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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1998
1-12571
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(Commission File No.)
INTELLICELL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4467726
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(State of incorporation) (I.R.S. Employer Identification No.)
9314 ETON AVENUE, CHATSWORTH, CALIFORNIA 91311
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(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (818) 709-2300
Securities registered pursuant to Section 12(b) of the Act:
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Title of Class Name of Each Exchange Which Registered
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COMMON STOCK, $0.01 PAR VALUE BOSTON STOCK EXCHANGE
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Securities registered pursuant to Section 12(g) of the Act:
Title of Class
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WARRANTS TO PURCHASE COMMON STOCK
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 (or for such shorter period that the
registrant as required to file such reports) 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 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. [__]
The aggregate market value of the registrant's Common Stock held by
non-affiliates as of March 26, 1999 was approximately $10,229,000 (based on
the closing sales price of such stock as of such date on the Nasdaq SmallCap
Market on March 26, 1999). No other capital stock is outstanding.
As of March 26, 1999 there were 6,915,902 shares of the registrant's Common
Stock outstanding.
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PART I
ITEM 1. BUSINESS.
The statements which are not historical facts contained in this Annual
Report for Intellicell Corp. (the "Company") 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 communication markets
and technologies, the nature of possible supplier or customer arrangements which
may become available to the Company in the future, risks associated with foreign
markets and currencies, possible technological obsolescence, uncollectible
accounts receivable, slow moving inventory, lack of adequate financing,
increased competition and any future unfavorable general economic conditions.
The Company's actual results may differ materially from the results discussed in
any forward-looking statement.
GENERAL
The Company is engaged in the wholesale distribution of wireless
communications products. The Company offers wireless telephones and accessories
from leading manufacturers, featuring brand names such as AT&T, Audiovox,
Ericsson, Mitsubishi, Motorola, Nokia, NEC, Panasonic, Qualcomm, Samsung and
Sony. The Company also offers a proprietary line of accessory products under the
Intellicell name. The Company has developed a customer base of more than 2,100
wholesalers, carriers, agents, dealers and retailers. The Company has
historically acquired most of its inventory products from, and has sold a
substantial portion of this inventory to, other distributors.
The Company's objective is to capitalize on wireless communications
opportunities in markets in which the Company believes it can achieve
significant growth. The Company intends to implement its business strategy by
(i) strategically aligning with certain key manufacturers and network operators
to provide value-added services, (ii) transitioning to a service-based company
offering a broad selection of services related to distribution, including "just
in time" delivery of wireless handsets and accessories, purchasing, selling,
warehousing, picking, packing and shipping and value added services, including
inventory management, marketing, kitting and customized packaging, private
labeling, light assembly, accounts receivable management, end user support
services and warranty servicing. As part of this strategy, the Company is
targeting emerging foreign markets and may seek to expand through acquisitions
of companies in businesses related to that of the Company.
RECENT DEVELOPMENTS
The Company experienced a significant decline in revenues and incurred
substantial operating losses in 1998. The losses incurred by the Company are
attributable to various factors, including the intense price competition in the
wireless communications industry. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations." Prior to March 1998,
the Company had failed to sustain significant supplier relationships with any of
the leading manufacturers of analog and digital cellular products. The Company's
supplier relationships have consisted of primarily other wholesale distributors.
As a result, the Company's supply of product has been inconsistent and of higher
cost. Furthermore, product obtained from other distributors does not typically
include price protection and promotional allowances when compared to the product
which are acquired directly from manufacturers. In March 1998, the Company
signed a non-exclusive distribution agreement with Sony Electronic Inc Wireless
Telecommunications Company ("Sony"), pursuant to which the Company was able to
distribute analog and cellular digital telephones and accessories to its
customer base. The relationship with Sony does include price protection and
promotional allowances, however, the Company was not granted open credit terms.
As a result, goods purchased from Sony are on a prepaid basis. The
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wide acceptance of the digital technology in wireless handsets, which
included personal communications services ("PCS"), TDMA and CDMA formats has
had an adverse effect on the demand for the analog cellular products sold by
the Company. Manufacturers in the PCS market have selected distribution
channels, which do not currently include the Company and distribute directly
to the end user. There can be no assurance that the Company will establish
additional strategic relationships with manufacturers of digital wireless
products or secure any strategic relationships allowing it to access digital
products directly. The Company's financial results will continue to be
adversely affected if it is unable to secure (i) additional supplier
relationships with manufacturers of analog and digital wireless products and
(ii) a consistent supply of digital products at commercially competitive
rates. See "Competition."
In November 1998, the Company consummated a private placement (the
"Offering") with an investor group (the "Investor Group") and agreed to certain
related transactions as follows:
(a) The Company issued $1,500,000 of unsecured, subordinated convertible
notes. The notes were convertible, at the option of the Company, upon
ratification of the Offering by the Company's shareholders, into 1,500,000 units
(the "Units"), and this conversion was effected by the Company in December 1998.
Each Unit consists of one share of common stock 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 of common
stock. The 1,000,000 warrants had a term of three years and were redeemable by
the Company under certain conditions. The Investor Group exercised all of these
warrants in March 1999.
(b) In conjunction with the Offering, the Company issued the options
to purchase 100,000 shares of common stock to a director who had previously
cancelled options to purchase 100,000 shares of common stock, but at the
lower exercise price of $1 per share for the new options and repriced the
exercise price to $1 for options to purchase 100,000 shares of common stock
previously granted to another outside director. The Company paid a financial
advisor, Sands Brothers, $50,000 upon the closing of the Offering and issued
warrants to purchase 150,000 shares of common stock at an exercise price of
$1, with the options to purchase 100,000 shares granted to Sands Brothers in
March 1998 being rescinded and cancelled.
(c) Options to purchase 200,000 shares of common stock at $1 per share
were each granted to John Swinehart, who became the Company's Chief Executive
Officer and a director in November 1998, to another individual who became a
director of the Company in November 1998 and to an individual who served as a
finder in the Offering. Of the options issued, five-sixths vested upon issuance,
with the remaining one-sixth vested upon exercise of the Unit warrants in March
1999.
(d) In December 1997, the Company declared a dividend in the form of a
warrant to its existing shareholders (except the Company's President and
Chairman). For every two shares held, a warrant to purchase one share was issued
with an exercise price of $4 per share. These warrants were 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 the Offering, the Board of Directors
agreed to reprice these warrants to an exercise price of $1 per share. In
addition, existing shareholders of record as of February 16, 1999 (other than
the Company's President and Chairman and the Investor Group) will receive an
additional warrant (which may only be exercisable after the Company registers
the shares issuable upon exercise) to purchase one share of common stock 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 per share.
(e) The common stock issued upon conversion of the notes and upon
exercise of the warrants issued 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,
together with the shares of common stock owned by the Chairman and President.
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In January 1998, the Company entered into a revolving line of credit
agreement (the "Credit Agreement") with BankAmerica Business Credit, Inc.
("BankAmerica") which provided for borrowings of up to a maximum of $12
million based on a maximum of 80% of eligible accounts receivable and the
lesser of $6 million or 50% of eligible inventory as defined in the Credit
Agreement. Subsequent to entering into the Credit Agreement, the Company was
in violation of the tangible net worth covenant of the Credit Agreement (with
BankAmerica providing a waiver of this default in exchange for reducing the
amount available to be loaned to the Company). In November 1998, the Company
paid off all amounts owing under and terminated the Credit Agreement. The
Company is seeking and has received a preliminary letter of interest from
another financial institution to provide a revolving line of credit for a
maximum of $5,000,000, although there can be no assurance that the Company
will be able to enter into a definitive agreement with this bank.
THE WIRELESS COMMUNICATIONS INDUSTRY
The wireless communications industry provides voice and data
communications services through wireless telephone, PCS, satellite, enhanced
specialized mobile radio ("ESMR") and paging services. Advances in system
technology and equipment, combined with lower equipment prices and service
charges, have increased consumer acceptance and driven dramatic increases in
worldwide demand for wireless communications products and services.
UNITED STATES MARKET
Wireless communications technology encompasses wireless communications
devices such as handheld, mobile and transportable handsets, pagers and two-way
radios. However, the Company currently sells only handsets and accessories for
handsets. Since its inception in 1983, the wireless handset market has grown
rapidly. The Company believes that the wireless communications industry will
continue its rapid growth for several reasons. Economic growth, increased
service availability and lowering cost of wireless service will continue to
create demand for wireless communications products. The Company further believes
the shift for most major markets from analog based signals to digital signals
will lower the cost for network operators and encourage consumers to purchase
the next generation of products. In addition, certain markets have seen a
significant increase in choices of wireless services. This increase in choices
has, in turn, resulted in increased demand for wireless communications products.
The proliferation of new manufacturers is expected to service the demand,
expanding the sales channels while lowering prices and increasing product
selection.
INTERNATIONAL MARKET
The markets for wireless products and services outside the United
States also have grown significantly. The Company expects that rapid growth
in international markets will continue as low market penetration, economic
growth and high population density result in increased demand for wireless
communications products and services. The Company also believes that wireless
systems in certain of these countries offer lower-cost alternatives to the
construction of conventional telephone facilities because they do not require
substantial investment in infrastructure. Due to these factors and the
limited availability and quality of land-line service, the Company believes
that consumers in many countries outside of the United States will
increasingly utilize wireless services. These markets present attractive
expansion opportunities for the Company, which will seek to reduce collection
loss problems it has encountered in its prior foreign sales through the use
of insurance.
EMERGING WIRELESS TECHNOLOGIES
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In addition to growth in the wireless market, the emergence of the new
digital wireless communications technologies and services, such as the TDMA,
CDMA, PCS, EMR and satellite communications systems, is expected to increase the
capabilities associated with wireless communications including seamless roaming,
increased service coverage, improved signal quality and greater data
transmission capacity. These technologies include cellular type services,
including advanced voice and data transmissions using small, light-weight
wireless telephones or hand-held computers. Digital format also offers greater
functionality, resulting in lower cost service options and lighter handsets with
longer battery life. Digital based technology has been introduced in markets
throughout the United States. Upon the widespread commercial introduction of
these services, demand for wireless communications products and services is
expected to increase.
Prior to 1995, the United States Federal Communications Commission (the
"FCC") allowed two carriers to provide cellular service to each metropolitan
service area. In connection with the auctioning of licenses in 1995 and 1996,
the FCC added three Digital carriers to each metropolitan service area,
increasing the total number of potential carriers to five per market. The
Company believes that this increase in the number of wireless service providers
will increase competition and generate additional demand for wireless
communications products and services through lower prices, increased advertising
and improved service quality.
During late 1994, the FCC awarded mobile satellite licenses to major
corporations that are investing in satellites which will enable them to provide
wireless phone, data, fax and paging services on a global basis. In addition,
other corporations have announced their intention to enter the mobile satellite
market and launch networks, which would permit computers to bypass local
telephone exchanges and connect directly to the Internet.
REGULATORY TRENDS
The Company believes that the Telecommunications Act of 1996 will
ultimately serve to reverse the trends associated with the breakup of AT&T and
the Bell System that separated long distance and local telephone service. This
statute permits long distance, cable and wireless companies to compete in local
markets. The Company believes that such deregulation will significantly increase
competition, which should translate into lower costs and increased numbers of
subscribers.
STRATEGY
The Company's strategy is to achieve and thereafter maintain
profitability by significantly expanding its revenues and by focusing on
products and services that can generate higher profit margins. The Company's
objective is to capitalize on wireless communication opportunities in markets
in which the Company believes it can achieve significant growth. The key
elements of the Company's strategy are as follows:
EXPAND THROUGH ACQUISITIONS. Assuming financing is available, of which no
assurance can be given, the Company is seeking to expand through acquisitions of
companies, which the Company believes will provide significant growth potential.
Any decision to make an acquisition will be based upon the business prospects
and competitive position of the acquisition candidate and the extent to which
the acquired business would enhance the Company's prospects and maximize
revenues. Potential acquisition candidates may include companies with
alternative distribution channels for wireless products. Although the Company
has recently identified several potential acquisition candidates, it has not
entered into any agreements to acquire any companies.
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VALUE ADDED DISTRIBUTOR. The Company believes that to be successful as a
distributor, it must offer services such as inventory management, warehousing,
repair and refurbishment services, credit risk management, transparent order
processing, customized kitting, packaging, handset software programming, and the
development of new alternative distribution channels. In addition to offering an
expansive menu of services, the Company must have access to an information
system capable of integrating, tracking and reporting all of the activities of
its customers. The Company's strategy is provide these services, which the
Company believes will provide higher profit margins than the Company's
traditional product distribution activities, to network operators and wireless
manufacturers.
TARGET EMERGING FOREIGN MARKETS. The Company is targeting emerging
foreign markets in which wireless products are believed to have potential for
significant market penetration. The Company believes that certain markets are
likely to achieve greater penetration based on anticipated economic growth and
the increasing numbers of carriers. Many of these markets, particularly in
Mexico and other Latin American countries, are characterized by low penetration
rates, high population densities and inadequate land-line service. The Company
anticipates that it will initially seek to achieve penetration in regions with
fast-growing economies and wireless markets. Additionally, the Company will seek
to further establish a position in Latin America by developing relationships
with established carriers and industry participants.
OFFER BROAD PRODUCT SELECTION. The Company distributes a broad selection
of popular brand name products and accessories. The Company analyzes customer
purchasing patterns and industry trends to anticipate demand for new products.
The emergence of new wireless communications technologies, including digital
wireless technology, PCS and satellite communications systems, is expected to
dramatically increase demand for wireless products and services. The Company
intends to evaluate cost, effectiveness and the potential of future wireless
services as primary considerations in selecting products for particular markets.
The Company is making an effort to develop relationships with equipment
manufacturers and other potential providers of emerging new wireless products
and services so as to position the Company to capitalize on evolving industry
standards and trends. No relationships have been developed to date and no
assurance can be given that such relationships with key players in the emerging
wireless product and service industry will be developed.
The Company's strategy and current and future marketing plans are subject
to change as a result of a number of factors, including inability to obtain
products at commercially competitive rates, adequate financing, progress or
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 it in the future, and competitive
factors. There can be no assurance that the Company will be able to successfully
expand its operations or achieve its other strategic objectives.
PRODUCTS
The Company offers a broad selection of wireless products from leading
manufacturers. The Company's product offerings include a variety of hand-held
and mobile cellular telephones featuring prominent brand names such as AT&T,
Ericsson, Mitsubishi, Motorola, Nokia, NEC, Audiovox, Panasonic, Samsung and
Sony. The Company continually reviews and evaluates wireless products in
determining the mix of products purchased for resale to customers and seeks
to acquire distribution rights for products which the Company believes have
the potential for significant market penetration. For the years ended
December 31, 1996, 1997, and 1998, approximately, 74.6%, 92.0%, and 92.3%,
respectively, of the Company's revenues were derived from sales of wireless
telephones. A significant portion of the Company's sales were of Motorola,
Ericsson and Nokia products (approximately 63% in 1997 and 47% in 1998).
Motorola, Ericsson and Nokia products are not available to the Company
directly from these manufacturers. Since the Company purchases these
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handsets from third parties, it does not obtain price protection, cooperative
advertising and marketing allowances on such products.
CUSTOMERS
The Company has developed a customer base of more than 2,100 wholesalers,
carriers, agents, dealers and retailers. The Company believes that these
categories of customers will continue to be the primary purchasers of the
Company's products.
For the years ended December 31, 1996, 1997 and 1998, sales of
cellular products to the Company's five largest customers accounted for
approximately 48.8%, 36.2% and 28.6%, respectively, of the Company's
revenues. For the year ended December 31, 1996, sales to Brightpoint and
Downtown accounted for approximately 17.1% and 15.9%, respectively, of the
Company's revenues. For the year ended December 31, 1997, sales to Downtown
and Brightpoint accounted for approximately 11.7% and 11.4%, respectively, of
the Company's revenues. For the year ended December 31, 1998, sales to
Brightpoint and Celluphone accounted for approximately 6.1% and 8.0%,
respectively, of the Company's revenues. For the years ending December 31,
1996 and 1997, no other customer accounted for more than 10% of the Company's
revenues, and no single customer accounted for more than 10% of the Company's
revenues for the year ended December 31, 1998.
In February 1998, the Company learned that the business and associated
assets of Downtown had been assumed by CellStar Corporation ("CellStar") a
supplier/customer and competitor of the Company, which the Company believes
maintained a first priority security interest in and to the assets of Downtown.
As a result, in 1997, the Company charged $1,665,000 to bad debt expense to
reserve the unpaid receivable from Downtown. In 1998, the Company determined
that collecting any amounts from this account was not economically viable for
the Company and therefore ceased collection efforts.
Brightpoint and CellStar are two of the Company's primary
customer/supplier competitors. Failure or delay by these or other
customer/suppliers in purchasing and/or supplying competitive products on
favorable terms, or at all, would materially adversely affect the Company's
sales, operating margins and ability to obtain and deliver products on a timely
and competitive basis. See "Competition."
The Company generally sells its products pursuant to customer purchase
orders and ships product orders received by 4:00 P.M. local time the same day.
Unless otherwise requested, substantially all of the Company's products are
delivered within two days of receipt of customer orders by common carrier.
Because orders are filled shortly after receipt, backlog is not material to the
Company's business.
The Company sells its products to customers in foreign markets, including
Israel, Paraguay, Mexico, Peru, Brazil and Canada and to United States-based
exporters of wireless products. For the years ended December 31, 1996, 1997 and
1998, sales of the Company's products to customers in foreign markets accounted
for 5.2%, 17.6% and 8.0%, respectively, of the Company's revenues. Approximatley
77% of the Company's 1998 foreign sales of $2.2 million were made in Mexico,
with no other country accounting for more than 10% of the Company's foreign
market sales. The Company is seeking to continue to expand product sales in
foreign markets. No assurance can be given that the Company will be able to do
so or with terms that limit the Company's exposure to collection risks. In 1998,
all sales to foreign countries were made in US dollars.
SUPPLIERS
The Company has established relationships with leading manufacturers and
distributors of wireless products. The Company generally negotiates directly
with suppliers in an effort to obtain
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adequate inventories of popular brand name products on favorable pricing
terms. Inventory purchases are based on quality, price, service, customer
demand, product availability and brand name recognition. Product
manufacturers typically provide warranties, which the Company extends to its
customers.
For the years ended December 31, 1996, 1997 and 1998, the Company's four
largest suppliers accounted for approximately 54.1%, 43.9% and 41.0%,
respectively, of product purchases. For the year ended December 31, 1996,
Brightpoint, Best Cellular, Sony and CellStar accounted for approximately 26.1%,
10.2%, 9.6% and 8.2%, respectively, of product purchases. For the year ended
December 31, 1997, Brightpoint, Progressive Concepts, Inc. and Audiovox,
accounted for approximately 11.9%, 11.8%, and 11.0% respectively, of product
purchases. For the year ended December 31, 1998, Sony, Audiovox and Brightpoint,
accounted for approximately 22.4%, 6.9%, and 6.5% respectively, of product
purchases. For these periods, none of the Company's other suppliers accounted
for more than 10% of product purchases. Brightpoint and CellStar are two of the
Company's primary competitors. Failure or delay by these or other suppliers in
supplying competitive products on favorable terms, or at all, could materially
adversely affect the Company's operating margins and the Company's ability to
obtain and deliver products on a timely and competitive basis. See
"Competition."
The Company has entered into non-exclusive arrangements with Sony,
Audiovox, NEC, and Panasonic Telecommunications and Systems Company pursuant to
which the Company distributes wireless telephones and accessories to carriers,
retailers and, with the exception of Sony products, wholesalers. Such
arrangements are terminable on short notice. The Company purchases products from
the above manufacturers and other distributors pursuant to purchase orders
placed from time to time in the ordinary course of business. The Company
believes that its relationships with its suppliers are satisfactory, although it
is seeking to establish more supplier relationships with manufacturers.
The Company generally places orders to its suppliers by facsimile on a
daily basis. Purchase orders are typically filled within one to seven days and
wireless products are shipped to the Company's warehouses by common carrier.
The Company obtains all of its proprietary accessory products from
manufacturers in Taiwan and is dependent on such manufacturers to provide
sufficient quantities of products on favorable terms. The Company currently pays
import duties of between 2.4% and 5.9% of the cost of its accessory products.
SALES, MARKETING AND DISTRIBUTION
The Company's executive officers and sales staff of twelve are
responsible for all of the Company's marketing and sales efforts. The
Company's sales personnel are paid a base salary plus commission (generally
between 8% and 15% of gross profit represented by their sales). The Company
maintains agreements with its sales personnel, which contain confidentiality
provisions and prohibit such individuals from competing with the Company.
The Company's sales staff consists of eight account executives. The
Company has assigned specific customers to each account executive, who is
responsible for maintaining all customer relations with their assigned group of
customers. Because of the service-oriented nature of the Company's business, the
Company's executive officers devote a substantial amount of time to developing
and maintaining continuing personal relationships with the Company's customers.
The Company's ability to expand its customer base may be limited by the number
of marketing personnel and will be largely dependent upon the efforts of such
individuals.
In an effort to increase its sales in foreign markets, primarily Latin
America, the Company in November 1997, began operation of a 12,800-square foot
warehouse and office facility in Miami, Florida.
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However, in May 1998, in an effort to cut costs, the Company closed this
facility, and the Company now services all its sales out if its Chatsworth,
California facility.
The Company believes that product recognition by customers and consumers
is an important factor in the marketing of the products sold by the Company.
Accordingly, the Company promotes its product lines through advertising in trade
publications and attendance at national and regional trade shows. The Company
also solicits customers through direct mail and telemarketing activities. The
Company's manufacturers and dealers use a variety of methods to promote their
products directly to consumers, including print and media advertising.
ASSET MANAGEMENT
ACCOUNTS. For the years ended December 31, 1996, 1997 and 1998,
approximately 79.3%, 93.6% and 86.5%, respectively, of the Company's sales were
made on open account. The Company generally offers 30-day open account terms to
its customers. As of December 31, 1996, 1997 and 1998, trade accounts receivable
averaged 35.6, 31.5 and 28.3 days for sales made on open account, respectively.
The Company experienced bad debt expense in 1998 of $108,000 (0.4% of 1998
sales), as compared to $3,627,000 in 1997 (4.4% of 1997 sales) and as compared
to $380,000 for 1996 (0.5% of 1996 sales). The Company engages credit rating
associations that provide credit rating information in connection with
individual customer accounts, attempts to monitor its customer's
creditworthiness and seeks to obtain advance payment or letters of credit from
its foreign customers. All foreign sales are made in United States dollars. As
direct and indirect foreign sales increase, the Company will become subject to
risks inherent in foreign trade, including credit risk, shipping delays, trade
restrictions, international political, regulatory and economic developments. In
September 1998, the Company obtained credit insurance on its accounts
receivable. Although this insurance is subject to certain limitations and
deductibles, the Company believes that the risk of bad debts from uncollectible
accounts receivable will be substantially reduced through the use of this
insurance.
INVENTORY. On average, the Company has historically turned inventory
approximately 14.2 times per year. The Company takes physical inventory on a
quarterly basis. On an annual basis, cumulative physical inventory adjustments
have accounted for less than 1% of total purchases during the years ended
December 31, 1996, 1997 and 1998.
MANAGEMENT INFORMATION SYSTEMS. The Company believes that inventory
control and other information systems are important factors in providing
customers with competitive prices and rapid delivery of variety of products.
Accordingly, the Company currently maintains financial, accounting and
management controls for its operations through the use of a centralized
accounting system and a computerized management information system. The
Company's management information system is designed to enable the Company to
adapt to new product developments and to enhance corporate productivity
through the integration of sales inventory controls, purchasing and financial
and credit control. The Company believes that the system allows the Company
to provide value to its customers through general efficiency, and timely and
accurate product and pricing information. Internally, the system provides
management and other key employees with detailed account information,
including buying and credit histories and current account status, as well as
pricing and product availability information. During 1997, the Company made
significant investments in maintenance and in upgrading its computer system.
In 1999, the Company anticipates continuing to make upgrading and maintenance
investments in its computer system to support its new strategy. The Company
believes that with the foregoing investment, the Company's management
information system will be sufficient to support its anticipated level of
operations.
COMPETITION
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The markets for wireless communication products are characterized by
intense price competition and significant price erosion over the life of a
product. The Company competes principally on the basis of price and product
availability. The Company competes with numerous well-established wholesale
distributors and manufacturers of wireless equipment, including the Company's
customers and suppliers, as well as with providers of cellular services, most of
which possess substantially greater financial, marketing, personnel and other
resources than the Company and have established reputations for success in the
sale and service of cellular products. A number of these competitors have the
financial resources necessary to enable them to withstand substantial price
competition and implement extensive advertising and promotional campaigns, both
generally and in response to efforts by additional competitors to enter into new
markets or introduce new products.
The Company has experienced and expects to continue to experience
significant price competition in the sale of analog and wireless digital
products. The Company believes this price competition is reflective of the lack
of direct supplier relationships of high demand digital cellular product and the
advent and customer acceptance of digital products. The primary suppliers of
product and the primary customers of the Company have been other wholesale
distributors. The supply of product from other wholesale distributors as
compared to supplies from manufacturers is inconsistent, of higher cost, on less
favorable terms and typically is without price protection and promotional
allowances. The Company will continue to seek to establish additional supplier
relationships with leading manufacturers of analog and digital cellular
products. No assurance can be given that the Company will be able to establish
such relationships. The Company expects its competitors to offer new and
existing products and services at prices necessary to gain and retain market
share. Certain of the Company's competitors have substantial financial
resources, which enable them to withstand sustained price competition or market
downturn better than the Company. Furthermore, no assurance can be given that
competitors of the Company (many of which are the Company's suppliers) will not
develop enhanced services that the Company will not be able to match based on
its industry and financial position.
Additionally, it is the Company's belief that the wide acceptance of the
digital format has had a negative impact on the demand for analog and
cellular digital product. The Company has not secured a strategic relationship
allowing it to access digital PCS products directly. Manufacturers currently in
the digital PCS market have selected distributors and distribution channels
other than the Company. As other manufacturers present their products to the
digital market they may compete directly with the Company, or enter into
joint ventures or strategic relationships with the Company's competitors, in
which case the Company's ability to access and sell such products could be
reduced or eliminated. The Company's results of operations, net sales,
profitability and financial condition have been and will continue to be
adversely impacted until access to a consistent supply of digital products
at commercially competitive rates is maintained at levels to sustain growth
and profitability.
The wireless distribution industry is characterized by low barriers to
entry and frequent introduction of new products. The industry is evolving, with
value-added services becoming of increased importance to the market. This
evolution is expected to increase entry barriers, as value added services
require increased human resources, management information systems and equipment.
The Company's ability to continue to compete successfully will be dependent on
its ability to anticipate and respond both strategically and financially to
various competitive factors affecting the industry, including new products and
services, changes in consumer preferences, demographic trends, international,
national, regional and local economic conditions particularly recessionary
conditions adversely affecting consumer spending and discount pricing strategies
and promotional activities by carriers.
The markets for wireless communications products are characterized by
rapidly changing technology and evolving industry standards, often resulting in
product obsolescence or short product life cycles. Accordingly, the Company's
success is dependent upon its ability to anticipate technological
10
<PAGE>
changes in the industry and to continually identify, obtain and successfully
market new products that satisfy evolving industry and customer requirements.
The use of alternative wireless technologies, including digital and satellite
communications systems, will reduce demand for existing cellular products,
increasing risk associated with the granting of credit and inventory
obsolescence. Upon widespread commercial introduction, digital, satellite
communications systems and other new wireless technologies could materially
change the types of products sold by the Company and its suppliers and result
in further significant price competition. There can be no assurance that the
Company will be able to continue to compete successfully, or will have the
financial capability to sustain its business particularly as domestic
cellular markets mature and the Company seeks to enter into new markets and
market new products and services.
The Company's current primary competitors include Brightpoint, CellStar,
Com-Quest Wireless Distributing Company, Arizona Wholesale Supply Company (a/k/a
QDI), and Progressive Concepts, Inc. ("Progressive"). For the year ended 1998,
the Company secured from the foregoing entities 21.0% of its product purchases,
with such products comprising 27.1% of the Company's telephone sales for the
1998 year. The occurrence of either increased price competition and/or the lack
of supply of such products would have an adverse effect on the Company.
TRADEMARK
The Company currently holds a federal trademark registration for the name
"Intellicell" for use in connection with wireless accessory products.
EMPLOYEES
At March 15, 1999, the Company had 25 employees, of which six are in
executive positions, eight are engaged in sales and marketing, four are engaged
in warehouse operations and seven engaged in accounting and administrative
activities. There are no employees covered by a collective bargaining agreement.
The Company believes that its relations with its employees are satisfactory.
RISK FACTORS
In addition to the other information in this Annual Report, the following
factors should be considered carefully in evaluating the Company's business and
prospects:
ABSENCE OF PROFITABILITY; FUTURE OPERATING RESULTS. The Company has
operated on a high-volume, low-margin basis. The Company has achieved only
limited profitability for limited periods of time, has incurred operating losses
for 1997 and 1998 and expects to incur further operating losses for at least the
first half of 1999. The Company's operating expenses have increased and can be
expected to increase significantly in connection with the Company's contemplated
expansion of its operations, which will require the Company to make substantial
up-front expenditures to finance increased levels of inventories and accounts
receivable and increased marketing efforts. A recent trend by original equipment
manufacturers to reduce prices of wireless products has had and could continue
to have an adverse effect on the Company's profit margins. Future events,
including unanticipated expenses, increased price competition, unfavorable
economic conditions, product returns and recalls and uncollectible accounts,
could have a material adverse effect on the Company's future operating results.
There can be no assurance that the Company's future operations will be
profitable.
11
<PAGE>
NEED FOR ADDITIONAL WORKING CAPITAL. The Company believes that it will
require additional working capital to significantly expand the level of its
operations as part of its strategy to generate operating profits and
implement its new strategies. The Company is seeking to obtain a line of
credit that will be secured by its accounts receivable and inventory.
Although the Company is in discussions with several financial institutions to
provide such a line of credit and has received a preliminary letter of
interest from one of these lenders, there can be no assurance that the
Company will be successful in obtaining this financing, which may also
contain various customary covenants that limit the Company's activities. If
the Company is unable to secure a line of credit or if it additional working
capital is required after obtaining a line of credit, it may seek additional
debt or equity financing, although it does not have any commitment from any
third party to provide this financing. There can be no assurance that
additional financing will be available to the Company on acceptable terms, or
at all.
RISKS ASSOCIATED WITH NEW STRATEGY TO PROVIDE DISTRIBUTION SERVICES. The
Company believes that it will require significant capital expenditures and
working capital to implement its strategy to become a value added distributor
providing services to manufacturers and network operators. Expansion efforts may
be required in the Company's warehousing facilities, computer systems and
equipment for repair and refurbishing and working capital to support increased
levels of inventory and accounts receivable. The Company plans on outsourcing
the aforementioned service elements until such time that the Company has
adequate capital. However, if the Company is unable to secure vendors to provide
these services on a cost-effective basis, the Company may be required to expend
its capital in their development, increasing general and overhead expenses,
including depreciation. There can be no assurance that the Company will be
successful in obtaining contracts to provide services to manufacturers and
network operators to absorb these extra costs, which would adversely affect the
Company's operating results. In addition, there can be no assurance that the
Company's sources for working capital, which may include a revolving line of
credit, would be available to support the Company's new strategy.
RISKS ASSOCIATED WITH REVENUE FLUCTUATIONS The Company has experienced
significant increases and contractions from time to time in its revenues,
which has placed and is expected to continue to place a strain on its
management, administrative, operational, financial, management information
systems and other resources. An expansion of the Company's operations as part
of a plan to generate operating profits will be largely dependent upon its
ability to maintain its operating and gross margins; secure an adequate
supply of competitive products on a timely basis and on commercially
reasonable terms; hire and retain skilled marketing and other personnel; and
successfully manage growth (including monitoring operations, controlling
costs and maintaining effective management, inventory and credit controls).
The Company has limited experience in effectuating expansion and there can be
no assurance that the Company will be able to successfully expand its
operations or manage growth. The Company's growth prospects will be
significantly affected by its ability to continue to successfully develop and
maintain relationships with leading manufacturers, dealers, agents, carriers
and sub-agents of wireless products. The Company's prospects could be
adversely affected by a decline in the wireless industry generally or in
particular geographic markets or related market segments, which could result
in reduction or deferral of expenditures by prospective customers.
RISKS ASSOCIATED WITH POSSIBLE ACQUISITIONS. The Company intends to
pursue opportunities by seeking to enter into marketing and distribution
alliances and by making acquisitions of businesses which the Company believes
will enhance its prospects. While the Company has from time to time evaluated
possible acquisition opportunities, the Company has no plans, agreements,
commitments, understandings or arrangements with respect to any such
acquisition. There can be no assurance that the Company will ultimately effect
any acquisition or that the Company will be able to successfully integrate into
its operations any business which it may acquire. Any inability to do so,
particularly in instances in which the Company has made significant capital
investments, could have a material adverse effect on the Company.
12
<PAGE>
DEPENDENCE ON PRINCIPAL SUPPLIERS. The Company is dependent on
third-party equipment manufacturers and distributors for all of its supply of
cellular telephones and accessories. The Company is dependent on the ability of
its suppliers to provide adequate inventories of currently popular brand name
products on a timely basis and on favorable pricing terms. The Company generally
does not maintain supply agreements and purchases products pursuant to purchase
orders placed from time to time in the ordinary course of business. There can be
no assurance that suppliers will continue to offer competitive products to the
Company on favorable terms or that the Company will not be subject to the risk
of price fluctuations and periodic delays. Failure or delay by principal
suppliers in supplying competitive products to the Company on favorable terms
would materially adversely affect the Company's operating margins and the
Company's ability to obtain and deliver products on a timely and competitive
basis.
