SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, N.W.
Washington, D.C. 20549
FORM 8-K/A-1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: May 28, 1997
Intercell Corporation
--------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Colorado 0-14306 84-0928627
-------- ------- ----------
(State of (Commission (IRS Employer
incorporation) File Number) Identification No.)
370 Seventeenth Street, Suite 3290
Denver, Colorado 80202
---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (303) 592-7753
------------------------------------------------------------
(Former Name or Former Address, if Change Since Last Report)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On June 6, 1997, Intercell Corporation (the "Company" or "Intercell")
acquired 90% of the outstanding common stock of Sigma 7 Corporation ("Sigma").
Pursuant to the agreement, the Company acquired 4,500,000 shares of Sigma's
common stock in exchange for the payment of $550,000 for the shares and for
providing approximately $1,985,000 in additional financing, consisting primarily
of secured loans and standby letters of credit. The funds were used for
inventory purchases, standby letters of credit to a major memory manufacturer,
payment of obligations, the settlement of litigation, working capital and the
redemption of Sigma preferred stock from two individuals holding such preferred
stock.
Sigma was formed on December 19, 1996 at which time it acquired all of the
outstanding common stock of BMI Acquisition Group, Inc. ("BMI"). Sigma's
acquisition did not include the acquisition of the outstanding convertible
preferred stock of BMI.
On September 2, 1997, the Company offered 1,000 shares of a new class of
its preferred stock at a par value of $2,500 per share (the "Preferred Series"),
to the existing holders of the preferred shares of BMI Acquisitions Group, Inc.
("BMI"), which offer the holders of the BMI preferred shares accepted on
September 11, 1997. When issued, the Preferred Series will contain terms and
conditions similar to the preferred shares of BMI which they replace, except
that as a result of such offer the BMI preferred shareholders no longer have the
right to convert their shares into shares of common stock of BMI, but may
convert the preferred shares into shares of the Company's common stock.
The Company timely filed a current report on Form 8-K, dated May 28, 1997,
with the Securities and Exchange Commission, reporting the above transaction
under Item 2.
The Company further agreed in Item 7 of such Report that it would file
financial statements of the acquired corporation within the time period and as
specified by the rules relating to filing reports on a Current Report on Form
8-k, by amendment. Such financial information is included under Item 7 of this
Report.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
A. Financial Statements of Business Acquired.
1. See Index to Financial Statements on page F-1 of this Report.
B. Pro Forma Financial Information
1. See Index to Financial Statements on page F-3 of this Report.
2
<PAGE>
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
Date: September 23, 1997 By: /s/ Paul H. Metzinger
--------------------------------------
Paul H. Metzinger, President and Chief
Executive Officer
3
<PAGE>
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
BMI ACQUISITION GROUP, INC.
Independent Auditor's Report on the Financial Statements
for the Year Ended December 31, 1995....................................F-4
Balance Sheet as of December 31, 1995 ..................................F-5, F-6
Statement of Operations for the year ended December 31, 1995.................F-7
Statement of Changes in Shareholder's Equity for the year ended
December 31, 1995........................................................F-8
Statement of Cash Flows for the year ended
December 31, 1995 .................................................F-9, F-10
Notes to Financial Statements for the year ended
December 31, 1995 ................................................F-11--F-22
Independent Auditor's Report on Supplementary Operating Information ........F-23
Schedule A--Cost of Good Sold ..............................................F-24
Schedule B--General and Administrative Expenses ............................F-25
Independent Auditor's Report on the Financial Statements
for the eleven and a half months ended December 18, 1996 ...............F-26
Balance Sheet as of December 18, 1996 ................................F-27, F-28
Statement of Operations for the eleven and a half months
ended December 18, 1996 ................................................F-29
Statement of Changes in Shareholder's Equity December 18, 1996..............F-30
Statement of Cash Flows for the eleven and a half months ended
December 18, 1996 ................................................F-31, F-32
Notes to Financial Statements December 18, 1996 ......................F-33--F-42
F-1
<PAGE>
Independent Auditor's Report on Supplementary Operating Information ........F-43
Schedule A--Cost of Good Sold ..............................................F-44
Schedule B--General and Administrative Expenses ............................F-45
SIGMA 7 CORPORATION
Independent Auditor's Report on the Consolidated Financial Statements
for the period December 19, 1996 to December 31, 1996...................F-46
Consolidated Balance Sheet as of December 31, 1996....................F-47, F-48
Consolidated Statement of Operations for the year ended
December 31, 1996 ......................................................F-49
Consolidated Statement of Changes in Shareholder's Equity
December 31, 1996 ......................................................F-50
Consolidated Statement of Cash Flows for the year
ended December 31, 1996 ..........................................F-51, F-52
Notes to Consolidated Financial Statements December 31, 1996 .........F-53--F-63
Independent Auditor's Report on Supplementary Operating Information ........F-64
Schedule A--Cost of Good Sold ..............................................F-65
Schedule B--General and Administrative Expenses ............................F-66
Unaudited Condensed Consolidated Balance Sheet, March 31, 1997 .............F-67
Unaudited Condensed Consolidated Statement of Operations of Sigma 7
Corporation for the Three Months Ended March 31, 1997 and
Unaudited Condensed Statement of Operations of BMI Acquisition
Group, Inc. for the Three Months Ended March 31, 1996...................F-68
Unaudited Condensed Consolidated Statement of Cash Flows of Sigma 7
Corporation for the Three Months Ended March 31, 1997 and
Unaudited Condensed Statement of Cash Flows of BMI Acquisitions
Group, Inc. for the Three Months Ended March 31, 1996...................F-69
Notes to Unaudited Interim Condensed Combined Financial Statements .........F-70
F-2
<PAGE>
PRO FORMA FINANCIAL INFORMATION
Pro Forma Condensed Combined Financial Information .........................F-71
Unaudited Pro Forma Condensed Combined Balance Sheet, March 31, 1997 .......F-72
Unaudited Pro Forma Combined Statement of Operations for the
year ended September 30, 1996............................................F-73
Unaudited Pro Forma Combined Statements of Operations for the
Six Months Ended March 31, 1997 ........................................F-74
Notes to Unaudited Condensed Combined Pro Forma Financial Statements..F-75, F-76
F-3
<PAGE>
To the Board of Directors
BMI Acquisition Group, Inc.
