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 September 30, 1998
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.)
9314 Eton Ave., Chatsworth, California 91311
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (818) 709-2300
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 November 13, 1998 there were 4,415,902 shares of the registrant's Common
Stock outstanding.
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PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Intellicell Corp.
Balance Sheets
December 31, September 30,
1997 1998
------------ ------------
(Unaudited)
Assets
Current Assets:
Cash $ -- $ 238,000
Accounts receivable, net of allowance for
doubtful accounts of $2,697,000 and $1,984,000 6,578,000 1,255,000
Inventories, net of reserves of $550,000
and $697,000 3,494,000 1,311,000
Notes receivable, net of allowance for
doubtful notes of $739,000 and $1,521,000 195,000 --
Deposits for purchase of inventory 271,000 105,000
Prepaid expenses and other current assets 439,000 193,000
------------ ------------
Total current assets 10,977,000 3,102,000
Property and equipment, net of accumulated
depreciation of $98,000 and $129,000 286,000 381,000
Goodwill, net of accumulated amortization
of $23,000 and $30,000 77,000 70,000
Deferred financing costs, net of
accumulated amortization of $288,000
and $290,000 74,000 117,000
------------ ------------
Total assets $ 11,414,000 $ 3,670,000
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Bank overdraft $ 250,000 --
Revolving credit facility 3,402,000 527,000
Accounts payable 3,425,000 1,147,000
Accrued expenses 304,000 188,000
------------ ------------
Total current liabilities 7,381,000 1,862,000
------------ ------------
Commitments and contingencies -- --
Stockholders' equity
Preferred stock -$.01 par value, 1,000,000
shares authorized and none issued
Common stock -$.01 par value, 15,000,000
shares authorized 4,415,902 shares issued
and outstanding 44,000 44,000
Additional paid-in capital 11,792,000 12,144,000
Accumulated deficit (7,803,000) (10,380,000)
------------ ------------
Total stockholders' equity 4,033,000 1,808,000
------------ ------------
Total liabilities and stockholders' equity $ 11,414,000 $ 3,670,000
============ ============
See accompanying notes to financial statements
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Intellicell Corp.
Statements of Operations
(Unaudited)
For the Nine Months Ended
September 30,
----------------------------
1998 1997
------------ ------------
Net sales $ 22,758,000 $ 61,505,000
Cost of sales 21,613,000 58,411,000
------------ ------------
Gross profit 1,145,000 3,094,000
Selling, general and administrative expenses 3,494,000 4,243,000
Non-recurring legal and auditing fees -- 1,024,000
------------ ------------
Loss from operations (2,349,000) (2,173,000)
Other income (expense):
Interest expense (194,000) (284,000)
Other Income (Expense) (34,000) 21,000
------------ ------------
Loss before income tax expense (2,577,000) (2,436,000)
Income tax expense -- (27,000)
------------ ------------
Net loss $ (2,577,000) $ (2,463,000)
============ ============
Basic loss per share $ (0.58) $ (0.55)
============ ============
Diluted loss per share $ (0.58) $ (0.55)
============ ============
Weighted average number of common shares
outstanding 4,415,902 4,462,828
============ ============
See accompanying notes to financial statements
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Intellicell Corp.