The Company has failed to sustain significant relationships with leading
manufacturers of analog and digital cellular products. The Company's supplier
relationships have been primarily other wholesale distributors. As a result, the
Company's supply of product is inconsistent, of higher cost and does not
typically include price protection and promotional allowances when compared to
the products which are obtained directly from manufacturers. In addition, the
wide acceptance of the digital technologies and their short supply, has had an
adverse effect on the demand for the analog products sold by the Company and the
supply for digital product. In addition, network operators of PCS products have
selected distribution channels which do not currently include the Company.
Although the Company's business strategy now targets establishing strategic
supply relationships with a number of large manufacturers, there can be no
assurance that the Company will establish additional strategic relationships
with manufacturers of analog and digital cellular products or secure any
strategic relationships allowing it to access digital or PCS products directly.
The Company's financial results will continue to be adversely affected if it is
unable to secure (i) additional supplier relationships with manufacturers of
analog and digital cellular products and (ii) a consistent supply of digital
products at commercially competitive rates.
INTENSE INDUSTRY COMPETITION. The markets for wireless communications
products are characterized by intense price competition and significant price
erosion over the life of a product. The Company competes with numerous
well-established wholesale distributors and manufacturers of wireless equipment,
including the Company's customers and suppliers, as well as with providers of
wireless services, many of which possess greater financial, marketing, personnel
and other resources than the Company. Brightpoint and CellStar, historically two
of the Company's principal suppliers, are also two of the Company's primary
competitors. Certain of the Company's competitors have the financial resources
necessary to enable them to withstand substantial price competition and
implement extensive advertising and promotional programs, both generally and in
response to efforts by additional competitors to enter into new markets and
introduce new products. The wireless distribution industry is also characterized
by low barriers to entry and frequent introduction of new products. The
Company's ability to compete successfully will be largely dependent on its
ability to maintain its current vendor relationships and anticipate and respond
to various competitive factors affecting the industry, including new products
which may be introduced, changes in consumer preferences, demographic trends,
international, national, regional and local economic conditions (particularly
recessionary conditions adversely affecting consumer spending), discount pricing
and promotional strategies by carriers and consolidating trends in the industry.
There can be no assurance that the Company will be able to compete successfully,
particularly as domestic wireless markets mature and the Company seeks to enter
into new markets and market new products.
DEPENDENCE ON SALES OF CELLULAR TELEPHONES; INCREASING SALES
CONCENTRATION AND ACCOUNTS RECEIVABLE; COLLECTION AND CREDIT RISKS. A
substantial portion of the Company's revenues are derived from the sale of
cellular telephones, a decline in the sale of which would have an adverse effect
on the Company. An increasing portion of the Company's revenues has been derived
from a limited customer
13
<PAGE>
base. The loss of one or more of these customers or other principal customers
could have a material adverse effect on the Company's financial condition and
results of operations. The Company has been required to write off significant
accounts receivable balances in the past. The Company's accounts receivable,
less allowance for doubtful accounts, at December 31, 1998 were approximately
$2,155,000, as compared to approximately $6,578,000, at December 31, 1997. At
December 31, 1998, the Company's allowance for doubtful accounts was
$251,000, which the Company believes is currently adequate for the size and
nature of its receivables. Nevertheless, delays in collection or
uncollectibility of accounts receivable could have a material adverse effect
on the Company's liquidity and working capital position. Substantially all of
the Company's sales are made on open account terms. In connection with the
Company's proposed expansion of sales, the Company intends to offer open
account terms to additional customers, which will subject the Company to
increased credit risk, particularly in the event that any such receivables
represent sales to a limited number of customers or are concentrated in
foreign markets, and could require the Company to continually increase its
allowance for doubtful accounts.
EVOLVING INDUSTRY STANDARDS AND TRENDS AND RAPID TECHNOLOGICAL CHANGE.
The markets for wireless communications products are characterized by rapidly
changing technology and evolving industry standards, often resulting in product
obsolescence or short product life cycles. Accordingly, the Company's marketing
strategy and ultimate success is dependent upon its ability to anticipate
technological changes in the industry and to continually identify, obtain and
successfully market new products that satisfy evolving industry and customer
requirements. In connection with the Company's proposed expansion, the Company
intends to make increased commitments of capital to purchase product
inventories. Increased concentrations of capital in inventory increase the risk
of loss from possible inventory obsolescence. There can be no assurance that
competitors or manufacturers of wireless products will not market products which
have perceived advantages over the Company's products or which render the
products currently sold by the Company obsolete or less marketable.
The use of alternative wireless communications technologies, including
digital, PCS and satellite communications systems, which are expected to
continue to successfully compete with analog wireless systems, may reduce demand
for existing wireless products. The Company expects that companies which have
developed or are developing new technologies or products in related market
segments will commercialize technologies which would compete with or replace
existing analog wireless technology. Certain of such technologies, upon
widespread commercial introduction, could materially change the types of
products sold by the Company and its suppliers and result in significant price
competition. There can be no assurance that the Company's existing customers or
consumers will be willing, for financial or other reasons, to purchase new
equipment necessary to utilize these new technologies or that product
obsolescence will not result in significant unsold inventories. Moreover,
complex hardware and software contained in new wireless and digital equipment
could contain defects which become apparent subsequent to widespread commercial
use resulting in product recalls and returns.
FOREIGN TRADE RISKS. Sales of wireless products to customers in foreign
markets, primarily in Latin America, have accounted for a portion of the
Company's revenues. For the year ended December 31, 1998, sales to customers
outside of the United States accounted for 8% of the Company's total revenues.
The Company is seeking to increase product sales in foreign markets and believes
that such markets present significant growth opportunities. Although the Company
maintains credit insurance with respect to a portion of its current foreign
sales, there can be no assurance that the Company will be able to continue to do
so or that any such markets will ultimately prove to be viable. To the extent
that the Company is able to successfully increase its foreign sales, it will
become increasingly subject to certain risks inherent in foreign trade,
including increased credit risks, customs duties and import quotas and other
trade restrictions, currency rates, shipping delays, failure or material
interruption of wireless
14
<PAGE>
systems and services and international political, regulatory and economic
developments, all of which, particularly in light of the historical and
political instability of many countries in Latin America, Asia and the Middle
East, could have a material adverse effect on the Company. Although all
foreign sales are currently made in United States dollars, an increase in the
value of the dollar in relation to foreign currencies may nevertheless have
an adverse effect on potential demand for wireless products. For competitive
reasons, the Company may make certain future foreign sales in local
currencies, exposing the Company to additional currency fluctuation risks.
The Company currently does not intend to engage in foreign currency hedging
transactions.
POSSIBLE FLUCTUATIONS IN OPERATING RESULTS; SEASONALITY. The Company's
operating results may vary from period to period as a result of purchasing
patterns of potential customers, the timing of introduction of new products by
the Company's suppliers and competitors, variations in sales by distribution
channels, product availability and pricing and the seasonal nature of the
Company's business. Sales of the Company's products are seasonal, with peak
product shipments occurring in the third and fourth quarters. Unanticipated
events, including delays in securing adequate inventories of competitive
products at the time of peak sales, or significant decreases in sales during
such periods, could result in losses which would not be easily reversed before
the following year. There can be no assurance that the foregoing factors will
not result in significant fluctuations in operating results in the future.
DEPENDENCE ON FOREIGN MANUFACTURERS. The Company currently obtains
product from several manufacturers who are based or affiliated with companies
in Asia that have been affected by the recent and well publicized Asian
financial crises, including Japan and Korea. The Company is dependent on such
manufacturers to provide sufficient quantities of products on favorable
terms. Failure or delay by such manufacturers in supplying products to the
Company would have an adverse effect on the Company. In addition, countries
in Asia may from time to time impose duties, tariffs, quotas or other
restrictions on exports or the United States may impose increased import
duties or tariffs on the import of products, which could adversely affect the
Company's operations.
POSSIBLE ADVERSE EFFECT OF TRADE SANCTIONS. The United States has from
time to time been involved in trade disputes relating to, among other things,
the opening of certain international markets to products (including wireless
telephones) manufactured in the United States. Although the Company believes
that the United States has resolved such disputes, there can be no assurance
that trade disputes will not arise in the future or that the United States will
not impose tariffs on wireless products and components manufactured abroad. Any
imposition of significant tariffs on such products and components manufactured
abroad, resulting in increased product costs, would reduce the Company's
operating margins and possibly render the marketing of such products
uneconomical.
POSSIBLE MEDICAL RISKS ASSOCIATED WITH WIRELESS TELEPHONES.
Lawsuits have been filed against manufacturers of wireless telephones alleging
possible medical risks, including brain cancer, associated with electromagnetic
fields emitted by portable hand-held cellular telephones. To date, there has
been only limited research in this area, and such research has not been
conclusive as to what effects, if any, exposure to electromagnetic fields
emitted by portable cellular telephones has on human cells. The Company
recognizes, however, that the perception that health risks may exist could
adversely affect the Company's ability to market portable wireless telephone
products. Inasmuch as a substantial portion of the Company's revenues is derived
from sales of portable wireless telephones, future studies confirming possible
health risks associated with the use of such products could have a material
adverse effect on the wireless communications industry and the Company. As a
distributor of wireless telephones, the Company may be subject to lawsuits filed
by plaintiffs alleging health risks. A successful claim against the Company
could have a material adverse effect on the Company, which does not carry
product liability insurance.
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<PAGE>
DEPENDENCE ON KEY PERSONNEL. The success of the Company has been largely
dependent on the personal efforts of John Swinehart, its Chief Executive
Officer; Ben Neman, its Chairman and President; Stephen Jarrett, its Executive
Vice President of Sales; David Kane, its Chief Financial Officer; Meir Abramov,
a vice president; and other key personnel. The Company also has recently hired
Michael Hedge as its Executive Vice President and General Manager and Michael
King as its Vice President of Marketing and Business Development. The loss or
interruption of the services of such individuals or other key employees could
have a material adverse effect on the Company's business and prospects. Mr.
Swinehart has no prior experience as a senior executive in a publicly-held
company and has limited experience in the cellular phone industry. In March
1998, the Company reduced its workforce by approximately 35% as a cost-cutting
measure. Any expansion of the Company's operations may require the hiring of
additional personnel, which could be made more difficult by the Company's prior
workforce reduction.
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ SYSTEM. The Company's Common
Stock is currently traded on the Nasdaq SmallCap Market. In order to continue to
be listed on Nasdaq, however, the Company must maintain certain requirements. In
January 1999, the Company received a notice from Nasdaq that it planned to
delist the Company's Common Stock based on Nasdaq's determination that the
Company would be unable to continue to maintain compliance with Nasdaq's minimum
net worth requirement. The Company has appealed this determination to a Nasdaq
panel hearing that will be held in April 1999. Although the Company is currently
in compliance with Nasdaq's net worth requirement and believes that it has
presented to Nasdaq a viable business plan for maintaining compliance with this
requirement, there can be no assurance that the Company will succeed in its
appeal. If Nasdaq were to delist the Company's Common Stock, an investor could
find it more difficult to dispose of, or to obtain accurate quotations as to the
market value of the Common Stock and the lack of a Nasdaq listing of its
securities could make it more difficult for the Company to do any equity
financings in the future.
CONTROL BY CURRENT STOCKHOLDER. As of December 31, 1998, Mr. Neman owned
approximately 30% of the Company's outstanding Common Stock. Accordingly, Mr.
Neman will be able to exert significant control over the election of the
Company's directors, decisions to increase the authorized capital, dissolve,
merge, or sell the assets of the Company and any other actions affecting the
affairs of the Company.
INDEMNIFICATION AND EXCULPATION PROVISIONS. The Company's amended
Certificate of Incorporation provides for indemnification of officers and
directors to the fullest extent permitted by Delaware law. In addition, under
the Company's amended Certificate of Incorporation, no director shall be liable
personally to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, provided that the Certificate of Incorporation
does not eliminate the liability of a director for (i) any breach of the
director's duty of loyalty to the Company or its stockholders; (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) acts or omissions in respect of certain unlawful
dividend payments or stock redemptions or repurchases; or (iv) any transaction
from which such director derives improper personal benefit. As a result of such
provisions in the Certificate of Incorporation and the By-Laws of the Company,
stockholders may be unable to recover damages against the directors and officers
of the Company for actions taken by them which constitute negligence, gross
negligence or a violation of their fiduciary duties, which may reduce the
likelihood of stockholders instituting derivative litigation against directors
and officers and may discourage or deter stockholders from suing directors,
officers, employees and agents of the Company for breaches of their duty of
care, even though such an action, if successful, might otherwise benefit the
Company and its stockholders.
AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED STOCK. The
Company's Certificate of Incorporation authorizes the issuance of up to
1,000,000 shares of "blank check" preferred stock with
16
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such designations, rights and preferences as may be determined from time to
time by the Board of Directors. Accordingly, the Board of Directors is
empowered, without stockholder approval, to issue preferred stock with
dividend, liquidation, conversion, voting or other rights which could
adversely affect the voting power or other rights of the holders of the
Company's Common Stock. In the event of issuance, the preferred stock could
be utilized, under certain circumstances, as a method of discouraging,
delaying or preventing a change in control of the Company.
YEAR 2000 COMPLIANCE. As is true for most companies, the Year 2000
computer problem creates a risk for the Company. If systems do not correctly
recognize the date information when the year changes to 2000, there could be an
adverse impact on the Company's operations. The Company, however, may not be
able to identify or remedy all Year 2000 compliance issues with respect to its
internal systems. As a result, the Year 2000 problem could have a materially
adverse effect on the Company's financial condition or results of operations.
Although the Company currently expects its information systems to be Year 2000
compliant by the end of 1999, no assurance can be given that the products the
Company distributes, including products manufactured and or developed by the
Company's suppliers and vendors, will contain all necessary date code changes
necessary to prevent processing errors potentially arising from calculations
using the Year 2000 date. The Company also believes that the purchasing patterns
of customers and potential customers may be affected by Year 2000 issues in a
variety of ways. If any of the above systems or products are not Year 2000
compliant, the Company's business, financial condition and results of operations
could be materially adversely affected.
The Company cannot be sure that it will not suffer business
interruptions, either because of its own Year 2000 problems or those of its
customers or suppliers whose Year 2000 problems may make it difficult or
impossible for them to fulfill their commitments to the Company. The Company is
continuing to evaluate Year 2000 related risks and will take such further
corrective actions as may be required.
ITEM 2. PROPERTIES
In February 1998, the Company moved its executive offices and warehouse
to a 36,000 square foot leased facility in Chatsworth, California. This facility
provides 23,000 square feet of warehouse and 13,000 square feet of operations
and office space. The lease is for a three-year term beginning February 1, 1998,
and provides for an initial monthly rent of $18,495, with annual escalation
based on the Consumer Price Index. At the end of the initial lease term, the
Company has an option to extend the lease for a period of three years. In May
1998, the Company subleased approximately one-third of the Chatsworth,
California facility for the same remaining lease term as the underlying lease.
In January 1999, the Company assumed the lease of a 2000-square foot
office and warehouse in Mexico City, Mexico. This facility handles sales into
Mexico. The lease is month-to-month with rent of $980 per month.
In November 1997, the Company commenced operation of a 12,800 square
foot leased warehouse and office facility in Miami, Florida. The facility
handled sales into the southeastern region of the United States and Latin
America. In July 1998, the Company terminated its Miami-Based operations and
assigned the lease for it Miami operations to a third party. The Company is
contingently liable for the obligations of this lease if the assignee
defaults.
The Company believes that its existing facilities are adequate for its
current and future requirements and that additional space will be available as
needed to accommodate future expansion of its operations.
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ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 30, 1998, the Company held its Annual Meeting of
Stockholders. At the meeting, the stockholders elected as directors Ben
Neman (with 4,182,020 affirmative votes and 55,400 withheld), Vinay Sharma (with
4,182,020 affirmative votes and 55,400 withheld), Stephen Jarrett (with
4,182,020 affirmative votes and 55,400 withheld), J. Sherman Henderson (with
4,182,020 affirmative votes and 55,400 withheld), John Swinehart (with 4,182,020
affirmative votes and 55,400 withheld), and Mark M. Laisure (with 4,182,020
affirmative votes and 55,400 withheld).
The stockholders also ratified the adoption of the Company's 1998 Stock
Option Plan (with 2,237,678 shares voting for, 62,100 against, and 44,600
abstaining).
The stockholders also ratified the Company's private placement of
$1,500,000 of three-year unsecured and subordinated convertible notes and
approved certain transactions related thereto (with 2,308,678 shares voting for,
28,800 against, and 6,900 abstaining).
The stockholders also ratified the appointment of Hollander, Lumer & Co.
LLP as the independent auditors for the Company for the fiscal year ending
December 31, 1998 (with 4,167,780 shares voting for, 20,640 against, and 5,700
abstaining).
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has traded on the Nasdaq SmallCap Market
("Nasdaq") under the symbol "FONE" since the Company's initial public offering
on December 18, 1996. The following table sets forth, for the period indicated,
the high and low sales prices of the Company's Common Stock as reported by
Nasdaq.
<TABLE>
<CAPTION>
HIGH LOW
---- -----
<S> <C> <C>
Year Ended December 31, 1997
----------------------------
First Quarter $9.38 $6.25
Second Quarter $7.88 $4.25
Third Quarter $9.75 $7.13
Fourth Quarter $7.75 $2.75
Year Ended December 31, 1998
----------------------------
First Quarter $5.50 $3.00
Second Quarter $3.25 $0.50
Third Quarter $1.88 $0.13
Fourth Quarter $6.88 $0.50
</TABLE>
Such quotations reflect inter-dealer bids, without retail mark-up,
mark-down or commissions, and may not reflect actual transactions.
On March 26, 1999, the closing price of the Common Stock on Nasdaq was
$2.50. As of March 26, 1999, there were approximately 24 holders of record of
the Company's Common Stock. The Company believes that there are in excess of 400
beneficial owners of its Common Stock whose shares are held in "street name."
DIVIDEND POLICY
During the two most recent fiscal years, the Company has not paid any
cash dividends on its Common Stock. The payment of cash dividends, if any, in
the future is within the discretion of the Company's Board of Directors and will
depend upon the Company's earnings, its capital requirements and financial
condition and other relevant factors. The Board of Directors does not intend to
declare any cash dividends in the foreseeable future, but instead intends to
retain all earnings, if any, for use in the Company's business operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RECENT SALES OF UNREGISTERED SECURITIES
In November 1998 the Company consummated a private placement of
$1,500,000 of convertible notes pursuant to Section 4(2) of the Securities
Act of 1933 to six individuals who are accredited investors. The notes were
converted on December 31, 1998 to units consisting of a total of 1,500,000
shares and three-year warrants to purchase 1,000,000 shares of common stock
at an exercise price of $1 per share. Sands Bros served as the Company's
financial advisor in connection with this private placement.
ITEM 6. SELECTED FINANCIAL DATA
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The following selected financial data are derived from the Financial
Statements of the Company which have been audited by BDO Seidman, LLP,
independent certified accountants for the years ended December 31, 1997 and 1996
and Hollander, Lumer & Co. LLP, for the year ended December 31, 1998. Such
selected financial data should be read in conjunction with the Company's
financial statements and related notes set forth herein commencing on page F-1.
STATEMENT OF OPERATIONS DATA:
(in thousands, except share and per share data)
Year ended December 31,
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Sales $ 56,447 $ 69,850 $ 81,225 $ 81,401 27,787
Cost of sales 54,402 67,485 77,555 77,862 26,152
Gross profit 2,045 2,365 3,670 3,539 1,635
Selling, general and
administrative
expenses 1,505 1,877 2,747 7,630 4,167
Non-recurring legal,
auditing and
professional fees -- -- -- 1,300 --
Income (loss) 540 488 923 (5,391) (2,532)
Other income (expense) (103) (86) (392) (391) (237)
Income (loss) from
operations 437 402 531 (5,782) (2,769)
Income tax expense
(benefit) -- -- (308) 334 --
Net (loss) Income
- historical $ 437 $ 402 $ 839 $ (6,116) $ (2,769)
Pro forma net income
(loss)(1) $ 257 $ 236 $ 315 $ (6,116) $ (2,769)
Pro forma net income
(loss) per share
(basic and diluted)(2) $ 0.13 $ 0.12 $ 0.15 $ (1.37) $ (0.63)
Weighted average number of
common shares
outstanding (basic) 2,030,000 2,030,000 2,113,674 4,451,182 4,415,902
Weighted average number of
common shares
outstanding (diluted) 2,030,000 2,030,000 2,114,641 4,451,182 4,415,902
</TABLE>
20
<PAGE>
BALANCE SHEET DATA:
(in thousands)
As of December 31,
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Working capital
(deficiency) $ (175) $ (243) $ 8,432 $ 3,596 $ 2,490
Total assets 7,250 8,604 16,025 11,414 4,178
Short-term debt 445 2,490 -- 3,402 --
Total liabilities 7,392 8,590 7,216 7,381 1,329
Stockholders' equity
(capital deficiency) (142) 14 8,809 4,033 2,849
</TABLE>
(1) Includes pro forma adjustments for income taxes. See Note 9 to Notes to
Financial Statements.
(2) Based on pro forma net income and the weighted average number of shares of
Common Stock outstanding.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
In February 1998, the Company became aware that the business and
associated assets of one of its major customers had been assumed by another
creditor of this customer. As a result, in 1997, the Company expensed $1,665,000
to bad debt expense to reserve the unpaid receivable from this customer. The
Company has abandoned collection efforts as being economically non viable.
The following table sets forth for the periods indicated, the percentage
of net sales represented by certain items reflected in the Company's statement
of operations. The statement of operations contained in the Company's financial
statements and the following table include pro forma adjustment for income
taxes.
PERCENTAGES OF NET SALES
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 95.5 95.6 94.1
Gross profit 4.5 4.4 5.9
Selling, general and administrative expenses 3.4 9.4 15.0
Non-recurring legal and auditing fees -- 1.6 --
Income (loss) from operations 1.1 (6.6) (9.1)
Other income (expense) (0.5) (0.5) (0.9)
21
<PAGE>
Income tax expense (benefit) (0.4) 0.4 --
Net (loss) income 1.0 (7.5) (10.0)
Pro forma net (loss) income .4 (7.5) (10.0)
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net sales decreased from $81,401,000 in 1997 to $27,787,000 in 1998, a
decrease of $53,614,000 or 65.9%. The primary reason for the decrease in
sales was the Company's lack of product from suppliers of the newest
generation digital products. The sales in 1997 were based on analog product
which was more readily available compared to 1998's paradigm where digital
product replaced analog's dominance and market share. In 1998, digital
product was not readily available on a consistent basis to the Company. Even
though the Company was able to obtain product from selected manufacturers and
other distributors of digital product on a non-exclusive basis, it was only
available in limited quantities.
Gross profit decreased by $1,904,000, or 53.8%, from 1997 to 1998 and
as a percentage of net sales increased from approximately 4.5% to
approximately 5.9% respectively, during these periods. The decrease in gross
profit from 1997 to 1998 is in line with the decrease in sales. The increase
in gross profits as percentage of sales is due to a somewhat more favorable
mix of products offered by the Company in 1998 versus 1997.
Selling, general and administrative expenses decreased by approximately
$3,463,000 or 45.4%, from 1997 to 1998, but increased from 9.4% to 15.0%, as a
percentage of net sales. The most significant items accounting for this decrease
are decrease in personnel of $473,000 and decrease in bad debt expense for
doubtful accounts receivable and doubtful notes receivable of $3,519,000. The
decrease in payroll and payroll related costs for 1998 as compared to 1997 was
primarily the result of having cost cutting measures initiated in 1998 by
reducing the size of the Company's workforce to compensate for waning sales and
lack of product.
In 1997, the Company incurred non-recurring expenses totaling $1,300,000.
Of this amount $1,024,000 was incurred in connection with the audit of the
Company's financial statements for the year ended December 31, 1996, consisting
primarily of professional fees, including the fees of its prior auditor, fees of
special counsel and a special auditor retained by the Company's Audit Committee.
In December 1997, the Company terminated acquisition negotiations with Pacific
Unplugged Communications, Inc.. Such negotiations had been ongoing since a
non-binding letter of intent was signed by the parties in August 1997. In
connection with the proposed acquisition the Company incurred and expensed, as
non-recurring, $276,000 of professional and legal fees.
Loss from operations was $5,391,000 for 1997, as compared to an operating
loss of $2,532,000 in 1998, a decrease in loss of $2,859,000 or 53%. The 1997
operating loss is primarily due to increased selling, general and administrative
expenses and non-recurring expenses for 1997, as described above. The 1998 loss
was primarily due to decreased sales.
Interest expense for 1997 and 1998 was $444,000 and $204,000,
respectively. Interest expense is primarily attributable to borrowings under the
Company's prior line of credit with BankAmerica, which during 1997, averaged
$3,016,000 at an average interest rate of 10.25% per annum. At December 31,
1997, there was $3,402,000 of borrowing under this credit line. During 1998, the
borrowings averaged $2,376,000 at an average interest rate of 7.1% per annum.
For most of 1998, the Company was not in compliance with covenants of the
BankAmerica line of credit, and several amendments to the line of credit
agreement reduced the Company's ability to borrow funds for most of 1998.
Historical net loss decreased from $6,116,000 for 1997 to a historical
net loss of $2,769,000 for 1998, a decrease of $3,347,000 or 55%. The decrease
in net loss resulted from decrease in selling, general and administrative
expenses and non-recurring legal and auditing and professional fees and
expenses. At
22
<PAGE>
December 31, 1998, the Company has recorded a net deferred tax asset of
$3,395,000, representing the future benefit of net operating losses and
timing differences and has established a valuation reserve in an equal amount
reflecting current assessment of the uncertain realizability of this asset.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales were essentially flat from year to year, increasing by
approximately $176,000, or 0.22%, from 1996 to 1997. For 1997, domestic sales
were $67,048,000 (82.4%) and foreign sales were $14,353,000 (17.6%) as compared
to domestic sales of $77,034,000 (94.8%) and foreign sales of $4,191,000 (5.2%)
for 1996. For the year ended December 31, 1997, accessory sales decreased by
$14,186,000 or 68.6%, with such decrease offset by increased phone sales of
$14,362,000, a 23.7% increase from such sales for the prior year.
Gross profit decreased by $131,000, or 3.6%, from 1996 to 1997 and as a
percentage of net sales decreased from approximately 4.5% to approximately 4.4%
respectively, during these periods. The decrease in gross profit from 1996 to
1997 was primarily the result of an increase in the inventory obsolescence
provision for 1997 of $197,000 (0.2% of 1997 sales) over such provision for
1996.
Selling, general and administrative expenses increased by approximately
$4,883,000 or 177.8%, from 1996 to 1997, and increased from 3.4% to 9.4%, as a
percentage of net sales. The most significant items accounting for this increase
was an increase in bad debt expense for doubtful accounts receivable of
$2,508,000 and doubtful notes receivable of $739,000, payroll and related costs
of $625,000, (with such increase comprised of $110,000 for executive officers,
$150,000 for accounting and administration and $365,000 for sales and marketing
compensation). The increase in payroll and payroll related costs for 1997 as
compared to 1996 was primarily the result of having three accounting and one
executive position filled for only part of 1996 while the increase in
compensation expense related to sales and marketing reflects both increased
compensation levels and the number of personnel involved in this effort.
Additional increases for 1997 over 1996 were associated with expense for
non-capitalizable equipment repair and maintenance of $258,000 primarily
associated with the Company's computer system, legal, auditing and professional
fees of $141,000, and increased loan fee expense associated with the replaced
line of credit of $172,000.
In 1997, the Company incurred non-recurring expenses totaling $1,300,000.
Of this amount $1,024,000 was incurred in connection with the audit of the
Company's financial statements for the year ended December 31, 1996, consisting
primarily of professional fees, including the fees of its prior auditor, fees of
special counsel and a special auditor retained by the Company's Audit Committee.
In December 1997, the Company terminated acquisition negotiations with Pacific
Unplugged Communications, Inc.. Such negotiations had been ongoing since a
non-binding letter of intent was signed by the parties in August 1997. In
connection with the proposed acquisition the Company incurred and expensed, as
non-recurring, $276,000 of professional and legal fees.
Income from operations was $923,000 for 1996, as compared to an operating
loss of $5,391,000 for 1997, a decrease of $6,314,000 or 684%. The 1997
operating loss was primarily due to increased selling, general and
administrative expenses and non-recurring expenses for 1997, as described above.
Interest expense for 1996 and 1997 was $431,000 and $444,000,
respectively. Interest expense is primarily attributable to borrowings under the
Company's line of credit with CIT which during 1997, averaged $3,016,000
(1996-$3,700,000) at an average interest rate of 10.25% (1996- 10%) per annum.
At December 31, 1997, there was $3,402,000 (1996 - nil) of borrowing under this
credit line.
23
<PAGE>
Historical net income decreased from $839,000 for 1996 to a historical
net loss of $6,116,000 for 1997, a decrease of $6,955,000 or 829%. The decrease
in net income resulted from an increase in selling, general and administrative
expenses and non-recurring legal and auditing and professional fees and expenses
and the reversal of a deferred tax benefit recorded in December 1996 in
accordance with FASB 109, "Accounting for Income Taxes". A net deferred tax
benefit of $330,000 was recognized upon termination of the Company's S
corporation election in December 1996. At December 31, 1997, the Company had
recorded a net deferred tax asset of $2,626,000 representing the future benefit
of net operating losses and timing differences and has established a valuation
reserve in an equal amount reflecting current assessment of the uncertain
realizability of this asset.
LIQUIDITY AND CAPITAL RESOURCES
Typically, the Company's primary cash requirements have been to fund
increased levels of inventories, accounts receivable and operations. The Company
has historically satisfied its working capital requirements principally through
cash flow from operations and borrowings. At December 31, 1998, the Company had
working capital of $2,490,000 compared to working capital of $3,596,000 at
December 31, 1997. The decrease in working capital is primarily attributable to
decreased accounts receivables from lower sales and lower inventory caused by a
short supply of product offset by lower borrowings under the Company's former
credit line. The losses sustained from operations have significantly reduced the
Company's liquidity. Additionally, as a result of the Company's operating
losses, certain vendors have restricted credit to the Company.
Net cash provided by (used in) operating activities was $2,930,000 in
1998, and ($5,374,000) in 1997. The increase in cash provided by operations
for 1998 was primarily attributable to the reduced net loss, and decrease in
accounts receivable and inventory. Net cash used in investing activities was
$278,000 in 1998, versus cash provided by investing activities of $1,505,000
in 1997. The decrease in cash provided by investing activities was primarily
attributable to proceeds from the collection of notes receivable in 1997. Net
cash provided by(used in) financing activities was ($2,290,000) in 1998 and
$3,869,000 in 1997. The decrease was primarily attributable to the advances
of the Company's line of credit in 1997 whilst in 1998, the Company repaid
and terminated this line of credit with a portion of the proceeds from its
private placement of convertible notes. In January 1997, the managing
underwriter exercised an over-allotment option (the "Over-allotment Option")
to purchase an additional 300,000 shares of common stock, resulting in net
proceeds of $1,341,000. In November 1998, the Company consummated a private
placement of convertible notes for resulting in net proceeds of $1,288,000
($1,500,000 net of $212,000 offering costs).
In January 1998, the Company entered into a new loan agreement with
BankAmerica Business Credit, Inc. ("BankAmerica") which provided for
borrowings under a line of credit of up to $12,000,000. Advances under the
line of credit were based on a borrowing formula equal to the sum of (i) 80%
of eligible accounts receivable and (ii) the lower of $6,000,000 or 50% of
eligible inventory. Interest accrued on such advances at the prime lending
rate plus one half of one percent (.5%) per annum and was payable monthly. In
November 1998, the Company paid off the remaining balance owing to
BankAmerica and terminated this agreement.
24
<PAGE>
The Company has increasingly emphasized the sale of products on open
account to maintain competitive other distributors who routinely grant credit.
For the years ended December 31, 1996, 1997 and 1998, 79.3%, 93.6% and 86.5% of
the Company's sales were made on open account. Inventory turns decreased from
14.2 times during 1997 to 10.1 times during 1998.
The Company's trade accounts receivable, less allowances for doubtful
accounts at December 31, 1998, was $2,155,000, as compared to $6,578,000 at
December 31, 1997 and as compared to $6,287,000 at December 31, 1996. As of
December 31, 1998, accounts 90 days past due were approximately 21.9% of
aggregate trade accounts receivable as compared to 9.9% of aggregate trade
accounts receivable at December 31, 1997.
The allowance for doubtful accounts receivable was $251,000 at December
31, 1998, and $2,697,000 at December 31, 1997. The decrease in the allowance for
doubtful accounts receivable results primarily from the Company's largest
customer in 1997 (11.7% of total 1997 sales) sustaining severe financial
difficulties. The Company currently believes that this customer is out of
business and that its assets have been taken over by another supplier/customer
and competitor. The Company has abandoned its pursuit in connection with the
foregoing and wrote off the account in 1998. Other significant decreases in the
allowance for doubtful account receivables relate to 44 domestic accounts
aggregating $577,000 and 7 foreign accounts aggregating $456,000 included in the
1997 balance, written off in 1998.
At December 31, 1998, notes receivable, less the allowance for doubtful
notes receivable was nil as compared to $195,000 at December 31, 1997. The
allowance for doubtful notes receivable at December 31, 1998, was $1,521,000 as
compared to $739,000 at December 31, 1997. Notes receivable are the result of
converting aged accounts receivable into interest bearing promissory notes with
a fixed maturity. Of the notes receivable for which an allowance is provided,
one note due from a foreign customer accounts for 71% of the total.
Bad debt expense for trade accounts receivable and notes receivable
equaled $108,000 or 0.4% of the Company's revenues for 1998 and $3,627,000 or
4.5% of the Company's revenues for 1997.
