 10.25%, respectively. The
credit facility is collateralized by substantially all of the assets of the
Company. The agreement prohibits the Company from paying dividends or incurring
additional indebtedness except for trade indebtedness and requires the Company
to maintain a tangible net worth of $4,500,000 and working capital of
$1,500,000.
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations.
Safe Harbor statement under the Private Securities Litigation Reform Act of
1995: The statements contained in this report, which are not historical facts,
are forward looking statements that involve risks and uncertainties including
but not limited to, possible delays in the Company's expansion efforts, changes
in wireless communications markets and technologies, the nature of possible
supplier or customer arrangements which may become available to the Company in
the future, possible technological obsolescence, increased competition and
unfavorable general economic conditions. The Company's actual results may differ
materially from the results discussed in any forward looking statement.
Changes in Financial Condition
Total assets at June 30, 1997 increased by $5,096,000 from December 31,
1996, primarily as a result of a $4,143,000 or 65.9% increase in accounts
receivable. Such increase was the result of a relatively large increase in sales
activity occurring in June and the extension of credit terms to customers. The
Company's allowance for doubtful accounts receivable was $491,000 at June 30,
1997. The Company believes the allowance is currently adequate for the size and
nature of its accounts receivable. Delays in the collection or the
uncollectibility of accounts receivable could have an adverse effect on the
Company's liquidity and working capital position. The Company is subject to
credit risks, particularly in foreign markets, which could require the Company
to increase its allowance for doubtful accounts. The Company attempts to
minimize losses on credit sales by closely monitoring its customers'
creditworthiness. The Company seeks to obtain letters of credit or similar
security in connection with open account sales to customers located in foreign
markets.
Net assets (assets less liabilities) of the Company increased by $910,000
or 10.3% from December 31, 1996, reflecting the issuance of additional shares of
the common stock pursuant to the exercise of the
7
<PAGE>
Over-allotment Option, offset by the Stock Cancellation and the net loss for the
six months ended June 30, 1997.
Inventory and deposits for purchases of inventory decreased by $2,778,000
or 35.3% from December 31, 1996 to June 30, 1997. Other receivables increased by
$3,240,000 from December 31, 1996 to June 30, 1997. The decrease in inventory
and deposits for purchases of inventory and the increase in other receivables
were primarily the result of the return of product to Sony Wireless Telecom
Communications Company (Sony) in June 1997. In June 1997, Sony announced that it
was entering into an exclusive distributor arrangement in the western United
States, and in accordance with its terms, terminated its distributorship
agreement with the Company. This resulted in the Company returning its inventory
of Sony product thereby reducing inventory and creating a receivable from Sony
in the amount of $2,149,000 which was subsequently paid in July 1997. Management
believes that the Company's arrangements with its existing suppliers are
adequate to provide sufficient quantities of competitive product on favorable
terms.
The Company's inventory reserve was $483,000 at June 30, 1997, which the
Company believes is currently adequate for obsolescence and net realizable
value, given the size and nature of its inventories. The amounts the Company
will ultimately realize could, however, differ materially from the amounts
estimated in arriving at inventory reserves.
At December 31, 1996 and June 30, 1997, the Company had recorded a deferred
income tax asset of $353,000 and $644,000 with no valuation allowance. A
deferred tax asset for the net operating loss incurred for the six months ended
June 30, 1997 in the amount of $250,000 was recorded. The Company believes it is
more likely than not that the deferred tax asset will be realized.
Total liabilities increased by $4,186,000 or 58.0% from December 31, 1996
to June 30, 1997, consistent with the increased level of operations. Bank
overdraft decreased by $962,000, borrowings under the revolving credit facility
increased by $3,010,000 and accounts payable increased by $2,218,000 from
December 31, 1996 to June 30, 1997. Management believes this is consistent with
the increase in accounts receivable for the same period.
Comparison of Operations
Net sales for the six months and three months ended June 30, 1997 decreased
$1,477,000, or 3.5%, and $971,000 or 4.8%, respectively. Such decrease were the
result of both volume and price decreases.
Gross profit increased by $597,000 or 31.8%, and $257,000 or 27.8% for the
six and three months ended June 30, 1997, from the prior comparable periods.
These increases were primarily due to increased volume discounts earned from
manufacturers.
Selling, general and administrative expenses increased by $822,000, or
70.2%, from the six months ended June 30, 1996 to the six months ended June 30,
1997. As a percentage of sales, selling, general and administrative expenses
were 2.8% and 4.9% for the six months periods ended June 30, 1996 and June 30,
1997, respectively. For the three months ended June 30, 1997, such expenses
increased by $506,000 or 97.3% over the comparable period of the prior year. The
above mentioned increase in expense is primarily associated with an increase in
sales staff, and promotional and advertising expenses.
During the six months ended June 30, 1997, the Company incurred
non-recurring legal and auditing fees relating to the Company's change in
auditors of $1,024,000, including the fees of its current
8
<PAGE>
and prior independent auditor, fees of special counsel and a special auditor
retained by the Company's Audit Committee of the Board of Directors. The
Company, based on estimates, had expensed $900,000 of such expenses in the first
quarter of 1997 and subsequently expensed the additional $124,000 through June
30, 1997.
The Company incurred a loss from operations of $545,000 for the six months
ended June 30, 1997, as compared to income from operations of $704,000 for the
six months ended June 30, 1996. For the quarters ended June 30, 1997 and 1996
the Company had income from operations of $30,000 and $403,000, respectively.
