<PAGE>
FORM 10-QSB
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 March 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-14306
INTERCELL CORPORATION
---------------------
(Exact name of small business issuer as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Colorado 84-0928627
- -------------------------------------------------------------- ----------
(State or other jurisdiction of incorporation or organization) (I.R.S. employer
identification number)
</TABLE>
370 Seventeenth Street, Suite 3580
Denver Colorado 80202
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(Address of principal executive offices)
Issuer's telephone number: (303) 592-1010
No Change
---------
(Former name, former address or former fiscal year, if changed since last
report)
Indicate by check mark whether the issuer (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 No X
____ ____
As of September 30, 1998 there were 37,770,634 shares of the registrant's
sole class of common shares outstanding.
Transitional Small Business Disclosure Format. Yes No X
____ ____
<PAGE>
INTERCELL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
March 31, 1998..................................................... 1
Condensed Consolidated Statement of Operations
For the Three Months and Six Months Ended March 31, 1998 and 1997.. 2
Condensed Consolidated Statement of Changes in Stockholders'
Equity For the Six Months Ended March 31, 1998..................... 3
Condensed Consolidated Statement of Cash Flows
For the Six Months Ended March 31, 1998 and 1997................... 4
Notes to Condensed Consolidated Financial Statements
March 31, 1998..................................................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................. 10
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.................................................15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................................16
SIGNATURES....................................................................17
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERCELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(unaudited)
March 31, 1998
ASSETS
Current Assets:
<TABLE>
<CAPTION>
<S> <C>
Cash $ 285,000
Accounts receivable, net of reserves 44,000
Notes receivable 12,000
Inventories 458,000
Prepaid expenses and other current assets 108,000
Land available for sale 1,424,000
------------
Total current assets 2,331,000
Property, plant and equipment, net of accumulated depreciation 634,000
Other assets:
Investments 210,000
Notes receivable non-currant portion 530,000
Goodwill and other intangible assets 40,000
------------
Total other assets 780,000
------------
Total assets $ 3,745,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, short term 2,093,000
Notes payable, related party 80,000
Accounts payable and accrued liabilities 1,866,000
Contingent liabilities 55,000
Covenant lease payable 96,000
------------
Total current liabilities 4,190,000
Long-term liabilities:
Convertible debenture 1,485,000
Long-term debt, less current portion 16,000
------------
Total long-term liabilities 1,501,000
Minority interest in consolidated subsidiary 42,000
Stockholders' equity:
Convertible preferred stock; 10,000,000 shares authorized:
Series C; 147 shares issued and outstanding as of March 31, 1998 1,119,000
(liquidation preference of $1,653,750)
Series D; 1,080 shares issued and outstanding as of March 31, 1998 2,468,000
(liquidation preference of $2,700,000)
Warrants to acquire common stock 3,075,000
Common Stock; no par value; 100,000,000 shares authorized;
35,760,229 shares outstanding as of March 31, 1998 21,312,000
Additional paid in capital 3,221,000
Deferred compensation (3,000)
Accumulated deficit (33,180,000)
------------
Total stockholders' equity (1,988,000)
------------
Total liabilities and stockholders' equity $ 3,745,000
============
</TABLE>
See notes to the consolidated financial statements.