The Company believes the allowances for doubtful accounts receivable and
doubtful notes receivable are adequate for the size and nature of its
receivables. Nevertheless, further delays in the collection or the
uncollectibility of accounts receivable will continue to have an adverse effect
on the Company's liquidity and working capital position. Because of market
considerations the Company will offer open account terms to additional
customers, which will subject the Company to increased credit risks,
particularly in foreign markets, and could require the Company to increase its
allowance for doubtful accounts. The Company attempts to minimize losses on
credit sales by 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.
At December 31, 1998, the Company's inventory reserve was $592,000, which
the Company believes is currently adequate for obsolescence and net realizable
value, given the size and nature of its
25
<PAGE>
inventories. The amounts the Company will ultimately realize could, however
differ materially from the amounts estimated in arriving at the inventory
reserve.
Based on currently proposed plans and assumptions relating to its
operations, the Company believes that with the funds raised in both the
Offering and the subsequent exercise of $1,000,000 warrants, projected cash
flow from operations and available cash resources, should be sufficient to
satisfy its near-term cash requirements. However, the Company is seeking
to obtain a new line of credit to finance future growth. There can be no
assurance that additional financing will be available to the Company on
commercially reasonable terms, or at all. The Company is also seeking to
address its liquidity concerns by attempting to secure more favorable
contracts for supply of products with manufacturers of digital wireless
equipment. In addition, the Company intends on establishing more stringent
criteria to evaluate creditworthiness prior to extending credit to customers
and limit the risk of additional bad debt with credit insurance. No assurance
can be given that these measures will help to alleviate the liquidity
concerns faced by the Company.
The Company's Common Stock is currently traded on the Nasdaq SmallCap
Market. In order to continue to be listed on Nasdaq, however, the Company must
maintain certain requirements. In January 1999, the Company received a notice
from Nasdaq that it planned to delist the Company's Common Stock based on
Nasdaq's determination that the Company will be unable to continue to maintain
compliance with Nasdaq's minimum net worth requirement. The Company has appealed
this determination to a Nasdaq panel hearing that will be held in April 1999.
Although the Company is currently in compliance with Nasdaq's net worth
requirement and believes that it has presented to Nasdaq a viable business plan
for maintaining compliance with this requirement, there can be no assurance that
the Company will succeed in its appeal. If Nasdaq were to delist the Company's
Common Stock, the lack of a Nasdaq listing of its securities could make it more
difficult for the Company to do any equity financings in the future.
SEASONALITY
Sales of the Company's products are seasonal and are a function of
consumer sales, with peak product shipments typically occurring in the third and
fourth quarters.
INFLATION
Inflation has historically not had a material effect on the Company's
operations.
YEAR 2000 COMPLIANCE
OVERVIEW AND BACKGROUND
The Company is implementing a project (the Project) to address the Year
2000 readiness of its information technology as well as its non-information
technology systems (e.g. telephones, alarm systems, office machines, etc.) which
have embedded technology (collectively referred to as Systems). Additionally,
the Project includes assessment of the Year 2000 readiness of the Company's
significant suppliers and customers.
STATUS OF THE PROJECT
The Project is divided into four separate phases - Planning and
Awareness, Inventory, Assessment and Renovate.
The Planning and Awareness phase began in November 1998 and is scheduled
for completion in early May 1999. This phase included: (I) development and
approval of the Project charter, (ii) formation of a
26
<PAGE>
Project management team to carry out the Project charter, (iii)
identification and assessment of overall Project risks and (iv) development
of a Project budget. Because the Company does not believe that its customers'
Year 2000 compliance issues will have a significant impact on the Company,
the Company plans on conducting informal conversations about Year 2000 issues
with its customers.
In April 1999, the Company will implement the Inventory phase of the
Project, which involves: (i) identification of significant Systems to be
assessed and (ii) identification of all significant suppliers and customers.
The Assessment phase is scheduled to begin in May 1999, with an
anticipated completion date of August 1999. This phase involves (i) contacting
vendors of significant Systems to assess the Year 2000 readiness of those
Systems, (ii) testing of the assertions made by significant Systems vendors,
(iii) contacting significant suppliers, customers and wireless network operators
in order to ascertain their state of Year 2000 readiness, (iv) assessment of
assertions made by significant suppliers and customers, (v) determination of the
extent to which renovation will be required to insure Year 2000 readiness and
(vi) development of contingency plans to the extent considered necessary.
Once the Assessment phase is completed for each System, the Renovation
phase will commence for those Systems identified as not Year 2000 compliant. The
Renovation phase is projected to be completed by mid 1999. The activities that
will be performed during Renovation include (i) repairing, replacing or
reprogramming all significant Systems that do not comply with Year 2000
readiness, (ii) testing and validation of renovated Systems and (iii)
establishment and completion of action plans to address any Year 2000 issues
with significant customers and suppliers.
COSTS
The Company will rely primarily on internal resources to implement and
fund the Project. Costs incurred to insure the Company's systems are Year 2000
compliant are not expected to exceed $25,000 or to be material to the Company's
results of operations, financial position or cash flows since the Company has
already been in the process of upgrading certain Systems to keep pace with new
computer and software technologies. Project costs are and will be expensed as
incurred.
RISKS AND CONTINGENCIES
The Company believes that the Project will meets its Year 2000 objectives
in a timely manner. However, the Company has not completed significant portions
of the Project. The ability of suppliers and customers with which the Company
transacts to timely convert their systems to be Year 2000 compliant is
uncertain. Lastly, disruptions in the economy generally resulting from Year 2000
issues could also have an adverse affect on the Company's operations. Such
failures could materially and adversely affect the Company's results of
operations, liquidity and financial position.
The Company is dependent on wireless equipment manufacturers for supply
of wireless handsets and accessories. Additionally, demand for the Company's
products (wireless handsets and accessories) by the Company's customers is
dependent on the ability of network operators to provide wireless network
services to the end-users of those products. Failure in the products and/or
systems of the wireless equipment manufacturers or network operators, including
those resulting from a lack of Year 2000 compliance, could have a material
adverse effect on the Company.
The estimated completion dates for the various phases and estimated costs
are dependent upon management's assumptions of certain future events, such as
compliance efforts, the availability of personnel and ability to locate and
renovate all Systems. There can be no assurance that third parties which the
Company significantly relies upon will succeed in their Year 2000 compliance
efforts or that failure by third parties would not have a material adverse
effect on the Company's results of operations or financial condition.
27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements appear in a separate section of this report as
pages F-1 through F-27 following Part IV. The unaudited Quarterly Results of
Operations are as follows (in thousands except per share data):
<TABLE>
<CAPTION>
1998 FIRST SECOND THIRD FOURTH
<S> <C> <C> <C> <C>
Net sales $9,931 $8,685 $4,142 $5,029
Gross profit 374 649 122 490
Net loss (1,175) (562) (840) (192)
Net loss per share (0.27) (0.13) (0.19) (0.04)
<CAPTION>
1997 FIRST SECOND THIRD FOURTH
<S> <C> <C> <C> <C>
Net sales $21,782 $19,211 $20,512 $19,896
Gross profit 1,292 1,180 622 445
Net loss (382) (48) (2,033) (3,653)
Net loss per share (0.08) (0.01) (0.46) (0.82)
1996 FIRST SECOND THIRD FOURTH
<S> <C> <C> <C> <C>
Net sales $22,288 $20,182 $23,519 $15,236
Gross profit 952 923 1,262 533
Pro forma net income (loss) 150 218 129 (182)
Pro forma net income (loss) per share 0.07 0.10 0.06 (0.08)
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 9, 1997, Richard A. Eisner & Company, LLP ("Eisner"), the
accounting firm that audited the Company's financial statements at December 31,
1994 and 1995 and for the years ended December 31, 1993, 1994 and 1995, resigned
as the Company's independent auditor. The report of Eisner for the fiscal years
ended December 31, 1993, 1994 and 1995 did not contain an adverse opinion or a
disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit
scope or accounting principles. During the audit period for the fiscal years
ended December 31, 1993, 1994 and 1995, and during the interim period prior to
Eisner's resignation, there were no disagreements with Eisner on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure. However, in its letter of resignation addressed to the
Company's Board of Directors, Eisner concluded that it was "unable to rely on
the integrity of management." In a subsequent letter filed as an Exhibit to the
Company's Report on Form 8-K, Eisner stated that its resignation followed an
expanded scope investigation in response to allegations with respect to the 1996
financial statements made to Eisner by the Company's controller, and that during
Eisner's investigation evidence came to its attention that contradicted
statements made to Eisner by management.
Effective April 19, 1997, the Company engaged BDO Seidman, LLP as
independent auditors to audit the Company's annual financial statements. During
the Company's two most recent fiscal years, the
28
<PAGE>
Company nor any person acting on behalf of the Company consulted BDO Seidman,
LLP regarding (i) the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Company's financial statements or (ii) any matters
that were either the subject of a disagreement or a reportable event.
On May 10, 1998, BDO Seidman, LLP the accounting firm that audited the
Company's financial statements at December 31, 1996 and 1997 and for the
years ended December 31, 1996 and 1997, resigned as the Company's independent
auditor. The report of BDO Seidman, LLP for the fiscal years ended December
31, 1996 and 1997 did not contain an adverse opinion or a disclaimer of
opinion, nor was it qualified or modified as to uncertainty, audit scope or
accounting principles. During the audit period for the fiscal years ended
December 31, 1996 and 1997, and during the interim period prior to BDO
Seidman LLP's resignation, there were no disagreements on any matter of
accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of BDO Seidman, LLP would have caused it to make a reference to
the subject matter of the disagreements in connection with its reports.
The Company did not consult with BDO Seidman, LLP in relation to any
financial statements or filings subsequent to May 10, 1998, including the
Company's quarterly reports on Form 10-Q filed during 1998 and the Offering.
BDO Seidman, LLP has disclaimed any association with such filings and
Offering.
Effective May 10, 1998, the Company engaged Hollander, Lumer & Co. LLP
as its independent auditors to audit the Company's annual financial
statements for the year ended December 31, 1998. During the Company's two
most recent fiscal years, and the subsequent interim period prior to the
engagement of Hollander, Lumer & Co. LLP, neither the Company nor any person
acting on behalf of the Company consulted Hollander, Lumer & Co. LLP
regarding (i) the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Company's financial statements or (ii) any matters
that were either the subject of a disagreement or a reportable event.
29
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item to be contained in an amendment,
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item to be contained in an amendment,
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item to be contained in an amendment,
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Cellular Specialists, a company controlled by Mr. Neman's brother, is a
customer of the Company. For the year ended December 31, 1998, the Company sold
$307,696 of wireless products to this company. As of March 15, 1999, $119,000
remains unpaid and is over 300 days past due.
Digicell International Inc. ("Digicell"), a company controlled by two of
Mr. Neman's cousins, is a customer and a supplier to the Company. For the year
ended December 31, 1998, the Company sold to Digicell $1,577,000 and purchased
from Digicell $817,000 of cellular products on terms no less favorable to the
Company than could be obtained from an unaffiliated third party. As of the date
of this report, no amounts were past due from this company.
Vinay Sharma, a director of the Company, is a partner with the law firm
Sharma & Herron, which provides certain legal services to the company.
30
<PAGE>
PART IV
ITEM. 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) The Financial Statements are filed as a part of this report as pages
F-1 through F-28 following the signature page.
(a)(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying accounts page F-29
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
(a)(3) Exhibits
The following Exhibits are filed herewith pursuant to Rule 601 of
Regulation of S-K and paragraph (C) of this Item 14.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3.1 Certificate of Incorporation (1)
3.2 Certificate of Merger and Plan and Agreement of Merger,
between Cellular Telecom Corporation, a California
corporation, and the Registrant (1)
3.3 Bylaws (1)
4.1 Specimen form of Common Stock Certificate (2)
4.2 Form of Representative's Warrant Agreement (2)
4.3 Form of Warrant issued as a dividend to Common Stock holders
of Registrant (3)
4.4 Warrant Agreement, between the Company and Continental Stock
Transfer Trust Company, as Warrant Agent dated December 17,
1997 (3)
10.1 Form of 1996 Stock Option Plan of Registrant (1)
10.2 Form of Employment Agreement between the Registrant and Ben
Neman, dated November 9, 1998. (1)
10.3 Form of Employment Agreement between the Registrant and James
E. Bunting (1)
10.4 1998 Stock Option Plan
10.5 Credit Facility and Security Agreement, dated June 18, 1996,
by and between the Registrant and CIT Group/Credit Finance,
Inc. and related documents (1)
10.6 Form of Employment Agreement between the Registrant and John
C. Snyder II, dated April 30, 1997 (4)
31
<PAGE>
10.7 Lease Agreement between the Company and Northpark Industrial,
dated December 22, 1997 (4)
10.8 Lease Agreement between the Company and AMB Industrial Income
Fund, Inc., dated July 18, 1997 (4)
10.9 Loan and Security Agreement, dated January 12, 1998, by and
between the Registrant and BankAmerica Business Credit Inc.
(4)
10.10 Form of Amendment to Loan and Security Agreement referred to
in Exhibit 10.9 (4)
10.11 Amendment No. 3. to Loan and Security Agreement referred to in Exhibit
10.9
10.12 Amendment No.4 to Loan and Security Agreement referred to in Exhibit
10.9
10.13 Amendment No. 5 to Loan and Security Agreement referred to in Exhibit
10.9
10.14 Termination Agreement and Mutual General Release to Loan and Security
Agreement referred to in Exhibit 10.9
10.15 Redeemable Warrant to Purchase Common Stock dated November 19, 1998
between the Registrant and members of the Investor Group.
10.16 Employment Agreement between the Registrant and Ben Neman, dated
November 25, 1998.
10.17 Assignment of lease to Cellular Wholesalers, Inc of Lease Agreement
referred to in Exhibit 10.8
10.18 Employment Agreement between the Registrant and Michael King, dated
January 8, 1999.
10.19 Employment Agreement between the Registrant and Michael Hedge, dated
January 29, 1999.
10.20 Registration Rights Agreement dated November 19, 1998 between the
Registrant and the Investor Group.
10.21 Subordinated Convertible Note dated November 19, 1998 between the
Registrant and members of the Investor Group in the Company's November
1998 private placement.
27. Financial Data Schedule
</TABLE>
- -------------------
(1) Incorporated by reference to Registrant's Form S-1 Registration
Statement filed with the Commission on November 4, 1996.
32
<PAGE>
(2) Incorporated by reference to Registrants Amendment No. 1 to Form S-1
Registration Statement filed with the Commission on December 9, 1996.
(3) Incorporated by reference to Registrant's Form 8-A Registration
Statement filed with the Commission on December 5, 1997.
(4) Incorporated by reference to Registrant's Form 10-K filed with the
Commission on April 15, 1998.
(b) Reports on Form 8-K:
No report on Form 8-K were filed during the last quarter of fiscal 1998
33
<PAGE>
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.
INTELLICELL CORP
Dated: March 29, 1999
By: /s/ John Swinehart
----------------------------
John Swinehart
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 and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ John Swinehart Chief Executive Officer, Director March 29, 1999
- -------------------------------
John Swinehart
/s/ Ben Neman President and Chairman of the March 29, 1999
- -----------------------------
Ben Neman Board
/s/ Stephen R. Jarrett Director March 29, 1999
- ----------------------------
Stephen R. Jarrett
/s/ David M. Kane Chief Financial Officer (Principal March 29, 1999
- ------------------------
David M. Kane Financial and Accounting
Officer)
/s/ J. Sherman Henderson Director March 29, 1999
- ------------------------
J. Sherman Henderson
/s/ Vinay Sharma Director March 29, 1999
- ------------------------
Vinay Sharma
/s/ Mark Laisure Director March 29, 1999
- ------------------------
Mark Laisure
</TABLE>
34
<PAGE>
INTELLICELL CORP.
Financial Statements
Years Ended December 31, 1996, 1997 and 1998
F-1
<PAGE>
INTELLICELL CORP.
Index to Financial Statements
<TABLE>
<S> <C>
Report of Independent Auditors F-3
Report of Independent Certified Public Accountants F-4
Balance sheets as of December 31, 1997 and 1998 F-5
Statements of operations for the years ended December 31,
1996, 1997 and 1998 F-7
Statements of changes in stockholders' equity
for the years ended December 31, 1996, 1997 and 1998 F-8
Statements of cash flows for the years ended December 31,
1996, 1997 and 1998 F-9
Notes to financial statements F-11
Schedule II - Valuation and qualifying accounts F-32
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Intellicell Corp.
Chatsworth, California
We have audited the accompanying balance sheet of Intellicell Corp. as
of December 31, 1998 and the related statements of operations, changes in
stockholders' equity, and cash flows for the year then ended. We have also
audited the financial statement schedule listed in Index at Item 14(a)(2) for
the year ended December 31, 1998. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Intellicell Corp.
at December 31, 1998, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles. Also, in our opinion, the financial statement schedule for the
year ended December 31, 1998, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects, the information set forth therein.
HOLLANDER, LUMER & CO. LLP
Los Angeles, California
March 11, 1999
Except for Note 13, as to
which the date is March 15, 1999
F-3
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Intellicell Corp.
Chatsworth, California
We have audited the accompanying balance sheet of Intellicell Corp.
as of December 31, 1997 and the related statements of income, stockholders'
equity, and cash flows for the years ended December 31, 1997 and 1996.
We have also audited the schedule, for the years ended December 31, 1997 and
1996, listed in the accompanying index. These financial statements and
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Intellicell Corp.
at December 31, 1997, and the results of its operations and its cash flows
for the years ended December 31, 1997 and 1996 in conformity with
generally accepted accounting principles.
Also, in our opinion, the schedule for the years ended December 31,
1997 and 1996, presents fairly in all material respects, the information
set forth therein.
BDO SEIDMAN, LLP
Los Angeles, California
March 6, 1998
F-4
<PAGE>
INTELLICELL CORP.
Balance Sheets
December 31, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
--------------------- ---------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ - $ 362,000
Accounts receivable, net of allowance for doubtful
accounts of $2,697,000 and $251,000 6,578,000 2,155,000
Inventories, net of reserves of $550,000 and $592,000 3,494,000 837,000
Notes receivable, net of allowance for doubtful
notes of $739,000 and $1,521,000 195,000 -
Deposits for purchase of inventory 271,000 254,000
Prepaid expenses and other current assets 439,000 211,000
--------------------- ---------------------
Total current assets 10,977,000 3,819,000
Property and equipment, net of accumulated
Depreciation of $98,000 and $242,000 286,000 359,000
Goodwill, net of accumulated amortization of
$23,000 and $100,000 77,000 -
Deferred financing costs, net of accumulated
amortization of $288,000 and $362,000 74,000 -
--------------------- ---------------------
Total assets $ 11,414,000 $ 4,178,000
--------------------- ---------------------
--------------------- ---------------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
INTELLICELL CORP.
Balance Sheets, continued
December 31, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
-------------------------- --------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 250,000 $ -
Revolving credit facility 3,402,000 -
Accounts payable 3,425,000 1,150,000
Accrued expenses 304,000 179,000
--------------------------- --------------------------
Total current liabilities 7,381,000 1,329,000
--------------------------- --------------------------
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 and 5,915,902 shares
issued and outstanding 44,000 59,000
Additional paid-in capital 9,809,000 11,379,000
Accumulated deficit (5,820,000) (8,589,000)
--------------------------- --------------------------
Total stockholders' equity 4,033,000 2,849,000
--------------------------- --------------------------
--------------------------- --------------------------
Total liabilities and stockholders' equity $ 11,414,000 $ 4,178,000
--------------------------- --------------------------
--------------------------- --------------------------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
INTELLICELL CORP.
Statements of Operations
Years Ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
--------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Net sales $ 81,225,000 $ 81,401,000 $ 27,787,000
Cost of sales 77,555,000 77,862,000 26,152,000
--------------------- ---------------------- ----------------------
Gross profit 3,670,000 3,539,000 1,635,000
Selling, general and administrative expenses 2,747,000 7,630,000 4,167,000
Non-recurring legal and auditing fees - 1,300,000 -
--------------------- ---------------------- ----------------------
Income (loss) from operations 923,000 (5,391,000) (2,532,000)
Other income (expense):
Interest expense (431,000) (444,000) (204,000)
Other income (expense) 39,000 53,000 (33,000)
--------------------- ---------------------- ----------------------
Income (loss) before income
tax expense (benefit) 531,000 (5,782,000) (2,769,000)
Income tax expense (benefit) (308,000) 334,000 -
--------------------- ---------------------- ----------------------
Net income (loss) - Historical $ 839,000 $ (6,116,000) $ (2,769,000)
--------------------- ---------------------- ----------------------
--------------------- ---------------------- ----------------------
Basic earnings (loss) per share $ (1.37) $ (0.63)
---------------------- ----------------------
---------------------- ----------------------
Diluted earnings (loss) per share $ (1.37) $ (0.63)
---------------------- ----------------------
---------------------- ----------------------
Pro forma amounts (unaudited)
Income before income tax expense $ 531,000
Income tax expense 216,000
---------------------
Net Income $ 315,000
---------------------
---------------------
Basic earnings per share $ 0.15
---------------------
---------------------
Diluted earnings per share $ 0.15
---------------------
---------------------
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
INTELLICELL CORP.
Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS
------------------------------ ADDITIONAL (ACCUMULATED DUE FROM
SHARES AMOUNT PAID-IN CAPITAL DEFICIT) OFFICER TOTAL
------------- ------------- --------------- --------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 2,030,000 $ 100,000 $ - $ 94,000 $ (180,000) $14,000,000
Net income for the period
January 1, 1996 to
to December 21, 1996 - - - 543,000 - 543,000
Withdrawal of undistributed S
corporation earnings - - - (637,000) (454,000) (1,091,000)
Reorganization with $.01 par
value common stock - (80,000) 80,000 - - -
Common stock issued as
consideration for note
payable 223,464 2,000 998,000 - - 1,000,000
Common stock acquired
from officer as settlement
of balance due from officer
and retirement of such shares (36,000) - (180,000) - 180,000 -
Common stock issued
pursuant to initial public
offering (net of expense) 2,000,000 20,000 8,027,000 - - 8,047,000
Net income for the period
December 22, 1996 to
December 31, 1996 - - - 296,000 - 296,000
-------------- ---------- ------------ ------------ ----------- -------------
Balance at December 31, 1996 4,217,464 42,000 8,925,000 296,000 (454,000) 8,809,000
Common stock issued
pursuant to initial public
offering over-allotment
provisions 300,000 3,000 1,337,000 - - 1,340,000
Common stock acquired
from officer as settlement
of balance due from officer
and retirement of such
shares (101,562) (1,000) (453,000) - 454,000 -
Net loss for the year - - - (6,116,000) - (6,116,000)
-------------- ---------- ------------ ------------ ----------- -------------
Balance at December 31, 1997 4,415,902 44,000 9,809,000 (5,820,000) - 4,033,000
Non-Cash compensation expense - - 297,000 - - 297,000
Common stock issued
pursuant to conversion
of convertible notes offered
in private placement
(net of expense) 1,500,000 15,000 1,273,000 - - 1,288,000
Net loss for the year - - - (2,769,000) - (2,769,000)
-------------- ---------- ------------ ------------- ---------- -------------
Balance at December 31, 1998 5,915,902 $ 59,000 $ 11,379,000 $ (8,589,000) $ - $ 2,849,000
-------------- ---------- ------------ ------------ ----------- -------------
-------------- ---------- ------------ ------------ ----------- -------------
</TABLE>
See accompanying notes to financial statements
F-8
<PAGE>
INTELLICELL CORP.
Statements of Cash Flows
For the Years Ended December 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------------ ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 839,000 $ (6,116,000) $ (2,769,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 91,000 303,000 234,000
Loss on disposal of fixed assets - - 48,000
Non cash compensation Expense - - 297,000
Provision for doubtful accounts receivable 380,000 2,888,000 108,000
Provision for inventory reserves 410,000 607,000 190,000
Provision for doubtful notes receivable - 739,000 -
Change in net deferred tax asset (330,000) 330,000 -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (2,615,000) (5,474,000) 4,510,000
(Increase) decrease in inventories (3,532,000) 2,336,000 2,467,000
(Increase) decrease in deposits for purchases of inventory (1,443,000) 1,172,000 17,000
(Increase) decrease in other receivables (500,000) 500,000 -
(Increase) decrease in prepaid expenses and other current assets (246,000) (171,000) 228,000
(Increase) decrease in other assets 53,000 (35,000) -
Increase (decrease) in accounts payable and accrued expenses 177,000 (2,453,000) (2,400,000)
--------------- ----------------- -----------------
Net cash provided by (used in) operating activities (6,716,000) (5,374,000) 2,930,000
--------------- ----------------- -----------------
Cash flows from investing activities:
Collection of notes receivable 218,000 1,698,000 -
Collection of advances to officer 192,000 - -
Collection of loans to employees and third parties 211,000 - -
Acquisition of property and equiptment (111,000) (193,000) (318,000)
Proceeds from the sale of property and equiptment - - 40,000
--------------- ----------------- -----------------
Net cash provided by (used in) investing activities 510,000 1,505,000 (278,000)
--------------- ----------------- -----------------
Cash flows from financing activities:
Bank overdraft (payments) 916,000 (762,000) (250,000)
Payments on loans payable (1,490,000) - -
Distributions to stockholders (1,091,000) - -
Deferred financing costs (176,000) (112,000) 74,000
Advances under credit facility 43,923,000 80,096,000 26,133,000
Repayments under credit facility (43,923,000) (76,694,000) (29,535,000)
Proceeds from the sale of common stock 8,047,000 1,341,000 1,288,000
--------------- ----------------- -----------------
Net cash provided by (used in) financing activities 6,206,000 3,869,000 (2,290,000)
--------------- ----------------- -----------------
Net increase in cash - - 362,000
Cash - beginning of period - - -
--------------- ----------------- -----------------
Cash - end of period $ - $ - $ 362,000
--------------- ----------------- -----------------
--------------- ----------------- -----------------
</TABLE>
See accompanying notes to financial statements
F-9
<PAGE>
INTELLICELL CORP.
Statements of Cash Flows
(Continued)
<TABLE>
<CAPTION>
1996 1997 1998
------------------ ----------------- -----------------
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest $ 431,000 $ 444,000 $ 204,000
Income taxes 20,000 223,000 -
Common stock acquired from officer as settlement
of balance due from officer and retirement of such
shares 180,000 454,000 -
Conversion of trade receivable into notes receivable 555,000 2,295,000 859,000
Issuance of common stock as consideration for note payable 1,000,000 - -
Reorganization of common stock 80,000 - -
Note receivable issued for excess distribution 454,000 - -
Fair value of stock warrant dividends - 1,983,000 2,044,000
</TABLE>
See accompanying notes to financial statements
F-10
<PAGE>
INTELLICELL CORP.
Notes to Financial Statements
(Continued)
NOTE 1 -- THE COMPANY AND BASIS OF PRESENTATION
Intellicell Corp. (the "Company") was incorporated in California during March
1994, under the name Cellular Telecom Corporation. The Company is successor to
the wholesale distribution business of Cellular Telecom Partnership (the
"Partnership"), a California general partnership organized in 1991 to engage in
the retail and wholesale distribution of wireless (cellular) products and
accessories. In March 1994, the Partnership in effect transferred all of the
assets, subject to the liabilities (which exceeded the assets by $82,000), of
its wholesale distribution business to the Company in exchange for which the
partners of the Partnership received all of the outstanding shares of common
stock of the Company. The ownership percentages of each owner in the Partnership
and the Company before and immediately after this transaction were the same. As
such, the Company accounted for this transaction as a combination of entities
under common control similar to a pooling of interests. The Partnership, which
had the same ownership as the Company, continued its retail operations through
August 1996, at which time it was dissolved.
In October 1996, the Company effected a 10,150 for 1 stock split. The financial
statements give retroactive effect to this transaction.
In connection with the Company's initial public offering in December 1996, the
Company reorganized under the laws of the State of Delaware and changed its name
to Intellicell Corp. The Company's authorized capital stock consists of
15,000,000 shares of common stock, par value $.01 per share and 1,000,000 shares
of preferred stock, par value $.01 per share.
The Company has developed a customer base of more than 2,100 wholesalers,
carriers, agents, dealers and retailers in both the domestic and international
market place. The Company is engaged in the wholesale distribution of cellular
products and accessories. International sales were $4,985,000, $14,353,000 and
$2,237,000 for the years ended December 31, 1996, 1997 and 1998, respectively.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
INVENTORIES
Inventories, consisting of wireless handsets and accessories, are stated at
the lower of cost or market. Cost is determined using the weighted average
cost method. The Company has provided for an inventory reserve for
obsolescence based on estimated net realizable value. The amounts the Company
will ultimately realize could differ materially from the amounts estimated in
arriving at the reserves.
F-11
<PAGE>
INTELLICELL CORP.
Notes to Financial Statements
(Continued)
REVENUE RECOGNITION
Revenue is recognized when wireless communication equipment is shipped to
customers. The Company generally does not allow returns unless goods are
defective and warrantied by the manufacturer.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. The
lives used for depreciation range from three to seven years. Maintenance and
repairs that neither materially add to the value of the property or equipment or
prolong its life are expensed. Betterment's or renewals are capitalized when
incurred.
PROMOTIONAL
Advertising costs are expensed as incurred.
INCOME TAXES
The Company elected to be treated as an S corporation under the Internal Revenue
Code for the year ended December 31, 1995 and for the period January 1, 1996
through December 21, 1996. In lieu of corporate income taxes, the shareholders
of an S corporation are taxed on their proportionate share of the Company's
taxable income. Upon completion of its initial public offering in December 1996,
the Company terminated its election as an S corporation and became subject to
both federal and state income taxes. Therefore, no provision or liability for
federal or state income taxes has been included in the historical financial
statements through the termination of the Company's status as an S corporation.
See Note 9 for pro forma information regarding the income tax provision which
would have been recorded if the Company had been a taxable corporation, based on
the tax laws in effect during those periods.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 128, Earnings per Share (SFAS No. 128). SFAS No. 128
specifies the computation, presentation and disclosure requirements for earnings
per share and is effective for periods ending after December 15, 1997. The
statement requires the restatement of all prior period earnings per share (EPS)
data presented. The new standard requires a reconciliation of the numerator and
denominator of basic EPS computation to the numerator and denominator of the
diluted EPS computation. During the year ended December 31, 1997 the Company
adopted this statement and restated EPS for the prior year accordingly. Under
SFAS No. 128, pro forma earnings per share for 1996 changed from $0.14 to $0.15
per share.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist principally of trade
F-12
<PAGE>
INTELLICELL CORP.
Notes to Financial Statements
(Continued)
receivables. The Company extends credit to a substantial number of its
customers and performs ongoing credit evaluations of those customers'
financial condition while, as is customary in the industry, requiring no
collateral. Customers that have not been extended credit by the Company are
on a cash-on-delivery basis.
The Company maintains several bank accounts at two commercial banks. Accounts at
banks are insured by the Federal Deposit Insurance Corporation (FDIC) up to
$100,000. The amount in excess of the FDIC limit totaled $215,000 as of December
31, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENT
The carrying amounts of trade receivables, other current assets, trade accounts
payable, bank overdraft, revolving credit facility, accrued expenses and notes
receivable approximate fair value because of the short maturity of those
instruments.
AMORTIZATION OF INTANGIBLE ASSETS
Deferred financing costs are being amortized on a straight-line basis over
the term of the revolving credit facility.
Goodwill is being amortized on a straight-line basis, over a ten-year period.
However, in 1998, the Company recorded amortization of the remaining balance
of Goodwill.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Financial Accounting Standards Board Statement No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" (SFAS No. 121), the Company is required to recognize impairment
losses for long-lived assets used in operations and certain identifiable
intangibles when events or changes in circumstances indicate the carrying amount
of an asset may not be recoverable. SFAS No. 121 also requires that long-lived
assets and certain identifiable intangibles held for sale, other than those held
for discontinued operations, be reported at the lower of carrying amount or fair
value less cost of disposal. Adoption of the Statement and its application did
not have a material impact on the Company's financial position or results of
operations.
STOCK-BASED COMPENSATION
As of January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123),
which established a fair value method of accounting for stock-based compensation
plans. In accordance with SFAS No. 123, the Company has chosen to continue to
account for stock-based compensation utilizing the intrinsic value method
prescribed in Accounting Principles Board (APB) Opinion No. 25. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
fair market price of the Company's stock at the date of grant over the amount an
employee must pay to acquire the stock. Also, in accordance with SFAS No. 123,
the Company has provided footnote disclosure with respect to stock-based
employee compensation. The cost of stock-based employee compensation is measured
at the grant date based on the value of the award and recognizes this cost over
the service period. The value of the stock-based award is determined using a
pricing model whereby compensation cost is the excess of the fair market value
of the stock as determined by the model at grant date or other measurement date
over the amount an employee must pay to acquire the stock.
F-13
<PAGE>
INTELLICELL CORP.
Notes to Financial Statements
(Continued)
SEGMENT INFORMATION
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information", (SFAS No. 131) issued by the FASB. SFAS No. 131 requires that
public companies report certain information about operating segments, products,
services and geographical areas in which they operate and their major customers.
The Company is one business segment, the wholesale distribution of wireless
products and accessories.
RECLASSIFICATION
Certain items in 1997 have been reclassified to conform with the 1998
presentation.
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
F-14
<PAGE>
INTELLICELL CORP.
Notes to Financial Statements
(Continued)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1998
----------- -----------
<S> <C> <C>
Office equipment, furniture and fixtures $ 78,000 $ 197,000
Computer equipment 196,000 249,000
Computer software 31,000 31,000
Other equipment 54,000 51,000
Leasehold improvements 25,000 73,000
----------- -----------
384,000 601,000
Accumulated depreciation 98,000 242,000
----------- -----------
Balance $ 286,000 $ 359,000
----------- -----------
----------- -----------
</TABLE>
Depreciation expense was $21,000, $63,000 and $157,000 for the years ended
December 31, 1996, 1997 and 1998, respectively.
