FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-14306
INTERCELL CORPORATION
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(Exact name of registrant as specified in its charter)
Colorado 84-0928627
- ------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S employer identification number)
incorporation or organization)
370 Seventeenth Street Suite 3290
Denver Colorado 80202
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 592-1010
999 West Hastings Street, Suite 1750
Vancouver, B.C., Canada, V6C 2W2
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(Former name, former address or former fiscal year,
if changed since last report)
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 was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No __
As of July 31, 1997 there were 30,576,524 shares of the registrant's sole class
of common shares, 5 Class B Preferred Shares and 167 Series C Preferred Shares
outstanding.
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
June 30, 1997 and September 30, 1996 1
Condensed Consolidated Statement of Operations
For the Three Months Ended June 30, 1997 and 1996
and the Nine Months Ended June 30, 1997 and 1996 2
Condensed Consolidated Statement of Cash Flows
For the Nine Months Ended June 30, 1997 and 1996 3
Notes to Condensed Consolidated Financial Statements
June 30, 1997 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 11
ITEM 2. CHANGES IN SECURITIES 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURES 13
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
INTERCELL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
<CAPTION>
(Unaudited) September 30,
June 30, 1997 1996
------------- ----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,526,000 $ 4,224,000
Short term investments 789,000 3,063,000
Accounts receivable, net 904,000 746,000
Inventories 2,850,000 1,066,000
Prepaid expenses and other current assets 249,000 102,000
Investment land held for sale 1,424,000 1,424,000
------------ ------------
Total current assets 7,742,000 10,625,000
Property, plant and equipment, net 3,595,000 1,418,000
Goodwill and other intangible assets, net 1,365,000 1,583,000
Unallocated purchase price related to Sigma 7 acquisition 3,341,000 --
Other assets 72,000 200,000
------------ ------------
$ 16,115,000 $ 13,826,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable $ -- $ 266,000
Notes payable to related parties -- 932,000
Current portion of long-term debt -- 120,000
Accounts payable and accrued liabilities 2,124,000 742,000
------------ ------------
Total current liabilities 2,124,000 2,060,000
Long term debt, less current portion -- 86,000
------------- ------------
Total liabilities 2,124,000 2,146,000
------------- ------------
Minority interest in subsidiary 2,500,000 --
------------- ------------
Stockholders' equity:
Convertible preferred stock: 10,000,000 shares authorized
Series B; 59 and 787 issued and outstanding as of June 30, 1997
and September 30, 1996 respectively 415,000 5,533,000
Series C; 403 issued and outstanding as of June 30, 1997 2,681,000 --
Warrants to acquire common stock 3,051,000 1,870,000
Common stock; no par value; 100,000,000 shares authorized
20,378,043 and 15,734,229 shares outstanding as of June 30, 1997,
and September 30, 1996 respectively 18,839,000 12,187,000
Deferred compensation (77,000) (331,000)
Accumulated deficit (13,418,000) (7,579,000)
------------ ------------
Total stockholders' equity 11,491,000 11,680,000
------------ ------------
$ 16,115,000 $ 13,826,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE>
<TABLE>
INTERCELL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
------- -------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 1,978,000 $ 873,000 $ 5,426,000 $ 2,499,000
Cost of goods sold 1,639,000 516,000 4,080,000 1,866,000
------------ ------------ ------------ ------------
Gross profit 339,000 357,000 1,346,000 633,000
Selling, general and administrative expenses 2,544,000 2,479,000 5,834,000 4,139,000
Research and development 348,000 6,000 1,537,000 38,000
------------ ------------ ------------ ------------
Operating loss (2,553,000) (2,128,000) (6,025,000) (3,544,000)
Other income (expense) 95,000 (121,000) 186,000 (121,000)
------------ ------------ ------------ ------------
Loss before income taxes (2,458,000) (2,249,000) (5,839,000) (3,665,000)
Income taxes -- -- -- --
------------ ------------ ------------ ------------
Net loss $ (2,458,000) $ (2,249,000) (5,839,000) (3,665,000)
Deemed Preferred Stock Dividend relating to
in-the-money conversion terms 306,000 -- 1,023,000 --
Accretion on Preferred Stock 118,000 -- 413,000 --
------------ ------------ ------------ ------------
Net loss applicable to common
stockholders $ (2,882,000) $ (2,249,000) $ (7,275,000) $ (3,665,000)
============ ============ ============ ============
Net loss per common share $ (0.15) $ (0.17) $ (0.42) $ (0.28)