San Diego, California
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying balance sheet of BMI Acquisition Group, Inc. as
of December 31, 1995, and the related statements of operations, retained
earnings, and cash flows for the year ending December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted the 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 are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to in the first paragraph
above, present fairly, in all material respects the financial position of BMI
Acquisition Group, Inc. as of December 31, 1995, and the results of their
operations and their cash flows for the year ending December 31, 1995, in
conformity with generally accepted accounting principles.
Matranga & Correia
/s/ Matranga & Correia
September 27, 1996
San Diego, CA
F-4
<PAGE>
BMI ACQUISITION GROUP, INC.
BALANCE SHEET
DECEMBER 31, 1995
ASSETS
CURRENT ASSETS
Cash $ 234,909
Investments 200
Accounts receivable - trade, net (Note 3) 1,533,308
Receivables, other (Note 5) 80,605
Inventories (Notes 1 and 4) 5,480,483
Prepaid state tax 98,579
Prepaid expenses (Note 6) 104,542
Advances 114,190
-----------
Total current assets 7,646,816
-----------
PROPERTY & EQUIPMENT (Note 1)
Property and equipment 2,488,140
Accumulated depreciation (668,170)
----------
Total property and equipment 1,819,970
----------
OTHER ASSETS
Deferred tax asset (Note 7) 0
Deposits 17,333
Covenants 50,000
Accumulated amortization (40,278)
-----------
Total other assets 27,055
-----------
Total assets $ 9,493,841
===========
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
BMI ACQUISITION GROUP, INC.
BALANCE SHEET
DECEMBER 31, 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, trade $ 1,211,594
Accounts payable, other 116,914
Deferred revenue 1,240,000
Other accrued liabilities 491,434
Capital lease (Note 10) 3,536
Note payable - bank (Note 14) 2,000,000
-----------
Total current liabilities 5,063,478
-----------
SHAREHOLDERS' EQUITY
Capital stock, common, no par value, authorized
100,000 shares, issued 12,000 shares 600,000
Preferred stock 4,882,277
Retained earnings (deficit) (1,051,914)
-----------
Total shareholders' equity 4,430,363
-----------
Total liabilities and shareholders' equity $ 9,493,841
===========
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
BMI ACQUISITION GROUP, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
SALES, NET $ 54,561,213
COST OF GOODS SOLD (Schedule A) (43,128,297)
------------
Gross profit 11,432,916
GENERAL AND ADMINISTRATIVE (Schedule B) (7,713,826)
------------
Net income from operations 3,719,090
------------
OTHER INCOME AND (EXPENSES)
Other income 29,446
Interest income 85,969
Gain (loss) on sale of assets (6)
Theft loss 344,871
Penalties 462
Loss -- supplier contract (Note 16) (1,400,000)
------------
Total other income and (expenses) (939,258)
------------
Net income before extraordinary
item and provision for income taxes 2,779,832
EXTRAORDINARY ITEM
Inventory write down (Note 17) (5,022,218)
------------
Net income (loss) before provision for income
taxes (2,242,386)
------------
PROVISION FOR INCOME TAXES (Note 7)
California income tax (800)
------------
Total provision for income taxes (800)
------------
NET INCOME (LOSS) $ (2,243,186)
============
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
<TABLE>
BMI ACQUISITION GROUP, INC.
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
DECEMBER 31, 1995
<CAPTION>
No. of Common No. of Preferred Retained
Shares Stock Shares Stock Deficit Total
------ ----- ------ ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance
May 25, 1994 0 $ 0 0 $ 0 $ 0 $ 0
Issuance of shares:
For Cash 12,000 600,000 600,000
Shareholder distributions (16,753,442) (16,753,442)
Net Income (loss) Fiscal
Year 1994 17,944,714 17,944,714
------------ ------------ ------------ ------------ ------------ ------------
Balance Dec. 31, 1994 12,000 600,000 -- -- 1,191,272 1,191,272
Issuance of Shares:
For debt 7,346,040 7,346,040 7,346,040
Preferred Stock redemptions (2,463,763) (2,463,763) (2,463,763)
Net Income (loss) Fiscal
Year 1995 (2,243,186) (2,243,186)
------------ ------------ ------------ ------------ ------------ ------------
Balance Dec. 31, 1995 12,000 600,000 4,882,277 4,882,277 (1,051,914) 4,430,363
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
BMI ACQUISITION GROUP, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 55,441,413
Cash paid to suppliers and employers (48,227,910)
Interest paid (181,493)
Interest received 85,969
Theft loss (344,871)
Other income 29,446
------------
Net cash provided by operating activities 6,802,554
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (523,194)
Payment for purchase of USMT acquisition (325,000)
Proceeds from sale of fixed assets 27,341
------------
Net cash (used) in investing activities (820,853)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on short-term debt (6,825,038)
Redemptions of preferred stock (2,463,763)
Proceeds from short-term debt 2,000,000
Payments under capital lease obligations (42,441)
------------
Net cash (used) in financing activities (7,331,242)
------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,349,541)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,584,450
------------
CASH AND CASH EQUIVALENTS AT DECEMBER 31, 1995 $ 234,909
============
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
BMI ACQUISITION GROUP, INC.