NOTE 4 -- NOTES RECEIVABLE
Notes receivable result from the conversion of aged accounts receivable into
interest bearing promissory notes with a fixed maturity. During 1997 and 1998,
the Company converted $2,295,000 and $859,000, respectively, of trade accounts
receivable into notes receivable. These notes are not collateralized, bear
interest at rates ranging from 0% to 10% and are repayable in periods ranging
from four to twenty-four months. At December 31, 1997 and 1998, notes receivable
were $934,000 and $1,521,000 respectively
F-15
<PAGE>
INTELLICELL CORP.
Notes to Financial Statements
(Continued)
with an associated allowance for doubtful notes receivable of $739,000 and
$1,521,000, respectively.
NOTE 5 --CREDIT FACILITY AND LOAN PAYABLE
CREDIT FACILITY
In October 1996, the Company entered into a revolving line of credit
agreement with a finance company, with an expiration in June 1998, and
provided 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 bore interest at
prime rate plus one and three-quarters percent (1.75%) per annum. At December
31, 1997, the Company was paying interest on advances at a rate of 10.25% per
annum. The credit facility was collateralized by substantially all of the
assets of the Company, prohibited the Company from paying dividends or
incurring additional indebtedness, except for trade indebtedness, and
required the Company to maintain a tangible net worth of $4,500,000 and
working capital of $1,500,000 subsequent to the closing of its initial
public offering.
In January 1998, the Company entered into a revolving line of credit
agreement with BankAmerica Business Credit, Inc. ("BankAmerica") which
provided 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 in the agreement. Borrowing under the
agreement accrued interest at prime rate plus one half of one percent (0.5%)
per annum. The credit facility was collateralized by substantially all of the
assets of the Company. The agreement prohibited 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 bore interest at the prime rate plus two and one-half percent
(2.5%) per annum. The revised credit agreement required 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 were included in the April
1998 revised agreement.
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 were not paid in full prior to August 24, 1998, the Company
would be obligated to pay an additional extension fee of $15,000, on September
4, 1998 and subsequent monthly extension fees of $25,000 on the first day of
each month thereafter until all obligations under the loan were paid in full.
All other significant restrictive covenants and prohibitions of the credit
agreement, as amended were 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.
On November 24, 1998, utilizing a portion of the funding of the Company's
convertible note private placement (the "Offering"), the Company terminated its
credit agreement with BankAmerica paying the remaining outstanding balance of
the borrowings.
F-16
<PAGE>
INTELLICELL CORP.
Notes to Financial Statements
(Continued)
LOAN PAYABLE
At December 31, 1996 and 1997, the Company had no notes payable. In December
1995, the Company converted $2,000,000 of its trade payable balance to its
largest supplier who is also a significant customer discussed in Note 8, into a
loan payable bearing interest at a rate of approximately 9.1% per annum and
payable in twelve monthly payments of $175,000. In July 1996, the Company issued
a $1,189,000 note payable in order to satisfy the then outstanding balance of
the loan payable. Of this amount, $1,000,000 automatically converted into
223,464 shares of common stock at $4.475 per share on the effective date of the
initial public offering which represented 5.3% of the then outstanding common
stock and the principal balance including accrued interest was repaid prior to
December 31, 1997. Such shares were subsequently divested (see Note 6).
NOTE 6 -- STOCKHOLDERS' EQUITY
COMMON STOCK
In March 1994, 100 shares (pre-stock split) of the Company's common stock were
issued to each of its two stockholders, one of whom is the Company's President
and former Chief Executive Officer (the "President"). In August 1995, pursuant
to a stockholders' agreement, the President purchased all of the shares owned by
the other stockholder for an aggregate of $115,000 and agreed to assume all
guarantees made to suppliers by the other stockholder on behalf of the Company.
In connection therewith goodwill in the amount of $100,000 was recorded for the
excess of the amount paid over the proportionate share of the net assets
obtained by the President.
In December 1996, the Company consummated its initial public offering of
2,000,000 shares of common stock at $5.00 per share, with net proceeds to the
Company (after underwriting discounts, commissions and offering expenses) of
$8,047,000 ($9,347,000 including the exercise of the underwriter's over
allotment option for 300,000 shares in January 1997).
In 1996, on the effective date of the Company's initial public offering,
$1,000,000 of the principal amount of a note payable (see Note 5) was
automatically converted into 223,464 shares of common stock. Additionally, the
Company acquired and retired 36,000 shares of common stock from the President as
settlement of $180,000 due from such officer.
During 1997 the President repaid 1996 excess S corporation distributions in the
amount of $454,000 by delivering to the Company 101,562 shares of the Company's
common stock owned by him. These shares were subsequently cancelled (see Note
7).
PRIVATE PLACEMENT OF CONVERTIBLE NOTES
In November 1998, the Company consummated the Offering with an investor group
(the "Investor Group") 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 were convertible, at the option of
the Company and upon ratification of the Offering by the Company's stockholders,
into 1,500,000 units (the "Unit"). Each Unit consisted 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 of common stock and
warrants to purchase 1,000,000 shares of common stock. Upon conversion of the
notes, the Company paid the accrued interest in cash.
The 1,000,000 warrants have a term of three years and are exercisable at any
time by the warrant-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.
On December 30, 1998, the stockholders of the Company ratified the Offering and
as a result, the notes were converted into 1,500,000 shares of common stock and
the warrants described above were issued. On March 15, 1999, the warrant
holders exercised the warrants (see Note 13).
MANAGEMENT
The Company appointed a new Chief Executive Officer, with the former Chief
Executive Officer, continuing to hold the titles of President and Chairman of
the Board. This Chief Executive Officer will receive a salary of $50,000 per
year.
The Company has extended the employment agreement with 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, the President
has agreed to a lock-up agreement that restricts the amount of shares that he
can sell under certain circumstances.
F-17
<PAGE>
INTELLICELL CORP.
Notes to Financial Statements
(Continued)
REPRICING OF WARRANTS AND NEW WARRANT DIVIDEND
In November 1997, the Company declared a dividend in the form of a warrant to
its existing stockholders as of December 1997 (except the Company's President
and Chairman). 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 the Offering, the Board of
Directors agreed to reprice these warrants to an exercise price of $1 per share.
In addition, existing stockholders of record as of February 16, 1999 (other than
the President and Chairman and the Investor Group) 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 common stock trade for a
period, as defined, above $2.00 per share. The repricing of the existing
warrants and issuance of the new warrants were ratified by the stockholders
on December 30, 1998. The warrants were valued at a total of $2,044,000
(based on Black-Scholes Model), which had no impact on the Company's results
of operations for the year ended December 31, 1998.
STOCK OPTIONS
Included in the options granted under the Company's stock option plans (the
"Plans"), the Company on March 5, 1998, granted five-year options to purchase an
aggregate of 300,000 shares of common stock under the 1998 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 two
outside directors of the Company and to a financial advisor. These options vest
in one year. A director subsequently agreed to the rescission and
cancellation of his granted 100,000 options prior to the options being vested.
In conjunction with the Offering, the Company issued 100,000 options to the
director who rescinded the 100,000 options discussed above, but at the lower
exercise price of $1 per share and repriced the exercise price to $1 for the
100,000 options previously granted to the other outside director. The Company
paid its financial advisor $50,000 upon the closing of the offering and
issued 150,000 warrants to purchase 150,000 shares of common stock at an
exercise price of $1, with the 100,000 options granted to the financial
advisor in March 1998 being rescinded and cancelled. On December 30, 1998,
these transactions were ratified by the stockholders. The new Chief Executive
Officer as described above received options to purchase 200,000 shares of
common stock at $1 per share. In addition, a new board member received
200,000 options of common stock at an exercise price of $1 per share. The
Company also granted options to purchase 200,000 shares of common stock as a
finders fee to an individual at an exercise price of $1 per share. All of the
foregoing 600,000 options were ratified by the stockholders on December 30,
1998. Of the options issued, 5/6ths will vest upon issuance, with the
remaining options of common stock vesting pro rata based on exercise and
redemption of the 1,000,000 Unit warrants. The 600,000 options were valued at
$486,000, of which non-cash compensation expense of $135,000 was recognized
for the options granted to an outside director that vested during 1998.
The Company accounted for the granted and non-cancelled options to outside
directors under the provisions of SFAS No. 123. The options vest in one year.
Non-cash compensation expense of $162,000 (based on Black Scholes Model) for
this was recognized during the year ended December 31, 1998.
F-18
<PAGE>
INTELLICELL CORP.
Notes to Financial Statements
(Continued)
STOCK OPTION PLANS
In October, 1996 and March, 1998 the Company adopted two stock option plans (the
"1996 Plan" and the "1998 Plan", the "Plans"), pursuant to which as amended,
options to purchase up to 1,000,000 shares ,cumulatively of common stock may be
granted as either incentive stock options ("ISOs") under the Internal Revenue
Code of 1986, as amended, or nonqualified stock options. ISOs may be granted
under the Plans to employees and officers of the Company. Nonqualified stock
options may be granted to consultants, directors (whether or not they are
employees), employees or officers of the Company. The Plans are administered by
a committee of the Board of Directors which, within the limitations of the
F-19
<PAGE>
INTELLICELL CORP.
Notes to Financial Statements
(Continued)
Plans, determine the persons to whom options will be granted, the number of
shares to be covered by each option, whether the options are intended to be
ISOs, the duration and rate of exercise of each option, the exercise price and
manner of exercise, and the time, manner and form of payment upon exercise of an
option. Options granted under the Plans may not be granted at a price less than
the fair market value of the common stock on the date of grant and will expire
not more than ten years from the date of grant.
Options to purchase Common Stock of the Company granted under the Plans were
280,750, 102,000 and 500,000 in 1996, 1997 and 1998, respectively, with such
options granted at the closing market value at the date of grant. Of the options
granted under the Plans, options forfeited were none, 103,000 and 288,000 in
1996, 1997 and 1998, respectively.
OTHER STOCK OPTIONS
In October 1995, the President granted, to an employee, options to purchase
217,000 of his (split adjusted) shares of common stock at $1.00 per share (see
Note 8). The options will vest as to one-third in each of October 1997, 1998 and
1999. Management believes that the exercise price of these options reflects the
fair value of the stock on the date of grant, and accordingly, no compensation
has been recorded. All of these options remain outstanding at December 31, 1998.
In addition, on October 31, 1996, the Company issued to other individuals
options to purchase 65,000 shares of common stock at $5.00 per share. All of
these options remain outstanding at December 31, 1998.
The Company applies APB No. 25 and related interpretations in accounting for its
options. Under APB No. 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the measurement
date, no compensation cost is recorded.
SFAS No. 123, requires the Company to provide pro forma information regarding
net income and earnings per share as if compensation cost for the Company's
stock option plans had been determined in accordance with the fair value based
method prescribed in SFAS No. 123. The Company estimates the fair value of each
stock option at the grant date by using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants in 1996:
dividend yield of 0 percent; expected volatility of 40 percent; risk-free
interest rate of 5.68 percent; and expected lives of 2 years, for grants in
1997: dividend yield of 0 percent; expected volatility of 17 percent; risk-free
interest rate varying between 5.5 and 5.9 percent; and expected lives of 2 years
and for grants in 1998: dividend yield of 0 percent; expected volatility of 180
percent; risk free interest rate varying between 4.25 and 4.55 percent; and
expected lives of 2 years.
Had compensation cost for the Company's stock option grants to employees been
determined based on the fair value at the grant date consistent with the method
of SFAS No. 123. The Company's net income (loss) and earnings (loss) per share
for 1996, 1997 and 1998 would have been reduced (increased) to the pro forma
amounts indicated below:
F-20
<PAGE>
INTELLICELL CORP.
Notes to Financial Statements
(Continued)
<TABLE>
<CAPTION>
1996 1997 1998
-------- ----------- ------------
<S> <C> <C> <C>
Net income (loss)
As reported $839,000 $(6,116,000) $ (2,769,000)
Pro forma $807,000 $(6,252,000) $ (2,948,000)
Basic earnings (loss) per share
As reported $ 0.40 $(1.37) $ (0.63)
Pro forma $ 0.38 $(1.40) $ (0.67)
Diluted earnings (loss) per share
As reported $ 0.40 $(1.37) $ (0.63)
Pro forma $0.38 $(1.40) $ (0.67)
</TABLE>
Due to the fact that the Company's stock option programs vest over many years
and additional awards are made each year, the above pro forma numbers are not
indicative of the financial impact had the disclosure provisions of SFAS No. 123
been applicable to all years of previous option grants.
Option valuation models require the input of highly subjective assumptions.
Because the Company's stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate in management's
opinion, the existing model does not necessarily provide a reliable single
measure of the fair value of its stock options.
F-21
<PAGE>
INTELLICELL CORP.
Notes to Financial Statements
(Continued)
A summary of the status of the Company's stock options and related information
for the years ended December 31, 1997 and 1998 is presented below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER PRICE PER EXERCISE
OF SHARES SHARE PRICE
---------- --------- --------
<S> <C> <C> <C>
Outstanding at January 1, 1997 345,750 $5.00-$5.50 $5.02
Granted 102,000 $6.63-$8.25 $7.45
Forfeited (103,000) $5.00 $5.00
--------- ----------- ------
Balance at December 31, 1997 344,750 $5.00-$8.25 $5.74
Granted 1,200,000 $0.38-$4.31 $1.19
Cancelled (200,000) $3.81 $3.81
Forfeited (188,000) $5.00-$8.25 $5.46
--------- ----------- ------
Balance at December 31, 1998 1,156,750 $0.38-$5.00 $1.48
---------- ----------- ------
---------- ----------- ------
</TABLE>
At December 31, 1996, 1997 and 1998 there were 114,250, 115,250 and 508,250
options to purchase common stock of the Company available for grant under the
plans, respectively. At December 31, 1998, there were 804,501 of such options
exercisable at prices ranging from $1.00 to $5.50 with a weighted average
exercise price of $1.52, and a weighted average fair value of options granted
during the year of $0.76.
The following schedule summarizes information about fixed stock options
outstanding at December 31, 1998.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER EXERCISE REMAINING NUMBER EXERCISE
DATE OF GRANT OF SHARES PRICE LIFE (YEARS) OF SHARES PRICE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
October 31, 1996 144,750 $5.00 2.8 96,500 $5.00
October 31, 1996 12,000 $5.50 2.8 8,000 $5.50
January 15, 1998 50,000 $1.00 4.0 -- --
October 14, 1998 120,000 $0.38 4.8 -- --
December 30, 1998 830,000 $1.00 8.6 700,001 $1.00
------- ----- --- ------- -----
1,156,750 $1.48 7.2 804,501 $1.52
--------- ----- --- ------- -----
--------- ----- --- ------- -----
</TABLE>
WARRANTS
F-22
<PAGE>
INTELLICELL CORP.
Notes to Financial Statements
(Continued)
Pursuant its then outstanding revolving line of credit agreement, the Company
issued in October 1996 to its former finance company warrants to purchase 15,000
shares of common stock at an exercise price of $5.00 per share. The warrants are
exercisable after one year from the grant date and have an expiration date of
December 2001. The above mentioned warrants were outstanding at December 31,
1998.
In connection with the Company's initial public offering in December 1996,
warrants to purchase 200,000 shares of common stock at an exercise price of
$5.50 per share were sold to the underwriter of such offering, at nominal cost.
Such warrants were outstanding at December 31, 1998.
On November 18, 1997, the Company declared the payment of a dividend to its
shareholders in the form of a warrant to purchase Common Stock of the
Company. Record owners of Common Stock as of December 10, 1997, received one
warrant for every two shares of Common Stock held. Each warrant entitles the
holder to purchase one share of Common Stock at $4.00 per share for a three
year period, subject to adjustment in certain circumstances. The warrants are
redeemable by the Company, upon notice of not less than 30 days at $.10 per
warrant in the event the closing bid quotation of the Common Stock on all 20
of the trading days ending on the third day prior to the day on which the
Company gives notice has been at least $7.00 per share; provided however that
no such right of redemption or exercise shall exist prior to the time that
such shares of Common Stock underlying the warrants have been registered
under the Securities Act of 1933, as amended. The President of the Company
has agreed to waive his rights to receive 946,219 warrant dividends on the
1,892,438 shares of Common Stock held by him. The warrants were valued at a
total of $1,983,000 (based on the Black-Scholes Model), which had no impact
on the Company's results of operations for the year ended December 31, 1997.
In December 1998, the stockholders ratified the Offering, which included the
repricing of these warrants' exercise price from $4.00 to $1.00.
The table below summarizes the transactions related to the Company's warrants to
purchase common stock:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- ---------
<S> <C> <C>
Warrants declared at December 17, 1996 215,000 $5.47
--------- ---------
Balance at December 31, 1996 215,000 $5.47
Warrants declared December 10, 1997 1,261,732 $1.00
--------- ---------
Balance at December 31, 1997 1,476,732 $1.65
Warrants declared December 31, 1998 2,411,732 $1.00
--------- ---------
F-23
<PAGE>
INTELLICELL CORP.
Notes to Financial Statements
(Continued)
<S> <C> <C>
Balance at December 31, 1998 3,888,464 $1.25
--------- ---------
--------- ---------
</TABLE>
All warrants are exercisable as of December 31, 1998.
COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
-----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic loss per share:
Net loss attributable to common stockholders $(2,769,000) 4,415,902 $ (0.63)
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
Options and warrants to purchase 5,045,214 shares were outstanding at December
31, 1998, but were not included in the computation of diluted loss per common
share because the effect would be antidilutive.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic loss per share:
Net loss attributable to common stockholders $(6,116,000) 4,451,182 $ (1.37)
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
Options and warrants to purchase 1,821,482 shares were outstanding at December
31, 1997, but were not included in the computation of diluted loss per common
share because the effect would be antidilutive.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic earnings per share:
Historical net income attributable to common
stockholders $839,000 2,113,674 $ 0.40
Effect of dilutive securities:
Weighted average options outstanding at end of year -- 967 --
------------ ----------- -----------
Diluted earnings per share:
Historical income available to common stockholders $839,000 2,114,641 $ 0.40
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
F-24
<PAGE>
INTELLICELL CORP.
Notes to Financial Statements
(Continued)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
(PRO FORMA)
----------- ------------- ---------
<S> <C> <C> <C>
Basic earnings per share:
Pro forma net income attributable to common
stockholders $315,000 2,113,674 $ 0.15
Effect of dilutive securities:
Weighted average options outstanding at end of year -- 967 --
------------ ----------- -----------
Diluted earnings per share:
Pro forma income available to common stockholders $315,000 2,114,641 $ 0.15
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
Options to purchase 212,000 shares of common stock at $5.50 per share were
outstanding during the second half of 1996 and were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares. The options,
which expire in 2001, remained outstanding at the end of the year.
NOTE 7 -- DUE FROM OFFICER
During 1996, the Company made excess S corporation distributions of $454,000 to
the President, who then owned 100% of the Company's outstanding stock. As a
result, the Company reflected as "Due from officer", a component of
stockholders' equity, the amount of $454,000 at December 31, 1996. The President
repaid this amount by the delivery of 101,562 shares of the Company's common
stock owned by him, to the Company. Such shares were subsequently cancelled (see
Note 6).
NOTE 8 -- COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
OPERATING LEASES
In November 1997, the Company began operations in a 12,800 square foot leased
warehouse and office facility in Miami, Florida. This lease was assigned to a
third party in June 1998. The lease had an initial monthly rental of $7,441 with
annual escalation. At the end of the initial lease term of five years and two
months, the Company had an option to extend the lease for an additional five
years.
In February 1998, the Company moved its executive offices and warehouse to a
36,000 square foot leased facility in Chatsworth, California. The lease is for a
three year term beginning February 1, 1998 and provides for an initial monthly
rental of $18,495, with annual escalation based on the Consumer Price Index. At
the end of the initial lease term, the Company has an option to extend the lease
for a period of three years.
F-25
<PAGE>
INTELLICELL CORP.
Notes to Financial Statements
(Continued)
In May 1998, the Company subleased approximately one-third of its Chatsworth
facility for $6,694 per month through January 31, 2001 to a third party.
The Company is obligated under long-term operating leases for office and
warehouse facilities in Chatsworth, California through the year 2001. Future
minimum lease payments due under non-cancelable operating lease agreements are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING SUBLEASE INCOME
DECEMBER 31, AMOUNT INCOME
------------- ----------------- ---------------
<S> <C> <C>
1999 203,445 80,328
2000 203,445 80,328
2001 18,495 6,694
</TABLE>
Rent expense, net of sublease rental income for the years ended December 31,
1996, 1997 and 1998, was $84,000, $124,000 and $202,000, respectively.
Under the assignment of the Miami property, if the assignee defaults, the
Company will be obligated under the terms of the lease.
EMPLOYMENT AGREEMENTS AND OFFICERS' SALARIES
During the years ended December 31, 1996, 1997 and 1998, officers' salaries
aggregated $107,000, $297,000 and $352,000, respectively.
The Company's Board of Directors has extended the employment agreement of 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, the president has agreed to a lock-up agreement that restricts the
amount of shares that he can sell.
The Company has entered into a three-year agreement, in January 1998, with an
officer and director which provides for an annual base compensation of $120,000.
The employment agreement contains a confidentiality provision, and a covenant
not to compete with the Company for a period of one year following termination
of employment. The agreement provides if the employee is terminated without
cause (including as a result of a change in control), the employee will be paid
an amount equal to six months of his annual salary and bonus in consideration of
his agreement not to compete with the Company.
The Company also has an employment agreement with an employee which commenced in
December 1996, and provides for a three-year term and annual compensation of
$132,000. This employee has options to purchase 217,000 shares of the
President's common stock (see Note 6).
F-26
<PAGE>
INTELLICELL CORP.
Notes to Financial Statements
(Continued)
MAJOR CUSTOMERS
During the years ended December 31, 1996 and 1997, a single customer accounted
for 16% and 12% of the Company's sales, respectively. The Company made nominal
sales in 1998 to this customer.
During the years ended December 31, 1996, 1997 and 1998, a second customer, who
is also the largest supplier discussed below and was a debt/equity holder until
1997 accounted for 17%, 11% and 6% of the Company's sales, respectively.
CONCENTRATION OF SUPPLIERS
The Company is dependent on third-party equipment manufacturers and distributors
for all of its supply of cellular telephones and accessories. One supplier, who
is also the second largest customer discussed above, and a debt/equity holder
until 1997, accounted for 26%, 12% and 6% of the Company's purchases during the
years ended December 31, 1996, 1997 and 1998, respectively. Such manufacturers
and distributors may at any time impose price increases or otherwise determine
not to continue to sell product to the Company on commercially reasonable terms,
or at all. A change in suppliers could cause a delay in the supply of product
and a possible loss of sales, which may adversely affect the Company's operating
results. Although there are a limited number of suppliers, management believes
other suppliers could provide sufficient quantities of products on commercially
reasonable terms.
The Company obtains substantially all of its proprietary accessory products from
manufacturers in Taiwan and is dependent on such manufacturers to provide
sufficient quantities of products on favorable terms. Any change in suppliers
may cause a delay in sales which would adversely affect operating results.
SUPPLIER/CUSTOMER TRANSACTIONS
Due to the limited supply of merchandise and the nature of the competitive
environment, the Company may purchase and sell inventory from/to the same
supplier/customer. These types of same supplier/customer transactions are often
at low gross profit margins. Such transactions are included in sales and
amounted to approximately $5,300,000, $1,900,000 and $8,957,000 for the years
ended December 31, 1996, 1997 and 1998, respectively.
LITIGATION
The Company is involved in various litigation matters that have resulted from
the normal course of business. In the opinion of Management, the aggregate
exposure or benefits of these matters will not have a material effect on the
Company's financial statements.
F-27
<PAGE>
INTELLICELL CORP.
Notes to Financial Statements
(Continued)
NOTE 9 --INCOME TAXES (BENEFIT)
In December 1996, as a result of the Company's initial public offering, its
election to be treated as an S corporation for federal and California tax
purposes was terminated. As an S corporation, the Company's income was subject
to tax at the stockholder level, not the corporate level. Accordingly, the
accompanying financial statements include unaudited pro forma adjustments for
income taxes required to be provided had the Company's S corporation status not
been in effect. The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1997 1998
(PRO FORMA,
UNAUDITED)
----------- --------- ---------
<S> <C> <C> <C>
Current:
Federal $ 415,000 $ -- $ --
State 113,000 -- --
--------- --------- ---------
528,000 -- --
--------- --------- ---------
Deferred:
Federal (271,000) 280,000 --
State (41,000) 54,000 --
--------- --------- ---------
(312,000) 334,000 --
--------- --------- ---------
Pro forma taxes on income $ 216,000 $ -- --
--------- --------- ---------
--------- --------- ---------
Provision for income taxes $ -- $ 334,000 --
--------- --------- ---------
--------- --------- ---------
</TABLE>
Income tax expense (benefit) differed from the amounts computed by applying the
statutory federal income tax rate of 34% as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1997 1998
(PRO FORMA,
(UNAUDITED)
----------- ----------- ----------
<S> <C> <C> <C>
Income taxes at the federal statutory rate $181,000 $(1,966,000) $ (941,000)
State taxes, net of federal taxes 31,000 (338,000) (50,000)
Nondeductible expenses 4,000 12,000 150,000
Adjustment to deferred tax asset --- --- 72,000
Less: valuation allowance -- 2,626,000 769,000
--------- ----------- ----------
F-28
<PAGE>
INTELLICELL CORP.
Notes to Financial Statements
(Continued)
<S> <C> <C> <C>
As per statements of operations $216,000 $ 334,000 $ ---
--------- ----------- ----------
--------- ----------- ----------
</TABLE>
As a result of the Company's change in tax status in December 1996, the Company
implemented Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." As a result of its implementation, the Company recorded an income
tax benefit of $308,000 for the year ended December 31, 1996, which included
recognition of a net deferred tax asset of $330,000 and a tax expense in that
year of $22,000. No valuation allowance was established at December 31, 1996 as
management believed it was more likely than not the net deferred tax asset would
be realized.
Deferred income taxes reflect the net effect of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Management established a 100%
valuation allowance as of December 31, 1997, because it cannot be determined if
it is more likely than not that the net deferred tax asset will be realized in
future periods. Significant components of the Company's deferred tax position
are as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax asset:
Inventory reserves $ 219,000 $ 236,000
Accounts and notes receivable allowances 1,368,000 706,000
Net operating loss carryforward 1,017,000 2,437,000
Other 41,000 21,000
------------ ------------
Deferred tax asset 2,645,000 3,400,000
Deferred tax (liability):
Depreciation (19,000) (5,000)
------------ ------------
Net deferred tax asset 2,626,000 3,395,000
Valuation allowance (2,626,000) (3,395,000)
------------ ------------
Net deferred tax asset $ -- $ --
------------ ------------
------------ ------------
</TABLE>
For tax purposes the Company has available a federal net operating loss
carryforwards of approximately $6,602,000. The loss carryforwards will expire
through 2018. For state purposes, the Company has available net operating loss
carryforwards of approximately $3,300,000.
NOTE 10 -- RELATED PARTY TRANSACTIONS
During the years ended December 31, 1996, 1997 and 1998, the Company sold
approximately $423,000, $254,000 and $317,000, respectively, of products to a
company, that is owned by the President's brother. In December 1996, the Company
granted options to purchase 35,000 shares of common stock at an exercise price
of $5.00 per share to the President's brother. On December 31, 1998, the Company
was
F-29
<PAGE>
INTELLICELL CORP.
Notes to Financial Statements
(Continued)
owed $139,000 by the company owned by the President's brother. This company
has agreed to a payment plan starting in March 1999, to settle this debt of
$10,000 per month bearing interest at 7% per annum.
A company owned by the President's cousins purchased cellular products from the
Company in the amounts of $87,000, $1,455,000 and $1,576,615 for the years ended
December 31, 1996, 1997 and 1998, respectively. The Company purchased cellular
products from this entity in the amount of $299,000 and $817,000 in 1997 and
1998, respectively and made no purchases in 1996.
During the year ended 1998, the Company paid legal fees to law firm where a
director is a partner in the amount of $28,518.
NOTE 11 -- 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 consisting primarily of
professional fees, including the fees of its prior and current auditors, fees of
special counsel and a special auditor retained by the Company's Audit Committee.
In August 1997, the Company entered into a non-binding letter of intent to
acquire all of the outstanding stock of Pacific Unplugged Communications, Inc.
and Unplugged de Mexico (Unplugged). In December 1997, the Company terminated
its negotiations with Unplugged. As a result the Company expensed $276,000 of
professional and legal fees incurred associated with the proposed acquisition,
in 1997 and $74,000 in 1998.
NOTE 12 -- GEOGRAPHIC AREA INFORMATION
The Company sells its products to customers in foreign countries. The
following summarized the sales to customers outside the United States:
<TABLE>
<CAPTION>
For the year Ending
December 31,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Mexico $ 560,000 $ 65,000 $1,718,000
Peru 239,000 6,723,000 68,000
Israel 1,341,000 571,000 30,000
Paraguay 1,782,000 1,825,000 88,000
Puerto Rico 348,000 325,000 109,000
Brazil 356,000 3,260,000 16,000
Colombia 59,000 388,000 -
Venezuela 26,000 882,000 1,000
Others 274,000 314,000 207,000
----------- ------------ ----------
$ 4,985,000 $ 14,353,000 $2,237,000
----------- ------------ ----------
----------- ------------ ----------
</TABLE>
F-30
<PAGE>
INTELLICELL CORP.
Notes to Financial Statements
(Continued)
NOTE 13 -- SUBSEQUENT EVENTS
EXERCISE OF WARRANTS FROM OFFERING
On March 15, 1999, the Investor Group related to the Offering (see Note 6) of
$1,500,000 convertible notes, exercised 1,000,000 warrants for an aggregate
of $1,000,000. The pro forma effect of the exercise of these Unit warrants on
the condensed balance sheet as of December 31, 1998 is as follows:
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------------
As Reported Adjustments Pro Forma
-------------------- ------------------ ------------------
<S> <C> <C> <C>
ASSETS
Total current assets $ 3,819,000 $ 1,000,000 $ 4,819,000
-------------------- ------------------ ------------------
Total assets 4,178,000 1,000,000 5,178,000
-------------------- ------------------ ------------------
-------------------- ------------------ ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Total current liabilities $ 1,329,000 $ 1,329,000
Stockholders' equity
Preferred Stock - -
Common Stock 59,000 10,000 69,000
Additional paid-in capital 13,362,000 990,000 14,352,000
Accumulated deficit (10,572,000) - (10,572,000)
-------------------- ------------------ ------------------
Total stockholders' equity 2,849,000 1,000,000 3,849,000
-------------------- ------------------ ------------------
Total liabilities and stockholders' equity $ 4,178,000 $ 1,000,000 $ 5,178,000
-------------------- ------------------ ------------------
-------------------- ------------------ ------------------
</TABLE>
F-31
<PAGE>
INTELLICELL CORP.
Schedule II -- Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
ADDITIONS
BALANCE ----------------------------- BALANCE
AT THE CHARGED TO CHARGED TO AT THE
BEGINNING COST AND OTHER DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (RECOUPMENTS) THE PERIOD
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the year ended
December 31, 1996:
Allowance for doubtful
accounts receivable $200,000 $380,000 $ -- $152,000(a) $428,000
Reserve for inventory
obsolescence 32,000 410,000 -- -- 442,000
For the year ended
December 31, 1997:
Allowance for doubtful
accounts receivable $428,000 $2,888,000 $ -- $619,000(a) $2,697,000
Allowance for doubtful
notes receivables -- 739,000 -- -- 739,000
Reserve for inventory
obsolescence 442,000 607,000 -- 499,000(b) 550,000
For the year ended
December 31, 1998:
Allowance for doubtful
accounts receivable $2,697,000 $162,000 $ (859,000)(d) $1,749,000(a) $251,000
Allowance for doubtful
notes receivables 739,000 -- 859,000(d) (77,000)(c) 1,521,000
Reserve for inventory
obsolescence 550,000 190,000 -- (148,000)(b) 592,000
</TABLE>
(a) Accounts written off
(b) Inventory written off
(c) Accounts collected of $54,000, accounts written off of $23,000
(d) Reclassification of reserve
F-32
<PAGE>
1998 STOCK OPTION PLAN
OF
INTELLICELL CORP.
1. Purpose
Intellicell Corp. (the "Company") desires to attract and retain the best
available talent and encourage the highest level of performance in order to
continue to serve the best interests of the Company, and its stockholders. By
affording key personnel the opportunity to acquire proprietary interests in the
Company and by providing them incentives to put forth maximum efforts for the
success of the business, the 1998 Stock Option Plan of Intellicell Corp. (the
"1998 Plan") is expected to contribute to the attainment of those objectives.
The word "Subsidiary" or "Subsidiaries" as used herein, shall mean any
corporation, fifty percent or more of the voting stock of which is owned by the
Company.
2. Scope and Duration
Options under the 1998 Plan may be granted in the form of incentive stock
options ("Incentive Options") as provided in Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), or in the form of nonqualified stock
options ("Non-Qualified Options"). (Unless otherwise indicated, references in
the 1998 Plan to "options" include Incentive Options and Non-Qualified Options.)
The maximum aggregate number of shares as to which options may be granted from
time to time under the 1998 Plan is 540,000 shares of the Common Stock of the
Company ("Common Stock"), which shares may be, in whole or in part, authorized
but unissued shares or shares reacquired by the Company. If an option shall
expire, terminate or be surrendered for cancellation for any reason without
having been exercised in full, the shares represented by the option or portion
thereof not so exercised shall (unless the 1998 Plan shall have been terminated)
become available for subsequent option grants under the 1998 Plan. As provided
in paragraph 13, the 1998 Plan shall become effective on February 20, 1998, and
unless terminated sooner pursuant to paragraph 14, the 1998 Plan shall terminate
on February 19, 2008, and no option shall be granted hereunder after that date.