1
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INTERCELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31 MARCH 31
-------------------------------------------------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $ 416,000 $ 528,000 $ 1,168,000 $ 1,046,000
Cost of goods sold 598,000 407,000 1,471,000 821,000
-------------------------------------------------------------------
Gross profit (182,000) 121,000 (303,000) 225,000
General and administrative expense 1,479,000 1,046,000 4,592,000 2,962,000
Research and development expense 0 815,000 1,000 1,189,000
-------------------------------------------------------------------
Loss from operations (1,661,000) (1,740,000) (4,896,000) (3,926,000)
Other income/ (expense) (361,000) 22,000 (371,000) 75,000
-------------------------------------------------------------------
Loss from continuing operations (2,022,000) (1,718,000) (5,267,000) (3,851,000)
Discontinued operations
Gain/ (loss) from discontinued
operations (461,000) 259,000 (215,000) 470,000
Loss on sale of subsidiary (350,000) (350,000)
-------------------------------------------------------------------
Loss from discontinued operations (811,000) 259,000 (565,000) 470,000
-------------------------------------------------------------------
Net loss (2,833,000) (1,459,000) (5,832,000) (3,381,000)
Deemed preferred stock dividend on (15,000) (496,000) (30,000) (717,000)
Series b, c and d relating to
in-the-money conversion terms
Accrued dividends Series d preferred stock (37,000) (37,000)
Accretion on Series b and c preferred stock (29,000) (155,000) (64,000) (295,000)
-------------------------------------------------------------------
Net loss applicable to common
stockholders ($2,914,000) ($2,110,000) ($5,963,000) ($4,393,000)
===================================================================
Net loss per common share:
Loss from continuing operations ($0.07) ($0.13) ($0.18) ($0.29)
Loss from discontinued operations ($0.02) $0.01 ($0.02) $0.03
-------------------------------------------------------------------
Net loss per applicable to common
stockholders ($0.09) ($0.12) ($0.20) ($0.26)
===================================================================
Weighted average number of common
shares outstanding 32,061,656 17,789,405 30,222,670 16,996,221
===================================================================
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
2
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INTERCELL CORPORATION AND SUBSIDIARIES
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
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<CAPTION>
CONVERTIBLE WARRANTS TO ADDITIONAL
PREFERRED STOCK ACQUIRE COMMON STOCK PAID-IN
SHARES AMOUNT COMMON STOCK SHARES AMOUNT CAPITAL
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, OCTOBER 1, 1997 1,252 $3,658,000 $3,050,000 30,371,075 $21,285,000 $2,996,000
CONSTRUCTIVE RETIREMENT OF TREASURY STOCK (1,100,000) (385,000)
WARRANTS ISSUED IN CONNECTION WITH CONVERTIBLE
DEBENTURE 25,000
SHARES ISSUED IN LIEU OF INTEREST 1,975,000 185,000
SHARES ISSUED FOR SERVICES 266,000 25,000
AMORTIZATION OF DEEMED DIVIDEND 30,000
ACCRUAL OF PREFERRED STOCK DIVIDEND 37,000
ACCRETION ON PREFERRED STOCK 64,000
CONVERSION OF SERIES B PREFERRED STOCK TO COMMON
STOCK (5) (40,000) 678,761 40,000
CONVERSION OF SERIES C PREFERRED STOCK TO COMMON
STOCK (20) (162,000) 3,569,393 162,000
BENEFICIAL CONVERSION FEATURE RELATED TO SERIES
A-1 AND A-2 DEBENTURES 225,000
NET LOSS
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1998 1,227 $3,587,000 $3,075,000 35,760,229 $21,312,000 $3,221,000
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Total
Deferred Treasury Accumulated Stockholders'
Compensation Stock Deficit Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCES, OCTOBER 1, 1997 ($3,000) ($385,000) ($27,217,000) $3,384,000
CONSTRUCTIVE RETIREMENT OF TREASURY STOCK 385,000
WARRANTS ISSUED IN CONNECTION WITH CONVERTIBLE
DEBENTURE 25,000
SHARES ISSUED IN LIEU OF INTEREST 185,000
SHARES ISSUED FOR SERVICES 25,000
AMORTIZATION OF DEEMED DIVIDEND (30,000)
ACCRUAL OF PREFERRED STOCK DIVIDEND (37,000)
ACCRETION ON PREFERRED STOCK (64,000)
CONVERSION OF SERIES B PREFERRED STOCK TO COMMON
STOCK
CONVERSION OF SERIES C PREFERRED STOCK TO COMMON
STOCK
BENEFICIAL CONVERSION FEATURE RELATED TO SERIES
A-1 AND A-2 DEBENTURES 225,000
NET LOSS (5,832,000) (5,832,000)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1998 ($3,000) $ 0 ($33,180,000) ($1,988,000)
====================================================================================================================================
</TABLE>
See notes to the consolidated financial statements.