Statements of Operations
(Unaudited)
For the Three Months Ended
September 30,
----------------------------
1998 1997
------------ ------------
Net sales $ 4,142,000 $ 20,512,000
Cost of sales 4,020,000 19,890,000
------------ ------------
Gross profit 122,000 622,000
Selling, general and administrative expenses 930,000 2,250,000
------------ ------------
Loss from operations (808,000) (1,628,000)
Other income (expense):
Interest expense (31,000) (104,000)
Other Income (expense) (1,000) 8,000
------------ ------------
Loss before income tax expense (840,000) (1,724,000)
Income tax expense -- (309,000)
------------ ------------
Net loss $ (840,000) $ (2,033,000)
============ ============
Basic loss per share $ (0.19) $ (0.46)
============ ============
Diluted loss per share $ (0.19) $ (0.46)
============ ============
Weighted average number of common shares
outstanding 4,415,902 4,415,902
============ ============
See accompanying notes to financial statement
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Intellicell Corp.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,577,000) $(2,463,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization 112,000 129,000
Non cash compensation expense 352,000 --
Provision for doubtful accounts receivable 713,000 751,000
Provision for inventory reserves 323,000 205,000
Provision for doubtful notes receivable 864,000 622,000
Change in net deferred tax asset 25,000
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 4,610,000 (5,378,000)
(Increase) decrease in inventories 1,860,000 260,000
(Increase) decrease in deposits for purchases
of inventory 166,000 223,000
(Increase) decrease in other receivables (669,000) (172,000)
(Increase) decrease in prepaid expenses and
other current assets 246,000 (106,000)
(Increase) decrease in other assets (9,000)
Increase (decrease) in accounts payable and
accrued expenses (2,504,000) 643,000
----------- -----------
Net cash provided by (used in) operating
activities 3,606,000 (5,230,000)
----------- -----------
Cash flows from investing activities:
Repayment of notes receivable -- (151,000)
Deferred Acquisition Cost -- (88,000)
Acquisition of fixed assets (200,000) 505,000
----------- -----------
Net cash provided by investing activities (200,000) 266,000
----------- -----------
Cash flows from financing activities:
Bank overdraft (payments) (250,000) 385,000
Deferred financing costs (43,000) (37,000)
Net advances (repayments) under credit facility (2,875,000) 3,275,000
Proceeds from the sale of common stock -- 1,341,000
----------- -----------
Net cash provided by (used in) financing
activities (3,168,000) 4,964,000
----------- -----------
Net increase in cash 238,000 --
Cash - beginning of period -- --
----------- -----------
Cash - end of period $ 238,000 $ -
----------- -----------
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest $ 194,000 $ 284,000
Income taxes $ -- $ 223,000
Common stock reacquired from officer as settlement
of balance due from officer and retirement of such
shares $ -- $ 454,000
Conversion of trade receivable into note receivable $ -- $ 1,657,000
</TABLE>
See accompanying notes to financial statements
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INTELLICELL CORP.
Notes to Financial Statements
(Unaudited)
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 audited financial statements contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997. Footnote
disclosures that substantially duplicate those in the Company's Form 10-K.
including significant accounting policies, have been omitted. The results of
operations for the three months and nine months ended September 30, 1998, are
not necessarily indicative of the results to be expected for the full fiscal
year.
2. Non-recurring Legal and Auditing Fees
During 1997, in connection with the audit of the Company's financial statements
for year ended December 31, 1996, (see 1997 Form 10-K, Item 9) the Company
incurred non-recurring expenses of $1,024,000 for the nine months ended
September 30, 1997 ($1,300,000 for the year ended December 31, 1997) consisting
primarily of professional fees, including the fees of its auditors, fees of
special counsel and a special auditor retained by the Company's Audit Committee.
3. Credit Facility
In January 1998, the Company entered into a revolving line of credit agreement
with BankAmerica Business Credit, Inc. ("BankAmerica") which expires in January
2001, and provides for borrowings of up to a maximum of $12,000,000 based on a
maximum of 80% of eligible receivables and the lesser of $6,000,000 or 50% of
eligible inventory, as defined. Borrowing under the agreement accrued interest
at prime rate plus one half of one percent (0.5%) per annum. 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, initially, required the Company
to maintain a tangible net worth of no less than, $5,500,000 at December 31,
1997, and annual earnings before interest taxes, depreciation and amortization
of $500,000. The Company was in violation of the tangible net worth covenant at
December 31, 1997. In April 1998, BankAmerica waived the December 31, 1997,
default of the tangible net worth covenant, and revised the January 1998 credit
agreement. Under the revised credit agreement the maximum borrowing was reduced
from $12 million to $6 million, with such borrowings limited to 80% of eligible
accounts receivable and the lesser of $1 million or 50% of eligible telephone
inventory as defined in the agreement. Borrowing under the revised credit
agreement bears interest at the prime rate plus two and one-half percent (2.5%)
per annum. The revised credit agreement requires the Company to meet monthly
levels of tangible net worth and earnings before interest, taxes, depreciation
and amortization. All other significant restrictive covenants and prohibitions
of the January 1998 agreement are included in the April 1998 revised agreement.