============ ============ ============ ============
Weighted average number of shares of
common stock outstanding 18,710,850 12,992,045 17,169,353 13,095,417
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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<TABLE>
INTERCELL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended
June 30
-------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss $(5,839,000) $(3,665,000)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 484,000 248,000
Amortization of deferred compensation 784,000 3,086,000
Common stock issued for interest 43,000 --
Changes in operating assets and liabilities net of effects
from purchase of Sigma 7 Corporation
Accounts receivable (55,000) 181,000
Inventory (972,000) (218,000)
Prepaid expenses (110,000) 18,000
Investment land held for sale -- (1,424,000)
Current liabilities 116,000 10,000
----------- -----------
Net cash used in operating activities (5,549,000) (1,764,000)
----------- -----------
Cash flows from investing activities
Proceeds from maturities of short-term investments 2,274,000 --
Acquisition of property, plant and equipment (1,150,000) (20,000)
Payment for purchase of Sigma 7 Corporation (550,000) --
Advances to Sigma 7 Corporation (1,395,000) --
Other assets 253,000 --
----------- -----------
Net cash provided by (used in) investing activities (568,000) (20,000)
----------- -----------
Cash flows from financing activities
Proceeds from issuance of common stock 150,000 2,481,000
Proceeds from issuance of Series C preferred stock and warrants 4,673,000 --
Proceeds (repayments) of notes payable (1,198,000) 87,000
Repayment of long term debt (206,000) (48,000)
----------- -----------
Net cash provided by financing activities 3,419,000 2,520,000
----------- -----------
Net increase (decrease) in cash and cash equivalents (2,698,000) 736,000
Cash and cash equivalents at beginning of period 4,224,000 57,000
----------- -----------
Cash and cash equivalents at end of period $ 1,526,000 $ 793,000
=========== ===========
Cash paid during the period for interest $ -- $ 84,000
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Intercell Corporation and its wholly-owned subsidiaries (the
"Company"). All intercompany transactions have been eliminated.
The condensed consolidated financial statements are unaudited (except
for the balance sheet information as of September 30, 1996, which is
derived from the Company's audited financial statements) and reflect
all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of
the financial position and operating results for the periods presented.
The condensed consolidated financial statements should be read in
conjunction with the September 30, 1996 audited financial statements of
Intercell Corporation and the notes thereto. The results of operations
for the three months and nine months ended June 30, 1997 are not
necessarily indicative of the results for the entire year ended
September 30, 1997, or any future period.
2. NET LOSS PER SHARE
Net loss applicable to common stockholders is computed by dividing the
sum of net loss, deemed preferred stock dividends and accretion on
preferred stock by the weighted average number of common shares and
dilutive common equivalent shares outstanding for each period
presented. Common stock equivalent shares consist of stock options and
are computed using the treasury stock method.
3. INVENTORIES
Inventories consist of: June 30, 1997 September 30, 1996
------------- ------------------
Raw materials $ 1,663,000 $ 422,000
Work in process 897,000 453,000
Finished goods 290,000 191,000
---------- ----------
$ 2,850,000 $ 1,066,000
========= =========
4. SERIES C PREFERRED SHARES
In December 1996, the Company issued 525 shares of no par value Series
C preferred stock (Series C preferred) and detachable warrants in a
private placement for $4,672,500 (net of issuance costs of $577,500).
Each share of Series C preferred is convertible into common stock at
the exchange rate in effect at the time of the conversion, as described
in the preferred stock agreements, and is subject to appropriate
adjustment for common stock splits, stock dividends, and other similar
transactions. Conversion of the Series C preferred is automatic upon
the expiration of three years from the original date of issuance. At
the date of issuance, the exchange rate was less than the prevailing
market rate, resulting in a deemed dividend of $932,000, of which
$81,000, $496,000 and $306,000 has been recognized on a pro rata basis
in the first, second and third quarters of the 1997 fiscal year
respectively. The Series C preferred are junior to the Company's Series
B preferred shares and contain a liquidation preference equal to the
original issue price plus 8% of the original issue price per annum to
the date of liquidation. Series C preferred shares are not entitled to
voting rights.