3
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INTERCELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 1998 AND 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash flows from operating activities ($5,832,000) ($ 3,381,000)
Net loss
Adjustments to reconcile net loss to net cash from
continuing operations:
Loss from discontinued operations 565,000
Impairment of ITCO 845,000
Depreciation and amortization 164,000 277,000
Minority interest in loss in consolidated subsidiaries (42,000)
Gain on sale of property and equipment (57,000)
Gain on issuance of stock at subsidiary (78,000)
Amortization of discount on convertible debenture 225,000
Amortization of deferred compensation 662,000
Common stock and warrants issued for services and interest 220,000 43,000
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable 678,000 (221,000)
Notes receivable (530,000)
Inventory 524,000 (332,000)
Prepaid expenses and other assets 232,000 (35,000)
Decrease in accounts payable and accrued liabilities (994,000) 126,000
-----------------------------------------
Net cash used in operating activities (4,080,000) (2,861,000)
-----------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (962,000)
Proceeds from sales and maturities of short-term investments 3,063,000
Acquisition of other assets 146,000
Proceeds from sale of assets 1,557,000
-----------------------------------------
Net cash provided by investing activities 1,557,000 2,247,000
-----------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 150,000
Proceeds from convertible debenture 1,500,000
Proceeds from notes payable 1,551,000
Proceeds from issuance of Series C preferred stock and warrants 4,673,000
Repayments of notes payable (180,000) (1,198,000)
Payment of debt issuance costs (170,000)
Repayment of long-term debt (206,000)
-----------------------------------------
Net cash flows provided by financing activities 2,701,000 3,419,000
-----------------------------------------
Net increase in cash 178,000 2,805,000
Cash, beginning 107,000 4,224,000
-----------------------------------------
Cash, ending $ 285,000 $ 7,029,000
=========================================
Non-cash investing and financing activities
Series B preferred stock converted to common stock $ 40,000 $ 4,225,000
========================================
Series C preferred stock converted to common stock $ 162,000
====================
Transfer of stock options from principal shareholders to Company officer $ 530,000
====================
</TABLE>
See notes to the consolidated financial statements.
4
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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 consolidated financial statements are unaudited 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 of and operating results for the periods presented. The
consolidated financial statements should be read in conjunction with the
September 30, 1997 audited financial statements of the Company and the
notes thereto. The results of operations for the three months ended March
31, 1998 are not necessarily indicative of the results for the entire year
ended September 30, 1998, or any future period.
2. NET LOSS PER SHARE
Net loss per share of common stock is computed based on the weighted
average number of common shares outstanding during the year. Stock
options, warrants and convertible preferred stock are not considered in the
calculation as the impact of the potential common shares would be to
decrease loss per share. Therefore, diluted loss per share is equivalent
to basic loss per share.
During the year ending September 30, 1998 the Company adopted SFAS No.
128 Earnings Per Share. This statement replaces the presentation of
primary earnings of loss per share (EPS) with a presentation of basic EPS.
It also requires dual presentation of basic and diluted EPS for all
entities with complex capital structures and requires reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. Basic EPS excludes dilution.
Diluted EPS reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. The adoption of SFAS 128 did not result in
a change to the previously presented EPS for the year ended September 30,
1997.
3. INVENTORIES
Inventories consist of: March 31, 1998
--------------
Raw materials $ 20,000
Work in process 15,000
Finished goods 423,000
--------
$458,000
========
5
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4. NON-CASH INVESTING AND FINANCING ACTIVITIES
The Company purchased 90% of the common stock outstanding of Sigma 7
Corporation ("Sigma 7") 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:
For the six months ending March 31,
1998 1997
---- ----
Series B preferred stock converted to common stock $ 40,000 $4,225,000
Series C preferred stock converted to common stock $162,000 $ 0
5. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Accounting Standards (SFAS) No. 132, Employer's
disclosures about Pensions and Other Post-Retirement Benefits. This
statement requires disclosure only and therefore will not impact the
Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. Currently, the Company does not have
any derivative financial instruments and does not participate in hedging
activities, therefore management believes SFAS No. 133 will not impact the
Company's financial statements.