STATEMENT OF CASH FLOWS (Cont.)
FOR THE YEAR ENDED DECEMBER 31, 1995
RECONCILIATION OF NET INCOME (LOSS) TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income (loss) $(2,243,186)
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 464,479
Change in assets and liabilities net of effects
from purchase of USMT:
Decrease in accounts receivable 880,200
Decrease in notes receivable 750,096
Decrease in inventory 8,316,659
Increase in investment (200)
Increase in advances (114,190)
Decrease in prepaid FTB 800
Increase in deferred tax asset valuation allowance (308,291)
Decrease in prepaid expenses 278,376
Increase in deposits (3,526)
Decrease in accounts payable (2,300,871)
Increase in deferred revenues 1,240,000
Decrease in other accrued liabilities (157,235)
Decrease in deferred tax liabilities (563)
Loss on sale of fixed assets 6
-----------
Total adjustments 9,045,740
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES: $ 6,802,554
===========
Supplemental Schedule of Noncash Investing and Financing Activities:
The Company purchased USMT for $325,000. In connection with the acquisition,
liabilities were assumed as follows:
Fair value of assets acquired $2,156,764
Cash paid (325,000)
----------
Liabilities assumed $1,831,764
==========
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of BMI Acquisition Group, Inc.,
a California corporation (the "Company"), is presented to assist in
understanding the Company's consolidated financial statements. The consolidated
financial statements and notes are representations of the Company's management
who is responsible for their integrity and objectivity. These accounting
policies conform to generally accepted accounting principles and have been
consistently applied in the preparation of the consolidated financial
statements.
Business Activity
The Company was established and incorporated on May 25, 1994, in the State of
California. On June 20, 1994, it acquired the majority of the assets of U.S
Modules Technologies, Inc. On January 1, 1995, the Company acquired the stock of
U.S. Modules Technologies, Inc. (refer to Note 2 for details of the
acquisition). The Company is a value-added distributor and tester of
micro-electronic components, and a designer and assembler of computer
sub-assemblies. It purchases untested surplus and non-standard dynamic random
access memory products (dRAMS) from several of the world's foremost dRAM
manufacturers. The Company tests the dRAM and markets the product based on
specifications developed and published by the Company's engineers. It also
performs assembly, testing and repair work on various electronic sub-assemblies.
The Company has the following four operating divisions: BMI, Inc., U.S. Modules
Technologies, Inc., Global Tech Industries and U.S. Modules, Inc.
Procurement of the dynamic random access memory products (dRAMS) is done through
the BMI division. Testing and assembly of dRAMS are handled by the U.S. Modules
Technologies division. Reclamation of micro-electronic components from
electronic scrap and the reconditioning of those reclaimed components is
performed by the Global Tech Industries division.
In addition to its procurement and recycling capabilities, the Company has
developed highly specialized testing and application design capabilities. Its
testing and assembly subsidiary, U.S. Modules, Inc., based in Milpitas,
California, tests large volumes of non-standard or surplus components, and
designs and assembles applications for these components.
See accountants' audit report.
F-11
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of U.S.
Modules Technologies, Inc. - a California corporation, BMI Acquisition Group,
Inc. - a California corporation (the "Company"), and U.S. Modules, Inc. - a
California corporation. All significant intercompany balances and transactions
have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits with financial institutions
and highly liquid debt instruments with original maturities of 90 days or less.
Revenue Recognition
The Company uses the accrual basis of accounting. Accordingly, revenues are
recorded in the period in which they are earned and expenses are recorded in the
period in which they are incurred. The effect of events on the business is
recognized as services are rendered or consumed rather than when cash is
received or paid.
Property and Equipment
Property and equipment are carried at cost. Depreciation of property and
equipment is provided using the straight-line method for financial reporting
purposes over their estimated useful lives as follows:
Vehicles 5 years
Office furniture and equipment 5 and 7 years
Leasehold improvements Life of Lease
Testing equipment 5 years
Warehouse equipment 5 years
Computer equipment and software 5 years
See accountants' audit report.
F-12
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Property and Equipment (Cont.)
For federal income tax purposes, depreciation is computed using the modified
accelerated cost recovery system. Repairs and maintenance that do not extend the
useful life of the assets are charged to operations as incurred.
Leases
Leases are classified as either capital or operating leases. Leases that
substantially transfer all of the benefits and risks of ownership of property to
the Company are accounted for as capital leases. At the time a capital lease is
entered into, an asset is recorded together with its related long-term
obligation to reflect the acquisition and financing. Rental payments under
operating leases are expensed as incurred. As of December 31, 1995, all of the
Company's lease agreements have been properly classified.
Inventories
Inventories are valued at moving-average cost method, not in excess of market.