4
<PAGE>
Shares of Series C preferred purchased in excess of certain quantities
as described in the preferred stock agreements, or purchased in
addition to previous purchases of Series B preferred shares are
accompanied by detachable warrants to purchase a number of shares of
common stock of the Company equal to between 20% and 50% of the
original aggregate purchase price of the Series C preferred shares
divided by a fixed conversion rate of $3.25 per share, exercisable 105
days after original issuance.
1. ACQUISITION OF SIGMA 7 CORPORATION
Effective June 6, 1997, the Company acquired a controlling interest in
Sigma 7 Corporation. Sigma 7 conducts its business through its wholly
owned subsidiary BMI Acquisition Group, Inc. ("BMI"). BMI has developed
and currently utilizes a proprietary patch technology to produce
fully-functional computer memory modules from defective memory chips.
The Company acquired control of Sigma 7 through the acquisition of
4,500,000 shares of Sigma 7's common stock in exchange for the payment
of $550,000 for 90% of its outstanding shares and by providing
approximately $1,985,000 in additional financing, consisting primarily
of secured loans and standby letters of credit. In addition, the
Company may issue 2,500 shares of a new class of preferred stock at
$1,000 per share to holders of certain preferred shares of BMI to
eliminate such preferred shares.
The total cash purchase price for Sigma 7 of $550,000 has been
allocated on a preliminary basis to the net assets acquired based on
the estimated fair values as follows:
Current assets $ 939,000
Property, plant and equipment 1,293,000
Other assets 125,000
Unallocated purchase price 3,341,000
Current liabilities assumed (881,000)
Other liabilities assumed (84,000)
Notes payable to Intercell (1,395,000)
Note payable (288,000)
Minority interest (2,500,000)
------------
Cash paid for common stock $ 550,000
============
The purchase price allocation is preliminary and the actual amount will
depend upon the valuation of the purchased technology at the
acquisition date. Consequently, the ultimate allocation of the purchase
price could differ from that presented above.
2. NON-CASH INVESTING AND FINANCING ACTIVITIES
The Company purchased 90% of the common stock outstanding of Sigma 7
Corporation for $550,000. In conjunction with the purchase, the Company
acquired assets with a fair value of $4,316,000 and assumed liabilities
and minority interests of $3,766,000.
In addition, the Company engaged in the following non-cash investing
and financing activities:
<TABLE>
<CAPTION>
Nine months ended June 30
-------------------------
1997 1996
---- ----
<S> <C> <C>
Series B preferred stock converted to common stock $ 5,118,000 $ -
Series C preferred stock converted to common stock $ 811,000 $ -
Transfer of stock options from principal shareholders
to Company officer $ 530,000 $ -
</TABLE>
5
<PAGE>
7. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share".
SFAS No. 128 requires the presentation of basic earnings per share
("EPS") and, for companies with complex capital structures, diluted
EPS. SFAS No. 128 is effective for annual and interim periods ending
after December 31, 1997. Adoption of SFAS No. 128 is not expected to
have a material impact on net loss per common share as presented in the
accompanying consolidated statements of operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This Statement establishes standards for reporting and
displaying comprehensive income and its components in the financial
statements. It does not, however, require a specific format for the
statement, but requires the Company to display an amount representing
total comprehensive income for the period in that financial statement.
The Company is in the process of determining its preferred format. This
Statement is effective for fiscal years beginning after December 15,
1997.
Also, in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". The Statement
establishes standards for the manner in which public business
enterprises report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports
issued to stockholders. This Statement is effective for financial
statements for periods beginning after December 15, 1997, and the
Company is currently evaluating its impact on the reporting of segment
information.
8. SUBSEQUENT EVENTS
Effective July 18, 1997, the Company entered into a stock purchase
agreement to sell, transfer, assign and deliver certain assets,
liabilities, rights and obligations of the Company related to the
Antenna Technology, including its wholly-owned subsidiaries Cellular
Magnetics and Intercell Wireless Corp., to Intercell Technologies
Corporation ("ITC"), a Colorado corporation, in exchange for shares of
ITC common stock, the Company's common stock and notes. The total
consideration received was valued at approximately $2,300,000.