6. YEAR 2000 CONVERSION
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due
to processing errors potentially arising from calculations using the Year
2000 date are a known risk. The Company is addressing this risk to the
availability and integrity of financial systems and the reliability of the
operational systems. The Company has established processes for evaluating
and managing the risks and costs associated with this problem. Management
believes the total cost of compliance and its effect on the Company's
future results of operations will be insignificant.
7. CONVERTIBLE DEBENTURES
In December 1997, the Company issued convertible debentures and
attached warrants for $1,500,000. Of this total, $750,000 is the Series A-
1 debenture and $750,000 is the Series A-2 debenture. The convertible
debentures were, at the time of issue, unsecured obligations of the
Company.
6
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The $750,000 Series A-1 debenture requires quarterly interest payments
at 9% per annum, beginning March 1, 1998 with the balance due on December
1, 1999. The debenture may be converted at the option of the holder after
60 days from the date of issuance at a conversion price per share equal to
the lessor of 85% of the market price as defined in the financing
agreement, or $0.75. In connection with the convertible debt, three
warrants were issued each entitling the holder to purchase 200,000 shares
of common stock for $0.17, $0.50 and $1.00, respectively. The warrants
expire three years from the date of issuance.
The $750,000 Series A-2 debenture pays interest quarterly at 9% per
annum, beginning June 1, 1998, with a maturity date of April 1, 1999, at a
conversion price for each share of common stock at 85% of the market price
as defined in the financing agreement.
At the request of the Company, the Series A-2 debenture was
accelerated to December 31, 1997. As consideration for the acceleration,
the Company provided security to the debenture holders for the entire
$1,500,000. The Company has assigned a first priority secured lien on the
assets of Sigma 7, a first deed of trust on property held for sale in
Arizona and an assignment of the $2,200,000 note from Intercell
Technologies Corporation to the Company. In addition, the Company issued
1,000,000 shares of its common stock to the debenture holders.
8. COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income. This
standard establishes requirements for disclosure of comprehensive income
consisting of certain items previously not included in the statements of
operations including unrealized gains and losses among others. For the
three and six months ended March 31, 1998 and 1997, the Company had no
items of comprehensive income.
9. SEGMENT REPORTING
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information, was effective for
financial statements for periods beginning after December 15, 1997. This
statement establishes standards for the manner in which public business
enterprises report information about operating segments in interim
financial reports issued to stockholders. As the FASB allows, the Company
will initially apply this standard in its financial statements for the year
ending September 30, 1998.
10. DISCONTINUED OPERATIONS
In February 1998, the Company entered into a stock purchase agreement
to sell, transfer, assign and deliver all assets, liabilities, rights and
obligations of the Company related to its wholly-owned subsidiary
California Tube Laboratory, Inc. ("CTL") to Jaymark Corporation
("Jaymark"), in exchange for $1,872,360 in cash, $500,000 in notes
receivable and an escrow account of $200,000. This has been accounted for
as a
7
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discontinued operation and the results of operations have been excluded
from continuing operations in the consolidated financial statements of
operations for all periods presented. The Company recognized a loss on the
sale of assets of approximately $350,000 consisting of approximately
$75,000 in investments and approximately $275,000 in retained earnings. The
Company also recognized a loss from discontinued operations of
approximately $215,000. The Company has not recognized any income tax
benefit from the loss due to the uncertainty of the Company to produce any
future net income.