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In August 1998, the Company executed a third amendment to the credit agreement
which reduced the maximum borrowing permitted under the agreement from $4
million to $1.2 million as of August 17, 1998 and to $1 million on September 1,
1998 , with such borrowings limited to the sum of 80% of eligible accounts
receivable and the lesser of $750,000 or 50% of eligible telephone inventory as
defined in the agreement. A $50,000 extension fee that the Company had
previously agreed to was restructured, with the Company paying $10,000 of such
fee on August 1, 1998 and agreeing that in the event that the obligations under
the BankAmerica loan have not been repaid in full prior to August 24, 1998, the
Company will be obligated to pay an additional extension fee of $15,000, on
September 4, 1998 an additional extension fee of $15,000 and subsequent monthly
extension fees of $25,000 on the first day of each month thereafter until all
obligations under the loan are paid in full. All other significant restrictive
covenants and prohibitions of the credit agreement, as amended are included in
the August 1998 revised agreement.
In August 1998, BankAmerica waived the default of the tangible net worth
covenant through June 30, 1998 and revised the credit agreement. In this fourth
amendment, the Company and BankAmerica agreed that either party may terminate
the credit agreement, as amended at any time after October 31, 1998. In October
1998, BankAmerica and the Company further amended the agreement, extending the
term through November 30, 1998 and further limiting the borrowings to $400,000.
The Company has entered into negotiations with several parties to secure
financing to replace the BankAmerica credit line including two other lending
institutions that have offered terms similar to the BankAmerica credit
agreement. These lenders have each issued the Company a letters of intent to
enter into a credit agreement providing maximum borrowings up to a maximum of
$2.5 and $5.0 million (depending upon the amounts of eligible inventory and
accounts receivables.) The letters of intent are subject to certain condition,
and there can be no assurance that the lenders will ultimately enter into a
formal credit agreement with the Company.
4. Commitments, Contingencies and Other Matters
The Offering
In November 1998, the Company consummated a private placement (the "Offering")
with an investor group (the "Investor Group"). In conjunction with the Offering,
the Company issued $1,500,000 of convertible, unsecured subordinated debt and
agreed to certain related transactions as follows:
Issuance of Convertible Debt
The Company issued $1,500,000 of unsecured, subordinated convertible notes
bearing interest of 2% per annum. The notes are convertible, at the option of
the Company and upon ratification of the Offering by the Company's shareholders,
into 1,500,000 units (the "Unit"). Each Unit consists of one common share plus
one warrant to purchase two-thirds of a share of common stock at an exercise
price of $1 per share, or a total of 1,500,000 million shares and warrants to
purchase 1,000,000 shares. Ben Neman, the Company's president and chairman of
the board and owner of 42.9% of the current outstanding shares of common stock,
has provided the Company with an irrevocable agreement to vote his shares in
favor of this transaction, including the conversion of the notes to Units.
The 1,000,000 warrants have a term of three years and are excisable at any time
by the warrant-
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holders, but may be redeemed by the Company if the closing bid price of the
Company's common stock remains above $2 per share for a defined period of time.
Stock Options
As reported in the audited financial statements contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997, the Company on
March 5, 1998, granted five-year options to purchase an aggregate of 300,000
shares of common stock under the 1998 Stock Option Plan. Of such options,
100,000 options were granted at an exercise price of $3.81 per share (the fair
market value of such stock on the date of grant) to each of Messrs. Sharma and
Henderson (outside directors of the Company) and to Sands Brothers & Co., Ltd.
("Sands Brothers"), a financial advisor. Mr. Sharma subsequently agreed to the
rescission and cancellation of his granted 100,000 options.
The Company accounted for the granted and non-cancelled options to the director
and Sands Brothers under the provisions of SFAS 123, resulting in a fair value
of $614,000 based on the Black Scholes Option Pricing Model. The options vest in
twelve months. Non-cash compensation expense was recognized during the nine
months and the quarter ended September 30, 1998 in the amount of $352,000 and
$131,000 respectively.
In conjunction with the Offering, the Company has agreed (subject to stockholder
approval) to reissue the 100,000 options to Mr. Sharma, but at the lower
exercise price of $1 per share and to reprice the exercise price to $1 for the
100,000 options previously granted to Mr. Henderson. The Company also has agreed
to pay Sands Brothers $50,000 upon the closing of the offering and (subject to
stockholder approval) to issue Sands Brothers 150,000 warrants to purchase
150,000 shares of common stock at an exercise price of $1 with the 100,000
options granted in March 1998 being rescinded and cancelled.