No gain or loss was recorded on the disposition.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with the
Company's audited consolidated financial statements and notes thereto for the
year ended September 30, 1996. This report contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 31E of the Securities Exchange Act of 1934, as amended. Actual results
could differ materially from those anticipated in forward-looking statements.
The Company is currently engaged in four lines of business: (i) the manufacture
and rebuilding of specialty electron power tubes; (ii) the design, development
and production of shielded cellular phone antennas that use the Company's
proprietary antenna technology (the "Antenna Technology") as well as the
manufacture of miniature and subminiature coils, transformers and other
electronic assemblies; (iii) the design, development and production of patented
particle interconnect products that use the Company's patented particle
interconnect technology (the "PI Technology") and a proprietary trade secret
electroplating process (the "Proprietary Electroplating Process"), and (iv) the
manufacture of computer memory modules.
The Company's operations are conducted by and through its wholly owned
subsidiaries, California Tube Laboratory, Inc. ("CTL"), Cellular Magnetics, Inc.
("Cellular Magnetics"), Intercell Wireless Corp. , and Particle Interconnect
Corporation ("PI Corp.") and its majority owned subsidiary, Sigma 7 Corporation
("Sigma 7).
CTL is a manufacturer and rebuilder of a wide variety of electron power tubes.
Currently, CTL provides rebuilt and new electron tubes to a wide variety of
customers who use microwave technology in various types of applications,
including AM and VHF radio, television, linear accelerators, radar, electron
guns and industrial microwave and heating use.
The Company owns the rights to certain patent applications relating to the
Antenna Technology that the Company had jointly developed with the
Telecommunications Research Center at Arizona State University ("ASU"). The
Antenna Technology is designed to reduce actual or perceived health hazards that
may be associated with exposure to electromagnetic signals by using a "shielded"
antenna. The Antenna Technology has been tested in working prototypes in
cellular phones by ASU. These tests indicated a significant reduction in
radiation emissions caused by wireless devices, and cellular phones in
particular. The tests also indicated several other benefits, including increased
range and reception, and improved battery life.
In September 1996, the Company formed a wholly owned subsidiary, Cellular
Magnetics, which acquired all the assets and liabilities of M.C. Davis Company
("M.C. Davis") in exchange for 277,778 shares of Common Stock valued at
$1,000,000 and $800,000 in cash. This acquisition, accounted for by the purchase
method of accounting, provided the Company with both a facility for the
immediate production of its Antenna Technology and an established manufacturing
facility. The Company has continued to produce the miniature and subminiature
electronic components previously produced by M.C. Davis.
Effective July 18, 1997, the Company entered into a stock purchase agreement to
sell, transfer, assign and deliver certain assets, liabilities, rights and
obligations of the Company related to the Antenna Technology, including its
wholly-owned subsidiaries Cellular Magnetics and Intercell Wireless Corp., to
Intercell Technologies Corporation ("ITC"), a Colorado corporation, in exchange
for shares of ITC common stock, the Company's common stock and notes. The total
consideration received was valued at approximately $2,300,000. No gain or loss
was recorded on the disposition.
7
<PAGE>
In September 1996, the Company formed a wholly owned subsidiary, PI Corp.,
which merged with Particle Interconnect, Inc., a California corporation
("Particle California"). The Company exchanged 1,400,000 shares of Common Stock
for all of the outstanding stock of Particle California. The transaction was
accounted for as an immaterial pooling-of-interest as the prior operations of
Particle California are not material to the Company's consolidated financial
position, results of operations or cash flows. From the date of the merger, PI
Corp. has been engaged primarily in the continuing development of the PI
Technology and the construction of production capabilities at its plant. PI
Corp. expects production of Particle Interconnect Products will commence in
1998. As the PI Technology is in the development stage, the Company does not
anticipate operating revenues from such line of business until such time, if
ever, as products developed using the PI Technology are completed, developed,
manufactured in commercial quantities, available for commercial delivery, and
accepted in the market place.
The Company believes that a significant requirement for introducing products
utilizing the PI Technology into the market will be entering into joint venture,
co-manufacturing, licensing or other similar arrangements with existing
manufacturers or distributors in this field. No such arrangements have been
entered into as of this date.