<TABLE>
<CAPTION>
Six months ending Year ending
March 31, September 30,
1998 1997
---- ----
<S> <C> <C>
Net Sales $1,583,000 $4,655,000
Cost of goods sold 1,589,000 3,739,000
---------- ----------
Gross profit (6,000) 916,000
General and administrative expense 210,000 790,000
---------- ----------
Income from operations (216,000) 126,000
Other income 1,000 30,000
---------- ----------
Income/loss from discontinued operations (215,000) 156,000
</TABLE>
11. NANOPIERCE ACQUISITION
In February 1998, the Company transferred all of the intellectual
property of its wholly owned subsidiary Particle Interconnect Corporation
to Nanopierce Technologies, Inc. ("Nanopierce"), formerly known as Sunlight
Systems, Inc., for 7,250,000 restricted post split shares of common stock
and 100 Series A, 8%, Voting, Convertible, Cumulative, Participating,
Preferred shares. The preferred shares are convertible to 7,250,000
restricted post split shares of Nanopierce's common stock. The Company has
approximately 74% controlling interest in Nanopierce on a fully diluted
basis. This transaction was discussed in detail in Form 8-K dated February
26, 1998 and as disclosed in Form 8-K the historical financial statement of
Sunlight Systems, Inc. were not included due to their insignificance. The
unaudited results of operations on a pro forma basis as though Nanopierce
had been acquired as of October 1, 1997 are as follows:
<TABLE>
<CAPTION>
For the six months ended March 31,
1998 1997
---- ----
<S> <C> <C>
Revenue $ 3,451,000 $ 1,205,000
Net loss $(4,710,000) $(5,901,000)
Net loss per share $ (0.28) $ (0.20)
</TABLE>
8
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12. SUBSEQUENT EVENTS
On June 5, 1998, the Company discontinued operations at Sigma 7, its
San Diego subsidiary, a manufacturer of memory modules. The Company
intends to seek protection for Sigma 7 under U.S. bankruptcy laws.
9
<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, 1997. 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. Forward-looking
statements may be identified by the use of forward-looking terminology such as
"may," "will," "expect," "anticipate," "believe," "continue" or similar terms,
variations of those terms or the negative of those terms. Actual results could
differ materially from those anticipated in forward-looking statements.
On February 6, 1998 the Company entered into a stock purchase agreement to
sell, transfer, and deliver all assets, liabilities, rights and obligations of
the Company related to its wholly-owned subsidiary CTL to Jaymark, in exchange
for $2,015,458 in cash and notes receivable. The Company recognized a loss from
discontinued operations of approximately $565,000 for the six months ended March
31, 1998, based on the disposition.
On February 26, 1998 the Company transferred all of the intellectual
property of its wholly owned subsidiary Particle Interconnect Corporation to
Nanopierce for 7,250,000 shares of common stock of Nanopierce and 100 Series A
8% Voting, Convertible, Cumulative, Participating, Preferred shares of
Nanopierce. The 100 preferred shares are convertible into 7,250,000 shares of
common stock. The Company owns approximately 60% of the outstanding common
stock of Nanopierce and approximately 74% of the common stock of Nanopierce on a
diluted basis, considering the voting and conversion rights of the Series A
preferred stock.
The Company discontinued all operations of its majority owned subsidiary
Sigma 7, a manufacturer of memory modules located in San Diego, California, on
June 5, 1998. The market for Sigma 7's main product line of memory modules
experienced significant price erosion on a worldwide basis. Sigma 7 did not
have the capitalization to continue and intends to seek protection under U.S.
bankruptcy laws.
The Company is currently engaged in the design, development and licensing
of products using its patented particle interconnect technology, through its
majority owned subsidiary Nanopierce.
In December 1997, the Company issued convertible debentures and attached
warrants for $1,500,000. Of this total, $750,000 is the Series A-1 debenture
and $750,000 is the Series A-2 debenture. The convertible debentures were, at
the time of issue, unsecured obligations of the Company.
The $750,000 Series A-1 debenture requires quarterly interest payments at
9% per annum, beginning March 1, 1998 with the balance due on December 1, 1999.
The debenture may be converted at the option of the holder after 60 days from
the date of issuance at a conversion price per share equal to the lessor of 85%
of the market price as defined in the
10
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financing agreement, or $0.75. In connection with the convertible debt, three
warrants were issued, each entitling the holder to purchase 200,000 shares of
common stock for $0.17, $0.50, and $1.00 respectively. The warrants expire three
years from the date of issuance. The portion of the proceeds allocable to the
warrants was $15,000.