Concentration of Credit Risk
The Company sells its products to original equipment manufacturers and third
party distributors in the electronics industry worldwide. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. As of December 31, 1995, the Company has established provisions for
potential credit losses and sales returns that are reasonably expected to be
incurred.
See accountants' audit report.
F-13
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Income Taxes
Income taxes are computed under the provisions of the Financial Accounting
Standards Board (FASB) Statement 109 - "Accounting for Income Taxes." Certain
items of income and expense are recognized for income tax purposes in different
periods from those in which such items are recognized for financial reporting
purposes. These items include depreciation expense. Deferred income taxes are
provided for the tax effect of these differences.
NOTE 2 - ACQUISITIONS
On January 1, 1995, the Company acquired 100% of the issued and outstanding
shares of stock of U.S. Modules Technologies, Inc. for $325,000 in cash. The
major remaining assets of U.S. Modules Technologies, Inc. was its 80% owned
subsidiary U.S. Modules, Inc. of Milpitas, California. It tests and assembles
dRAM chips onto single in-line memory modules (SIMM cards). The Company acquired
the remaining 20% minority interest of U.S. Modules during 1995.
NOTE 3 - ACCOUNTS RECEIVABLE - TRADE
Trade accounts receivable is shown net of allowance for bad debts, returns,
allowances and discounts as follows:
Accounts receivable $2,069,156
Less: Allowance for bad debts (275,110)
Reserve for returns, allowances and discounts (260,738)
----------
Net trade receivables $1,533,308
==========
See accountants' audit report.
F-14
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 4 -- INVENTORIES
Inventories at December 31, 1995, consisting of the following:
Raw materials/work in progress $3,604,176
Finished goods 2,098,126
Reserve for slow moving items (221,819)
----------
Total net inventory $5,480,483
==========
Inventories are stated at the lower of cost or market. Cost is determined by the
moving-average cost method. Inventory values were significantly reduced during
the year to reflect the decline in market value of computer chips.
NOTE 5 -- RECEIVABLES -- OTHER
Receivables -- other at December 31, 1995, consisted of the following:
Employee notes receivable (a) $ 35,857
Other receivables (b) 14,144
Vendor receivable (c) 30,604
----------
Total receivables -- other $ 80,605
==========
(a) Employee receivables:
(1) Various advances $ 4,200
(2) 5% interest-bearing note receivable; payable
at $84.07 per week through July 1996 1,261
(3) 6% interest-bearing note receivable; payable at
$100 semi-monthly through November 1998 6,296
(4) 8% interest-bearing note receivable; payable at
$200 semi-monthly through June 1997 7,606
(5) 6.60% interest-bearing note receivable; lump
sum payable on January 31, 1996 16,494
----------
Total employee receivables $ 35,857
==========
See accountants' audit report.
F-15
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 5 -- RECEIVABLES -- OTHER (Cont.)
(b) Other receivables of $14,144 consist of various expenses paid on behalf of
unrelated parties.
(c) Vendor receivable:
(1) Component Design $ 30,604
----------
Total vendor receivable $ 30,604
==========
NOTE 6 -- PREPAID EXPENSES
Prepaid expenses at December 31, 1995, consisted of the following:
Prepaid service contracts $ 496
Prepaid expenses 20,924
Prepaid insurance 58,401
Prepaid rent 15,449
Prepaid inventory 9,272
--------
$104,542
========
NOTE 7 -- INCOME TAXES PAYABLE
The components of the provision for (benefit from) income taxes on income are as
follows:
Total Paid Payable
----- ---- -------
Current tax expense:
CA franchise tax $800 $800 $ 0
U.S. federal tax 0 0 0
---- ---- ----
Total income taxes payable $800 $800 $ 0
==== ==== ====
See accountants' audit report.
F-16
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 7 -- INCOME TAXES PAYABLE (Cont.)
Deferred tax expense:
CA franchise tax $ 0
U.S. federal tax 0
----------
Total deferred 0
----------
Total tax provision $ 800
==========
The deferred tax asset at December 31, 1995, is as follows:
CA franchise tax $ 61,135
U.S. federal tax 184,062
Valuation allowance (245,197)
-----------
Total $ 0
===========
The provision (benefit) for income taxes for December 31, 1995, consists of the
following:
Current provision -- California $ 800
-- Federal 0
-----------
Total current provision $ 800
===========
Deferred tax provision:
Depreciation $ (43,868)
Inventory reserves 105,627
Allowance for doubtful accounts 1,335
Valuation allowance (63,094)
-----------
Total deferred provision 0
-----------
Total income tax provision $ 800
===========
See accountants' audit report.
F-17
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 7 - INCOME TAXES PAYABLE (Cont.)
The provision (benefit) for income taxes in the accompanying statements of
operations differs from the amount of tax based on the statutory income tax
rates as follows:
Provision for income taxes at statutory rate:
CA franchise tax $ 800
U.S. federal tax 0
----------
Total provision for income tax $ 800
==========
The components of the Company's deferred income tax (benefit) asset as of
December 31, 1995, are as follows:
Fixed asset reserves/depreciation $ (37,412)
Allowance for doubtful accounts 199,871
Inventory reserves 82,738
Valuation allowance (245,197)
----------
Total components of the Company's
deferred income tax (benefit) asset $ 0
==========
An allowance for the deferred income tax (benefit) asset has been set at one
hundred percent (100%) due to a going concern issue (see Note 18) which causes
us to believe that it is more likely than not, that the deferred tax (benefit)
asset will not be realized.