Management
The Company has appointed John Swinehart to be the new Chief Executive Officer,
with the former Chief Executive Officer, Ben Neman, continuing to hold the
titles of President and Chairman of the Board. This Chief Executive Officer will
receive a salary $50,000 per year and options to purchase 200,000 shares of
common stock at $1 per share. In addition, two new board members, who will each
receive 200,000 options of common stock at an exercise price of $1 per share
have been designated by the Investor Group and added to the Board of Directors.
All of the foregoing 600,000 options will be issued only upon stockholder
ratification of the Offering. Of the options issued, 5/6ths will vest upon
issuance, with the remaining options vesting prorata based on exercise of the
warrants. the redemption of the 1,000,000 Unit warrants.
The Company's Board of Directors has extended the employment agreement with Ben
Neman, the Company's President and Chairman of the Board, for three years from
November 1998. He will receive a salary of not less than $72,000 per year and be
subject to salary increases at the discretion of the Board of Directors. In the
case of a termination for reasons other than cause, as defined, he shall be due
severance of $500,000 payable upon said termination. In addition, during his
employment Mr. Neman has agreed to a lock-up agreement that restricts the amount
of shares that he can sell.
Repricing of Warrants and New Warrant Dividend
In December 1997, the Company declared a dividend in the form of a warrant to
its existing
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shareholders (except Ben Neman). For every two shares held, a warrant to
purchase one share was issued with an exercise price of $4 per share. These
warrants are redeemable by the Company if the closing bid price of the Common
Stock remains above $7 per share for a defined period. In conjunction with this
Offering, the Board of Directors agreed to reprice these warrants to an exercise
price of $1 per share. In addition, existing shareholders (other then Ben Neman)
will receive an additional warrant to purchase one share at $1 per share, for
every two shares held This new warrant will be redeemable by the Company if its
shares trade for a period, as defined, above $2.00 per share. The repricing of
the existing warrants and issuance of the new warrants are subject to
stockholder ratification of the Offering.
Registration of Securities
The common stock issuable upon conversion of the notes and upon exercise of the
warrants issuable upon conversion of the notes, together with the common stock
issuable upon exercise of the options and warrants issued to officers and
directors of the Company and Sands Brothers will be registered following
stockholder ratification of the Offering, together with the shares of common
stock owned by Ben Neman.
Item 2. Management's Discussion and Analysis of Financial Condition 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, the need for additional working capital, 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 product obsolescence,
uncollectible accounts receivable, slow moving inventory, lack of adequate
financing, increased competition and unfavorable general economic conditions.
The Company's actual results may differ materially from the results discussed in
any forward looking statement.
Comparison of Operations
Net sales for the nine months and three months ended September 30, 1998
decreased $38,747,000, or 63.0%, and $16,370,000, or 79.8% from the comparable
periods of the prior year. The decrease in sales is the result of reduced demand
for analog products and the Company's recent inability to procure digital
products because of decreased working capital borrowing capabilities from
lenders and vendors resulting in both volume and price decreases.
Gross profit decreased by $1,949,000 or 63.0%, for the nine months ended
September 30, 1998 and $500,000 or 80.4% for the three months ended September
30, 1998, from the prior comparable periods. As a percentage of sales, gross
profit for the nine months ended September 30, 1998 and 1997 was 5.0% and 3.0%
for the three months ended September 30, 1998 and 1997. The lower gross profit
is reflective of decreased demand for analog product. During the first quarter
and second quarters of 1998, the Company's inventory and sources of supply were
predominately analog and as such the Company experienced significant gross
margin deterioration. During the third quarter, The Company has made an effort
to change the phone inventory to digital based product and, as a result, the
gross profit deterioration was eliminated. The current phone inventory
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is balanced between diminishing analog phone sales and growing digital phone
sales.
Selling, general and administrative expenses decreased by $749,000 or 17.7% for
the nine months ended September 30, 1997 as compared to the nine months ended
September 30, 1998. Selling, general and administrative expenses decreased by
$1,320,000 or 58.7% from the three months ended September 30, 1997 to the three
months ended September 30, 1998. These decreases in expenses over those of the
comparable periods of the prior fiscal year are due to lower payroll and related
payroll costs as a result of the Company's cost-cutting efforts in 1998, offset
by moving costs for the Company's new facilities in Chatsworth, and non-cash
expenses such as stock options grants to non-employees, loan fees for the credit
agreement, increased reserves for doubtful accounts receivables and increased
reserves for inventory obsolescence.