The $750,000 Series A-2 debenture pays interest quarterly at 9% per annum,
beginning June 1, 1998, with a maturity date of April 1, 1999. The debt may be
converted at the option of the holder any time at the end of six business days
following the maturity date, at a conversion price for each share of common
stock at 85% of the market price as defined in the financing agreement. The
Company has recognized $225,000 in interest expense relating to the beneficial
conversion terms of the debentures.
At the request of the Company, purchase and payment for the Series A-2
debenture was accelerated to December 31, 1997. As consideration for the
acceleration, the Company provided security to the debenture holders for the
entire $1,500,000. The Company assigned a first priority secured lien on the
assets of Sigma 7, a first deed of trust on property held for resale in Arizona
and a $2,200,000 note from Intercell Technologies Corporation to the Company.
In connection with the placement of the convertible debentures, the Company paid
a $180,000 commission to a third-party investment banker and issued the
investment banker warrants to purchase 200,000 shares of common stock at an
exercise price of $0.15 per share. The warrants were valued at $10,000. The
$180,000 and $10,000 have been included in general and administrative expense.
In addition, the Company issued 1,000,000 shares of its common stock to the
debenture holders and recognized $71,000 in general and administrative expense.
The Company also issued 1,241,000 shares of common stock for services rendered
and in lieu of interest expense during the six months ended March 31, 1998
recognizing $162,750 in general and administrative expense.
RESULTS OF OPERATIONS
REVENUES
Total revenues in the second quarter of 1998 were $416,000 representing a
21% decrease from the second quarter revenues in 1997 of $528,000. Total
revenues in the first six months of 1998 were $1,168,000 representing a 12%
increase over the first six months revenues of $1,046,000 in the prior fiscal
year. The increase in revenue for the six months was primarily attributable to
the inclusion of revenues from the Company's memory module manufacturer of
$354,000 which was not included in the six months ended March 31, 1997 revenue.
Sales of memory modules increased to $354,000 in the first six months of
1998 compared to $0 in the first six months of 1997. The balance of the
Company's sales in the first six months of 1998 has remained consistent with the
first six months sales of the 1997 fiscal year.
GROSS PROFIT
Gross profit was (44%) in the second quarter of the 1998 fiscal year
compared with 23% in the second quarter of the 1997 fiscal year. For the six
months ended March 31, 1998 gross profits were (26%) compared to 22% for the six
months ended March 31, 1997. This decrease in margins was primarily
attributable to negative margins experienced in the memory module
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market. Prices for memory modules fell drastically during the period causing the
Company to sell products at negative margins. The margins for electronic
components also decreased from 32% for the second quarter of 1997 to 18% in the
second quarter of 1998.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased to $1,000 in the first six
months of fiscal 1998 compared to $1,189,000 in the first six months of 1997.
For the second quarter of 1998 the Company had no research and development costs
compared to $815,000 for the second quarter of 1997. The decrease was primarily
attributable to the suspension of the research and development activities
associated with the Company's particle interconnect technology. Research and
development costs relating to the particle interconnect technology were reduced
from $956,000 in 1997 to $0 in 1998. The Company has changed its focus from
creating a manufacturing process and facility to licensing its technology to
companies that already have a manufacturing process in place.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased by 41% to $1,479,000 in the
second quarter of the 1998 fiscal year compared to $1,046,000 in the second
quarter of fiscal 1997. For the six months ended March 31, 1998 general and
administrative expenses increased by 55% to $4,592,000 compared to $2,962,000 in
the six months ended March 31, 1997. This increase was primarily attributable
to the inclusion of general and administrative expenses for the Company's new
memory module operations of $935,000 and 100% of the expenses associated with
the antenna technology operations of $900,000 due to impairment concerns of
Intercell Technologies Corporation to pay it's obligation to the Company. In
addition, the Company incurred additional legal costs associated with the
Company's intellectual property rights to the particle interconnect technology.
OTHER INCOME/EXPENSE
The Company earned $117,000 in interest income on its cash and short-term
investments in the first six months of the 1998 fiscal year compared to $146,000
for the first six months in 1997, while incurring interest and other expenses of
$488,000 and $71,000 respectively.