NOTE 8 - COMMITMENTS
The Company has entered into leases for 9,824 square feet of space located at
7100 Convoy Court. The Company also entered leases for 8,400 square feet at 7170
Convoy Court and 2,885 square feet at 7366 Convoy Court. The lease at 7100
Convoy Court expires on April 30, 1996. Minimum lease payments are $4,912 per
month plus utilities. The lease at 7170 Convoy Court expires on April 30, 1996.
Minimum lease payments are $4,200 per month plus utilities. The lease at 7366
Convoy Court expires on April 30, 1996. Minimum lease payments are $721 per
month plus utilities, increasing to $750 per month plus utilities on June 1,
1995.
See accountants' audit report.
F-18
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 8 -- COMMITMENTS (Cont.)
The Company also entered into a lease for 8,713 square feet of space located at
1435 McCandless Drive, Milpitas, California. This lease expires December 14,
1996. Minimum lease payments are $5,663 per month, plus common area maintenance
charges and utilities.
The scheduled payments for the next five years are as follows:
7100 7170 7366
Year Milpitas Convoy Convoy Convoy Total
- ----- -------- ------ ------ ------ -----
1996 $ 67,956 $ 19,648 $ 16,800 $ 3,000 $107,404
1997 0 0 0 0 0
1998 0 0 0 0 0
1999 0 0 0 0 0
2000 0 0 0 0 0
-------- -------- -------- -------- --------
$ 67,956 $ 19,648 $ 16,800 $ 3,000 $107,404
======== ======== ======== ======== ========
NOTE 9 -- SUBSEQUENT EVENTS
On January 2, 1996 the Company entered into a five-year lease. The Company will
be relocating operations to a 33,938 square foot space located at 6610 Nancy
Ridge Drive. Monthly rent payments for 1996 will be $16,969.
The schedule payments for the next five years are as follows:
1996 $135,752
1997 203,628
1998 203,628
1999 203,628
2000 203,628
--------
Total $950,264
========
See accountants' audit report.
F-19
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 10 -- LEASES PAYABLE
Lease payable at December 31, 1995, consist of the following:
a) Lease payable -- Manifest $ 3,536
---------
Total leases payables 3,536
Less: current portion 3,536
---------
Balance at December 31, 1995 $ 0
=========
a) Lease payable, monthly lease payments are $732 including interest at 14.00%
and maturing in June 16, 1996.
The scheduled principal payments for the next five years are as follows:
1996 $3,536
1997 0
1998 0
1999 0
2000 0
------
Total $3,536
======
NOTE 11 -- ECONOMIC DEPENDENCY
The Company obtains a significant amount of its inventory from three major dRAM
manufacturing sources. Although BMI Acquisition Group, Inc. was able to obtain
an acceptable supply of materials during the last year, there can be no
assurance that BMI Acquisition Group, Inc. will be able to secure a continued
supply in the future. If suppliers reduce, terminate, suspend or delay their
shipments to the Company in the near future, there could be substantial negative
effect on the Company's business and results of operations.
See accountants' audit report.
F-20
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 12 -- CONTINGENCIES
The Company has a written warranty program on its products for one year. The
program is novel within the industry, includes potential product liability
claims and thus, the Company is unable to estimate accurately the ultimate cost
of the program. Accordingly, the Company has not accrued for any warranty
expenses or potential product liability claims in the financial statements.
NOTE 13 -- CUSTOMERS
The Company's products are sold, primarily, to original equipment manufacturers.
For the period ending December 31, 1995, BMI Acquisition Group, Inc.'s largest
customers accounted for 32%, 30%, 11% and 11% of sales. No other customer
accounted for 10% or more of net sales.
The Company believes that loss of these customers would not have a material
adverse effect on its business because of the significant industry demand for
the Company's products.
As is customary in the industry, the Company does not have long-term sales
agreements with its customers. However, the Company believes that it enjoys
excellent relationships with its customers.
NOTE 14 -- NOTE PAYABLE -- BANK
Note payable - bank, dated December 29, 1995 bears interest at 1% above the
London Interbank market rate. The note is unsecured, no prepayment penalties,
and is due December 27, 1996.
Balance at December 31, 1995 $2,000,000
==========
See accountants' audit report.
F-21
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 15 -- PREFERRED STOCK
On January 15, 1995, the shareholders decided to recapitalize the company and
cancel their secured shareholder loans. In consideration for this cancellation,
the company issued them preferred stock.
NOTE 16 -- LOSS -- SUPPLIER CONTRACT
The Company entered into a prepaid inventory purchase agreement with a major
supplier of dRAM, whereby the supplier guaranteed to supply approximately
$8,000,000 of products at fixed prices. The price of dRAM fell so dramatically
during the year that the Company exercised its right not to take delivery, thus,
forfeiting its prepaid deposit.
NOTE 17 -- INVENTORY WRITE DOWN
Due to the major decline in the market value of dRAM, the statement of earnings
includes a one-time write down of the Company's inventory to market value.
NOTE 18 -- GOING CONCERN
There has been a rapid decline in the price of computer components, which has
caused a substantial decrease in BMI's inventory valuation. If this decrease in
the industry persists throughout the following year, the entities ability to
meet maturing obligations without selling operating assets, or restructuring
debt based on these outside pressures, will be strained.
Based on the status of the industry at this time, there is a possibility of
discontinuance of operations in 1996.
See accountants' audit report.