Effective June 6, 1997, the Company acquired a controlling interest in Sigma 7.
Sigma 7 conducts its business through its subsidiary BMI Acquisition Group, Inc.
BMI has developed and currently utilizes a proprietary patch technology to
produce fully functional computer memory modules from defective memory chips.
The Company acquired control of Sigma 7 through the acquisition of 90% of the
outstanding shares of Sigma 7's common stock in exchange for the payment of
$550,000 and by providing approximately $1,985,000 in additional financing,
consisting primarily of secured loans and standby letters of credit. In
addition, the Company may issue 2,500 shares of a new class of preferred stock
at $1,000 per share to holders of certain preferred shares of BMI to eliminate
such preferred shares. The total cash purchase price for Sigma 7 has been
allocated on a preliminary basis to the net assets acquired based on the
estimated fair values. The actual allocation of the purchase price will depend
upon the valuation of the purchased technology at the acquisition date.
Consequently, the ultimate allocation of the purchase price could differ.
To improve the Company's working capital position, the Company completed an
offering pursuant to Regulation D to institutional investors on December 15,
1996, of 525 shares of its Series C Preferred Stock, with attached warrants,
pursuant to which it received net proceeds of $4,672,500. The Series C Preferred
Stock is convertible into Common stock at the exchange rate in effect at the
date of conversion, as described in the preferred stock agreements. At the date
of issuance, the exchange rate was less than the prevailing market rate,
resulting in a deemed dividend of $932,000, of which $81,000, $496,000 and
$306,000 has been recognized on a pro rata basis in the first, second and third
quarters of the 1997 fiscal year respectively.
RESULTS OF OPERATIONS
REVENUES:
Total revenues in the third quarter of 1997 were $1,978,000 and represented a
127% increase over the third quarter revenues in the prior fiscal year of
$873,000. Total revenues in the nine months ended June 30, 1997 were $5,426,000,
a 117% increase over revenues in the nine month period ending June 30, 1996 of
$2,499,000. These increases in revenue were primarily attributable to the
inclusion of revenues from the Company's electronic components operations of
$536,000, $510,000 and $434,000 in the first, second and third quarters of the
1997 fiscal year respectively and a $211,000, $565,000 and $223,000 increase in
first, second and third quarter sales of electron tube products in the current
fiscal year over the corresponding quarters of the prior fiscal year. In
addition, revenues for the third quarter of 1997 included $448,000 in sales by
Sigma 7.
8
<PAGE>
Sales of electron tube products increased by 18% in the third quarter of 1997
compared to the third quarter of 1996 and by 33% in the first nine months of
1997 compared to the first nine months of the 1996 fiscal year. This increase
was primarily due to new defense related contracts entered into in the final
quarter of the 1996 fiscal year for which production commenced in the first
quarter of the 1997 fiscal year and continued through the second and third
quarters. The Company anticipates that sales under these contracts will decrease
for the remainder of the year from the rate experienced in the third quarter of
the 1997 fiscal year.
In September 1996, the Company, through its wholly-owned subsidiary Cellular
Magnetics, merged with AC Magnetics, Inc. doing business as M.C. Davis. M.C.
Davis was acquired by the Company to provide industrial engineering and
production capabilities for the Company's antenna technology. M.C. Davis has
production facilities located in Arizona City, Arizona and Sonora, Mexico, and
is engaged in the production of miniature and subminiature electronic
components. The 1997 fiscal year represents the first year in which the results
of the Company's new electronic components operations have been consolidated
with the Company's.
On June 6, 1997, the Company acquired a majority interest in Sigma 7, a
manufacturer of computer memory modules. The third quarter of the 1997 fiscal
year represents the first period in which the results of Sigma 7 have been
consolidated with the Company.
GROSS PROFITS
Gross profits were 17% of sales in the three months ended June 30, 1997 compared
with 41% in the third quarter of the 1996 fiscal year. For the nine months ended
June 30, 1997 gross profits were 25% compared to 25% for the nine months ended
June 30, 1996. Margins decreased in the three months ended June 30, 1997 year
relative to the 1996 year due to the inclusion of the Company's lower margin
memory module operations for the first time in the 1997 fiscal year. In
addition, margins decreased in the three months ended June 30, 1997 compared to
the third quarter of 1996 due to increased product costs for new electron tube
products under development.