INCOME TAXES
As of March 31, 1998 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
The independent auditor's report on the Company's financial statements for
the year ended September 30, 1997 included a "going concern" paragraph, meaning
the auditors have expressed substantial doubt about the Company's ability to
continue as a going concern.
12
<PAGE>
The Company has taken several steps regarding future operations, including
those discussed below. In February 1998, the Company sold its interest in CTL
and A.C. Magnetics, Inc. to raise additional capital for ongoing operations.
The Company received $1,500,000 in cash, $500,000 in a note receivable and
$200,000 in escrow for the sale of CTL. The Company received $700,000 in cash
for the sale of A.C. Magnetics, Inc. which it used to pay down its debt on the
Series A-1 convertible debenture.
The Company has also discontinued operations at Sigma 7 and Particle
Interconnect Corporation during June 1998 and will seek protection under the
U.S. bankruptcy laws for Sigma 7. The intellectual property rights to the
particle interconnect technology have been transferred to Nanopierce resulting
in an approximate 74% ownership of Nanopierce on a diluted basis. In July 1998,
Nanopierce secured a two-year credit facility to finance its ongoing operations.
This agreement was to supply Nanopierce with $1,500,000 in capital during the
next twelve months with up to a total of $8,500,000 over a 24-month period. As
of September 30, 1998, Nanopierce has received $750,000 under the original
agreement. The agreement has been amended to allow Nanopierce to assign the
remaining commitment to other parties. Nanopierce is currently seeking
substitute investors to fulfill the terms of the agreement. The Company has
identified a substitute investor for a portion of the financing ($3.5 million).
The Company is still qualifying investors for the remaining $750,000 of the
financing. If the financing is performed in full, it will provide Nanopierce
with enough capital to meet its plan of operation for the next year. There is
no assurance, however, that Nanopierce will be able to find a substitute
investor for the remaining $750,000 and, if such substitute investor is not
found, it could impair Nanopierce's ongoing operations due to capital
requirements. The Company has reduced its costs to a bare minimum and is
currently seeking its own financing.
During the six months ended March 31, 1997 the Company's cash and cash
equivalents increased by $178,000. This increase was due primarily to proceeds
from the issuance of $1,500,000 in convertible debentures in December 1997, the
sale of CTL and the sale of A.C. Magnetics, Inc. A portion of these proceeds
was used to pay off debts of Sigma 7 and the Company.
In the 1998 fiscal year, the Company intends to make capital expenditures
of approximately $250,000. These expenditures will provide for an office and
application engineering facility for Nanopierce. In the first six months of
fiscal 1998 the Company had no capital expenditures.
The Company believes that if a substitute investor can be found to complete
the entire credit facility of Nanopierce, adequate funding is available to
support operations for the next twelve months. The Company also believes that
sales of its Nanopierce products and technology licenses 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 licensing, joint venture, co-manufacturing or other similar
arrangement with connector manufacturers using the Nanopierce technology. The
failure to secure such a relationship could result in the Company requiring
substantial additional capital and resources to bring Nanopierce products to
market.
13
<PAGE>
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 further issuance of debt or equity in the Company.
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000 date
are known risks. The Company is addressing this risk to the availability and
integrity of financial systems and the reliability of the operational systems.
Management believes the total cost of compliance and its effect on the Company's
future results of operations will be insignificant.
In February 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Accounting Standards (SFAS) No. 132, Employer's disclosures about
Pensions and Other Post-Retirement Benefits. This statement requires disclosure
only and therefore will not impact the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. Currently, the Company does not have any
derivative financial instruments and does not participate in hedging activities,
therefore management believes SFAS No. 133 will not impact the Company's
financial statements.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
The Company made the following unregistered sale of its securities from
January 1, 1998 through March 31, 1998:
<TABLE>
<CAPTION>
TITLE OF
DATE OF SALE SECURITIES Amount Consideration Purchaser
<S> <C> <C> <C> <C>
1/16/98 Common Stock 250,000 Settlement Barbara J. Drew
</TABLE>
Exemption From Registration Claimed.