F-22
<PAGE>
To the Board of Directors
BMI Acquisition Group, Inc.
San Diego, California
Our examination was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information for the
year ending December 31, 1995, is presented for purposes of additional analysis
and is not a required part of the basic financial statements. The supplementary
information has been subjected to the auditing procedures applied in the
examination of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
Matranga & Correia
/s/ Matranga & Correia
September 27, 1996
San Diego, CA
F-23
<PAGE>
BMI ACQUISITION GROUP, INC.
SCHEDULE A -- COST OF GOODS SOLD
FOR THE YEAR ENDED DECEMBER 31, 1995
COST OF GOODS SOLD
Materials $40,645,276
Outside processing 1,892,778
Depreciation 286,088
Freight 281,002
Commissions 23,153
-----------
TOTAL COST OF GOODS SOLD $43,128,297
===========
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
BMI ACQUISITION GROUP, INC.
SCHEDULE B -- GENERAL AND ADMINISTRATIVE EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995
GENERAL AND ADMINISTRATIVE EXPENSES
Salaries -- Officers $ 284,500
-- Other 3,797,475
Accounting 13,816
Advertising 42,839
Amortization 16,667
Auto expense 53,698
Bank charges 1,459
Computer supplies 13,333
Contract labor 75,785
Consulting 395,088
Depreciation 161,724
Charitable contributions 9,736
Dues and subscriptions 22,342
Employee benefits 19,170
Equipment rental 59,259
Insurance -- general, workers' compensation and health 402,451
Interest expense 181,493
Legal fees 101,173
Licenses and fees 6,064
Miscellaneous 140,785
Meals and entertainment 98,888
Office expense and supplies 73,537
Payroll preparation charges 17,251
Payroll taxes 366,450
Postage and freight 17,188
Property taxes 23,454
Research and development 119,485
Rent 235,576
Repairs and maintenance 80,812
Sales tax expense 63,168
Security 87,534
Telephone 147,084
Testing supplies 24,029
Training 14,838
Travel 233,435
Utilities 117,943
Warehouse expense 12,891
Warehouse supplies 181,406
----------
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES $7,713,826
==========
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
To the Board of Directors
BMI Acquisition Group, Inc.
San Diego, California
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying balance sheet of BMI Acquisition Group, Inc. as
of December 18, 1996, and the related statements of operations, retained
earnings, and cash flows for the eleven and a half months ending December 18,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted the 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 are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to in the first paragraph
above, present fairly, in all material respects the financial position of BMI
Acquisition Group, Inc. as of December 18, 1996, and the results of their
operations and their cash flows for the eleven and a half months ending December
18, 1996, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has experienced operating losses over the past
two years, resulting in a deficit equity position. The company's financial
position and operating results raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Matranga & Correia
/s/ Matranga & Correia
February 11, 1997
San Diego, CA
F-26
<PAGE>
BMI ACQUISITION GROUP, INC.
BALANCE SHEET
DECEMBER 18, 1996
ASSETS
CURRENT ASSETS
Cash $ 0
Accounts receivable - trade, net (Note 4) 21,818
Inventories (Notes 1 and 5) 550,425
Prepaid expenses (Note 6) 30,056
-----------
Total current assets 604,299
-----------
PROPERTY & EQUIPMENT (Note 1)
Property and equipment 2,281,323
Accumulated depreciation (818,601)
-----------
Total property and equipment 1,462,722
-----------
OTHER ASSETS
Deferred tax asset (Note 7) 0
Deposits 22,053
Technology - patent applied for 252,405
Total other assets 274,458
-----------
Total assets $ 2,339,479
===========
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
BMI ACQUISITION GROUP, INC.
BALANCE SHEET
DECEMBER 18, 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, trade $ 659,767
Accounts payable, other 138,000
Deferred revenue 229,193
Other accrued liabilities 37,911
Contingent liabilities (Note 14) 60,000
Current portion capital lease (Note 9) 12,934
-----------
Total current liabilities 1,137,805
-----------
NON-CURRENT LIABILITIES
Capital lease (Note 9) 28,905
Total non-current liabilities 28,905
-----------
Total liabilities 1,166,710
-----------
SHAREHOLDERS' EQUITY
Capital stock, common, no par value, authorized
100,000 shares, issued 12,000 shares 600,000
Preferred stock, $1 par value, 4,882,277
shares authorized, issued and outstanding 4,882,277
Additional paid in capital 2,000,000
Retained earnings (deficit) (6,309,508)
-----------
Total shareholders' equity 1,172,769
-----------
Total liabilities and shareholders' equity $ 2,339,479
===========
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
BMI ACQUISITION GROUP, INC.
STATEMENT OF OPERATIONS
FOR THE ELEVEN AND A HALF MONTHS ENDED DECEMBER 18, 1996
SALES, NET $ 18,028,464
COST OF GOODS SOLD (Schedule A) (20,398,654)
------------
Gross profit (loss) (2,370,190)
GENERAL AND ADMINISTRATIVE (Schedule B) (3,127,604)
------------
Net income (loss) from operations (5,497,794)
------------
OTHER INCOME AND (EXPENSES)
Other income 311,394
Interest income 5,350
Gain (loss) on sale of assets (74,144)
------------
Total other income and (expenses) (242,600)
------------
Net income (loss) before provision for income taxes (5,255,194)
------------
PROVISION FOR INCOME TAXES (Note 7)
California income tax (2,400)
------------
Total provision for income taxes (2,400)
------------
NET INCOME (LOSS) $ (5,257,594)
============
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
<TABLE>
BMI ACQUISITION GROUP, INC.