3. Administration
The 1998 Plan shall be administered by the Board of Directors of the
Company. The Board of Directors shall have plenary authority in its discretion,
subject to and not inconsistent with the express provisions of the 1998 Plan, to
grant options covered by each option, the term of each option, the persons to
whom, and the time or times at which, options shall be granted and the number of
shares to be covered by each option; to designate options as Incentive Options
or Non-Qualified Options; to interpret the 1998
<PAGE>
plan; to prescribe, amend and rescind rules and regulations relating to the 1998
Plan; to determine the terms and provisions of the option agreements (which need
not be identical) entered into in connection with options under the 1998 Plan;
and to make all other determinations deemed necessary or advisable for the
administration of the 1998 Plan. In order to comply with Section 162(m) of the
Code, the Board of Directors may delegate to the Company's 162(m) committee the
authority to determine the number and conditions of options granted to officers
of the Company. The Board of Directors may delegate to one or more of its
members or to one or more agents such administrative duties as it may deem
advisable, and the Board of Directors, any committee or any person to whom it
has delegated duties as aforesaid may employ one or more persons to render
advice with respect to any responsibility the Board of Directors or such
committee or such person may have under the 1998 Plan.
4. Eligibility; Factors to be Considered in Granting Options
Incentive Options shall be limited to persons who are employees of the
Company or its present and future Subsidiaries and at the date of grant of any
option are in the employ of the Company or its present and future Subsidiaries.
In determining the employees to whom Incentive Options shall be granted and the
number of shares to be covered by each Incentive Option, the Board of Directors
shall take into account the nature of employees' duties, their present and
potential contributions to the success of the Company and such other factors as
it shall deem relevant in connection with accomplishing the purposes of the 1998
Plan. An employee who has been granted an option or options under the 1998 Plan
may be granted an additional option or options, subject, in the case of
Incentive Options, to such limitations as may be imposed by the Code on such
options. Except as provided below, a Non-Qualified Option may be granted to any
person, including, but not limited to, employees, independent agents,
consultants and attorneys, who the Board of Directors believes has contributed,
or will contribute, to the success of the Company. Options covering no more than
432,000 shares of Common Stock may be granted to any one eligible person in any
twelve month period.
5. Option Price
The purchase price of the Common Stock covered by each option shall be
determined by the Board of Directors but in no event shall the purchase price be
less than 100% of the Fair Market Value (as defined in paragraph 15 below) of a
share of the Common Stock on the date on which the option is granted. Such price
shall be subject to adjustment as provided in paragraph 12 below. The Board of
Directors shall determine the date on which an option is granted; in the absence
of such a determination, the date on which the Board of Directors adopts a
resolution granting an option shall be considered the date on which such option
is granted.
6. Term of Options
The term of each option shall be not more than ten years from the date of
grant, as the Board of Directors shall determine, subject to earlier termination
as provided in paragraphs 10 and 11 below.
7. Exercise of Options
2
<PAGE>
(a) Subject to the provisions of the 1998 Plan and unless otherwise
provided in the option agreement, options granted under the 1998 Plan shall
become exercisable as determined by the Board of Directors. In its discretion,
the Board of Directors may, in any case or cases, prescribe that options granted
under the 1998 Plan become exercisable in installments or provide that an option
may be exercisable in full immediately upon the date of its grant. The Board of
Directors may, in its sole discretion, also provide that an option granted
pursuant to the 1998 Plan shall immediately become exercisable in full upon the
happening of any of the following events; (i) the first purchase of shares of
Common Stock pursuant to a tender offer or exchange offer (other than an offer
by the Company) for all, or any part of, the Common Stock, (ii) the approval by
the stockholders of the Company of an agreement for a merger in which the
Company will not survive as an independent, publicly owned corporation, a
consolidation, or a sale, exchange or other disposition of all or substantially
all of the Company's assets, (iii) with respect to an employee, on his 65th
birthday, or (iv) with respect to an employee, on the employee's involuntary
termination from employment, except as provided in Section 10 herein. In the
event of a question or controversy as to whether or not any of the events
hereinabove described has taken place, a determination by the Board of Directors
that such event has or has not occurred shall be conclusive and binding upon the
Company and participants in the 1998 Plan.
(b) Any option at any time granted under the 1998 Plan may contain a
provision to the effect that the optionee (or any persons entitled to act under
Paragraph 11 hereof) may, at any time at which Fair Market Value is in excess of
the exercise price and prior to exercising the option, in whole or in part,
request that the Company purchase all or any portion of the option as shall then
be exercisable at a price equal to the difference between (i) an amount equal to
the option price multiplied by the number of shares subject to that portion of
the option in respect of which such request shall be made and (ii) an amount
equal to such number of shares multiplied by the fair market value of the
Company's Common Stock (within the meaning of Section 422 of the Code and the
treasury regulations promulgated thereunder) on the date of purchase. The
Company shall have no obligation to make any purchase pursuant to such request,
but if it elects to do so, such portion of the option as to which the request is
made shall be surrendered to the Company. The purchase price for the portion of
the option to be so surrendered shall be paid by the Company, at the election of
the Board of Directors either in cash or in shares of Common Stock (valued as of
the date and in the manner provided in clause (ii) above), or in any combination
of cash and Common Stock, which may consist, in whole or in part, of shares of
authorized but unissued Common Stock or shares of Common Stock held in the
Company's treasury. No fractional share of Common Stock shall be issued or
transferred and any fractional share shall be disregarded. Shares covered by
that portion of any option purchased by the Company pursuant hereto and
surrendered to the Company shall not be available for the granting of further
options under the Plan. All determinations to be made by the Company hereunder
shall be made by the Board of Directors.
3
<PAGE>
(c) An option may be exercised, at any time or from time to time (subject,
in the case of Incentive Options, to such restrictions as may be imposed by the
Code), as to any or all full shares as to which the option has become
exercisable until the expiration of the period set forth in Paragraph 6 hereof,
by the delivery to the Company, at its principal place of business, of (i)
written notice of exercise in the form specified by the Board of Directors
specifying the number of shares of Common Stock with respect to which the option
is being exercised and signed by the person exercising the option as provided
herein, (ii) payment of the purchase price; and (iii) in the case of
Non-Qualified Options, payment in cash of all withholding tax obligations
imposed on the Company by reason of the exercise of the option. Upon acceptance
of such notice, receipt of payment in full, and receipt of payment of all
withholding tax obligations, the Company shall cause to be issued a certificate
representing the shares of Common Stock purchased. In the event the person
exercising the option delivers the items specified in (i) and (ii) of this
Subsection (C), but not the item specified in (iii) hereof, if applicable, the
option shall still be considered exercised upon acceptance by the Company for
the full number of shares of Common Stock specified in the notice of exercise
but the actual number of shares issued shall be reduced by the smallest number
of whole shares of Common Stock which, when multiplied by the Fair Market Value
of the Common Stock as of the date the option is exercised, is sufficient to
satisfy the required amount of withholding tax.
(d) The purchase price of the shares as to which an option is exercised
shall be paid in full at the time of exercise. Payment shall be made in cash,
which may be paid by check or other instrument acceptable to the Company; in
addition, subject to compliance with applicable laws and regulations and such
conditions as the Board of Directors may impose, the Board of Directors in its
sole discretion, may on a case-by-case basis elect to accept payment in shares
of Common Stock of the Company which are already owned by the option holder,
valued at the Fair Market Value thereof (as defined in paragraph 15 below) on
the date of exercise; provided, however, that with respect to Incentive Options,
no such discretion may be exercised unless the option agreement permits the
payment of the purchase price in that manner.
(e) Except as provided in paragraphs 10 and 11 below, no option granted to
an employee may be exercised at any time by such employee unless such employee
is then an employee of the Company or a Subsidiary.
8. Incentive Options
(a) With respect to Incentive Options granted, the aggregate Fair Market
Value (determined in accordance with the provisions of paragraph 15 at the time
the Incentive Option is granted) of the Common Stock or any other stock of the
Company or its current or future Subsidiaries with respect to which incentive
stock options, as defined in Section 422 of the Code, are exercisable for the
first time by any employee during any calendar year (under all incentive stock
option plans of the Company and its parent and subsidiary corporation's, as
those terms are defined in Section 424 of the Code) shall not exceed $100,000.
4
<PAGE>
(b) No Incentive Option may be awarded to any employee who immediately
prior to the date of the granting of such Incentive Option owns more than 10% of
the combined voting power of all classes of stock of the Company or any of its
Subsidiaries unless the exercise price under the Incentive Option is at least
110% of the Fair Market Value and the option expires within 5 years from the
date of grant.
(c) In the event of amendments to the Code or applicable regulations
relating to Incentive Options subsequent to the date hereof, the Company may
amend the provisions of the 1998 Plan, and the Company and the employees holding
options may agree to amend outstanding option agreements, to conform to such
amendments.
9. Non-Transferability of Options
Options granted under the 1998 Plan shall not be transferable otherwise
than by will or the laws of descent and distribution, and options may be
exercised during the lifetime of the optionee only by the optionee. No transfer
of an option by the optionee by will or by the laws of descent and distribution
shall be effective to bind the Company unless the Company shall have been
furnished with written notice thereof and a copy of the will and such other
evidence as the Company may deem necessary to establish the validity of the
transfer and the acceptance by the transferor or transferees of the terms and
conditions of such option.
10. Termination of Employment
In the event that the employment of an employee to whom an option has been
granted under the 1998 Plan shall be terminated (except as set forth in
paragraph 11 below), such option may be, subject to the provisions of the 1998
Plan, exercised (to the extent that the employee was entitled to do so at the
termination of his employment) at any time within ninety (90) days after such
termination, but not later than the date on which the option terminates;
provided, however, that any option which is held by an employee whose employment
is terminated for cause or voluntarily without the consent of the Company shall,
to the extent not theretofore exercised, automatically terminate as of the date
of termination of employment. As used herein, "cause" shall mean conduct
amounting to fraud, dishonesty, negligence, or engaging in competition or
solicitations in competition with the Company and breaches of any applicable
employment agreement between the Company and the optionee. Options granted to
employees under the 1998 Plan shall not be affected by any change of duties or
position so long as the holder continues to be a regular employee of the Company
or any of its current or future Subsidiaries. Any option agreement or any rules
and regulations relating to the 1998 Plan may contain such provisions as the
Board of Directors shall approve with reference to the determination of the date
employment terminates and the effect of leaves of absence. Nothing in the 1998
Plan or in any option granted pursuant to the 1998 Plan shall confer upon any
employee any right to continue in the employ of the Company or any of its
Subsidiaries or parent or affiliated companies or interfere in any way with the
right of the
5
<PAGE>
Company or any such Subsidiary or parent of affiliated companies to terminate
such employment at any time.
11. Death or Disability of Employee
If an employee to whom an option has been granted under the 1998 Plan
shall die while employed by the Company or a Subsidiary or within ninety (90)
days after the termination of such employment (other than termination for cause
or voluntary termination without the consent of the Company), such option may be
exercised, to the extent exercisable by the employee on the date of death, by a
legatee or legatees of the employee under the employee's last will, or by the
employee's personal representative or distributees, at any time within one year
after the date of the employee's death, but not later than the date on which the
option terminates. In the event that the employment of an employee to whom an
option has been granted under the 1998 Plan shall be terminated as the result of
a disability, such option may be exercised, to the extent exercisable by the
employee on the date of such termination, at any time within one year after the
date of such termination, but not later than the date on which the option
terminates.
12. Adjustments Upon Changes in Capitalization, Etc.
Notwithstanding any other provision of the 1998 Plan, the Board of
Directors may, at any time, make or provide for such adjustments to the 1998
Plan, to the number and class of shares issuable thereunder or to any
outstanding options as it shall deem appropriate to prevent dilution or
enlargement of rights, including adjustments in the event of changes in the
outstanding Common Stock by reason of stock dividends, split-ups,
recapitalizations, mergers, consolidations, combinations or exchanges of shares
separations, reorganizations, liquidations and the like. In the event of any
offer to holders of Common Stock generally relating to the acquisition of their
shares, the Board of Directors may make such adjustment as it deems equitable in
respect of outstanding options and rights, including in its discretion revision
of outstanding options and rights so that they may be exercisable for the
consideration payable in the acquisition transaction. Any such determination by
the Board of Directors shall be conclusive. Any fractional shares resulting from
such adjustments shall be eliminated.
13. Effective Date
The 1998 Plan shall become effective on February 20, 1998.
14. Termination and Amendment
The Board of Directors of the Company may suspend, terminate, modify or
amend the 1998 Plan, provided that any amendment that would increase the
aggregate number of shares which may be issued under the 1998 Plan, materially
increase the benefits accruing to participants under the 1998 Plan, or
materially modify the requirements as to eligibility for participation in the
1998 Plan, shall be subject to the
6
<PAGE>
approval of the Company's stockholders, except that any such increase or
modification that may result from adjustments authorized by paragraph 12 does
not require such approval. No suspension, termination, modification or amendment
of the 1998 Plan may, without the consent of the employee to whom an option
shall theretofore have been granted, effect the rights of such employee under
such option.
15. Miscellaneous
As said term is used in the 1998 Plan, the "Fair Market Value" of a share
of Common Stock on any day means: (a) if the principal market for the Common
Stock is a national securities exchange or the National Association of
Securities Dealers Automated Quotations System ("NASDAQ"), the closing sales
price of the Common Stock on such day as reported by such exchange or market
system, or on a consolidated tape reflecting transactions on such exchange or
market system, or (b) if the principal market for the Common Stock is not a
national securities exchange and the Common Stock is not quoted on NASDAQ, the
mean between the highest bid and lowest asked prices for the Common Stock on
such day as reported by the National Quotation Bureau, Inc.; provided that if
clauses (a) and (b) of this paragraph are both inapplicable, or if no trades
have been made or no quotes are available for such day, the Fair Market Value of
the Common Stock shall be determined by the Board of Directors and shall be
conclusive as to the Fair Market Value of the Common Stock.
The Board of Directors or the Committee may require, as a condition to the
exercise of any options granted under the 1998 Plan, that to the extent required
at the time of exercise, (i) the shares of Common Stock reserved for purposes of
the 1998 Plan shall be duly listed, upon official notice of issuance, upon stock
exchange(s) on which the Common Stock is listed, (ii) a Registration Statement
under the Securities Act of 1933, as amended, with respect to such shares shall
be effective, and/or (iii) the person exercising such option deliver to the
Company such documents, agreements and investment and other representations as
the Board of Directors shall determine to be in the best interests of the
Company.
During the term of the 1998 Plan, the Board of Directors in its
discretion, may offer one or more option holders the opportunity to surrender
any or all unexpired options for cancellation or replacement. If any options are
so surrendered, the Board of Directors may then grant new Non-Qualified or
Incentive Options to such holders for the same or different numbers of shares at
higher or lower exercise prices than the surrendered options. Such new options
may have a different term and shall be subject to the provisions of the 1998
Plan the same as any other option.
Anything herein to the contrary notwithstanding, the Board of Directors
may, in its sole discretion, impose more restrictive conditions on the exercise
of an option granted pursuant to the 1998 Plan; however, any and all such
conditions shall be specified in the option agreement limiting and defining such
option.
7
<PAGE>
16. Compliance with SEC Regulations
It is the Company's intent that the 1998 Plan comply in all respects with
Rule 16b-3 of the Act and any regulations promulgated thereunder. If any
provision of the 1998 Plan is later found not to be in compliance with said
Rule, the provisions shall be deemed null and void. All grants and exercises of
Incentive Options under the 1998 Plan shall be executed in accordance with the
requirements of Section 16 of the Act, as amended, and any regulations
promulgated thereunder.
17. Corporate Transactions
In the event of the proposed dissolution or liquidation of the Company,
the Board of Directors shall notify each optionee at least 30 days prior to such
proposed action. To the extent not previously exercised, all options will
terminate immediately prior to the consummation of such proposed action;
provided, however, that the Board of Directors, in the exercise of its sole
discretion, may permit the exercise of any options prior to their termination,
even if such options were not otherwise exercisable. In the event of a merger or
consolidation of the Company with or into another corporation or entity in which
the Company does not survive, or in the event of a sale of all or substantially
all of the assets of the Company in which the stockholders of the Company
receive securities of the acquiring entity or an affiliate thereof, all options
shall be assumed or equivalent options shall be substituted by the successor
corporation (or other entity) or a parent or subsidiary of such successor
corporation (or other entity); provided, however, that if such successor does
not agree to assume the options or to substitute equivalent options therefor,
the Board of Directors, in the exercise of its sole discretion, may permit the
exercise of any of the options prior to consummation of such event, even if such
options were not otherwise exercisable.
8
<PAGE>
AMENDMENT NO. 3 TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 3 TO LOAN AND SECURITY AGREEMENT ("Amendment") is
dated as of August 1, 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 One Million Five Hundred Thousand Dollars
($1,500,000), which shall be reduced to One Million Two Hundred
Thousand Dollars ($1,200,000) as of August 17, 1998 and which shall
be further reduced to One Million Dollars ($1,000,000) as of
September 1, 1998 (the "Maximum Revolving Credit Line") or
(b) The sum of
(i) up to eighty (80%) percent of the Net Amount of
Eligible Accounts, and
(ii) the lesser of
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<PAGE>
a) the Maximum Inventory Loan or
b) up to fifty (50%) of the value of Eligible Inventory;
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;
(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 3. Section 3.6 of the Agreement is amended in its
entirety to read as follows:
"3.6 Extension Fee. The Borrower agrees to pay the Lender $10,000 on
August 1, 1998 and, in the event the Obligations are not paid in full
prior thereto, $15,000 on August 24, 1998, $15,000 on September 4, 1998,
and $25,000 on the first day of each month thereafter until the
Obligations are paid in full."
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.
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<PAGE>
C. Other Documents. Borrower shall have executed and delivered to
Lender such other documents and instruments as Lender may require.
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 not 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
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<PAGE>
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 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 Newman
---------------------------
Signature
President
---------------------------
Title
BANKAMERICA BUSINESS CREDIT, INC.
---------------------------
Signature
---------------------------
Title
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<PAGE>
WAIVER AND AMENDMENT NO. 4 TO
LOAN AND SECURITY AGREEMENT
THIS WAIVER AND AMENDMENT NO. 4 TO LOAN AND SECURITY AGREEMENT
("Amendment") is dated as of August 12, 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, an Events of Default has occurred under the Agreement; and
WHEREAS, the Borrower desires to have the Events of Default waived and 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. Waiver of Default. The Lender hereby waives the Events of
Default arising from the failure of the Borrower to comply with the minimum
Adjusted Tangible Net Worth requirement for the months ending April 30, 1998,
May 31, 1998 and June 30, 1998 as required by Section 10.23 of the Agreement and
the minimum EBITDA requirement for the months ending April 30, 1998, May 31,
1998 and June 30, 1998 as required by Section 10.22 of the Agreement. This
waiver is only applicable and shall only be effective for the specific
instances, for the specific purposes, and for the specific period for which
given. Such waiver is expressly limited to the facts and circumstances referred
to herein and shall not operate (a) as a waiver of or consent to non-compliance
with any other section of the Agreement or any other Loan Document, (b) as a
waiver of or a restriction on or prejudice with respect to, any right, power or
remedy of the Lender under the Agreement or any other Loan Document, or (c) as a
waiver of or consent to any other Event of Default or Event under the Agreement
or any other Loan Document.
Section 2. Amendment to the Agreement. The Lender and Borrower agree that
Section 14 the Agreement is amended in its entirety to read as follows:
"The initial term of this Agreement shall expire on October
31, 1998 ("Stated Termination Date") and shall automatically be
renewed thereafter for successive monthly terms unless the Agreement
is Terminated as
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<PAGE>
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 3. 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.
Section 4. 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.
-2-
<PAGE>
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 not 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 or 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 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
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<PAGE>
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.
--------------------------------
Signature
--------------------------------
Title
BANKAMERICA BUSINESS CREDIT, INC.
--------------------------------
Signature
--------------------------------
Title
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<PAGE>
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;
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<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
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<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
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<PAGE>
TERMINATION AGREEMENT AND MUTUAL GENERAL RELEASE
This Termination Agreement and Mutual General Release ("Release") dated
November 19, 1998, is entered into by and between Intellicell Corp., a
Delaware corporation ("Borrower"), and BankAmerica Business Credit, Inc., a
Delaware corporation ("BABC").
FOR VALUABLE CONSIDERATION, receipt of which is hereby acknowledged, the
parties agree to terminate the Loan and Security Agreement between them dated
as of January 12, 1998, as amended ("Loan Agreement"), effective on the date
hereof, and the parties hereby mutually release and forever discharge one
another, and their respective successors, representatives, assigns, officers,
directors, agents, employees, and attorneys, and each of them, of and from any
and all claims, demands, debts, liabilities, actions, and causes of action of
every kind and character based upon or arising out of the Loan Agreement
(except as hereinafter specifically set forth). Notwithstanding termination
of the Loan Agreement, all obligations of Borrower under the Loan Agreement
which by their terms are intended to survive termination shall continue in
full force and effect.
The parties hereby specifically waive as against one another any rights
they, or any of them, may have under Section 1542 of the California Civil
Code, which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR.
The parties hereby warrant and represent that they have not assigned or
in any other way conveyed, transferred, or encumbered all or any portion of
the claims or rights covered by this Release. The parties, and each of them,
execute this Release voluntarily, after consultation with counsel, and with
full knowledge of its significance.
The release by BABC provided for herein is conditioned upon the final
payment, in cash, of all of Borrower's "Obligations" (as defined in the Loan
Agreement) and all checks and other instruments delivered by Borrower to
BABC, and Borrower agrees to repay BABC, on demand, the amount of any such
check or other instrument that may be returned for nonpayment and any other
Obligations which remain unpaid. Borrower further agrees to indemnify BABC
against any and all claims, debts, liabilities, obligations, actions,
proceedings, penalties, judgments, causes of action, costs, and expenses
(including, without limitation attorneys' fees) of every kind, which BABC may
sustain or incur as a result of Borrower's failure to pay any payroll or
other taxes of Borrower or as a result of any other acts, omission, or
occurrence relating to Borrower.
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<PAGE>
This Release, the Loan Agreement, and the other written documents and
instruments between the parties set forth in full all of the representations
and agreements of the parties, and this Release may not be modified or
amended, nor may any rights hereunder be waived, except in a writing signed
by the parties hereto.
INTELLICELL CORP.
By: /s/ [ILLEGIBLE]
------------------------------------
Title: CFO
---------------------------------
BANKAMERICA BUSINESS CREDIT, INC.
By: /s/ [ILLEGIBLE]
------------------------------------
Title: Vice President
---------------------------------
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<PAGE>
INTELLICELL CORP.
REDEEMABLE WARRANT TO PURCHASE COMMON STOCK
This certifies that _________________________________ is the holder of
_________ warrants, each warrant entitling the holder at any time up to and
including 5:00 p.m. California Time on [Insert the date that is three years
following the date of the Final Closing] (the "Expiration Date") to purchase
from Intellicell Corp., a Delaware corporation (hereinafter called the
"Company), two-thirds of a fully paid and nonassessable share of Common Stock of
the Company at a price ("Exercise Price") of One Dollar ($1.00) per share upon
the surrender hereof to the Company at its office at 9314 Eton Avenue,
Chatsworth, California 91311, during its usual business hours of any business
day, with simultaneous payment therefor in lawful money of the United States of
the purchase price set forth above.
THIS WARRANT IS ONE OF A SERIES OF SUBSTANTIALLY IDENTICAL WARRANTS (THE
"WARRANTS") UNDERLYING THREE-YEAR UNSECURED AND SUBORDINATED CONVERTIBLE NOTES
(THE "NOTES") WHICH ARE BEING SOLD BY THE COMPANY IN A PRIVATE PLACEMENT
OFFERING (THE "OFFERING").
1. EXERCISE OF WARRANT. Subject to the terms and conditions hereof, this
Warrant may be exercised in whole or in part, at any time during normal business
hours prior to the Expiration Date, by (i) delivery of a written notice, in the
form of the Notice of Exercise attached hereto, of such holder's election to
exercise this Warrant, which notice shall specify the number of shares to be
purchased upon exercise hereof, (ii) payment to the Company of an amount equal
to the Exercise Price multiplied by the number of shares as to which this
Warrant is being exercised (plus any applicable issue or transfer taxes) in cash
or by bank check, and (iii) the surrender of this Warrant at the principal
office of the Company. If this Warrant is being exercised only in part, the
Company shall issue a new Warrant identical in all respects to this Warrant
except that it shall represent the right to purchase the number of shares as to
which this Warrant is not then being exercised. The Company has the right at its
sole discretion to extend the Expiration Date by notice given to all Warrant
holders. No fractional share shall be issued upon the exercise of rights to
purchase hereunder.
2. REGISTRATION OF COMMON STOCK. Subject to stockholder approval of the
Offering, the Company and the investors in the Offering, as well as the certain
additional holders of Company securities, will enter into a Registration Rights
Agreement pursuant to which the Company will file a registration statement with
the Securities and Exchange Commission ("SEC") within 90 days of the closing of
the Offering (the "Closing") covering the Common Stock issuable upon conversion
of the Notes and the Common Stock underlying the Warrants, and the Company will
use its reasonable best efforts to cause such registration statement to become
effective and to thereafter remain effective for a period of four years from the
Closing. Prior to the Company giving a notice of redemption of Warrants
hereunder, the registration statement filed by the Company must have become
effective.
3. REDEMPTION OF WARRANTS. The Company may call the Warrants for
redemption in whole or in part at a price of $0.01 for each Warrant, by written
notice specifying the redemption date, such notice to be mailed at least 30 days
before such redemption date, to the Warrant holders at their respective
addresses as they appear on the books of the Company; provided, however, that
such notice
1.
<PAGE>
may only be mailed following any period of 20 consecutive trading days during
which the closing bid price for the Common Stock on the Nasdaq SmallCap
Market (or such other trading market as the Common Stock may then be trading)
has exceeded $2.00 per share on each such day. If the Company elects to
redeem part, but not all, of the Warrants, then such redemption shall be made
pro rata with respect to all of the Warrants. This Warrant may be exercised
at any time prior to the close of business on the date prior to the
redemption date, and if not then exercised will terminate and be cancelled.
4. ADJUSTMENTS.
(a) The warrant price at which Common Stock shall be purchasable upon the
exercise of the Warrants shall be $1.00 per share or after adjustment, as
provided in this Section, shall be such price as so adjusted (the "Warrant
Price").
(b) The Warrant Price shall be subject to adjustment from time to time as
follows:
(i) In case the Company shall at any time after the date hereof pay a
dividend in shares of Common Stock or make a distribution in shares of Common
Stock, then upon such dividend or distribution the Warrant Price in effect
immediately prior to such dividend or distribution shall forthwith be reduced to
a price determined by dividing:
(A) an amount equal to the total number of shares of Common
Stock outstanding immediately prior to such dividend or distribution multiplied
by the Warrant Price in effect immediately prior to such dividend or
distribution, by (B) the total number of shares of Common Stock outstanding
immediately after such issuance or sale.
For the purposes of any computation to be made in accordance with the
provisions of this Section 4(b)(i), the following provisions shall be
applicable: Common Stock issuable by way of dividend or other distribution on
any stock of the Company shall be deemed to have been issued immediately after
the opening of business on the date following the date fixed for the
determination of stockholders entitled to receive such dividend or other
distribution.
(ii) In case the Company shall at any time subdivide or combine the
outstanding Common Stock, the Warrant Price shall forthwith be proportionately
decreased in the case of subdivision or increased in the case of combination to
the nearest one cent. Any such adjustment shall become effective at the time
such subdivision or combination shall become effective.
(iii) Within a reasonable time after the close of each quarterly
fiscal period of the Company during which the Warrant Price has been adjusted as
herein provided, the Company shall:
(A) file with the transfer agent of the Warrants (the "Warrant
Agent") a certificate signed by the President or Vice President of the Company
and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary of the Company, showing in detail the facts requiring all such
adjustments occurring during such period and the Warrant Price after each such
adjustment; and
(B) the Warrant Agent shall have no duty with respect to any
such certificate filed with it except to keep the same on file and available for
inspection by holders of Warrants during reasonable business hours, and the
Warrant Agent may conclusively rely upon the latest certificate furnished to it
hereunder. The Warrant Agent shall not at any time be under any duty
2.
<PAGE>
or responsibility to any holder of a Warrant to determine whether any facts
exist which may require any adjustment of the Warrant Price, or with respect
to the nature or extent of any adjustment of the Warrant Price when made, or
with respect to the method employed in making any such adjustment, or with
respect to the nature or extent of the property or securities deliverable
hereunder. In the absence of a certificate having been furnished, the
Warrant Agent may conclusively rely upon the provisions of the Warrants with
respect to the Common Stock deliverable upon the exercise of the Warrants and
the applicable Warrant Price thereof.
(iv) Notwithstanding anything contained herein to the contrary,
no adjustment of the Warrant Price shall be made if the amount of such
adjustment shall be less than $0.05, but in such case any adjustment that
would otherwise be required then to be made shall be carried forward and
shall be made at the time and together with the next subsequent adjustment
which, together with any adjustment so carried forward, shall amount to not
less than $0.05.
(v) In the event that the number of outstanding shares of
Common Stock is increased by a stock dividend payable in subdivision of the
outstanding Common Stock, then, from and after the time at which the adjusted
Warrant Price becomes effective pursuant this Section by reason of such
dividend or subdivision, the Common Stock issuable upon the exercise of each
Warrant shall be increased in proportion to such increase in outstanding
shares. In the event that the number of shares of Common Stock outstanding
is decreased by a combination of the outstanding Common Stock, then, from and
after the time at which the adjusted Warrant Price becomes effective pursuant
to this Section by reason of such combination, the number of shares of Common
Stock issuable upon the exercise of each Warrant shall be decreased in
proportion to such decrease in the outstanding shares of Common Stock.
(vi) In case of any reorganization or reclassification of the
outstanding Common Stock (other than a change in par value, or from par value
to no par value, or as a result of a subdivision or combination), or in case
of any consolidation of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger in which the
Company is the continuing corporation and which does not result in any
reclassification of the outstanding Common Stock), or in case of any sale or
conveyance to another corporation of the property of the Company as an
entirety or substantially as an entirety, the holder of each Warrant then
outstanding shall thereafter have the right to purchase the kind and amount
of shares of Common Stock and other securities and property receivable upon
such reorganization, reclassification, consolidation, merger, sale or
conveyance by a holder of the number of shares of Common Stock which the
holder of such Warrant shall then be entitled to purchase; such adjustments
shall apply with respect to all such changes occurring after the date of
exercise of such Warrant.
(vii) Subject to the provisions of this Section 4, in case the
Company shall, at any time prior to the exercise of the Warrants, make any
distribution of its assets to holders of its Common Stock as a liquidating or a
partial liquidating dividend, then the holder of Warrants who exercises its
Warrants after the record date for the determination of those holders of Common
Stock entitled to such distribution of assets as a liquidating or partial
liquidating dividend shall be entitled to receive for the Warrant Price per
Warrant, in addition to each share of Common Stock, the amount of such
distribution (or, at the option of the Company, a sum equal to the value of any
such assets at the time of such distribution as determined by the Board of
Directors of the Company in good faith), which would have been payable to such
holder had he been the holder of record of the Common Stock receivable upon
exercise of its Warrant on the record date for the determination of those
entitled to such distribution.
3.
<PAGE>
(viii) In case of the dissolution, liquidation or winding up of the
Company, all rights under the Warrants shall terminate on a date fixed by the
Company, such date to be no earlier than ten (10) days prior to the
effectiveness of such dissolution, liquidation or winding up and not later than
five (5) days prior to such effectiveness. Notice of such termination of
purchase rights shall be given to the last registered holder of the Warrants, as
the same shall appear on the books of the Company maintained by the Warrant
Agent, by registered mail at least thirty (30) days prior to such termination
date.
(ix) In case the Company shall, at any time prior to the
expiration of the Warrants and prior to the exercise thereof, offer to the
holders of its Common Stock any rights to subscribe for additional shares of
any class of the Company, then the Company shall give written notice thereof
to the last registered holder thereof not less than thirty (30) days prior to
the date on which the books of the Company are closed or a record date is
fixed for the determination of the stockholders entitled to such subscription
rights. Such notice shall specify the date as to which the books shall be
closed or record date fixed with respect to such offer of subscription and
the right of the holder thereof to participate in such offer of subscription
shall terminate if the Warrant shall not be exercised on or before the date
of such closing of the books or such record date.
(x) Any adjustment pursuant to the aforesaid provisions of this
section 4 shall be made on the basis of the number of shares of Common Stock
which the holder thereof would have been entitled to acquire by the exercise
of the Warrant immediately prior to the event giving rise to such adjustment.
(xi) Irrespective of any adjustments in the Warrant Price or the
number or kind of shares purchasable upon exercise of the Warrants, Warrants
previously or thereafter issued may continue to express the same price and
number and kind of shares as are stated in the similar Warrants initially
issuable pursuant to this Warrant Agreement.
(xii) The Company may retain a firm of independent public
accountants (who may be any such firm regularly employed by the Company) to make
any computation required under this Section 4, and any certificate setting forth
such computation signed by such firm shall be conclusive evidence of the
correctness of any computation made under this Section 4.
(xiii) If at any time, as a result of an adjustment made pursuant
to Section 4(b)(vi) above, the holders of a Warrant or Warrants shall become
entitled to purchase any securities other than shares of Common Stock,
thereafter the number of such securities so purchasable upon exercise of each
Warrant and the Warrant Price for such shares shall be subject to adjustment
from time to time in a manner and on terms as nearly equivalent as practicable
to the provisions with respect to the Common Stock contained in Section 4(b)(ii)
through (v).