For the nine months ended September 30, 1998, the Company incurred a loss from
operations of $2,349,000 and a net loss of $2,577,000, compared to a loss from
operations and net loss of $2,173,000 and $2,463,000, respectively, for the
comparable period in 1997. For the three months ended September 30, 1998, the
Company incurred a loss from operations of $808,000 and a net loss of $840,000
compared to a loss from operations and net loss of $1,628,000 and $2,033,000 for
the comparable period in 1997. The loss from operations for the nine months
ending September 30, 1997 included a non-recurring charge of $1,024,000 for
legal and auditing fees associated with the fiscal year end 1996 audit.
Changes in Financial Condition
For the nine months and three months ending September 30, 1998, the Company
incurred significant losses. The Company believes that these losses are
primarily attributable to the growth in the number of major domestic carriers
from two to five. The three new carriers, which provide digital transmission
technology, have C, D and E block transmission licenses. The new carriers, in
most markets, have chosen to procure digital phones directly from manufacturers
and have utilized distributors, such as the Company for logistic services such
as inventory management, product fulfillment and activities for end users. This
change in distribution paradigm has greatly impacted the Company's ability to
procure digital product. During this period, the Company's analog inventory
consistently lost much of its fair market value, which required reserves for
obsolescence. In addition, many of the Company's customers suffered from the
change in technology. As a result, the Company's accounts receivables required
additional reserves. Therefore, the Company believes that reduced sales were
caused by market conditions of obsolescence, the impact of the change of
technology on its customers and reduced working capital causing an inability to
purchase digital inventory.
As a result of decreased sales, the Company initiated cost cutting measures,
including reducing in March 1998 its sales and administrative staff and
subleasing approximately one-third of its Chatsworth office location. This
sublease was executed on May 1, 1998 at rates and on terms consistent with the
Company's lease on such facility. The Company also closed its Miami location and
sold its furniture and fixtures and leasehold improvements in Miami to a third
party, who also signed a sublease for the remaining lease term.
In an effort to procure the current state-of-the-art digital product, the
Company has entered into non-exclusive distribution agreements with several
manufacturers, including Sony Electronics Inc. Wireless Communications,
LG/Sansys, Samsung of America and NEC of America. Currently,
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these vendors of digital product provide the Company product on a prepaid basis.
See "Liquidity and Capital Resources." The Company is in negotiations with these
new suppliers of digital cellular product to provide purchasing terms. There can
be no assurance that the Company will be able to obtain sufficient credit
amounts to effect large purchases that will allow the Company to subsequently
sell such product at high enough volumes to create a positive sustained impact
for the Company.
Total assets at September 30, 1998 decreased by $7,875,000 or 71.7% from
December 31, 1997, primarily as a result of a $5,323,000 or 80.9% decrease in
accounts receivable and a $2,183,000 or 62.5% decrease in inventories. The
decrease in accounts receivable is the result of reduced sales for the nine
months ending September 30, 1998 and increased reserves for doubtful accounts as
a percentage of total accounts receivable. The decrease in inventory is a result
of lower purchases of product caused by the reduced demand for the Company's
analog cellular product (phones and accessories) in inventory and its recent
inability to procure significant amounts of digital cellular phone product.
Inventory also decreased as a result of increased reserves for obsolescence.
Net assets (assets less liabilities) of the Company decreased by $2,356,000 or
65.5% from December 31, 1997, reflecting the net loss, net of non-cash
compensation expense for the nine months ended September 30, 1998.
The Company's inventory reserve was $697,000 at September 30, 1998, or 35.7% of
inventories at that date. The Company believes this reserve is currently
adequate for obsolescence and net realizable value, given the size and nature of
its inventories. The Company believes that a concerted effort will be required
to reduce its inventory of analog accessories, which amounted to approximately
$750,000, net of reserves. The amounts the Company will ultimately realize
could, however, differ materially from the amounts estimated in arriving at
inventory reserves.
At September 30, 1998 the Company has a deferred tax asset of $3,612,000,
representing the future benefit of net operating losses and timing differences
and has established a valuation allowance of an equal amount reflecting current
assessment of realizability.