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
DECEMBER 18, 1996
<CAPTION>
No. of Common No. of Preferred Paid-in Retained
Shares Stock Shares Stock Capital Deficit Total
------ ----- ------ ----- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance
May 25, 1994 0 $ 0 0 $ 0 $ 0 $ 0 $ 0
Issuance of shares:
For Cash 12,000 600,000 600,000
Shareholder distributions (16,753,442) (16,753,442)
Net Income (loss) Fiscal
Year 1994 17,944,714 17,944,714
--------- --------- ---------- ---------- ---------- ----------- ------------
Balance Dec. 31, 1994 12,000 600,000 -- -- -- 1,191,272 1,191,272
Issuance of Shares:
For debt 7,346,040 7,346,040 7,346,040
Preferred Stock redemptions (2,463,763) (2,463,763) (2,463,763)
Net Income (loss) Fiscal
Year 1995 (2,243,186) (2,243,186)
--------- --------- ---------- ---------- ---------- ----------- ------------
Balance Dec. 31, 1995 12,000 600,000 4,882,277 4,882,277 -- (1,051,194) 4,430,363
Shareholders assumption of
Company debt 2,000,000 2,000,000
Net income (loss) Fiscal
year 1996 (5,257,594) (5,257,594)
--------- --------- ---------- ---------- ---------- ------------ ------------
Balance Dec. 18, 1996 12,000 600,000 4,882,277 4,882,277 2,000,000 (6,309,508) 1,172,769
========= ========= ========== ========== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
BMI ACQUISITION GROUP, INC.
STATEMENT OF CASH FLOWS
FOR THE ELEVEN AND A HALF MONTHS ENDED DECEMBER 18, 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 16,516,971
Cash paid to suppliers and employers (16,694,020)
Interest paid (8,905)
Interest received 5,350
Other income 311,394
FTB tax provision (2,400)
------------
Net cash provided by operating activities 128,390
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (304,755)
Proceeds from sale of fixed assets 155,558
Patent acquisition costs (252,405)
Net cash (used) in investing activities (401,602)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital lease acquisition 47,722
Payments under capital lease obligations (9,419)
------------
Net cash provided by financing activities 38,303
------------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (234,909)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 234,909
------------
CASH AND CASH EQUIVALENTS AT DECEMBER 18, 1996 $ 0
============
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
BMI ACQUISITION GROUP, INC.
STATEMENT OF CASH FLOWS (Cont.)
FOR THE ELEVEN AND A HALF MONTHS ENDED DECEMBER 18, 1996
RECONCILIATION OF NET INCOME (LOSS) TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income (loss) $(5,257,594)
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 442,023
Loss on sale of fixed assets 74,144
Decrease in accounts receivable 1,988,554
Decrease in receivable other 80,605
Decrease in inventory 4,930,058
Decrease in investment 200
Increase in advances 114,190
Increase in reserve for returns (260,738)
Decrease in prepaid FTB 98,579
Increase in allowance for bad debts (216,326)
Decrease in prepaid expenses 74,486
Increase in deposits (4,720)
Decrease in accounts payable (551,827)
Increase in other accounts payable 21,086
Decrease in deferred revenues (1,010,807)
Decrease in other accrued liabilities (453,523)
Increase in contingent liabilities 60,000
Total adjustments 5,385,984
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES: $ 128,390
===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
The shareholders personally assumed debt of the Company in the amount of
$2,000,000. The following entry was made in the Company's books to record these
transactions:
Debt Credit
---- ------
Note payable - bank $2,000,000
Additional paid in capital $2,000,000
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 18, 1996
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of BMI Acquisition Group, Inc.,
a California corporation (the "Company"), is presented to assist in
understanding the Company's consolidated financial statements. The consolidated
financial statements and notes are representations of the Company's management
who is responsible for their integrity and objectivity. These accounting
policies conform to generally accepted accounting principles and have been
consistently applied in the preparation of the consolidated financial
statements.
Business Activity
The Company was established and incorporated on May 25, 1994, in the State of
California. On June 20, 1994, it acquired the majority of the assets of U.S.
Modules Technologies, Inc. On January 1, 1995, the Company acquired the stock of
U.S. Modules, Inc. Effective September 30, 1996, the Company merged its wholly
owned subsidiaries, U.S. Modules Technologies, Inc. and U.S. Modules, Inc. into
the parent BMI Acquisition Group, Inc. The Company is a value-added distributor
and tester of micro-electronic components, and a designer and assembler of
computer sub-assemblies. It purchases untested surplus and non-standard dynamic
random access memory products (dRAMS) from several of the world's foremost dRAM
manufacturers. The Company tests the dRAM and markets the product based on
specifications developed and published by the Company's engineers. It also
performs assembly, testing and repair work on various electronic sub-assemblies.
In addition to its procurement and recycling capabilities, the Company has
developed highly specialized testing and application design capabilities. It
tests large volumes of non-standard or surplus components, and designs and
assembles applications for these components.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of U.S.
Modules Technologies, Inc. - a California corporation, BMI Acquisition Group,
Inc. - a California corporation (the "Company"), and U.S. Modules, Inc. - a
California corporation. All significant intercompany balances and transactions
have been eliminated in consolidation. On September 30, 1996, the Company merged
its wholly owned subsidiaries, U.S. Modules Technologies, Inc. and U.S. Modules,
Inc. into the parent BMI Acquisition Group, Inc.