5. NOTICES TO WARRANT HOLDERS.
(a) Upon any adjustment of the Warrant Price and the number of shares of
Common Stock issuable upon exercise of a Warrant, then and in each such case the
Company shall give written notice thereof to the Warrant Agent, which notice
shall state the Warrant Price resulting from such adjustment and the increase or
decrease, if any, in the number of shares purchasable at such price upon the
exercise of a Warrant, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based. The Company
shall also mail such notice to the holders of the Warrants at their addresses
appearing in the Warrant register. Failure to give or mail such notice, or any
defect therein, shall not affect the validity of the adjustments.
4.
<PAGE>
(b) In case at any time:
(i) the Company shall pay dividends payable in stock upon its
Common Stock or make any distribution (other than regular cash dividends) to
the holders of its Common Stock; or
(ii) the Company shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class or
other rights; or
(iii) there shall be any capital reorganization or
reclassification of the capital stock of the Company, or consolidation or merger
of the Company with, or sale of substantially all of its assets to, another
corporation; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company; then in any one or more of such
cases, the Company shall give written notice in the manner set forth in
Section 5(a) of the date on which (A) a record shall be taken for such
dividend, distribution or subscription rights, or (B) such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up shall take place, as the case may be. Such notice shall also
specify the date as of which the holders of Common Stock of record shall
participate in such dividend, distribution or subscription rights, or shall
be entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up as the case may be.
Such notice shall be given at least thirty (30) days prior to the action in
question and not less than thirty (30) days prior to the record date in
respect thereof. Failure to give such notice, or any defect therein, shall
not affect the legality or validity of any of the matters set forth in this
Section 5(b).
(c) The Company shall cause copies of all financial statement and reports,
proxy statements and other documents that are sent to its stockholders to be
sent by first-class mail, postage prepaid, on the date of mailing to such
stockholders, to each registered holder of Warrants at his address appearing in
the warrant register as of the record date for the determination of the
stockholders entitled to such documents.
6. WARRANT HOLDER. Prior to the due presentment for registration of
transfer hereof, the Company and the Warrant Agent may deem and treat the
registered holder as the absolute owner hereof and of each Warrant represented
hereby (notwithstanding any notations of ownership or writing hereon made by
anyone other than a duly authorized officer of the Company or the transfer
agent) for all purposes and shall not be affected by any notice to the contrary.
7. NO RIGHTS AS STOCKHOLDER. Prior to the exercise of this Warrant the
holder of this Warrant shall not be entitled to any rights of a stockholder of
the Company, including, without limitation, the right to vote, to receive
dividends or other distributions, or to receive notice of meetings of
stockholders.
8. LOST, STOLEN, MUTILATED OR DESTROYED WARRANTS. If this Warrant is
lost, stolen, mutilated or destroyed, the Company shall, on such terms as to
indemnity or otherwise as it may in its discretion impose (which in the case of
a mutilated Warrant shall include the surrender thereof), issue a new Warrant of
like denomination and tenor as the Warrant so lost, stolen, mutilated or
destroyed. Any such new Warrant shall constitute an original contractual
obligation of the Company, whether or not the allegedly lost, stolen, mutilated
or destroyed Warrant shall be at any time enforceable by anyone.
5.
<PAGE>
9. MISCELLANEOUS. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
Person or holder hereof against which enforcement of such change, waiver,
discharge or termination is sought. The headings in this Warrant are for
purposes of reference only and shall not limit or otherwise affect the meaning
hereof.
IN WITNESS WHEREOF, the Company has executed this Warrant as of the day and
year first above written.
Dated: INTELLICELL CORP.
------------------
By
------------------------------------
, President
6.
<PAGE>
NOTICE OF EXERCISE
TO BE EXECUTED BY THE REGISTERED HOLDER
IN ORDER TO EXERCISE THIS WARRANT
INTELLICELL CORP.
The undersigned hereby exercises the right to purchase
_____________________________ shares of Common Stock covered by this Warrant
according to the conditions thereof and herewith makes payment of
$______________________________, the aggregate Exercise Price of such shares of
Common Stock.
[Print or type name(s) of Holder. If
Holder is a trust, partnership,
corporation or other entity, print name
and title of authorized signatory.]
Signature(s) of Holder or authorized signatory
7.
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into effective as of November 9, 1998 by and
between INTELLICELL CORP., a Delaware corporation (the "EMPLOYER" or the
"COMPANY"), and Ben Neman (the "EMPLOYEE").
W I T N E S S E T H:
---------------------
WHEREAS, the Employee is currently the Company's Chairman of the Board
("CHAIRMAN"), President and Chief Executive Officer under an agreement expiring
in December 1999;
WHEREAS, the Employer desires to continue to employ the Employee as its
Chairman and President and to be assured of his services as such on the terms
and conditions hereinafter set forth; and
WHEREAS, the Employee is willing to accept such employment on such terms
and conditions; and
WHEREAS, the Employee and Employer desire to enter into an agreement that
will supersede any previous employment agreements;
WHEREAS, the Company considers the establishment and maintenance of a
sound and vital management to be essential to protecting and enhancing the best
interests of the Company and its shareholders, and the Company recognizes that
the existence of a possible change in control of the Company causes uncertainty
among management which may result in the possible departure or distraction of
members of management to the detriment of the Company and its shareholders.
WHEREAS, the Employee desires assurance that he will be protected against
the financial impact in the event of the unexpected termination of the Employee.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, and intending to be legally bound hereby, the Employer
and the Employee hereby agree as follows:
1. Term. Employer hereby agrees to continue to employ Employee, and
Employee hereby agrees to continue to serve Employer for a three-year period
commencing on November 16, 1998 (the "EFFECTIVE DATE") (such period being herein
referred to as the "INITIAL TERM," and any year commencing on the Effective Date
or any anniversary of the Effective Date being hereinafter referred to as an
"EMPLOYMENT YEAR"). After the Initial Term, this Agreement shall be renewable
automatically for successive one year periods (each such period being referred
to as a "RENEWAL TERM"), unless, more than thirty days prior to the expiration
of the Initial Term
<PAGE>
or any Renewal Term, the Employee or the Company gives written notice that
employment will not be renewed.
2. Employee Duties.
(a) During the term of this Agreement, the Employee shall serve as the
Employer's Chairman and President. The Employee recognizes and
acknowledges that the senior most executive officer of the Company is
the Chief Executive Officer of the Company.
(b) The Employee shall devote such attention and knowledge in
furtherance of the business and activities of the Company as necessary
to adequately perform his duties. The principal place of performance by
the Employee of his duties hereunder shall be the Company's principal
executive offices, in the greater metropolitan area of Los Angeles,
California, although the Employee may be required to travel outside of
such area, for reasonable periods for an officer in Employee's position,
in connection with the business of the Company.
(c) The Employee shall be entitled to manage and direct his own personal
investments and business affairs, to participate in such charitable and
public interest activities as he may deem appropriate, and to serve on
other boards of directors (with the reasonable approval of the Board),
all and to the extent that such activities do not significantly conflict
with his obligations to the Company.
3. Compensation.
(a) During the term of this Agreement, the Employer shall pay the
Employee a salary (the "SALARY") of no less than $72,000 per annum in
respect of each Employment Year, payable in equal installments
semi-monthly, or at such other times as may mutually be agreed upon
between the Employer and the Employee. Such Salary may be increased from
time to time at the discretion of the Board.
(b) In addition to the foregoing, the Employee shall be entitled to
bonuses and such other compensation in the form of cash, stock, stock
options or other property or rights as may from time to time be awarded
to him by the Board during or in respect of his employment hereunder.
4. Benefits.
(a) During the term of this Agreement, the Employee shall have the right
to receive or participate in all benefits and plans, which the Company
may from time to time institute during such period for its employees and
for which the Employee is eligible. Nothing paid to the Employee under
any plan or arrangement presently in effect or made available in the
future shall be deemed to be in lieu of the Salary or any other
obligation payable to the Employee pursuant to this Agreement.
(b) During the term of this Agreement, the Employee will be entitled to
no less then 4 weeks vacation per year and such number of paid holidays,
personal days, and sick leave days in
2
<PAGE>
each calendar year as are determined by the Company from time to time.
Such vacation may be taken in the Employee's discretion, and at such
time or times as are not inconsistent with the reasonable business needs
of the Company.
5. Travel Expenses. All travel and other expenses incident to the rendering
of services reasonably incurred on behalf of the Company by the Employee during
the term of this Agreement shall be paid by the Employer. If any such expenses
are paid in the first instance by the Employee, the Employer shall reimburse him
therefor on presentation of appropriate receipts for any such expenses.
6. Termination. This Agreement will not be terminated by the voluntary or
involuntary dissolution of the Employer. Notwithstanding the provisions of
SECTION 1 hereof, the Employee's employment with the Employer may be earlier
terminated as follows:
(a) By action taken by the Board, the Employee may be discharged for
cause (as hereinafter defined), effective as of such time as the Board
shall determine. Upon discharge of the Employee pursuant to this SECTION
6(a), the Employer shall have no further obligation or duties to the
Employee, except for payment of Salary through the effective date of
termination, and as provided in SECTIONS 5, 7 and 8 and the Employee
shall have no further obligations or duties to the Employer, except as
provided in SECTION 8.
(b) In the event of (i) the death of the Employee or (ii) action of the
Board and the inability of the Employee, by reason of physical or mental
disability, to continue substantially to perform his duties hereunder
for a period of 180 consecutive days, during which 180 day period Salary
and any other benefits hereunder shall not be suspended or diminished.
Upon any termination of the Employee's employment under this Section
6(b), the Employer shall have no further obligations or duties to the
Employee, except as provided in SECTIONS 5, 7, 8 and 9.
(c) In the event that Employee's employment with the Employer is
terminated by action taken by the Board without cause, including the
removal of the Employee as Chairman of the Board or President or in the
event of termination of the Employee as Chairman of the Board or
President, then the Employer shall have no further obligation or duties
to Employee, except for payment of the amounts described below and as
provided in SECTIONS 5, 7, 8 and 9, and Employee shall have no further
obligations or duties to the Employer, except as provided in SECTION 8.
In the event of such termination, the Employer shall pay to the Employee
a lump sum of $500,000 which shall be payable immediately upon such
termination.
(d) In the event that the Employee's employment with the Company is
terminated upon a Constructive Involuntary Termination (as defined
below), then the Employer shall have no further obligation or duties to
Employee, except for payment of the amounts described below and as
provided in SECTIONS 5, 7, 8 and 9, and Employee shall have no further
obligations or duties to the Employer, except as provided in SECTION 8.
In the event of such termination, the Employer shall pay to the Employee
a lump sum equal to the amount due under SECTION 3(a) through the
Initial Term, which shall be payable immediately upon such
3
<PAGE>
termination.
(e) For purposes of this Agreement, the Company shall have "CAUSE" to
terminate the Employee's employment under this Agreement if the
Employee(i) by any willful action or inaction, or through gross neglect,
materially breaches any of the provisions of this Agreement or of his
employment, or (ii) engages in criminal misconduct (including
embezzlement and criminal fraud) which is materially injurious to the
Company, monetarily or otherwise.
(f) For purposes of this Agreement, the term "CONSTRUCTIVE INVOLUNTARY
TERMINATION" shall mean voluntary termination of employment by the
Employee as a result of a significant reduction or significantly adverse
change in the duties, responsibilities, reporting relationship, job
description, compensation, perquisites, office or location of employment
of the Employee without the written consent of the Employee.
(g) Upon thirty (30) days prior written notice to the Company from the
Employee for any reason.
7. Registration Rights.
(a) Demand Registration. If the stockholders of the Company fail to
approve the transactions contemplated in that certain private placement
memorandum dated November 11, 1998 at the next meeting of the
stockholders of the Company, the Employee shall have the right,
exercisable by written notice to the Employer, to have the Employer
prepare, file and use its best efforts to have declared effective by the
Securities and Exchange Commission, on one occasion, a registration
statement and such other documents, including a prospectus, as may be
necessary in the opinion of both counsel for the Employer and counsel
for the Employee, if any, in order to comply with the provisions of the
Securities Act of 1933, as amended (the "SECURITIES ACT"), so as to
permit a public offering and sale of the shares of common stock of the
Employer held by the Employee.
(b) Piggyback Registration. Each time the Company shall determine to
register any of its securities either for its own account or the account
of a security holder or holders exercising their respective demand
registration rights (other than pursuant to SECTION 7(a) hereof), other
than a registration relating solely to employee benefit plans, or a
registration relating solely to a Rule 145 Transaction, or a
registration on any registration form which does not permit secondary
sales, the Company will:
(i) promptly give to the Employee written notice thereof; and
(ii) use its best efforts to include in such registration (and
any related qualification under blue sky laws or other
compliance), and in any underwriting involved therein, all
of the shares of common stock held by the Employee in such
registration statement.
4
<PAGE>
(c) Limitations on Resales. Notwithstanding the foregoing, the Employee
shall not sell any of his shares of common stock of the Employer
pursuant to the foregoing registration statements unless and until
Employee ceases to serve for any reason (other than for cause) as the
Chairman of the Board or President of the Employer; PROVIDED, HOWEVER,
the Employee shall continue to have the right at any time after the date
of this Agreement to sell shares of common stock of the Employer under
Rule 144 promulgated under the Securities Act in accordance with
applicable law, subject to the terms of the lock-up agreement. A form of
lock-up agreement is attached hereto as EXHIBIT 1, which the Employer
and Employee expect to be executed by them.
8. Confidentiality; Noncompetition.
(a) The Employer and the Employee acknowledge that the services to be
performed by the Employee under this Agreement are unique and
extraordinary and, as a result of such employment, the Employee will be
in possession of confidential information relating to the business
practices of the Company. For purposes of this Agreement, the term
"CONFIDENTIAL INFORMATION" shall mean any and all information (verbal
and written) relating to the Company or any of its affiliates, or any of
their respective activities, other than such information which can be
shown by the Employee to be in the public domain (such information not
being deemed to be in the public domain merely because it is embraced by
more general information which is in the public domain) other than as
the result of breach of the provisions of this Section 8(a), including,
but not limited to, information relating to: trade secrets, personnel
lists, financial information, research projects, services used, pricing,
customers, customer lists and prospects, product sourcing, marketing and
selling and servicing. The Employee agrees that he will not, during or
for a period of two years after the termination of employment, directly
or indirectly, use, communicate, disclose or disseminate to any person,
firm or corporation any confidential information regarding the clients,
customers or business practices of the Company acquired by the Employee
during his employment by Employer, without the prior written consent of
Employer; provided, however, that the Employee understands that Employee
will be prohibited from misappropriating any trade secret at any time
during or after the termination of employment.
(b) The Employee hereby agrees that he shall not, during the period of
his employment and for a period of one (1) year following such
employment, directly or indirectly, within any county (or adjacent
county) in any State within the United States or territory outside the
United States in which the Company is engaged in business during the
period of the Employee's employment or on the date of termination of the
Employee's employment, engage, have an interest in or render any
services to any business (whether as owner (other than as an owner of
less than 5% of a Company whose securities are listed on a National
Stock Exchange or Nasdaq) manager, operator, licensor, licensee, lender,
partner, stockholder, joint venturer, employee, consultant or otherwise)
directly competitive with the Company's business activities.
(c) The Employee hereby agrees that he shall not, during the period of his
employment and
5
<PAGE>
for a period of one (1) year following such employment, directly or
indirectly, take any action which constitutes an interference with or a
disruption of any of the Company's business activities including,
without limitation, the solicitations of the Company's customers, or
persons listed on the personnel lists of the Company. At no time during
the term of this Agreement, or thereafter shall the Employee, directly
or indirectly, disparage the commercial, business or financial
reputation of the Company.
(d) For purposes of clarification, but not of limitation, the Employee
hereby acknowledges and agrees that the provisions of SECTIONS 8(b) and
(c) above shall serve as a prohibition against him, during the period
referred to therein, directly or indirectly, hiring, offering to hire,
enticing, soliciting or in any other manner persuading or attempting to
persuade any officer, employee, agent, lessor, lessee, licensor,
licensee or customer who has been previously contacted by either a
representative of the Company, including the Employee, (but only those
suppliers existing during the time of the Employee's employment by the
Company, or at the termination of his employment), to discontinue or
alter his, her or its relationship with the Company.
(e) Upon the termination of the Employee's employment for any reason
whatsoever, all documents, records, notebooks, equipment, price lists,
specifications, programs, customer and prospective customer lists and
other materials which refer or relate to any aspect of the business of
the Company which are in the possession of the Employee including all
copies thereof, shall be promptly returned to the Company.
(f) (i) The Employee agrees that all processes, technologies and
inventions ("INVENTIONS"), including new contributions, improvements,
ideas and discoveries, whether patentable or not, conceived, developed,
invented or made by him during his employment by Employer shall belong
to the Company, provided that such Inventions grew out of the Employee's
work with the Company are related in any manner to the business
(commercial or experimental) of the Company or are conceived or made on
the Company's time or with the use of the Company's facilities or
materials. The Employee shall further: (a) promptly disclose such
Inventions to the Company; (b) assign to the Company, without additional
compensation, all patent and other rights to such Inventions for the
United States and foreign countries; (c) sign all papers necessary to
carry out the foregoing; and (d) give testimony in support of his
inventorship;
(f)(ii) If any Invention is described in a patent application or is
disclosed to third parties, directly or indirectly, by the Employee
within two years after the termination of his employment by the Company,
it is to be presumed that the Invention was conceived or made during the
period of the Employee's employment by the Company; and
(f)(iii) The Employee agrees that he will not assert any rights to any
Invention as having been made or acquired by him prior to the date of
this Agreement, except for Inventions, if any, disclosed to the Company
in writing prior to the date hereof.
(g) The Company shall be the sole owner of all products and proceeds of
the Employee's services hereunder, including, but not limited to, all
materials, ideas, concepts, formats,
6
<PAGE>
suggestions, developments, arrangements, packages, programs and other
intellectual properties that the Employee may acquire, obtain, develop
or create in connection with and during the term of the Employee's
employment hereunder, free and clear of any claims by the Employee (or
anyone claiming under the Employee) of any kind or character whatsoever
(other than the Employee's right to receive payments hereunder). The
Employee shall, at the request of the Company, execute such assignments,
certificates or other instruments as the Company may from time to time
deem necessary or desirable to evidence, establish, maintain, perfect,
protect, enforce or defend its right, or title and interest in or to any
such properties.
(h) The parties hereto hereby acknowledge and agree that (i) the Company
would be irreparably injured in the event of a breach by the Employee of
any of his obligations under this SECTION 8, (ii) monetary damages would
not be an adequate remedy for any such breach, and (iii) the Company
shall be entitled to injunctive relief, in addition to any other remedy
which it may have, in the event of any such breach.
(i) The parties hereto hereby acknowledge that, in addition to any other
remedies the Company may have under SECTION 8(H) hereof, the Company
shall have the right and remedy to require the Employee to account for
and pay over to the Company all compensation, profits, monies, accruals,
increments or other benefits (collectively, "BENEFITS") derived or
received by the Employee as the result of any transactions constituting
a breach of any of the provisions of SECTION 8, and the Employee hereby
agrees to account for and pay over such Benefits to the Company.
(j) Each of the rights and remedies enumerated in SECTION 8(h) and 8(i)
shall be independent of the other, and shall be severally enforceable,
and all of such rights and remedies shall be in addition to, and not in
lieu of, any other rights and remedies available to the Company under
law or in equity.
(k) If any provision contained in this SECTION 8 is hereafter construed
to be invalid or unenforceable, the same shall not affect the remainder
of the covenant or covenants, which shall be given full effect, without
regard to the invalid portions.
(l) If any provision contained in this SECTION 8 is found to be
unenforceable by reason of the extent, duration or scope thereof, or
otherwise, then the court making such determination shall have the right
to reduce such extent, duration, scope or other provision and in its
reduced form any such restriction shall thereafter be enforceable as
contemplated hereby.
(m) It is the intent of the parties hereto that the covenants contained
in this SECTION 8 shall be enforced to the fullest extent permissible
under the laws and public policies of each jurisdiction in which
enforcement is sought (the Employee hereby acknowledging that said
restrictions are reasonably necessary for the protection of the
Company). Accordingly, it is hereby agreed that if any of the provisions
of this SECTION 8 shall be adjudicated to be invalid or unenforceable
for any reason whatsoever, said provision shall be (only with respect to
the operation thereof in the particular jurisdiction in which such
adjudication is made) construed by limiting and reducing it so as to be
enforceable to the extent permissible, without
7
<PAGE>
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of said provision in any other jurisdiction.
9. Indemnification. The Employer shall indemnify and hold harmless the
Employee against any and all expenses reasonably incurred by him in connection
with or arising out of (a) the defense of any action, suit or proceeding in
which he is a party, or (b) any claim asserted or threatened against him, in
either case by reason of or relating to his being or having been an employee,
officer or director of the Company, whether or not he continues to be such an
employee, officer or director at the time of incurring such expenses, except
insofar as such indemnification is prohibited by law. Such expenses shall
include, without limitation, the fees and disbursements of attorneys, amounts of
judgments and amounts of any settlements, provided that such expenses are agreed
to in advance by the Employer. The foregoing indemnification obligation is
independent of any similar obligation provided in the Employer's Certificate of
Incorporation or Bylaws, and shall apply with respect to any matters
attributable to periods prior to the Effective Date, and to matters attributable
to his employment hereunder, without regard to when asserted.
10. General. This Agreement is further governed by the following
provisions:
(a) Notices. All notices relating to this Agreement shall be in writing
and shall be either personally delivered, sent by telecopy (receipt
confirmed) or mailed by certified mail, return receipt requested, to be
delivered at such address as is indicated below, or at such other
address or to the attention of such other person as the recipient has
specified by prior written notice to the sending party.
Notice shall be effective when so personally delivered, one business
day after being sent by telecopy or five days after being mailed.
To the Employer:
Intellicell Corp.
9314 Eton Avenue
Chatsworth, California 91311
Attn.: Chief Executive Officer
To the Employee:
Mr. Ben Neman
2180 Stradella Road
Los Angeles, California 90077
With, in either case, a copy in the same manner to:
Troy & Gould
1801 Century Park East, 16th Floor
Los Angeles, California 90067
8
<PAGE>
Attention: Sanford J. Hillsberg, Esq.
(b) Parties in Interest. Employee may not delegate his duties or assign
his rights hereunder. This Agreement shall inure to the benefit of, and
be binding upon, the parties hereto and their respective heirs, legal
representatives, successors and permitted assigns.
(c) Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties hereto with
respect to the employment of the Employee by the Employer and contains
all of the covenants and agreements between the parties with respect to
such employment in any manner whatsoever. Any modification or
termination of this Agreement will be effective only if it is in writing
signed by the party to be charged.
(d) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
(e) Warranty. Employee hereby warrants and represents as follows:
(i) That the execution of this Agreement and the discharge of
Employee's obligations hereunder will not breach or conflict with
any other contract, agreement, or understanding between Employee
and any other party or parties.
(ii) Employee has ideas, information and know-how relating to the
type of business conducted by Employer, and Employee's disclosure
of such ideas, information and know-how to Employer will not
conflict with or violate the rights of any third party or parties.
(f) Severability. In the event that any term or condition in this
Agreement shall for any reason be held by a court of competent
jurisdiction to be invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any
other term or condition of this Agreement, but this Agreement shall be
construed as if such invalid or illegal or unenforceable term or
condition had never been contained herein.
(g) Execution in Counterparts. This Agreement may be executed by the
parties in one or more counterparts, each of which shall be deemed to be
an original but all of which taken together shall constitute one and the
same agreement, and shall becomeeffective when one or more counterparts
has been signed by each of the parties hereto and delivered to each of
the other parties hereto.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
INTELLICELL CORP.
By: /s/ Steve Jarrett
-------------------------------
Name: Steve Jarrett
Title: Executive Vice President
By: /s/ David M. Kane
-------------------------------
Name: David M. Kane
Title: Vice President, Chief
Financial Officer
/s/ Ben Neman
------------------------------------
Ben Neman
10
<PAGE>
ASSIGNMENT AND ASSUMPTION OF LEASE AND SECURITY DEPOSIT
KNOW ALL MEN BY THESE PRESENTS, that in consideration of the sum of Ten
and No/100 ($10.00) Dollars and other good and valuable consideration, the
receipt and sufficiency which are hereby acknowledged, INTELLICELL, CORP., a
Delaware corporation (the "Assignor") having an address at 9314 Eton Avenue,
Chatsworth, CA 91406, Attention: Mr. Ben Neman, do hereby assign, set over
and transfer to CELLULAR WHOLESALERS, INC., an Illinois corporation (the
"Assignee") having an address at 5151 Church Street, Skokie, IL 60077,
Attention: Mr. Eric Rosenbloom, all of Assignor's right, title and interest
in and to that certain Lease dated July 18, 1997, (the "Lease"), between AMB
INDUSTRIAL INCOME FUND, INC., a Maryland corporation (as predecessor to AMB
Property, L.P.), as Landlord and Assignor, as Tenant, whereby Assignor leases
approximately twelve thousand eight hundred (12,800) rentable square feet in
Beacon Industrial Park, Miami, Florida (the "Demised Premises"), together
with the security deposit given by Assignor to Landlord thereunder in the
amount of $13,973.34 (the "Security Deposit").
By its acceptance of this Assignment, Assignee does hereby assume and
agree to perform all of the Assignor's obligations under the Lease, and shall
indemnify and hold harmless the Assignor against any claims, suits, actions,
charges, liabilities, losses, costs or expenses (including, without
limitation, reasonable attorneys' fees and disbursements), damages or
obligations (including, without limitation, any recalculation or
re-pro-ration of tenant's proportionate share of Increased Operating Costs
[as defined in the Lease] for the period subsequent to the date of this
Assignment), which Assignor may directly or indirectly sustain or which may
arise in connection with the Demised Premises or by reason of Assignee's acts
or Assignee's failure to observe, perform or comply with any of the
obligations of the tenant under the Lease occurring subsequent to the date of
this Assignment. Assignor shall indemnify and hold Assignee harmless against
any claims, suits, actions, charges, liabilities, losses, costs or expenses
(including, without limitation, reasonable attorneys' fees and
disbursements), damages, or obligations (including, without limitation, any
recalculation or re-pro-ration of tenant's proportionate share of Increased
Operating Costs [as defined in the Lease] for the period commencing on
January 1, 1998 and ending on the date of this Assignment
[the "Effective Period"]; provided, however, that with respect to any such
recalculation or re-pro-ration of tenant's proportionate share of Increased
Operating Costs, (i) Assignee shall not be in default under the Lease, (ii)
Assignee shall provide Assignor with written notice of such recalculation or
re-proration (the "Notice") promptly upon Assignee's receipt of the same but
in no event later than June 30, 1999, and (iii) Assignee shall promptly
reimburse Assignor for any excess of tenant's proportionate share of
Increased Operating Costs paid by Assignor to Landlord during the Effective
Period), which Assignee may directly or indirectly sustain by reason of
Assignor's acts or Assignor's failure to observe, perform or comply with any
of the obligations of the tenant under the Lease occurring prior to the date
of this Assignment.
Upon the execution and delivery of this Assignment by Assignee to
Assignor, Assignee shall reimburse the Security Deposit to Assignor as
follows: (i) the amount of $11,473.34 by Assignee's check payable to
Assignor, subject to collection, and (ii) the amount of $2,500.00 (the
<PAGE>
"Escrowed Funds") by Assignee's check payable to Kamensky and Rubinstein, as
Attorneys (the "Escrow Agent"), to be held by the Escrow Agent in an
interest-bearing escrow account in accordance with the following terms and
conditions:
1. If the Notice is delivered to Assignor promptly upon Assignee's
receipt of the same but in no event later than June 30, 1999, and if such
Notice sets forth any shortfall in the amount of tenant's proportionate share
of Increased Operating Costs paid by the Assignor during the Effective
Period, then Assignor shall have a period of sixty (60) days to review the
Notice and dispute such shortfall with the Landlord, whereupon Escrow Agent
shall continue to hold the Escrowed Funds until Assignor has directed the
Escrow Agent to release to Landlord the Assignor's proportionate share of
Increased Operating Costs. Escrow Agent shall release such amount to Landlord
and shall release the remainder of the Escrowed Funds, together with any
interest earned thereon, to Assignor within five (5) business days after
Assignor's direction.
2. If the Notice is delivered to Assignor promptly upon Assignee's
receipt of the same but in no event later than June 30, 1999, and if such
Notice sets forth any excess in the amount of tenant's proportionate share of
Increased Operating Costs paid by the Assignor during the Effective Period,
then simultaneously with Assignee's delivery of the Notice to Assignor, (A)
Escrow Agent shall release to Assignor the Escrowed Funds, together with any
interest earned thereon, and (B) Assignee shall reimburse Assignor for such
excess no later than thirty (30) days after Assignee's delivery of the Notice
to Assignor.
3. If Assignee fails to provide Assignor with the Notice before June
30, 1999, Assignor shall deliver to Escrow Agent written notice of the same,
whereupon Escrow Agent shall release to Assignor the Escrowed Funds, together
with any interest earned thereon within five (5) business days after Escrow
Agent's receipt of such notice.
4. Upon the release of the Escrowed Funds as provided herein, Assignor
shall have no further obligation or liability whatsoever with respect to
tenant's proportionate share of Increased Operating Costs.
5. Any notice, payment or demand under this Assignment shall be deemed
given either (a) three (3) business days after mailed by registered or
certified mail, return receipt requested, or (b) one (1) business day after
sent by Federal Express or other nationally recognized overnight courier
service providing for written evidence of delivery, addressed to the parties
hereto at the address as first set forth above and if given to Assignor, a
copy shall be given to Stuart S. Ball, Esq. at Littman Krooks Roth & Ball P C.,
655 Third Avenue, New York, New York 10017 and if to Assignee and/or Escrow
Agent, a copy shall be given to Paula Maggio, Esq. at Kamensky & Rubinstein,
Suite 200, 7250 North Cicero Avenue, Lincolnwood, Illinois 60656-1693. Either
party may designate by notice in writing a new or other address to which such
notice, payment or demand shall thereafter be so given or mailed.
Except as may be expressly herein provided, this Assignment shall not
create any rights
<PAGE>
in any third parties against Assignor or Assignee not otherwise heretofore in
existence.
This Assignment may not be amended, modified or terminated except by an
instrument in writing executed by the parties hereto.
This Assignment shall be binding upon and shall inure to the benefit of
the parties hereto and their respective heirs, successors and assigns.
IN WITNESS WHEREOF, the Assignor and the Assignee have duly executed
this Assignment and Assumption of Lease as of the 1st day of July, 1998.
In the presence of: Assignor: Intellicell, Corp., a Delaware corporation
/s/ Sonya Abedi By: /s/ Ben Neman
- ----------------------- ------------------------------------------------
Sonya Abedi Name: Ben Neman
- ----------------------- Title: C.E.O.
(As to Assignor)
Assignee: Cellular Wholesalers, Inc.,
In the presence of: an Illinois corporation
/s/ [ILLEGIBLE] By: /s/ Melvyn Cohen
- ----------------------- -----------------------------------------
Controller Name: Melvyn Cohen
- ----------------------- Title: Secretary Treasurer
(As to Assignee)
Accepted and Agreed to:
Kamensky & Rubinstein, Escrow Agent
/s/ [ILLEGIBLE]
- ---------------------------------
<PAGE>
EMPLOYMENT AGREEMENT
This Agreement is made effective as of January 19, 1999, by and between Michael
King ("Employee") and INTELLICELL, CORP., a Delaware corporation ("Employer" or
the "Company")
RECITALS
A. Employer desires to employ Employee as its Vice President of Marketing
and Business Development and to be assured of his services as such on the
terms and conditions hereinafter set forth.
C. Employee is willing to accept employment in the above-described capacity on
such terms and conditions.
For all the reasons set forth above, and in consideration of the mutual
covenants and promises of the parties, and intending to be legally bound hereby,
Employer and Employee agree as follows:
Section I
Employment
Employee shall perform the duties and responsibilities of Vice President of
Marketing and Business Development, reporting directly to the President and CEO
and its Board of Directors ("Board"). Such duties and responsibilities shall be
reasonably related to Employee's position. Employee shall devote all of his
business time, attention, knowledge and skills faithfully, diligently and to the
best of his ability, in furtherance of the business and activities of the
Company and may not, directly or indirectly, in any capacity, do any work for or
on behalf of himself exclusively, or any other company, person or entity,
irrespective of whether or not same is in a competing business. Employee is,
under California law, considered employed at will. The principal place of
performance by Employee of his duties hereunder shall be out of Employee's home
office or such other place as the Board shall determine, although Employee may
be required to travel outside of the area where his office is located in
connection with the business of the Company.
Section II
Term of Employment
The term of employment shall be three (3) years commencing as of the date
hereof (the "Effective Date") (such period being referred to as the "Initial
Term" and any year commencing on the Effective Date or any anniversary of the
Effective Date being hereinafter referred to as an "Employment Year"). After
the Initial Term, this Agreement shall be renewable automatically for successive
one year periods (each such period being referred to as a "Renewal Term"),
unless, approximately sixty (60) days prior to the expiration of the Initial
Term or any Renewal Term, either the Employee or the Company give written notice
that the employment will not be renewed.
Section III
Compensation
Employer shall pay employee a monthly salary ("Salary") of Ten Thousand
Dollars ($10,000.00), payable twice monthly, on the 15th and 30th days of each
month (pro-rated, as applicable), or at such other times as may mutually be
agreed upon between Employer and Employee.
Subject to formal Board approval, Employer shall grant 50,000 Incentive
Options to purchase 50,000 shares of common stock of the Company, under the
Employer's 1998 Stock Option Plan. Options are granted with an exercise price
equal to the fair market value of the Company's common stock on the date of
grant. These options will vest one-third per year, at the end of the year, over
3 years pending continued employment with Employer.
Page 1 of 6
<PAGE>
Section IV
Benefits
(a) During the term of this Agreement, Employee shall have the right to
receive or participate in all benefits and plans which the Company may form time
to time institute during such period for its employees and for which Employee is
eligible. Nothing paid to Employee under any plan or arrangement presently in
effect or made available in the future shall be deemed to be in lieu of salary
or any other obligation payable to Employee pursuant to this Agreement.