Total liabilities decreased by $5,519,000 or 74.8% from December 31, 1997 to
September 30, 1998. This reduction is primarily composed of a $2,278,000
reduction in accounts payable, a $2,875,000 reduction in borrowings under the
revolving credit facility and a $250,000 reduction in the bank overdraft balance
at September 30, 1998 as compared to December 31, 1997. This reduction in
liabilities is associated with reduced levels of business activity, including
purchases and inventory levels during the nine months ending September 30, 1998.
Liquidity and Capital Resources
Historically, the Company's primary cash requirements have been to fund
increased levels of inventories and accounts receivable, as well as recent
operating losses. The Company has satisfied its working capital requirements
principally through the issuance of equity securities and borrowings. Working
capital at September 30, 1998 was $1,240,000, compared to working capital of
$3,596,000 at December 31, 1997. This decrease in working capital reflects the
losses sustained by the Company subsequent to December 31, 1997.
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Net cash provided by operating activities was $3,606,000 for the nine months
ended September 30, 1998 as compared to net cash used in operating activities of
$(5,230,000) for the nine months ended September 30, 1997. The cash provided by
operating activities for the nine months ended September 30, 1998 was primarily
the result of a reduction of accounts receivable and inventories and net of an
increase in use of cash for deposits for purchase of inventory. Net cash used by
investing activities for the nine months ended September 30, 1998 was $200,000
as compared to $266,000 for the nine months ended September 30, 1997. Net cash
used by investing activities for the nine ended September 30, 1998 was the
result of repayments on the Company's credit agreement and an overdraft position
at December 31, 1997. For the nine months ended September 30, 1997, net cash
provided by financing activities totaled $4,964,000, which was the result of
increased borrowings under the Company's credit facility and proceeds from the
exercise of the over-allotment option from the Company's initial public offering
of $1,341,000.
The Company has incurred significant losses, which have materially, adversely
impacted its cash flow and liquidity. The Company currently does not have
significant borrowing availability under its existing credit facility or through
many of its vendors to be able to maintain or expand the current level of its
operations. Under the Company's line of credit, the Company is prohibited from
incurring additional indebtedness, except for trade indebtedness. The lender
that provides the Company's current credit facility has reduced the maximum
borrowings permitted under that facility to $400,000 and may cancel the facility
at any time after November 30, 1998. The Company has entered into negotiations
with several parties to secure financing to replace the BankAmerica credit line
including two lending institutions that have offered terms similar to the
BankAmerica credit agreement. These two lenders have issued the Company letters
of intent to enter into a credit agreement providing maximum borrowings up to a
maximum of $2.5 and $5.0 million, respectively (depending upon the amounts of
eligible inventory and accounts receivables.) The letters of intent are subject
to certain condition, and there can be no assurance that the lenders will
ultimately enter into a formal credit agreements with the Company.
In June 1998, the Company was notified by Nasdaq that its shares were below the
minimum bid price requirement of $1.00 for continued listing on the Nasdaq Small
Cap Stock Market. In October 1998, the Company was notified by Nasdaq that since
the Company's common stock had traded for 10 consecutive trading days with a
closing bid at least of $1 per share, the Company was now in compliance with
Nasdaq's minimum bid price requirement. However, as of September 30, 1998 the
Company's tangible net worth was less than Nasdaq's minimum continued listing
requirement of $2,000,000. If the Company is not successful in converting the
convertible notes described below to equity (which requires shareholder
approval) or otherwise in raising additional capital or if the price of its
common stock falls below $1, NASDAQ may delist the Company's common stock.
However, the Company is confident that the ultimate conversion will occur since
the Company has already obtained an agreement from its largest shareholder who
holds approximately 43% of the Company's stock to vote in favor of conversion.
In November 1998, the Company completed a private placement with an investor
group of $1,500,000 convertible, unsecured subordinated notes. The notes are
convertible, at the option of the Company and upon ratification by the Company's
stockholders of the private placement. Each unit consists of one common share
plus one warrant to purchase two-thirds of a share of common stock at an
exercise price of $1 per share, or a total of 1,500,000 shares and warrants to
purchase 1,000,000 shares.