The Company incurred a net loss of $430,000 for the six months ended June 30,
1997 as compared to pro forma net income of $368,000 for the six months ended
June 30, 1996. For the quarters ended June 30, 1997 and 1996 the Company had a
net loss of $48,000 and a pro-forma net income of $218,000, respectively. The
loss from operations for the six months ended June 30, 1997, and net loss for
the six and three months ended June 30, 1997, are primarily attributable to the
non-recurring legal and auditing fees described above and increased interest
expense on borrowings under its credit line.
Liquidity and Capital Resources
The Company's primary cash requirements have been to fund increased levels
of inventories and accounts receivable. The Company has historically satisfied
its working capital requirements principally through cash flow from operations,
the issuance of equity securities and borrowings. Working capital at June 30,
1997 was $9,376,000 compared to working capital of $8,432,000 at December 31,
1996.
Net cash used in operating activities was $3,180,000 and $1,946,000 for the
six months ended June 30, 1997, and 1996, respectively. The increase in cash
used was primarily attributable to the net loss for the period, and increased
levels of accounts receivable.
Net cash used in investing activities for the six months ended June 30,
1997 was $209,000 as compared to a net cash provided of $372,000 for the six
months ended June 30, 1996. The net cash used was primarily the result of
increased notes receivable.
Net cash provided by financing activities was $3,389,000 and $2,392,000 for
the six months ended June 30, 1997 and 1996, respectively. This increase was
attributable to the net of proceeds from the exercise of the Over-allotment
Option of $1,341,000.
Under the Company's credit agreement the Company is prohibited from paying
dividends or incurring additional indebtedness except for trade indebtedness and
requires the Company to maintain a tangible net worth of not less than
$4,500,000 and working capital of not less than $1,500,000. The Company is in
compliance with all restrictive covenants at June 30, 1997.
At June 30, 1997 the Company had no cash or cash equivalents.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In October 1996, an action was filed against the Company seeking a judgment
to cancel the Company's trademark registration for the name "Intellicell". The
action is in a preliminary stage and the Company is unable to determine the
outcome of the action. Although the Company intends to vigorously defend this
action, there can be no assurance that such action will be resolved in a manner
favorable to the Company.
9
<PAGE>
Item 2. Change In Securities
On April 30, 1997, the Company granted to John C. Snyder II, its Chief
Financial Officer, options to purchase 50,000 shares of common stock at an
exercise price of $6.625 per share.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 11 Computations of Earnings Per Share
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
Report on Form 8-K dated April 15, 1997. (Item 304 Change in
Registrant's Certifying Accountant).
Report on Form 8-K/A dated April 21, 1997. (Item 304 Change in
Registrant's Certifying Accountant).
Report on Form 8-K dated April 27, 1997. (Item 304 Change in
Registrant's Certifying Accountant).
10
<PAGE>
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange
Act of 1934, Intellicell Corp. has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Intellicell Corp.
By: /s/John C. Snyder II Dated: August 11, 1997
- ------------------------------------
John C. Snyder II
Chief Financial Officer
11
Intellicell Corp.
EXHIBIT 11
Computation of Earnings (Loss) Per Share
(Unaudited)
<TABLE>
<CAPTION>
For The 6 Months Ended For The Three Months Ended
June 30, June 30,
------------------------------------------------------
1996 1997 1996 1997
------------------------------------------------------
<S> <C> <C> <C> <C>
Earnings (loss) per share:
Pro forma net income (loss) for primary earnings
(loss) per share $ 368,000 $ (430,000) $ 218,000 $ (48,000)
======================================================
Weighted average common shares outstanding 2,030,000 4,486,680 2,030,000 4,466,125
Weighted average shares sold to fund stockholder
distribution paid out of proceeds of initial public offering 142,346 142,346
Weighted average shares resulting from conversion of
convertible notes payable at discount from market 23,464 23,464
------------------------------------------------------
Weighted average common shares and equivalents 2,195,810 4,486,680 2,195,810 4,466,125
======================================================
Primary pro forma earnings (loss) per share $ 0.17 $ (0.10) $ 0.10 $ (0.01)
======================================================
</TABLE>
For the periods ending June 30, 1996 and 1997, no additional common stock
equivalents (upon exercise of common share equivalents under the modified
treasury stock method) were included in the calculation of earnings (loss) per
share.
For the periods ended June 30, 1996, no such common share equivalents existed
and for the periods ended June 30, 1997, the results would be anti-dilutive. For
the periods ended June 30, 1996 and 1997, earnings (loss) per share was
identical under the primary and fully diluted basis.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENT INCLUDED IN THIS QUARTERLY REPORT ON FORM 10-Q,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 10,921,000
<ALLOWANCES> 491,000
<INVENTORY> 5,087,000
<CURRENT-ASSETS> 20,747,000
<PP&E> 248,000
<DEPRECIATION> 60,000
<TOTAL-ASSETS> 21,121,000
<CURRENT-LIABILITIES> 11,371,000
<BONDS> 0
0
0
<COMMON> 44,000
<OTHER-SE> 9,675,000
<TOTAL-LIABILITY-AND-EQUITY> 21,121,000
<SALES> 40,993,000
<TOTAL-REVENUES> 40,993,000
<CGS> 38,521,000
<TOTAL-COSTS> 38,521,000
<OTHER-EXPENSES> 1,024,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 180,000
<INCOME-PRETAX> (712,000)
<INCOME-TAX> 282,000
<INCOME-CONTINUING> (430,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (430,000)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