(b) During the term of this Agreement Employee shall be entitled to the
number of paid holidays, personal days off and sick leave days in each calendar
year as are determined by the Company from time to time. Employee shall be
entitled to one (1) week of vacation during his first year of employment and two
(2) weeks per year for each year thereafter. Such vacation shall be taken in
Employee's discretion with the prior approval of Employer, and at such times as
are not inconsistent with the reasonable business needs of the Company.
Section V
Travel and Other Expenses
All travel and other expenses incidental to the rendering of services
reasonably incurred on behalf of the Company by Employee during the term of this
Agreement shall be paid by Employer. If any such expenses are paid in the first
instance by Employee, Employer shall reimburse him therefor within a reasonable
time of presentation of appropriate receipts for such expenses.
Section VI
Termination
(a) Notwithstanding anything in this Agreement to the contrary, Employer
shall have the right to discharge Employee, for cause in the event: (i)
Employee shall be unable to perform his full duties pursuant to this Agreement
to the satisfaction of Employer as a result of illness, disability, or other
incapacity for a aggregate period of 90 days or more during the term hereof; or
(ii) Employee shall fail to perform any reasonable duties assigned to him; or
(iii) Employee shall commit a willful or intentional breach of his duties and
obligations to Employer; or (iv) Employee shall otherwise violate an provision
of this Agreement; or (v) Employee shall be adjudicated an incompetent; or (vi)
Employee engages in criminal misconduct (including, without limitation,
embezzlement and criminal fraud); or (vii) Employee shall be guilty of material
dishonesty or shall be convicted of any felony, or Employee shall have breached
any warranty given under this Agreement. Upon discharge pursuant to this
Section, Employer shall have no further obligation or duties to Employee other
than payment of salary and reimbursement of expenses through the effective date
of termination of Employee.
(b) In the event that Employee's employment is terminated with cause, then
Employer shall have no further obligation or duties to Employee, other than for
payment of amount as provided under Section V. In the event of such termination
without cause, after six months from date of employment, Employer shall continue
to pay Employee, at the current Salary rate either, (i) for the remainder of the
Initial Term, or the remainder of the current Renewal Term if this Agreement has
been renewed, or (ii) for a further period of three (3) months following
termination, whichever is less.
(c) Notwithstanding the discharge of Employee pursuant to this Section,
Employee shall continue to be bound by the provisions of Sections VII and VIII
of this Agreement.
Page 2 of 6
<PAGE>
Section VII
Non-Disclosure and Non-Competition
(a) Employer and Employee acknowledge that the services to be performed by
Employee under this Agreement are unique and extraordinary and, as a result of
such employment, Employee will come unto possession of confidential information
relating to the business and practices of the Company. The term "Confidential
Information" shall mean any and all information (verbal and written) relating to
the Company or any of its affiliates, or any of their respective activities,
other than such information which can be shown by Employee to be in the public
domain (such information not being deemed to be in the public domain merely
because it is embraced by more general information which is in the public
domain) other than as a result of a breach of the provisions of this Section,
including, but limited to: trade secrets, research projects, personnel lists,
financial information, services used, pricing, customers, customer lists and
prospects, product sourcing, marketing and selling and servicing. Employee will
not at any time, either during or after the term of this Agreement, divulge any
Confidential Information to any other person, firm, or entity, nor use or permit
the use of any said Confidential Information, other than pursuant to Employment
on behalf of Employer hereunder. Without limiting the generality of the
foregoing, upon the termination of Employment for any reason, Employee shall
forthwith deliver to Employer all documents and other material in his possession
or under his control containing any Confidential Information and/or relating to
the business of Employer.
(b) It is understood and agreed by Employee that all business
relationships and goodwill now existing with respect to customers and suppliers
of Employer, whether or not created or served by Employee hereunder, and all
such relationships and goodwill which may hereafter become known to or be
created or enhanced by Employee in the course of Employment hereunder,
constitute valuable proprietary rights and interests of Employer, and are, and
shall at all times remain, the sole property of, and shall inure to the sole
benefit of Employer. Accordingly, Employee agrees that during the term of
Employment and for a further period of one (1) year beginning on the date of
termination of Employment for any reason, Employee will not, as proprietor,
partner, joint venturer, stockholder, director, officer, trustee, principal,
agent, servant, employee consultant or in any other capacity whatever, directly
or indirectly, solicit orders from, sell, or render services to any customer
within the United States, its territories and possessions, with respect to any
product or service competitive with any product or service sold or developed by
Employer or any subsidiary or affiliated corporation at any time during
Employment, nor shall Employee directly or indirectly aid or assist any other
person, firm, or corporation to do any of the aforesaid acts. In addition, for
a period of one (1) year after termination of Employment for any reason,
Employee shall not, in any of the aforesaid capacities, directly or indirectly
do or participate in business with any suppliers of Employer concerning any of
the products which have been, or are being, or are planned to be manufactured
for or supplied to Employer by such supplier at the time of Employee's
termination.
(c) During Employment and for a further period of one (1) year beginning
on the termination of Employment under any circumstances, Employee shall not, as
a proprietor, partner, joint venturer, stockholder, director, officer, trustee,
principal, agent, servant, employee, consultant or any other capacity whatever,
directly or indirectly, (i) engage in, or be financially interested in any
business operating within the United States, and any other country in which
Employer conducts substantial business, which is competitive with business
either, engaged-in or contemplated, by Employer as of the date Employee's
termination from employment, or (ii) solicit or induce any officer, salesman, or
other employee of Employer or any subsidiary or affiliated corporation, for any
employment in a line of business to any conducted by Employer, nor shall
Employee directly or indirectly aid or assist any other person, firm, or
corporation to do any of the aforesaid acts.
(d) Employee acknowledges that, as an executive of Employee, he will
become familiar with the affairs, customers and other Confidential Information
of Employer. Employee acknowledges that his compliance with the provisions of
this Agreement and, in particular, this Section is necessary to protect the
goodwill and other proprietary interests of Employer, that their enforcement
will not significantly impair the ability of Employee to earn a livelihood and
that, but for the covenants entered into hereunder, Employer would not enter
into this Agreement with Employee. Employee acknowledges that his breach of any
of the provisions of this Section will result in irreparable and continuing
damage to the business of Employer for which there will be no adequate remedy at
law and agrees that in the event of any such breach, Employer and its successors
and
Page 3 of 6
<PAGE>
assigns shall be entitled to injunctive relief and to such other and further
relief as may be proper.
(e) The parties hereto hereby acknowledge that, in addition to any other
remedies the Company may have under paragraph (d) of this Section, the Company
shall have the right and remedy to require Employee to account for any pay over
to the Company all compensation, profits, monies, accruals, increments or other
benefits (collectively, "Benefits") derived or received by Employee as the
result of any transactions constituting a breach of this Section VII or Section
VIII below, and Employee hereby agrees to account for and pay over such Benefits
to the Company.
(f) Each of the rights and remedies enumerated above shall be independent
of the other and shall be severally enforceable. All such rights and remedies
shall be in addition to, and not in lieu of, any other rights and remedies
available to the Company under law or in equity.
(g) If any provision contained in this Section VII, or Section VIII below,
is hereafter construed to be invalid or unenforceable, the same shall not effect
the remainder of the covenants with shall be give full effect, without regard to
the invalid portions.
(h) If any provision contained in this Section VII, or Section VIII below,
is found to be unenforceable by reason of the extent, duration or scope thereof,
or otherwise, then the court making such determination shall have the right to
reduce or scope, or other provision, and in its reduced form any such
restriction shall thereafter be enforceable as contemplated hereby.
(i) It is the intent of the parties hereto that the covenants contained in
this Section VII, or Section VIII below shall be enforced to the fullest extent
under the laws and public policies of each jurisdiction in which enforcement is
sought (Employee acknowledges that said restrictions are reasonably necessary
for the protection of the Company). Accordingly, it is hereby agreed that if
any of the provisions of this Section VII, or Section VIII below, shall be
adjudicated to be invalid or unenforceable for any reason whatsoever, said
provision shall be (only with respect to the operation thereof in the particular
jurisdiction in which such adjudication is made) construed by limiting and
reducing it so as to be enforceable to the extent permissible, without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of said provision in any other jurisdiction.
Section VIII
Discoveries and Inventions
(a) Any discovery, invention, formula, process, improvement or idea
("Discovery" or "Discoveries"), whether or not patentable, relating to or useful
in the business of Employer and wholly or partially conceived, made or learned
by Employee during the period of Employment shall be the sole and exclusive
property of Employer. Employee shall disclose any Discovery to Employer
promptly and shall upon request, assist Employer in obtaining and assigning to
it all rights, title and interest in any United States or foreign patent on any
Discovery.
(b) If any Discovery is described in a patent application or is disclosed
to third parties, directly or indirectly, by Employee within two (2) years
following termination of his employment with the Company, it is to be presumed
that the Discovery was conceived or made during the period of Employee's
employment by the Company.
(c) Employee will not assert rights to any Discovery as having been
made or acquired by him prior to the date of this Agreement, except
for Discoveries, if any, disclosed to the Company in writing prior
to the date hereof.
Page 4 of 6
<PAGE>
Section IX
Indemnification
Employee agrees to indemnify and hold harmless Employer and its successors
and assigns against any loss, cost, liability or expense incurred by any of them
(including, without limitation, attorney's fees and costs of suit) by reason of
breach or nonfulfillment by Employee of any provision of this Agreement
Section X
Arbitration
Any differences, claims, or matters in dispute arising between the parties
out of this agreement or connected with this agreement shall be submitted by
them to arbitration by the American Arbitration Association or its successor,
and the determination of the American Arbitration Association or its successor,
and the determination of the American Arbitration Association or its successor
shall be final and absolute. The arbitrator shall be governed by the rules and
regulations of the American Arbitration Association or its successor, and the
pertinent provisions of the laws of the State of California relating to
arbitration. The decision of the arbitrator may be entered as a judgement in
any court of the State of California or elsewhere.
Section XI
Provisions of General Application
(a) Employee warrants and represents that (i) he is in good health and not
suffering from any impairment to his general well being, (ii) the execution of
this Agreement and discharge of Employee's obligations hereunder does not and
will not constitute a breach of or default under (A) any employment agreement or
non-competition agreement to which Employee is a party, or (B) any other
contract, agreement, or understanding between Employee and any other party or
parties, and (iii) Employee has ideas, information and know-how relating to the
type of business conducted by Employer, and Employee's disclosure of such ideas,
information and know-how to Employer will not conflict with or violate the
rights of any third party or parties.
(b) This Agreement contains the entire agreement of the parties relating
to the subject matter hereof. This Agreement supersedes and is in lieu of any
and all other employment arrangements between Employee and Employer.
(c) Any notice required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been effectively given for all
purposes (i) if delivered personally, upon delivery, or (ii) if mailed, upon
deposit in the United States mail, registered or certified mail, postage
prepaid, addressed to Employee's residence (as last known to Employer), in the
case of Employee, or to the principal office of Employer, in the case of
Employer. Either party may change the address at which such party is to receive
notice by notice to the other party.
(d) Any waiver, change, modification, extension or discharge in connection
with this Agreement must be in writing and signed by the party to be bound
thereby. The waiver by Employer of a breach by Employee of, or failure of
Employee to comply with, any provision of this Agreement shall not be construed
as, or constitute, a continuing waiver of, or a waiver of any breach of, or
failure to comply with any provision of this Agreement.
(e) Employer may sell, assign and transfer all or part of its rights under
this Agreement to any Affiliates of Employer or any purchaser of Employer or
successor to the business or assets of Employer, provided, however, that such
purchaser or successor assumes the obligations of Employer hereunder. This
Agreement is personal to Employee, and Employee may not sell, assign, pledge or
otherwise transfer any of these rights under this Agreement.
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<PAGE>
(f) All provisions of this Agreement are intended to be interpreted and
construed in a manner making such provisions valid, legal and enforceable. In
the event any provision of this Agreement or portion thereof is found to be
wholly or partially invalid, illegal or unenforceable in any judicial
proceeding, such provision shall be deemed to be modified or restricted to the
extent necessary to make such provision valid, legal and enforceable. In the
event such provision or portion thereof cannot be so modified or restricted,
such provision or portion thereof shall be deemed to be excised from this
Agreement, and the validity, legality and enforceability of the remainder of
this Agreement shall not be affected or impaired in any manner.
(g) Confidential Information shall constitute a "Trade Secret" as defined
and subject to protection by Employer, under the Uniform Trade Secrets Act.
This Agreement is entered into in the State of California and shall not be
governed by and construed in accordance with the laws and decisions of the State
of California.
IN WITNESS WHEREOF, Employer and Employee have executed this Agreement as
of the date first above written.
INTELLICELL CORP.
By /s/ John F. Swinehart /s/ Michael King
--------------------------------------- ---------------------------------
John F. Swinehart, CEO Michael King
"Employer" "Employee"
Page 6 of 6
<PAGE>
EMPLOYMENT AGREEMENT
This Agreement is made effective as of January 29, 1999, by and between Michael
S. Hedge ("Employee") and INTELLICELL, CORP., a Delaware corporation ("Employer"
or the "Company")
RECITALS
A. Employer desires to employ Employee as its Executive Vice President -
General Manager and to be assured of his services as such on the terms and
conditions hereinafter set forth.
C. Employee is willing to accept employment in the above-described capacity on
such terms and conditions.
For all the reasons set forth above, and in consideration of the mutual
covenants and promises of the parties, and intending to be legally bound hereby,
Employer and Employee agree as follows:
Section I
Employment
Employee shall perform the duties and responsibilities of Executive Vice
President - General Manager, reporting directly to the President and CEO.
Such duties and responsibilities shall be reasonably related to Employee's
position. Employee shall devote all of his business time, attention,
knowledge and skills faithfully, diligently and to the best of his ability,
in furtherance of the business and activities of the Company and may not,
directly or indirectly, in any capacity, do any work for or on behalf of
himself exclusively, or any other company, person or entity, irrespective of
whether or not same is in a competing business. Employee is considered
employed under the applicable law in which the Employee is employed. The
principal place of performance by Employee of his duties hereunder shall be
in or near Dallas, Texas or such other place as the Company's Board of
Directors (the "Board") shall determine, although Employee may be required to
travel outside of the metro Dallas area where his office is located in
connection with the business of the Company.
Section II
Term of Employment
The term of employment shall be three years commencing as February 8, 1999
(the "Effective Date") (such period being referred to as the "Initial Term" and
any year commencing on the Effective Date or any anniversary of the Effective
Date being hereinafter referred to as an "Employment Year").
Section III
Compensation
Employer shall pay employee a monthly salary ("Salary") of Twelve Thousand
five hundred Dollars ($12,500.00), payable twice monthly, on the 15th and 30th
days of each month (pro-rated, as applicable)(the "paydate") or at such other
times as may mutually be agreed upon between Employer and Employee. In
addition, Employer shall pay employee a one-time signing bonus of $36,000
payable on the first Paydate after commencement of employment.
Subject to formal Board approval, Employer shall grant Incentive Options
to purchase 100,000 shares of common stock of the Company, under the Employer's
1998 or 1996 Stock Option Plans. The five year options are granted with an
exercise price equal to the fair market value of the Company's common stock on
the date of grant. These options will vest as to $100,000 of excercisable value
(number of shares x cash exercise price) December 31, 1999, December 31, 2000
and December 31, 2001 with any remaining options vesting on February 8, 2002
pending continued employment with Employer.
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<PAGE>
Subject to formal Board approval and at the sole discretion of the Board,
Employee may, from time to time receive bonuses based on performance of the
Employee and the earnings of the Employer. Said bonuses will be paid in either
cash or stock options.
As further incentive for the Employee, Employer agrees to provide the
financial arrangements for the Employee to exercise vested options to purchase
72,000 shares of Cellstar Corp. shares at an exercise price of $6.95 per share.
Said arrangements to include, but not be limited to finding a willing stock
broker to provide a margin loan to the Employee. The difference between the
margin loan and the exercise price would be either funded by the Employer as an
interest free loan to the Employee or the Employer would make other arrangements
on terms no less favorable. Employee hereby agrees to provide Employer a
security interest in the 72,000 shares of Cellstar Corp. shares and to repay any
loans made from the first sales of these shares or by February 28, 2000;
whichever occurs earlier. If any loans made by Employer to Employee have not
been repaid by February 28, 2000. Employer may offset in full, all amounts so
owed from any salary, bonuses reimbursements or other amounts owed by Employer
to Employee.
Section IV
Benefits
(a) During the term of this Agreement, Employee shall have the right to
receive or participate in all benefits and plans which the Company may from
time to time institute during such period for its employees and for which
Employee is eligible. Nothing paid to Employee under any plan or arrangement
presently in effect or made available in the future shall be deemed to be in
lieu of salary or any other obligation payable to Employee pursuant to this
Agreement.
(b) During the term of this Agreement Employee shall be entitled to the
number of paid holidays, personal days off and sick leave days in each calendar
year as are determined by the Company from time to time. Employee shall be
entitled to two weeks of vacation during his first year of employment and two
weeks per year for each year thereafter. Such vacation shall be taken in
Employee's discretion with the prior approval of Employer, and at such times as
are not inconsistent with the reasonable business needs of the Company.
Section V
Travel and Other Expenses
All travel and other expenses incidental to the rendering of services
reasonably incurred on behalf of the Company by Employee during the term of this
Agreement shall be paid by Employer. If any such expenses are paid in the first
instance by Employee, Employer shall reimburse him therefor within a reasonable
time of presentation of appropriate receipts for such expenses.
If the Employer requests the Employee to relocate, the Employer agrees to
pay reasonable costs. Employer and Employee agree to a maximum limit of said
costs before the move is consummated. Furthermore, Employer agrees that a
dispute over the amount of reasonable costs shall not constitute cause as
defined in Section VI of this Agreement.
Section VI
Termination
(a) Notwithstanding anything in this Agreement to the contrary, Employer
shall have the right to discharge Employee, for cause in the event: (i)
Employee shall be unable to perform his full duties pursuant to this Agreement
to the satisfaction of Employer as a result of illness, disability, or other
incapacity for an aggregate period of 90 days or more during the term hereof; or
(ii) Employer shows Employee fails to competently perform his reasonable duties
assigned to him by Employer; or (iii) Employee shall commit a
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<PAGE>
willful or intentional breach of his duties and obligations to Employer or
engage in any materially dishonest conduct in connection with the performance
of his duties under this Agreement; or (iv) Employee shall otherwise violate
any material provision of this Agreement; or (v) Employee shall be
adjudicated an incompetent; or (vi) Employee shall engage in criminal
misconduct (including, without limitation, embezzlement and criminal fraud);
or (vii) Employee shall be convicted of any felony; or (viii) Employee shall
have breached any warranty given under this Agreement. Upon discharge
pursuant to this Section, Employer shall have no further obligation or duties
to Employee other than payment of salary and reimbursement of expenses
through the effective date of termination of Employee.
(b) In the event that Employee's employment is terminated with cause, then
Employer shall have no further obligation or duties to Employee, other than for
payment of amounts as provided under Section V and VI and shall be entitled to
recover from Employee any costs or damages resulting from Employee's breach of
this Agreement. In the event of such termination without cause, after six
months from date of employment, Employer shall continue to pay Employee, at the
current Salary rate either, (i) for the remainder of the Initial Term or (ii)
for a further period of twelve months following termination, whichever is less.
In the event of such termination without cause, within six months from the date
of employment, Employer shall continue to pay Employee, at the current Salary
rate either (i) for the remainder of the Initial Term, or (ii) for a further
period of six months following termination, whichever is less.
c Notwithstanding the discharge of Employee pursuant to Sections 6(a)
and 6(b) above, Employee shall continue to be bound by the provisions of
Sections VII and VIII of this Agreement.
(d) In the event that there is a Change in Control (as hereinafter
defined), at the option of the Employee, which must be executed in writing ten
days following the Change in Control, this Agreement will be terminated and the
Employer and Employee shall have no further obligation or duties to each other,
except as provided in SECTION VII(a).
(e) For purposes of this Agreement a "CHANGE IN CONTROL" shall mean and be
determined to have occurred if (A) any person ("PERSON") (as such term is used
in Sections 13(b) and 14(b) of the Securities and Exchange Act of 1934, as
amended) (the "EXCHANGE ACT") is or becomes the beneficial owner ("BENEFICIAL
OWNER") (as defined in Rule 13d-3 promulgated under the Exchange Act), directly
or indirectly, of securities of the Company representing thirty five percent (35
%) or more of the combined voting power of the then outstanding securities of
the Company; (B) during any period of two (2) years, a majority of the members
of the Board is replaced by directors who were not nominated and approved by the
Board; or (C) the Company is combined with or acquired by another company and
the Board shall have determined, either before such event or thereafter, by
resolution, that a Change in Control will occur or has occurred.
Section VII
Non-Disclosure and Non-Competition
(a) Employer and Employee acknowledge that the services to be performed by
Employee under this Agreement are unique and extraordinary and, as a result of
such employment, Employee will come unto possession of confidential information
relating to the business and practices of the Company. The term "Confidential
Information" shall mean any and all information (verbal and written) relating to
the Company or any of its affiliates, or any of their respective activities,
other than such information which can be shown by Employer to not be in the
public domain (such information not being deemed to be in the public domain
merely because it is embraced by more general information which is in the public
domain) other than as a result of a breach of the provisions of this Section,
including, but limited to: trade secrets, research projects, personnel lists,
financial information, services used, pricing, customers, customer lists and
prospects, product sourcing, marketing and selling and servicing. Employee will
not at any time, either during or after the term of this Agreement, divulge any
Confidential Information to any other person, firm, or entity, nor use or permit
the use of any said Confidential Information, other than pursuant to employment
on behalf of Employer hereunder. Without limiting the generality of the
foregoing, upon the termination of employment hereunder for any reason, Employee
shall forthwith deliver to Employer all documents and other material in his
possession or under his
Page 3
<PAGE>
control containing any Confidential Information and/or relating to the
business of Employer.
(b) It is understood and agreed by Employee that all business
relationships and goodwill now existing with respect to customers and suppliers
of Employer, whether or not created or served by Employee hereunder, and all
such relationships and goodwill which may hereafter become known to or be
created or enhanced by Employee in the course of employment hereunder,
constitute valuable proprietary rights and interests of Employer, and are, and
shall at all times remain, the sole property of, and shall inure to the sole
benefit of Employer. Accordingly, Employee agrees that during the term of
employment and for a further period of one year beginning on the date of
termination of Employment for any reason, Employee will not, as proprietor,
partner, joint venturer, stockholder, director, officer, trustee, principal,
agent, servant, employee consultant or in any other capacity whatever, directly
or indirectly, solicit orders from, sell, or render services to any customer
within the United States, its territories and possessions, with respect to any
product or service competitive with any product or service sold or developed by
Employer or any subsidiary or affiliated corporation at any time during
employment, nor shall Employee directly or indirectly aid or assist any other
person, firm, or corporation to do any of the aforesaid acts. In addition, for
a period of one year after termination of employment for any reason, Employee
shall not, in any of the aforesaid capacities, directly or indirectly do or
participate in business with any suppliers of Employer concerning any of the
products which have been, or are being, or are planned to be manufactured for or
supplied to Employer by such supplier at the time of Employee's termination.
During employment and for a further period of one year beginning on the
termination of such Employment under any circumstances; hereunder Employee
shall not, as a proprietor, partner, joint venturer, stockholder, director,
officer, trustee, principal, agent, servant, employee, consultant or any other
capacity whatever, directly or indirectly, (i) engage in, or be financially
interested in any business operating within the United States, and any other
country in which Employer conducts substantial business, which is competitive
with business either, engaged-in or contemplated, by Employer as of the date
Employee's termination from employment except for ownership in less than one
percent of any publically traded stock, or (ii) solicit or induce any officer,
salesman, or other employee of Employer or any subsidiary or affiliated
corporation, for any employment in a line of business to any conducted by
Employer, nor shall Employee directly or indirectly aid or assist any other
person, firm, or corporation to do any of the aforesaid acts.
(d) The provision of Section VII (b) and Section VII (c) above will be
limited to a period of six months if the Employee's employment with Employer is
less than one year.
(e) Employee acknowledges that, as an executive of Employee, he will
become familiar with the affairs, customers and other Confidential Information
of Employer. Employee acknowledges that his compliance with the provisions of
this Agreement and, in particular, this Section is necessary to protect the
goodwill and other proprietary interests of Employer, that their enforcement
will not significantly impair the ability of Employee to earn a livelihood and
that, but for the covenants entered into hereunder, Employer would not enter
into this Agreement with Employee. Employee acknowledges that his breach of any
of the provisions of this Section will result in irreparable and continuing
damage to the business of Employer for which there will be no adequate remedy at
law and agrees that in the event of any such breach, Employer and its successors
and assigns shall be entitled to injunctive relief and to such other and further
relief as may be proper.
(f) The parties hereto hereby acknowledge that, in addition to any other
remedies the Company may have under paragraph (d) of this Section, the Company
shall have the right and remedy to require Employee to account for and pay over
to the Company all compensation, profits, monies, accruals, increments or other
benefits (collectively, "Benefits") derived or received by Employee as the
result of any transactions constituting a breach of this Section VII or Section
VIII below, and Employee hereby agrees to account for and pay over such Benefits
to the Company.
(g) Each of the rights and remedies enumerated above shall be independent
of the other and shall be severally enforceable. All such rights and remedies
shall be in addition to, and not in lieu of, any other rights and remedies
available to the Company under law or in equity.
(h) If any provision contained in this Section VII, or Section VIII below,
is hereafter construed to
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<PAGE>
be invalid or unenforceable, the same shall not affect the remainder of the
covenants with shall be give full effect, without regard to the invalid
portions.
(i) If any provision contained in this Section VII, or Section VIII below,
is found to be unenforceable by reason of the extent, duration or scope thereof,
or otherwise, then the court making such determination shall have the right to
reduce or scope, or other provision, and in its reduced form any such
restriction shall thereafter be enforceable as contemplated hereby.
(j) It is the intent of the parties hereto that the covenants contained in
this Section VII, or Section VIII below shall be enforced to the fullest extent
under the laws and public policies of each jurisdiction in which enforcement is
sought (Employee acknowledges that said restrictions are reasonably necessary
for the protection of the Company). Accordingly, it is hereby agreed that if
any of the provisions of this Section VII, or Section VIII below, shall be
adjudicated to be invalid or unenforceable for any reason whatsoever, said
provision shall be (only with respect to the operation thereof in the particular
jurisdiction in which such adjudication is made) construed by limiting and
reducing it so as to be enforceable to the extent permissible, without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of said provision in any other jurisdiction.
Section VIII
Discoveries and Inventions
(a) Any discovery, invention, formula, process, improvement or idea
("Discovery" or "Discoveries"), whether or not patentable, relating to or useful
in the business of Employer and wholly or partially conceived, made or learned
by Employee during the period of Employment shall be the sole and exclusive
property of Employer. Employee shall disclose any Discovery to Employer
promptly and shall upon request, assist Employer in obtaining and assigning to
it all rights, title and interest in any United States or foreign patent on any
Discovery.
(b) If any Discovery is described in a patent application or is disclosed
to third parties, directly or indirectly, by Employee within two years
following termination of his employment with the Company, it is to be presumed
that the Discovery was conceived or made during the period of Employee's
employment by the Company.
(c) Employee will not assert rights to any Discovery as having been
made or acquired by him prior to the date of this Agreement, except for
Discoveries, if any, disclosed to the Company in writing prior to the date
hereof.
Section IX
Indemnification
Employee agrees to indemnify and hold harmless Employer and its successors
and assigns against any loss, cost, liability or expense incurred by any of them
(including, without limitation, reasonable attorney's fees and costs of suit) by
reason of breach or nonfulfillment by Employee of any provision of this
Agreement
Section X
Arbitration
Any differences, claims, or matters in dispute arising between the parties
out of this Agreement or connected with this Agreement shall be submitted by
them to arbitration the city of employment when the dispute arises by the
American Arbitration Association or its successor, and the determination of the
American
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<PAGE>
Arbitration Association or its successor, and the determination of the
American Arbitration Association or its successor shall be final and
absolute. The arbitrator shall be governed by the rules and regulations of
the American Arbitration Association or its successor, and the pertinent
provisions of the laws of the applicable State relating to arbitration. The
decision of the arbitrator may be entered as a judgement in any court of the
State of California or elsewhere.
Section XI
Provisions of General Application
(a) Employee warrants and represents that (i) he is in good health and not
suffering from any impairment to his general well being, (ii) the execution of
this Agreement and discharge of Employee's obligations hereunder does not and
will not constitute a breach of or default under (A) any employment agreement or
non-competition agreement which would affect the Employee's employment
hereunder, or (B) any other contract, agreement, or understanding between
Employee and any other party or parties, and (iii) Employee has ideas,
information and know-how relating to the type of business conducted by Employer,
and Employee's disclosure of such ideas, information and know-how to Employer
will not conflict with or violate the rights of any third party or parties.
Employee, however, does not agree to disclose nor will Employer disclose any
confidential information, if any, of Employee's former employer(s).
(b) This Agreement contains the entire agreement of the parties relating
to the subject matter hereof. This Agreement supersedes and is in lieu of any
and all other employment arrangements or understandings between Employee and
Employer.
(c) Any notice required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been effectively given for all
purposes (i) if delivered personally, upon delivery, or (ii) if mailed, upon
deposit in the United States mail, registered or certified mail, postage
prepaid, addressed to Employee's residence (as last known to Employer), in the
case of Employee, or to the principal office of Employer, in the case of
Employer. Either party may change the address at which such party is to receive
notice by notice to the other party.
(d) Any waiver, change, modification, extension or discharge in connection
with this Agreement must be in writing and signed by the party to be bound
thereby. The waiver by Employer of a breach by Employee of, or failure of
Employee to comply with, any provision of this Agreement shall not be construed
as, or constitute, a continuing waiver of, or a waiver of any breach of, or
failure to comply with any provision of this Agreement.
(e) Employer may sell, assign and transfer all or part of its rights under
this Agreement to any Affiliates of Employer or any purchaser of Employer or
successor to the business or assets of Employer, provided, however, that such
purchaser or successor assumes the obligations of Employer hereunder. This
Agreement is personal to Employee, and Employee may not sell, assign, pledge or
otherwise transfer any of these rights under this Agreement.
(f) All provisions of this Agreement are intended to be interpreted and
construed in a manner making such provisions valid, legal and enforceable. In
the event any provision of this Agreement or portion thereof is found to be
wholly or partially invalid, illegal or unenforceable in any judicial
proceeding, such provision shall be deemed to be modified or restricted to the
extent necessary to make such provision valid, legal and enforceable. In the
event such provision or portion thereof cannot be so modified or restricted,
such provision or portion thereof shall be deemed to be excised from this
Agreement, and the validity, legality and enforceability of the remainder of
this Agreement shall not be affected or impaired in any manner.
(g) Confidential Information shall constitute a "Trade Secret" as defined
and subject to protection by Employer, under the Uniform Trade Secrets Act.
This Agreement is entered into in the State of California and shall be governed
by and construed in accordance with the internal laws and decisions of the State
of
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California.
IN WITNESS WHEREOF, Employer and Employee have executed this Agreement as
of the date first above written.
INTELLICELL CORP.
"Employer"
By /s/ David Kane /s/ Michael Hedge
------------------------------------- ----------------------------------
David M. Kane, CFO Michael S. Hedge
"Employee"
By /s/ Ben Newman
-------------------------------------
Ben Neman, Chairman, President
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<PAGE>
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement dated 19th day of November, 1998 (this
"Agreement"), among INTELLICELL CORP., a Delaware corporation (the
"Corporation"), and the SECURITYHOLDERS (as herein defined).
WHEREAS, the Securityholders own or have the right to purchase or otherwise
acquire shares of the Common Stock (as hereinafter defined) of the Corporation;
and
WHEREAS, the Corporation and the Securityholders deem it to be in their
respective best interests to set forth the rights of the Securityholders in
connection with public offerings and sales of the Common Stock.
NOW, THEREFORE, in consideration of the premises and mutual covenants and
obligations hereinafter set forth, the Corporation and the Securityholders
hereby agree as follows:
SECTION 1. DEFINITIONS. As used in this Agreement, the following terms
shall have the following meanings:
(a) "Advisor Shares" means those shares of Common Stock issuable or
issued to Sands upon exercise of the warrants issued to Sands in connection with
the Offering, which shall be included as Registrable Shares for purposes of this
Agreement.
(b) "Closing" means the date of closing of the Offering.
(c) "Commission" means the Securities and Exchange Commission or any
other Federal agency at the time administering the Securities Act.
(d) "Common Stock" means the common stock, $0.01 par value per share,
of the Corporation.
(e) "Exchange Act" means the Securities Exchange Act of 1934 or any
successor Federal statute, and the rules and regulations of the Commission
promulgated thereunder, all as the same shall be in effect from time to time.
(f) "Offering" means the offering of subordinated convertible notes
by the Corporation pursuant to a Confidential Private Placement Memorandum dated
November 11, 1998.
(g) "Other Shares" means at any time those shares of Common Stock
held by any person (or issuable upon exercise or conversion of any security held
by any person) that do not constitute Primary Shares or Registrable Shares.
(h) "Primary Shares" means at any time the authorized but unissued
shares of Common Stock and shares of Common Stock held by the Corporation in its
treasury.
(i) "Registrable Shares" means Restricted Shares that constitute
Common Stock.
(j) "Restricted Shares" means shares of Common Stock issued and
outstanding or issuable upon exercise or conversion of warrants or other
securities to purchase Common Stock held by the Securityholders. As to any
particular Restricted Shares, once issued, such Restricted Shares shall cease to
be Restricted Shares when (i) they have been registered under the Securities
Act, the registration statement in
1.