Page 12
<PAGE>
In connection with and subject to stockholder ratification of the private
placement, the Company will reduce the exercise price of the warrants
distributed to its shareholders in 1997 from $4 to $1 per share and will issue
new warrants to its existing stockholders (other than Ben Neman) with an
exercise price of $1 per share, with stockholders receiving one warrant to
purchase one share for each two shares currently held by such stockholders.
The Company believes it will require additional working capital to support its
current operations and to expand the level of those operations as part of a
strategy to generate operating profits. There can be no assurance that the
funding from the Offering (including any funds realized from any exercise of
warrants) will provide sufficient additional working capital for the Company to
meet its objectives. Should the Company be unable to replace its current line of
credit with Bank of America with other debt financing, proceeds from the
Offering will be insufficient to both repay Bank of America and provide adequate
working capital for the Company to meet its objectives.
Page 13
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 10.13 Form of Amendment No. 5 to Loan and Security Agreement
Exhibit 27 Financial Data Schedule
Page 14
<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/ David M. Kane Dated: November 23, 1998
- ------------------------------------
David M. Kane
Chief Financial Officer
(and duly authorized officer)
Page 15
AMENDMENT NO. 5 TO
LOAD AND SECURITY AGREEMENT
THIS AMENDMENT NO. 5 TO LOAN AND SECURITY AGREEMENT ("Amendment") is dated
as of October 31, 1998 and is entered into by and between BankAmerica Business
Credit, Inc. ("Lender") and Intellicell Corp. ("Borrower"). All capitalized
terms used herein but not otherwise defined shall have the meanings ascribed to
them in the Agreement (as hereinafter defined).
WITNESSETH
WHEREAS, the Borrower and the Lender have entered into that certain Loan
and Security Agreement dated as of January 12, 1998, as amended and supplemented
(the "Agreement"); and
WHEREAS, the Borrower desires to amend the Agreement and the Lender is
willing to do so, subject to the terms and conditions stated herein; and
NOW,THEREFORE, in consideration of the premises herein contained and other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the Borrower and Lender hereby agree as follows:
Section 1. Amendment to the Agreement. The Lender and Borrower agree that
the Agreement shall be amended as follows:
A. Amendment to Section 1. The definition of "Availability"
contained in Section 1 of the Agreement is amended to read as follows:
"'Availability' means at any time the lesser of:
(a) The amount of Five Hundred Thousand Dollars ($500,000.00),
which shall be reduced to Four Hundred Thousand Dollars $400,000.00)
as of November 7, 1998 (the "Maximum Revolving Credit Line") or
(b) Up to eighty (80%) percent of the Net Amount of Eligible
accounts;
provided, however, that at all times Availability shall be reduced
by the sum of:
(a) the unpaid balance of Revolving Loans at that time;
(b) the aggregate undrawn face amount of all outstanding
Letters of Credit which the Lender has caused to be issued or
obtained for the Borrower's account;
-1-
<PAGE>
(c) reserves for accrued interest on the Revolving Loans and
reserves for accounts payable 30 days or more past due date;
(d) the Environmental Compliance Reserve; and
(e) all other reserves which the Lender in its reasonable
discretion deems necessary or desirable to maintain with respect to
the Borrower's account, including, without limitation, with respect
to any amounts which the Lender may be obligated to pay in the
future for the account of the Borrower."
B. Amendment to Section 14. Section 14 of the Agreement is amended
in its entirety to read as follows:
"The initial term of this Agreement shall expire on November
30, 1998 ("Stated Termination Date") and shall automatically be
renewed thereafter for successive monthly terms unless the Agreement
is terminated as provided below. Each of the Borrower and the Lender
shall have the right to terminate the Agreement, without premium or
penalty, at the end of the initial term or any monthly term by
giving the other written notice not less than ten (10) days prior to
the end of such initial or monthly term. The Lender may also
terminate this Agreement without notice upon and at any time during
the continuation of an Event of Default. Upon the effective date of
termination of this Agreement for any reason whatsoever, all
Obligations shall become immediately due and payable and Borrower
shall immediately arrange for the cancellation of Letters of Credit
then outstanding. Notwithstanding the termination of this Agreement,
until all Obligations are paid and performed in full, the Lender
shall retain all its rights and remedies hereunder (including,
without limitation, in all then existing and after-arising
Collateral)."
Section 2. Conditions. The effectiveness of this Amendment is subject to
the satisfaction of the following conditions precedent:
A. Amendment. Fully executed copies of this Amendment signed by the
Borrower.