RESEARCH AND DEVELOPMENT
Research and development expenses increased to $348,000 in the third quarter of
fiscal 1997 compared to $6,000 in the third quarter of fiscal 1996 and to
$1,537,000 in the nine months ended June 30, 1997 compared to $38,000 in the
nine months ended June 30, 1996. This increase was primarily attributable to
research and development activities incurred in connection with the Company's
new PI Technology ($317,000 and $1,273,000 in the three month and nine month
periods ended June 30, 1997 respectively) as the Company commenced design,
assembly and testing of its production line and continued testing of the
technology. In addition, the Company continued its developmental work on its
antenna technology ($31,000 and $264,000 in the three month and nine month
periods ended June 30, 1997 respectively) in conjunction with Arizona State
University.
GENERAL, SELLING AND ADMINISTRATIVE
General, selling and administrative expenses increased by 3% to $2,544,000 in
the third quarter of 1997 compared to $2,479,000 in the third quarter of the
1996 fiscal year. For the nine months ended June 30, 1997, general selling and
administrative expenses increased by 41% to $5,834,000 compared to $4,139,000 in
the nine months ended June 30, 1996. The increase for the nine months ended June
30, 1997 was primarily attributable to the inclusion of compensation recognized
on the transfer of stock options from three principal shareholders to an officer
and director of the Company ($530,000) in the first quarter of the 1997 fiscal
year, additional legal and accounting costs in the 1997 fiscal year related to
the filing of a Registration Statement on Form S-1 in January, 1997, the buyout
of four management contracts ($920,000) and the inclusion of general, selling
and administrative expenses for the Company's new electronic components,
cellular antenna, particle interconnect and memory module operations for the
first time in the 1997 fiscal year. General, selling and administrative expenses
for the three and nine months ended June 30, 1996 consisted primarily of
compensation expense resulting from the vesting of stock options granted at
exercise prices below the fair value of common stock on the date of grant.
9
<PAGE>
OTHER INCOME/EXPENSE
Other income/expense includes $76,000 in interest income earned on cash and
short term investments in the third quarter of the 1997 fiscal year and $238,000
in the nine months ended June 30, 1997. In the third quarter and the first nine
months of the 1996 fiscal year, the amount of interest income earned by the
Company was insignificant. The remaining balance of other income/expense is
comprised of miscellaneous expense accruals.
INCOME TAXES
As of June 30, 1997 the Company had a net operating loss carryover for federal
and California income tax purposes. The benefit of these net operating loss
carryforwards has not been recorded by the Company as it is uncertain that the
Company will generate sufficient income in future periods to utilize the loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended June 30, 1997, cash and cash equivalents decreased
by $2,698,000. Net cash used in operations was $5,549,000, due primarily to an
operating loss of $5,839,000 and increases in accounts receivable of $55,000 and
inventories of $972,000, partially offset by depreciation and amortization of
$484,000, amortization of deferred compensation of $784,000 and an increase in
current liabilities of $116,000. Net cash used in investment activities was
$568,000 due primarily to the acquisition of property, plant and equipment, cash
payments for the purchase of and cash advances to Sigma 7 offset by the maturity
of short-term investments and the disposition of other assets. Net cash provided
by financing activities was $3,419,000. This was due primarily to net proceeds
of $4,673,000 from the private placement of 525 Series C Preferred Shares and
warrants in December 1996. A portion of these proceeds were used to pay off
liabilities of $1,198,000 assumed on the acquisition of PI Corp. and M.C. Davis
and to repay long-term debt of $206,000.
In the 1997 fiscal year, the Company intends to make capital expenditures of
approximately $1,500,000 in addition to amounts allocated to property, plant and
equipment on the acquisition of the majority interest of Sigma 7. These
expenditures will be made on the Company's new manufacturing facility in
Watsonville, California and establishing the Company's initial full production
line and facility using its PI Technology in Colorado Springs, Colorado. In the
nine months ended June 30, 1997, capital expenditures totaled $1,149,000.