<PAGE>
connection therewith has been declared effective and they have been disposed
of pursuant to such effective registration statement, (ii) they are eligible
to be sold or distributed pursuant to Rule 144 within any consecutive three
month period (including, without limitation, Rule 144(k)) without volume
limitations, or (iii) they shall have ceased to be outstanding.
(k) "Rule 144" means Rule 144 promulgated under the Securities Act or
any successor rule thereto or any complementary rule thereto (such as Rule
144A).
(l) "Sands" means Sands Brothers & Co., Ltd.
(m) "Securities Act" means the Securities Act of 1933 or any
successor Federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect from time to time.
(n) "Securityholders" means the purchasers of the Corporation's
securities in the Offering, Ben Neman, Sands and each additional person
receiving warrants or options as a finder in connection with the Offering who
shall execute a counterpart signature page hereto, and includes any successor
to, or assignee or transferee of, any such person who or which agrees in writing
to be treated as a Securityholder hereunder and to be bound by the terms and
comply with all applicable provisions hereof.
SECTION 2. REGISTRATION. The Corporation agrees to file a registration
statement covering the Registrable Shares within 90 days after the Closing (the
"Filing Date") and to use its reasonable best efforts to cause the registration
statement to become effective under the Securities Act; PROVIDED, HOWEVER, that
the Corporation shall not be obligated to effect any registration under the
Securities Act except in accordance with the following provisions:
(a) the Corporation shall not be obligated to use its reasonable best
efforts to file (i) any registration statement at any time unless the
Corporation's stockholders approve the Offering, (ii) more than one registration
statement pursuant to this Section 2;
(b) the Corporation may delay the filing or effectiveness of any
registration statement for a period of up to 120 days after the Filing Date
pursuant to this Section 2 if during the Filing Date the Corporation is engaged,
or has fixed plans to engage within 90 days of the time of such request, in a
firm commitment underwritten public offering of Primary Shares in which the
Company may include Registrable Shares pursuant to Section 3;
(c) with respect to any registration pursuant to this Section 2, the
Corporation shall give notice of such registration to the Securityholders
hereunder and to the holders of all Other Shares which are entitled to
registration rights and the Corporation may include in such registration any
Primary Shares or Other Shares;
(d) If the method of disposition requested by the holders, pursuant
to this Section 2, is an underwritten public offering, the majority of the
holders of Registrable Shares shall have the right to designate the managing
underwriter of such offering, which underwriter shall be reasonably acceptable
to the Corporation; and
(e) At any time before the registration statement covering
Registrable Shares becomes effective, the holders of a majority of such shares
may request the Corporation to withdraw or not to file the registration
statement. In that event, if such request of withdrawal shall not have been
caused by, or made in response to, the material adverse effect of an event on
the business, properties, condition, financial or otherwise, or operations of
the Corporation, the Company shall have no further obligations with respect to
the registration of Registrable Shares under this Section 2 unless the holders
shall pay to the Corporation the expenses incurred by the Corporation through
the date of such request.
2.
<PAGE>
SECTION 3. PIGGYBACK REGISTRATION. If the Corporation at any time
proposes for any reason to register Primary Shares or Other Shares under the
Securities Act (other than on Form S-4 or Form S-8 promulgated under the
Securities Act or any successor forms thereto), it shall promptly give written
notice to Sands of its intention to so register such Primary Shares or Other
Shares and, upon the written request, delivered to the Corporation within 30
days after delivery of any such notice by the Corporation, of Sands to include
in such registration Advisor Shares (which request shall specify the number of
Advisor Shares proposed to be included in such registration), the Corporation
shall use its best efforts to cause all such Advisor Shares to be included in
such registration on the same terms and conditions as the securities otherwise
being sold in such registration; PROVIDED, HOWEVER, that if the managing
underwriter advises the Corporation that the inclusion of all Advisor Shares
requested to be included in such registration would interfere with the
successful marketing (including pricing) of the Primary Shares or Other Shares
proposed to be registered by the Corporation, then the number of Primary Shares,
Advisor Shares and Other Shares proposed to be included in such registration
shall be included in the following order:
(a) if the Corporation proposes to register Primary Shares:
(i) FIRST, the Primary Shares; and
(ii) SECOND, the Advisor Shares and Other Shares requested to be
included in such registration (or, if necessary, such Advisor Shares and Other
Shares PRO RATA among the holders thereof based upon the number of Advisor
Shares and Other Shares requested to be registered by each such holder); or
(b) if the Corporation proposes to register Other Shares pursuant to
a request for registration by the holders of such Other Shares:
(i) FIRST, the Other Shares held by the parties demanding such
registration;
(ii) SECOND, the Advisor Shares and Other Shares (other than
shares registered pursuant to Section 3(b)(i) hereof) requested to be registered
by the holders hereof (or, if necessary, PRO RATA among the holders thereof
based on the number of Advisor Shares and Other Shares requested to be
registered by such holders); and
(iii) THIRD, the Primary Shares.
SECTION 4. PREPARATION AND FILING. If and whenever the Corporation is
under an obligation pursuant to the provisions of this Agreement to use its
reasonable best efforts to effect the registration of any Registrable Shares,
the Corporation shall, as expeditiously as practicable:
(a) use its reasonable best efforts to cause a registration statement
that registers such Registrable Shares to become and remain effective until the
earlier of the date that is four years after the Closing or until all of such
Registrable Shares have been disposed of (it being understood that the
Corporation may discontinue at any time any registration that is described in
Section 3);
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective
until the earlier of the date that is four years after the Closing or until all
of such Registrable Shares have been disposed of and to comply with the
provisions of the Securities Act with respect to the sale or other disposition
of such Registrable Shares (it being understood that the Corporation may
discontinue at any time any registration that is described in Section 3);
(c) use its reasonable best efforts to register or qualify such
Registrable Shares under such other securities or blue sky laws of such
jurisdictions as the Securityholders reasonably request and do any
3.
<PAGE>
and all other acts and things which may be reasonably necessary or advisable
to enable the Securityholders to consummate the disposition in such
jurisdictions of the Registrable Shares owned by the Securityholders;
PROVIDED, HOWEVER, that the Corporation will not be required to qualify
generally to do business, subject itself to general taxation or consent to
general service of process in any jurisdiction where it would not otherwise
be required to do so but for this paragraph (c) or to provide any material
undertaking or make any changes in its By-laws or Certificate of
Incorporation which the Board of Directors determines to be contrary to the
best interests of the Corporation;
(d) furnish to the Securityholders holding such Registrable Shares
such number of copies of a summary prospectus, if any, or other prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as such Securityholders may reasonably
request in order to facilitate the public sale or other disposition of such
Registrable Shares;
(e) use its reasonable best efforts to cause such Registrable Shares
to be registered with or approved by such other governmental agencies or
authorities as may be necessary by virtue of the business and operations of the
Corporation to enable the Securityholders holding such Registrable Shares to
consummate the disposition of such Registrable Shares;
(f) notify the Securityholders holding such Registrable Shares on a
timely basis at any time when a prospectus relating to such Registrable Shares
is required to be delivered under the Securities Act within the appropriate
period mentioned in subparagraph (a) of this Section 4, of the happening of any
event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the circumstances then
existing and, at the request of the Securityholders, prepare and furnish to such
Securityholders a reasonable number of copies of a supplement to or an amendment
of such prospectus as may be necessary so that, as thereafter delivered to the
offerees of such shares, such prospectus shall not include an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances then existing;
(g) subject to the execution of confidentiality agreements in form
and substance satisfactory to the Corporation, make available upon reasonable
notice and during normal business hours, for inspection by the Securityholders
holding such Registrable Shares, any underwriter participating in any
disposition pursuant to such registration statement and any attorney, accountant
or other agent retained by the Securityholders or underwriter (collectively, the
"Inspectors"), all pertinent financial and other records, pertinent corporate
documents and properties of the Corporation (collectively, the "Records"), as
shall be reasonably necessary to enable them to exercise their due diligence
responsibility, and cause the Corporation's officers, directors and employees to
supply all information (together with the Records, the "Information") reasonably
requested by any such Inspector in connection with such registration statement.
Any of the Information which the Corporation determines in good faith to be
confidential, and of which determination the Inspectors are so notified, shall
not be disclosed by the Inspectors unless (i) the disclosure of such Information
is necessary to avoid or correct a misstatement or omission in the registration
statement, (ii) the release of such Information is ordered pursuant to a
subpoena or other order from a court of competent jurisdiction or (iii) such
Information has been made generally available to the public; the Securityholders
agree that they will, upon learning that disclosure of such Information is
sought in a court of competent jurisdiction, give notice to the Corporation and
allow the Corporation, at the Corporation's expense, to undertake appropriate
action to prevent disclosure of the Information deemed confidential;
(h) use its best efforts to obtain from its independent certified
public accountants "cold comfort" letters in customary form and at customary
times and covering matters of the type customarily covered by cold comfort
letters;
(i) use its best efforts to obtain from its counsel an opinion or
opinions in customary
4.
<PAGE>
form;
(j) provide a transfer agent and registrar (which may be the same
entity and which may be the Corporation) for such Registrable Shares;
(k) issue to any underwriter to which the Securityholders holding
such Registrable Shares may sell shares in such offering certificates evidencing
such Registrable Shares;
(l) list such Registrable Shares on any national securities exchange
on which any shares of the Common Stock are listed or, if the Common Stock is
not listed on a national securities exchange, use its best efforts to qualify
such Registrable Shares for inclusion on the automated quotation system of the
National Association of Securities Dealers, Inc. (the "NASD"), or such other
national securities exchange as the holders of a majority of such Registrable
Shares shall reasonably request;
(m) use its reasonable best efforts to take all other steps necessary
to effect the registration of such Registrable Shares contemplated hereby.
Each holder of the Registrable Shares, upon receipt of any notice from the
Corporation of any event of the kind described in Section 4(f) hereof, shall
forthwith discontinue disposition of the Registrable Shares pursuant to the
registration statement covering such Registrable Shares until such holder's
receipt of the copies of the supplemented or amended prospectus contemplated by
Section 4(f) hereof, and, if so directed by the Corporation, such holder shall
deliver to the Corporation all copies, other than permanent file copies then in
such holder's possession, of the prospectus covering such Registrable Shares at
the time of receipt of such notice.
SECTION 5. EXPENSES. All expenses (other than underwriting discounts and
commissions relating to the Registrable Shares, as provided in the last sentence
of this Section 5) incurred by the Corporation in complying with Section 4,
including, without limitation, all registration and filing fees (including all
expenses incident to filing with the NASD), fees and expenses of complying with
securities and blue sky laws, printing expenses, and fees and expenses of the
Corporation's counsel and accountants shall be paid by the Corporation;
PROVIDED, HOWEVER, that all underwriting discounts and selling commissions
applicable to the Registrable Shares and Other Shares shall be borne by the
holders selling such Registrable Shares and Other Shares, in proportion to the
number of Registrable Shares and Other Shares sold by each such holder.
SECTION 6. INDEMNIFICATION.
(a) In connection with any registration of any Registrable Shares
under the Securities Act pursuant to this Agreement, the Corporation shall
indemnify and hold harmless the holders of Registrable Shares, each underwriter,
broker or any other person acting on behalf of the holders of Registrable Shares
and each other person, if any, who controls any of the foregoing persons within
the meaning of the Securities Act against any losses, claims, damages or
liabilities, joint or several (or actions in respect thereof), to which any of
the foregoing persons may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon (i) an untrue statement or allegedly
untrue statement of a material fact contained in the registration statement
under which such Registrable Shares were registered under the Securities Act,
any preliminary prospectus or final prospectus contained therein or otherwise
filed with the Commission, any amendment or supplement thereto or any document
incident to registration or qualification of any Registrable Shares, or (ii) the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading or,
with respect to any prospectus, necessary to make the statements therein in
light of the circumstances under which they were made not misleading, or any
violation by the Corporation of the Securities Act or state securities or blue
sky laws applicable to the Corporation and relating to action or inaction
required of the Corporation in connection with such registration or
qualification under such state securities or blue sky laws. The Corporation
shall reimburse the holders of Registrable Shares, any
5.
<PAGE>
underwriter or broker or such other person acting on behalf of the holders of
Registrable Shares and each controlling person of such underwriters, brokers
or other persons for any legal or other expenses reasonably incurred by an of
them in connection with investigating or defending any such loss, claim,
damage, liability or action; PROVIDED, HOWEVER, that the Corporation shall
not be liable in any such case to the extent that any such loss, claim,
damage, liability or action (including any legal or other expenses incurred)
arises out of or is based upon an untrue statement or allegedly untrue
statement or omission or alleged omission made in said registration
statement, preliminary prospectus, final prospectus, amendment, supplement or
document incident to registration or qualification of any Registrable Shares
in reliance upon and in conformity with written information furnished to the
Corporation through an instrument duly executed by the holders of Registrable
Shares or their counsel or underwriter specifically for use in the
preparation thereof; PROVIDED FURTHER, HOWEVER, that the foregoing indemnity
agreement is subject to the condition that, insofar as it relates to any
untrue statement, allegedly untrue statement, omission or alleged omission
made in any preliminary prospectus but eliminated or remedied in the final
prospectus (filed pursuant to Rule 424 of the Securities Act), such indemnity
agreement shall not inure to the benefit of any Securityholder, underwriter,
broker or other person acting on behalf of holders of the Restricted Shares
from whom the person asserting any loss, claim, damage, liability or expense
purchased the Restricted Shares which are the subject thereof, if a copy of
such final prospectus had been made available to such selling person and such
Securityholder, underwriter, broker or other person acting on his behalf and
such final prospectus was not delivered to the purchaser with or prior to the
written confirmation of the sale of such Registrable Shares to such purchaser.
(b) In connection with any registration of Registrable Shares under
the Securities Act pursuant to this Agreement, each holder of Registrable Shares
shall severally and not jointly indemnify and hold harmless (in the same manner
and to the same extent as set forth in the preceding paragraph of this Section
6) the Corporation, each director of the Corporation, each officer of the
Corporation who shall sign such registration statement, each underwriter, broker
or other person acting on behalf of the holders of Registrable Shares and each
person who controls any of the foregoing persons within the meaning of the
Securities Act with respect to any statement or omission from such registration
statement, any preliminary prospectus or final prospectus contained therein or
otherwise filed with the Commission, any amendment or supplement thereto or any
document incident to registration or qualification of any Registrable Shares, if
such statement or omission was made in reliance upon and in conformity with
written information furnished by the holders of Registrable Shares to the
Corporation or such underwriter specifically for use in connection with the
preparation of such registration statement, preliminary prospectus, final
prospectus, amendment, supplement or document; PROVIDED, HOWEVER, that the
maximum amount of liability in respect of such indemnification shall be limited,
in the case of each seller of Registrable Shares, to an amount equal to the net
proceeds actually received by such Seller from the sale of Registrable Shares
effected pursuant to such registration.
(c) Promptly after receipt by an indemnified party of notice of the
commencement of any action involving a claim referred to in the preceding
paragraphs of this Section 6, such indemnified party will, if a claim in respect
thereof is made against an indemnifying party, give written notice to the latter
of the commencement of such action. In case any such action is brought against
an indemnified party, the indemnifying party will be entitled to participate in
and to assume the defense thereof, jointly with any other indemnifying party
similarly notified to the extent that it may wish, with counsel reasonably
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party shall not be responsible for any legal or other
expenses subsequently incurred by the indemnified party in connection with the
defense thereof; PROVIDED, HOWEVER, that if any indemnified party shall have
reasonably concluded, based upon the advice of counsel, that there may be one or
more legal or equitable defenses available to such indemnified party which are
additional to or conflict with those available to the indemnifying party, or
that such claim or litigation involves or could have an effect upon matters
beyond the scope of the indemnity agreement provided in this Section 6, the
indemnifying party shall not have the right to assume the defense of such action
on behalf of such indemnified party and such indemnifying party shall reimburse
such indemnified party and any person controlling such indemnified party for
that portion of the reasonable fees and expenses of any one counsel retained by
the indemnified party which is reasonably related to the matters covered by the
indemnity agreement provided in this Section 6.
6.
<PAGE>
(d) If the indemnification provided for in this Section 6 is held by
a court of competent jurisdiction to be unavailable to an indemnified party with
respect to any loss, claim, damage, liability or action referred to herein, then
the indemnifying party, in lieu of indemnifying such indemnified party
hereunder, shall contribute to the amounts paid or payable by such indemnified
party as a result of such loss, claim, damage, liability or action in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and of the indemnified party on the other in connection
with the statements or omissions which resulted in such loss, claim, damage,
liability or action as well as any other relevant equitable considerations. The
relative fault of the indemnifying party and of the indemnified party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the indemnifying party or by
the indemnified party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
SECTION 7. INFORMATION BY HOLDER. The Securityholders shall furnish to
the Corporation such written information regarding the Securityholders and the
distribution proposed by the Securityholders as the Corporation may reasonably
request in writing and as shall be reasonably required in connection with any
registration, qualification or compliance referred to in this Agreement.
SECTION 8. EXCHANGE ACT COMPLIANCE. The Corporation shall use its best
efforts to comply with all of the reporting requirements of the Exchange Act
applicable to it (whether or not it shall be required to do so, but specifically
excluding Section 14 of the Exchange Act if not then applicable to the
Corporation) and shall comply with all other public information reporting
requirements of the Commission which are conditions to the availability of Rule
144 for the sale of the Common Stock. The Corporation shall cooperate with the
Securityholders in supplying such information as may be necessary for the
Securityholders to complete and file any information reporting forms presently
or hereafter required by the Commission as a condition to the availability of
Rule 144.
SECTION 9. SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to
the benefit of the Corporation and the Securityholders and, subject to Section
9, the respective successors and assigns of the Corporation and the
Securityholders.
SECTION 10. ASSIGNMENT. Each Securityholder may assign its rights
hereunder to any purchaser or transferee of Registrable Shares; PROVIDED,
HOWEVER, that such purchaser or transferee shall, as a condition to the
effectiveness of such assignment, be required to execute a counterpart to this
Agreement agreeing to be treated as a Securityholder whereupon such purchaser or
transferee shall have the benefits of, and shall be subject to the restrictions
contained in, this Agreement as if such purchaser or transferee was originally
included in the definition of an Securityholder herein and had originally been a
party hereto.
SECTION 11. ENTIRE AGREEMENT. This Agreement contains the entire
agreement among the Corporation and the Securityholders with respect to the
subject matter hereof and supersedes all prior and contemporaneous arrangements
or understandings with respect thereto.
SECTION 12. NOTICES. All notices, requests, consents and other
communications hereunder to any party shall be deemed to be sufficient if
contained in a written instrument delivered in person or sent by telecopy,
nationally-recognized overnight courier or first class registered or certified
mail, return receipt requested, postage prepaid, addressed to such party at the
address set forth below or such other address as may hereafter be designated in
writing by such party to the other parties:
7.
<PAGE>
(i) if to the Corporation, to:
Intellicell Corp.
9314 Eton Avenue
Chatsworth, CA 91311
Telecopy: (818) 882-1707
Attention: Chief Financial Officer
with a copy to:
Troy & Gould, Professional Corporation
1801 Century Park East, 16th Floor
Los Angeles, CA
Telecopy: (310) 201-4746
Attention: Sanford J. Hillsberg, Esq.; and
(ii) if to the Securityholders, to each such Securityholder at his
name and address as set forth in the records of the Company.
All such notices, requests, consents and other communications shall be deemed to
have been delivered (a) in the case of personal delivery or delivery by
telecopy, on the date of such delivery, (b) in the case of dispatch by
nationally-recognized overnight courier, on the next business day following such
dispatch and (c) in the case of mailing, on the third business day after the
posting thereof.
SECTION 13. MODIFICATIONS; AMENDMENTS; WAIVERS. The terms and provisions
of this Agreement may not be modified or amended, nor may any provision be
waived, except pursuant to a writing signed by the Corporation and the holders
of at least a majority of the Registrable Shares then outstanding; PROVIDED,
HOWEVER, that any amendment to or modification of this Agreement which would
have a disproportionate adverse affect on the rights of any Securityholder shall
require the written consent of such Securityholder.
SECTION 14. COUNTERPARTS; FACSIMILE SIGNATURES. This Agreement may be
executed in any number of counterparts, and each such counterpart hereof shall
be deemed to be an original instrument, but all such counterparts together shall
constitute but one agreement.
SECTION 15. HEADINGS. The headings of the various sections of this
Agreement have been inserted for convenience of reference only and shall not be
deemed to be a part of this Agreement.
SECTION 16. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California applicable to
contracts made and to be performed wholly therein.
8.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Registration
Rights Agreement on the date first written above.
INTELLICELL CORP.
By:
--------------------------------
Name:
Title:
SECURITYHOLDERS
-----------------------------------
Name:
-----------------------------------
Name:
-----------------------------------
Name:
-----------------------------------
Name:
-----------------------------------
Name:
-----------------------------------
Name:
-----------------------------------
Name:
-----------------------------------
Name:
SANDS BROTHERS & CO., LTD.
By:
--------------------------------
Name:
Title:
9.
<PAGE>
THIS NOTE HAS BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND MAY NOT BE
TRANSFERRED UNTIL (i) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT") SHALL HAVE BECOME EFFECTIVE WITH RESPECT THERETO
OR (ii) RECEIPT BY INTELLICELL CORP. (THE "COMPANY") OF AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT REGISTRATION UNDER
THE ACT IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER NOR IS SUCH
TRANSFER IN VIOLATION OF ANY APPLICABLE STATE SECURITIES LAWS. THIS LEGEND
SHALL BE ENDORSED UPON ANY NOTE EXCHANGED FOR THIS NOTE.
INTELLICELL CORP.
No._____ $______
SUBORDINATED CONVERTIBLE NOTE
INTELLICELL CORP., a Delaware corporation (the "Company"), for value
received, hereby promises to pay to _____________________ or registered
assigns (the "Payee") on the date three years from the date hereof (the
"Maturity Date") at the offices of the Company, 9314 Eton Avenue, Chatsworth,
California 91311, the principal amount of _____________________ ($_________),
including interest at the rate of two percent (2%) per annum accrued through
the Maturity Date, in such coin or currency of the United States of America
as at the time of payment shall be legal tender for the payment of public and
private debts.
1. PREPAYMENT
A. The principal amount of this Note may be prepaid by the Company,
in whole or in part, without penalty, at any time.
2. COVENANTS OF COMPANY
A. The Company covenants and agrees that, so long as this Note shall
be outstanding, it will:
(i) Promptly pay and discharge all lawful taxes, assessments,
and governmental charges or levies imposed upon the Company or upon its income
and profits, or upon any of its property, before the same shall become in
default, as well as all lawful claims for labor, materials and supplies which,
if unpaid, might become a lien or charge upon such properties or any part
thereof, provided, however, that the Company shall not be required to pay and
discharge any such tax, assessment, charge, levy or claim so long as the
validity thereof shall be contested in good faith by appropriate proceedings and
the Company shall set aside on its books adequate reserves with respect to any
such tax, assessment, charge, levy or claim so contested;
(ii) Do or cause to be done all things reasonably necessary to
preserve and keep in full force and effect its corporate existence, rights and
franchises and comply with all laws applicable to the Company, except where the
failure to comply would not have a material adverse effect on the Company;
(iii) At all times reasonably maintain, preserve, protect and
keep its property used or useful in the conduct of its business in good repair,
working order and condition, and from time to time make all needful and proper
repairs, renewals, replacements, betterments and improvements thereto as shall
be
1.
<PAGE>
reasonably required in the conduct of its business;
(iv) To the extent necessary for the operation of its business,
keep adequately insured by financially sound reputable insurers, all property of
a character usually insured by similar corporations and carry such other
insurance as is usually carried by similar corporations (other than earthquake
insurance); and
(v) At all times keep true and correct books, records and
accounts.
3. EVENTS OF DEFAULT
A. This Note shall become and be due and payable upon written demand
made by the holder hereof if one or more of the following events, herein called
events of default, shall happen and be continuing:
(i) Default in the payment of the principal and accrued interest
on this Note when and as the same shall become due and payable, whether by
acceleration or otherwise;
(ii) Default in the due observance or performance of any material
covenant, condition or agreement on the part of the Company to be observed or
performed pursuant to the terms hereof and such default shall continue uncured
for thirty (30) days after written notice thereof, specifying such default,
shall have been given to the Company by the holder of the Note;
(iii) Application for, or consent to, the appointment of a
receiver, trustee or liquidator of the Company or of its property;
(iv) Admission in writing of the Company's inability to pay its
debts as they mature;
(v) General assignment by the Company for the benefit of
creditors;
(vi) Filing by the Company of a voluntary petition in bankruptcy
or a petition or an answer seeking reorganization, or an arrangement with
creditors;
(vii) Entering against the Company of a court order approving
a petition filed against it under the Federal bankruptcy laws, which order shall
not have been vacated or set aside or otherwise terminated within sixty (60)
days; or
(viii) The sale by the Company of all or substantially all of
its assets (each of the foregoing, an "Event of Default").
B. The Company agrees that notice of the occurrence of any Event of
Default will be promptly given to the holder at his or her registered address by
certified mail.
C. Upon the occurrence of an Event of Default, the Note shall
thereafter bear interest at the higher of the maximum nonusurious rate of
interest permitted by applicable law or 10%.
D. Subject to the provisions of 4(B) hereof, in case any one or more
of the events of
2.
<PAGE>
default specified above shall happen and be continuing, the holder of this
Note may proceed to protect and enforce his rights by suit in the specific
performance of any covenant or agreement contained in this Note or in aid of
the exercise of any power granted in this Note or may proceed to enforce the
payment of this Note or to enforce any other legal or equitable rights of
such holder.
4. AMENDMENTS AND WAIVERS
A. Subject to the provisions of 4(C) and (D) hereof, the covenants
set forth in 2(A) hereof may be waived by the written consent of the holders of
a majority in the outstanding principal amount of the Notes issued pursuant to
the Confidential Private Placement Memorandum dated November 11, 1998 (the
"Memorandum").
B. Subject to the provisions of 4(C) and (D) hereof, the events of
default set forth in clauses (i) and (ii) of 3(A) hereof may be waived by the
written consent of the holders of a majority in outstanding principal amount of
the Notes issued pursuant to the Memorandum.
C. The Company may amend or supplement this Note with the written
consent of the holders of a majority in outstanding principal amount of the
Notes issued pursuant to the Memorandum; provided, however, that without the
consent of each Noteholder, no amendment, supplement or waiver may:
1. reduce the principal amount or rate of interest of the Notes
whose holders must consent to any amendment, supplement or waiver; or
2. extend the maturity date of the Notes or the time for
payment of interest by more than one year from the respective date(s) set forth
herein.
D. After any waiver, amendment or supplement under this Section
becomes effective, the Company shall mail to the holders of the Notes a notice
briefly describing such waiver, amendment or supplement.
5. RESTRICTIONS ON TRANSFER
This Note, including the common stock and warrants issuable upon
conversion of the Note, have not been registered under the Securities Act and
may not be offered or sold within the United States or to U.S. Persons (as such
term are defined under the Securities Act of 1933, as amended (the "Securities
Act")) except pursuant to an exemption from, or in a transaction not subject to
the registration requirements or, the Securities Act.
6. CONVERSION
The Company may, at any time, convert all or any part of the Notes,
pursuant to which each $1.00 principal amount of Notes being converted shall be
converted into one share of common stock, $.01 par value, of the Company
("Common Stock") and one warrant (each warrant being redeemable and entitling
the holder to purchase two-thirds of one share of Common Stock at a price of
$1.00 per share) ("Warrant"); provided, however, that the Company will not
convert all or any part of the Notes unless and until the stockholders of the
Company approve the private offering of the Company as set forth in the
Memorandum. The Common Stock and Warrants are together referred to herein as
the "Underlying Securities." Upon conversion of the Notes, the Company will pay
in cash to the holders of the Notes being converted the amount
3.
<PAGE>
of any accrued interest on the Notes, or portions thereof, being converted.
On or after the date of conversion, and in any event within 10 days
after receipt of notice, by mail, postage prepaid from the Company, each holder
of record of a Note will surrender such holder's Note at the principal office of
the Company or at such other place as the Company will designate, and will
thereupon be entitled to receive certificates evidencing the Underlying
Securities into which such principal amount of the Note (including accrued
interest) is converted. On the date of the conversion, each holder of record of
a Note will be deemed to be the holder of record of the Underlying Securities
issuable upon such conversion notwithstanding that the Notes will not have been
surrendered at the office of the Company, that notice from the Company will not
have been received by any holder of record of the Notes, or that the
certificates evidencing such Underlying Securities then be actually delivered to
such holder.
The Company will at all times reserve and keep available out of its
authorized but unissued Common Stock the full number of shares of Common Stock
deliverable upon the conversion of all the then outstanding Notes and will take
all such action and obtain all such permits or orders as may be necessary to
enable the Company lawfully to issue such Common Stock upon the conversion of
Notes. The holders of shares of Common Stock issued upon conversion of the
Notes shall not be entitled to receive with respect to those shares the
distribution to existing stockholders of a dividend in the form of warrants to
purchase Common Stock described in the Memorandum.
No fractions of shares of Common Stock or Warrants will be issued upon
conversion, but in lieu thereof the Company will pay cash equal to such
principal amount of the Note which is not convertible into an integral number of
shares of Common Stock or Warrants.
7. SUBORDINATION OF THE NOTE
The Company covenants and agrees, and each holder of this Note by
acceptance hereof covenants and agrees, expressly for the benefit of the present
and future holders of Senior Debt (the term "Senior Debt" shall mean all Debt of
the Company except Junior Debt; the term "Debt" shall mean indebtedness
representing money borrowed and purchase money indebtedness; the term "Junior
Debt" shall mean all Debt of the Company which is subordinate and junior in
right with respect to the general assets of the Company to other Debt of the
Company and "Junior Debt" shall include without limitation this Note), that,
notwithstanding anything to the contrary in this Note, the payment of the
principal of and interest on this Note is expressly subordinated to all Senior
Debt of the Company which may at any time and from time to time be outstanding,
and that this Note shall rank on a parity with any other Junior Debt, and
further that:
A. Upon any receivership, insolvency, bankruptcy, assignment for the
benefit of creditors, reorganization, whether or not pursuant to bankruptcy
laws, sale of all or substantially all of the assets, dissolution, liquidation,
or any other marshaling of the assets and liabilities of the Company, no amount
shall be paid by the Company, and the holder of this Note shall not be entitled
to receive any amount, in respect of the principal of or interest on this Note
unless and until all Senior Debt shall have been paid in full together all
interest thereon and all other amounts payments in respect thereof.
B. In the event of any default in the payment of the principal
(including any sinking fund payments or required prepayments) of or interest on
any Senior Debt and during the continuance of any such default, no amount shall
be paid by the Company, and the holder of this Note shall not be entitled to
receive any amount, in respect of the principal of or interest on this Note.
4.
<PAGE>
C. Upon the occurrence of any of the events enumerated in
subparagraph A above, claims or proofs of claims may be filed by or on behalf of
the holder of this Note, but no such claims or proofs of claims shall be filed
by or on behalf of such holder which shall assert any right on the part of such
holder to receive any payments in respect of the principal of or interest on
this Note, except subject to the payment in full of all Senior Debt for which
claims or proofs of claims are duly filed.
D. No present or future holders of Senior Debt shall at any time in
any way be prejudiced, or their rights to enforce subordination impaired, by any
act or failure to act on the part of the Company or any such holder, or by any
noncompliance by the Company with the terms and provisions of this Note,
regardless of any knowledge thereof such holders may have or otherwise be
charged with.
8. UNSECURED
This Note is unsecured.
9. MISCELLANEOUS
A. The Company may consider and treat the person in whose name this
Note shall be registered as the absolute owner thereof for all purposes
whatsoever (whether or not this Note shall be overdue) and the Company shall not
be affected by any notice to the contrary. The registered owner of this Notes
shall have the right to transfer it by assignment (subject to the limitation on
transfer contained in this Note) and the transferee thereof shall, upon his
registration as owner of this Note, become vested with all the powers and rights
of the transferor. Registration of any new owner shall take place upon
presentation of this Note to the Company at its offices, 9314 Eton Avenue,
Chatsworth, California 91311, together with a duly authenticated assignment. In
case of transfer by operation of law, the transferee agrees to notify the
Company of such transfer and of his address, and to submit appropriate evidence
regarding the transfer so that this Note may be registered in the name of the
transferee. This Note is transferable only on the books of the Company by the
holder hereof, in person or by attorney, on the surrender hereof, duly endorsed.
Communications sent to any registered owner shall be effective as against all
holders or transferees of the Note not registered at the time of sending the
communication.
B. Payment of principal and interest shall be made to the registered
owner of this Note upon presentation of this Note upon or after maturity.
C. This Note shall be construed and enforced in accordance with the
internal laws of the State of California.
IN WITNESS WHEREOF, the Company has caused this Note to be signed in its
name by its President.
INTELLICELL CORP.
By:
-------------------------------
Ben Neman
President
5.
<TABLE> <S> <C>
<PAGE>
<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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 362,000
<SECURITIES> 0
<RECEIVABLES> 2,406,000
<ALLOWANCES> 251,000
<INVENTORY> 837,000
<CURRENT-ASSETS> 3,819,000
<PP&E> 601,000
<DEPRECIATION> 242,000
<TOTAL-ASSETS> 4,178,000
<CURRENT-LIABILITIES> 1,329,000
<BONDS> 0
0
0
<COMMON> 59,000
<OTHER-SE> 2,790,000
<TOTAL-LIABILITY-AND-EQUITY> 4,178,000
<SALES> 27,787,000
<TOTAL-REVENUES> 27,787,000
<CGS> 26,152,000
<TOTAL-COSTS> 26,152,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 204,000
<INCOME-PRETAX> (2,769,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,769,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,769,000)
<EPS-PRIMARY> (0.63)
<EPS-DILUTED> (0.63)
</TABLE>