This sale by the Company of its unregistered securities was made by the
Company in reliance upon Sections 4(2) and 4(6) of the Securities Act of 1933,
as amended. Ms. Drew was known to the Company and its management, through a pre-
existing business relationship, as a long standing business associate of
management and as a former employee of CTL. She was provided access to all
material information which she requested and all information necessary to verify
such information and was afforded access to management of the Company in
connection with her purchase. She acquired such securities for investment and
not with a view toward distribution, acknowledging such intent to the Company.
All certificates or agreements representing such securities that were issued
contained restrictive legends, prohibiting further transfer of the certificates
or agreements representing such securities, without such securities either being
first registered or otherwise exempt from registration in any further resale or
disposition.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS:
Exhibit 11.1: Statement of computation of earnings per share
Exhibit 27.1: Financial Data Schedule
(B) REPORTS:
1) Form 8-K, filed September 24, 1998, disclosed the disposition of
California Tube Laboratory.
2) Form 8-K, filed September 22, 1998, disclosed the disposition of
all or substantially all of the assets of Particle Interconnect
Corporation.
16
<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: October 30, 1998 By /s/ Paul Metzinger
-------------------
Paul Metzinger, President and Chief Executive
Officer
Date: October 30, 1998 By /s/ Thomas Vander Stel
-----------------------
Thomas Vander Stel, Secretary and Chief
Financial Officer
17
<PAGE>
LIST OF EXHIBITS
Exhibit 11.1: Statement of computation of earnings per share
Exhibit 27.1: Financial Data Schedule
18
<PAGE>
EXHIBIT 11.1
INTERCELL CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
Three months ended March 31 Six months ended March 31
1998 1997 1998 1997
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Loss from continuing operations ($2,022,000) ($1,718,000) ($5,267,000) ($3,851,000)
Deemed preferred stock dividend relating to
in-the-money conversion terms (15,000) (496,000) (30,000) (717,000)
Accrual dividends preferred stock (37,000) (37,000)
Accretion on preferred stock (29,000) (155,000) (64,000) (295,000)
----------------------------------------------------------------
Loss from continuing operations applicable to common (2,103,000) (2,369,000) (5,398,000) (4,863,000)
shareholders
Discontinued operations
Gain/(loss) from discontinued operations (461,000) 259,000 (215,000) 470,000
Loss on sale of subsidiary (350,000) (350,000)
----------------------------------------------------------------
Loss from discontinued operations (811,000) 259,000 (565,000) 470,000
Net loss applicable to common stockholders ($2,914,000) ($2,110,000) ($5,963,000) ($4,393,000)
================================================================
Weighted average number
of common shares outstanding 32,061,656 17,789,405 30,222,670 16,996,221
Net loss per common share:
Loss from continuing operations ($0.07) ($0.13) ($0.18) ($0.29)
Loss from discontinued operations ($0.02) $ 0.01 ($0.02) $ 0.03
----------------------------------------------------------------
Net loss per applicable to common stockholders ($0.09) ($0.12) ($0.20) ($0.26)
================================================================
</TABLE>
Diluted loss per share is not presented as the effect of the potential
conversion of preferred stock to common stock and the exercise of outstanding
warrants and options would decrease loss per share.
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INTERCELL
CORPORATION'S FINANCIAL STATEMENTS AS OF MARCH 31, 1998 AND FOR THE SIX
MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 285,000
<SECURITIES> 0
<RECEIVABLES> 586,000
<ALLOWANCES> 0
<INVENTORY> 458,000
<CURRENT-ASSETS> 2,331,000
<PP&E> 956,000
<DEPRECIATION> 322,000
<TOTAL-ASSETS> 3,745,000
<CURRENT-LIABILITIES> 4,190,000
<BONDS> 0
0
3,587,000
<COMMON> 21,312,000
<OTHER-SE> (26,887,000)
<TOTAL-LIABILITY-AND-EQUITY> 3,745,000
<SALES> 1,168,000
<TOTAL-REVENUES> 1,168,000
<CGS> 1,471,000
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,593,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 371,000
<INCOME-PRETAX> (4,896,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,267,000)
<DISCONTINUED> (565,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,832,000)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