The Company believes that current and known future capital resources will be
adequate to fund its operations over the next 12 months. The Company also
believes that sales of its Particle Interconnect Products, currently anticipated
to commence in the 1998 fiscal year, in combination with the sales of electron
tube products of CTL and memory modules of Sigma 7 will provide sufficient funds
to meet the Company's capital requirements for the next two years. This
assumption is based on the Company's belief that it will be successful in
entering into a joint venture, co-manufacturing, licensing or other similar
arrangement with existing connector manufacturers with respect to the
manufacture of Particle Interconnect Products. The failure to enter into such
relationships could result in the Company requiring substantial additional
capital and resources to bring the Particle Interconnect Products to market.
To the extent the Company's operations are not sufficient to fund the Company's
capital requirements, the Company may enter into a revolving loan agreement with
a financial institution, or attempt to raise additional capital through the sale
of additional capital stock or through the issuance of debt. At the present time
the Company does not have a revolving loan agreement with any financial
institution nor can the Company provide any assurances that it will be able to
enter into any such agreement in the future or be able to raise funds through
the issuance of debt or equity in the Company.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was notified of a potential litigation matter (the "Complaint") that
was to be filed by American Microcell Corp. ("AMC") and MicroAntenna, Inc.
(collectively, "Plaintiffs") against, among others, the Company, Terry Neild, a
director and Executive Vice President of the Company, and Lucius Ross, a
consultant to the Company, in Superior Court of Maricopa County, No. CV 96-___.
The Complaint alleged that Messrs. Ross and Neild, former directors of
Plaintiffs, breached their fiduciary duties to Plaintiffs by appropriating a
corporate opportunity, the acquisition of the Antenna Technology, of Plaintiffs
for their personal benefit and the benefit of the Company. The Complaint
requested both compensatory damages, an assignment of all rights to the Antenna
Technology and a lien or constructive trust on the Antenna Technology and all
proceeds therefrom.
The Company agreed to settle this matter through the payment of $40,000 to the
Plaintiffs, which amount was paid on April 28, 1997.
Subsequent to the date of the Company's acquisition of Particle California, the
Company became aware of a purported assignment on February 14, 1991 of a
one-half interest, title and right to the then patent application, which is now
U.S. Patent No. 5,083,697 (a basic patent underlying the PI Technology) made by
Louis Difrancesco, the inventor of the PI Technology, to Mr. Kenneth Bahl. Based
upon documentation the Company has been able to obtain to date, the Company
believes the assignment was given in consideration of the formation of a
business that was never formed and, thus, the assignment appears to be invalid
due to a failure of consideration and appears to be voidable for failure of
performance. Mr. Bahl may have licensed at least one company, PI Materials,
Inc., to practice the inventions that are the subject of the assignment. To the
extent the assignment is valid, Mr. Bahl would have a one-half interest in
certain patents based on the PI Technology. Any future activity by Mr. Bahl
including assignment, sale or license of these patents by Mr. Bahl to other
persons or entities could materially adversely affect the Company's business,
financial conditions and results of operations. The Company is currently
vigorously pursuing a resolution to this matter, including the possibility of
initiating all legal remedies available to it to obtain the full and
unconditional rights to the PI Technology.
Other than the complaint, no material legal proceedings (other than routine
litigation incidental to the business) to which the Company (or any officer or
director of the Company, or any affiliate or owners of record or beneficially of
more than 5% of the common stock) to management's knowledge, is a party or to
which the property of the Company is subject, is pending and no such material
proceedings are known by management of the Company to be contemplated.
ITEM 2. CHANGES IN SECURITIES
On December 16, 1996, the Company completed an offering of 525 shares of Series
C Preferred Stock (the "Series C Preferred Stock"). Each share of Series C
Preferred Stock is convertible at the option of the holder into Common Stock as
described below during the following period: (i) up to 20% of the Series C
Preferred Stock initially issued to the holder at any time on and after April
15, 1997; and (ii) an additional 20% per month on the 15th day of each month
thereafter; provided, however, that the holder of the Series C Preferred Stock
may not convert more than 25% of the aggregate Series C Preferred Stock
initially issued to such holder in any given one month period beginning April
15, 1997 and ending on April 15, 1998.