B. Resolution. A certificate executed by the Secretary or Assistant
Secretary of Borrower certifying that the Borrower's Board of Directors
has adopted resolutions authorizing the execution, delivery and
performance by Borrower of the Amendment shall be delivered to Lender.
C. Other Documents. Borrower shall have executed and delivered to
Lender such other documents and instruments as Lender may require.
-2-
<PAGE>
Section 3. Miscellaneous.
A. Survival of Representations and Warranties. All representations
and warranties made in the Agreement or any other document or documents
relating thereto, including, without limitation, any Loan Document
furnished in connection with this Amendment, shall survive the execution
and delivery of this Amendment and the other Loan Documents, and no
investigation by Lender or any closing shall affect the representations
and warranties or the right of Lender to rely thereon.
B. Reference to Agreement. The Agreement, each of the Loan
Documents, and any and all other agreements, documents or instruments now
or hereafter executed and delivered pursuant to the terms hereof, or
pursuant to the terms of the Agreement as amended hereby, are hereby
amended so that any reference therein to the Agreement shall mean a
reference to the Agreement as amended hereby.
C. Agreement Remains in Effect. The Agreement and the Loan Documents
remain in full force and effect and the Borrower ratifies and confirms its
agreements and covenants contained therein.
D. Severability. Any provision of this Amendment held by a court of
competent jurisdiction to be invalid or unenforceable shall nor impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
E. APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER LOAN DOCUMENTS
EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE
PERFORMABLE IN THE STATE OF CALIFORNIA AND SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.
F. Successors and Assigns. This Amendment is binding upon and shall
inure to the benefit of Lender and Borrower and their respective
successors and assigns; provided, however, that Borrower may not assign or
transfer any of its rights or obligations hereunder without the prior
written consent of Lender.
G. Counterparts. This Amendment may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an
original, but all of which, when taken together shall constitute one and
the same instrument.
H. Headings. The headings, captions and arrangements used in this
Amendment are for convenience only and shall not affect the interpretation
of this Amendment.
I. Expenses of Lender. Borrower agrees to pay on demand (i) all
costs and expenses reasonably incurred by Lender in connection with the
preparation, negotiation and execution of this Amendment and the other
Loan Documents executed pursuant
-3-
<PAGE>
hereto and any and all subsequent amendments, modifications, and
supplements hereto or thereto, including, without limitation, the costs
and fees of Lender's legal counsel and the allocated cost of Lender's
in-house counsel and (ii) all costs and expenses reasonably incurred by
Lender in connection with the enforcement or preservation of any rights
under the Agreement, this Amendment and/or other Loan Documents,
including, without limitation, the costs and fees of Lender's legal
counsel and the allocated cost of Lender's in-house counsel.
J. NO ORAL AGREEMENTS. THIS AMENDMENT, TOGETHER WITH THE OTHER LOAN
DOCUMENTS AS WRITTEN, REPRESENTS THE FINAL AGREEMENT BETWEEN LENDER AND
BORROWER AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS
OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN LENDER AND BORROWER.
IN WITNESS WHEREOF, the parties have executed this Amendment under seal on
the date first written above.
INTELLICELL CORP.
/s/ Ben Neman
---------------------------
Signature
President
---------------------------
Title
BANKAMERICA BUSINESS CREDIT, INC.
/s/ S. King
---------------------------
Signature
Vice President
---------------------------
Title
-4-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 238,000
<SECURITIES> 0
<RECEIVABLES> 3,239,000
<ALLOWANCES> 1,984,000
<INVENTORY> 1,311,000
<CURRENT-ASSETS> 3,102,000
<PP&E> 584,000
<DEPRECIATION> 203,000
<TOTAL-ASSETS> 3,670,000
<CURRENT-LIABILITIES> 1,862,000
<BONDS> 0
0
0
<COMMON> 44,000
<OTHER-SE> 1,764,000
<TOTAL-LIABILITY-AND-EQUITY> 3,670,000
<SALES> 22,758,000
<TOTAL-REVENUES> 22,758,000
<CGS> 21,613,000
<TOTAL-COSTS> 21,613,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 194,000
<INCOME-PRETAX> (2,577,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,577,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,577,000)
<EPS-PRIMARY> (0.58)
<EPS-DILUTED> (0.58)
</TABLE>