In general, each share of Series C Preferred Stock is convertible into shares of
Common Stock pursuant to the following formula (the Conversion Formula") (800) x
(N/365) + 10,000/Conversion Price (with N being the number of days that have
expired between the date of conversion and December 16, 1996, and the
"Conversion Price" being the lesser of: $3.25 (the "Fixed Conversion Price") or
85% of average closing bid price (the "Closing Bid Price") of the Common
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Stock for the five trading days immediately preceding the date of conversion
(the "Variable Conversion Price")). If at the time of conversion the Variable
Conversion Price is less than the Fixed Conversion Price, the Company may elect,
in its sole discretion, to redeem the shares of Series C Preferred Stock offered
for conversion in an amount equal to $10,000 x 117.60%.
The Company also has the right to redeem the Series C Preferred Stock on or
after December 16, 1997, provided the Company purchases at least $1,500,000 of
Series C Preferred Stock (based on the Original Issuance Price defined below)
for a price equal to 130% of the Original Issuance Price for the first 18
months. For each six months thereafter, the redemption percentage decreases by
5% until the expiration of three years.
Each share of Series C Preferred Stock outstanding at December 16, 1999,
automatically shall either be converted in accordance with the Conversion
Formula or the Original Issuance Price plus an accrued premium of 8% per year
(the "Accrued Premium").
The holders of the Series C Preferred Stock are not entitled to receive
dividends and shall have no voting power, except as otherwise provided by the
Colorado Business Corporation Act (which generally provides voting rights for
any action that directly adversely affects the rights of the holders of the
Series C Preferred Stock). In the event of any liquidation, dissolution or
winding up of the Company (a "Liquidation Event"), the holders of Series C
Preferred Stock shall be entitled to receive, after any distribution to the
holders of the Series B Preferred Stock and other senior securities, if any, and
prior to any Distribution to any junior securities (including holders of Common
Stock) the sum of $10,000 (the "Original Issue Price") and the Accrued Premium.
At the option of each holder of Series C Preferred Stock, a sale, conveyance or
disposition of substantially all of the assets of the Company or the
effectuation by the Company of a transaction, or series of transactions, in
which more than 50% of the voting power of the Company is disposed of, will
generally be deemed to be a Liquidation Event.
So long as the shares of Series C Preferred Stock are outstanding, the Company
may not, without the written approval of the holders of at least 75% of the then
outstanding shares of Series C Preferred Stock (i) alter or change the rights,
preferences or privileges of the Series C Preferred Stock or any senior
securities, if any that would adversely effect the holders of the Series C
Preferred Stock; (ii) create any class or series of capital stock having a
preference over or on parity with the series C Preferred Stock with respect to
Distributions; (iii) cause the holders of the Series C Preferred Stock to be
taxed under Section 305 of the Internal Revenue Code; or (iv) issue any
additional shares of Series C Preferred Stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS:
Exhibit 11.1: Statement of computation of earnings per share.
(B) REPORTS:
1) Form 8-K, dated May 28, 1997 disclosed the
acquisition of control of Sigma 7 Corporation through
the acquisition of approximately 90% of the issued
and outstanding common shares of Sigma 7 for $550,000
and approximately $1,985,000 in additional financing.
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<PAGE>
SIGNATURES
Pursuant to the requirements 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.
INTERCELL CORPORATION
(Registrant)
Date: 9/5/97 By: /s/ Paul Metzinger
-----------------------------------------------------
Paul Metzinger, President and Chief Executive Officer
Date: 9/5/97 By: /s/ Alan Smith
-----------------------------------------------------
Alan Smith, Secretary and Chief Financial Officer
13
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
-------- -------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (2,458,000) $ (2,249,000) $ (5,839,000) $ (3,665,000)
Deemed Preferred Stock Dividend relating to
in-the-money conversion terms 306,000 -- 1,023,000 --
Accretion on Preferred Stock 118,000 -- 413,000 --
------------ ------------ ------------ ------------
Net loss applicable to common stockholders $ (2,882,000) $ (2,249,000) $ (7,275,000) $ (3,665,000)
============ ============ ============ ============
Net loss per common share $ (0.15) $ (0.17) $ (0.42) $ (0.28)
============ ============ ============ ============
Weighted average number of shares of
common stock outstanding 18,710,850 12,992,045 17,169,353 13,095,417
============ ============ ============ ============
</TABLE>
14