See accountants' audit report
F-33
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 18, 1996
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits with financial institutions
and highly liquid debt instruments with original maturities of 90 days or less.
Revenue Recognition
The Company uses the accrual basis of accounting. Accordingly, revenues are
recorded in the period in which they are earned and expenses are recorded in the
period in which they are incurred. The effect of events on the business is
recognized as services are rendered or consumed rather than when cash is
received or paid.
Property and Equipment
Property and equipment are carried at cost. Depreciation of property and
equipment is provided using the straight-line method for financial reporting
purposes over their estimated useful lives as follows:
Vehicles 5 years
Office furniture and equipment 5 and 7 years
Leasehold improvements Life of Lease
Testing equipment 5 years
Warehouse equipment 5 years
Computer equipment and software 5 years
For federal income tax purposes, depreciation is computed using the modified
accelerated cost recovery system. Repairs and maintenance that do not extend the
useful life of the assets are charged to operations as incurred.
See accountants' audit report
F-34
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 18, 1996
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Leases
Leases are classified as either capital or operating leases. Leases that
substantially transfer all of the benefits and risks of ownership of property to
the Company are accounted for as capital leases. At the time a capital lease is
entered into, an asset is recorded together with its related long-term
obligation to reflect the acquisition and financing. Rental payments under
operating leases are expensed as incurred. As of December 18, 1996, all of the
Company's lease agreements have been properly classified.
Inventories
Inventories are valued at moving-average cost method, not in excess of market.
Concentration of Credit Risk
The Company sells its products to original equipment manufacturers and third
party distributors in the electronics industry worldwide. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. As of December 18, 1996, the Company has established provisions for
potential credit losses and sales returns that are reasonably expected to be
incurred.
Income Taxes
Income taxes are computed under the provisions of the Financial Accounting
Standards Board (FASB) Statement 109 - "Accounting for Income Taxes." Certain
items of income and expense are recognized for income tax purposes in different
periods from those in which such items are recognized for financial reporting
purposes. These items include depreciation expense. Deferred income taxes are
provided for the tax effect of these differences.
NOTE 2 - STATUS AS A GOING CONCERN
There has been a rapid decline in the price of memory components, which has
caused a substantial decrease in BMI's inventory valuation. If this decrease in
the industry persists throughout the following year, the Company's ability to
meet maturing obligations without selling operating assets, or restructuring
debt based on these outside pressures, will be strained.
See accountants' audit report
F-35
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 18, 1996
NOTE 2 - STATUS AS A GOING CONCERN (Cont.)
Based on the status of the industry at this time, there is a possibility of
discontinuance of operations in 1997.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. During the one year and eleven and a half months
ended December 18, 1996, the Company experienced operating losses and negative
operating cash flows which have been funded primarily from banks, privately
financed loans, and proceeds from the sale of assets. The Company has incurred
consolidated net losses of ($2,243,186) and ($5,257,594) for the one year and
eleven and a half months ended December 31, 1995 and December 18, 1996,
respectively, and a total retained deficit of ($6,309,508) at December 18, 1996,
and continues to operate at a loss. In addition, current liabilities exceed
current assets by $535,506 at December 18, 1996. These factors, as well as the
uncertain conditions that the Company faces, creates an uncertainty as to the
Company's ability to continue as a going concern. The Company is developing a
plan to reduce its liabilities through possible sales of assets or obtain
additional equity capital. The need for additional debt or equity financing
continues. The ability of the Company to continue as a going concern is
dependent upon the success of the plan.
NOTE 3 - SUBSEQUENT EVENT
On December 19, 1996, Sigma 7 Corporation, a Delaware Corporation, entered into
a stock purchase agreement and purchased all of the outstanding common stock of
BMI Acquisition Group, Inc. (the Company) from its previous shareholders, for an
acquisition cost of $2,700,000 plus a covenant not to complete agreement,
consisting of $200,000 in cash and the issuance of $2,500,000 of preferred stock
in the Company. The results of operations of Sigma 7 Corporation was immaterial
and it was not practicable to develop pro forma operations and earnings
information.
NOTE 4 - ACCOUNTS RECEIVABLE - TRADE
Trade accounts receivable is shown net of allowance for bad debts, returns,
allowances and discounts as follows:
Accounts receivable $ 80,602
Less: Allowance for bad debts (58,784)
--------
Net trade receivables $ 21,818
========
See accountants' audit report
F-36
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 18, 1996
NOTE 5 - INVENTORIES
Inventories at December 18, 1996, consisted of the following:
Raw materials/work in progress/finished goods $668,425
Reserve for slow moving items (118,000)
--------
Total net inventory $550,425
========
Inventories are stated at the lower of cost or market. Cost is determined by the
moving-average cost method. Inventory values were significantly reduced during
the year to reflect the decline in market value of computer chips.
NOTE 6 - PREPAID EXPENSES
Prepaid expenses at December 18, 1996, consisted of the following:
Prepaid service contracts $ 432
Prepaid expenses 121
Prepaid insurance 29,503
--------
$ 30,056
========
NOTE 7 - INCOME TAXES PAYABLE
The components of the provision for (benefit from) income taxes on income are as
follows:
Total Paid Payable
----- ---- -------
Current tax expense:
CA franchise tax $2,400 $2,400 $ 0
U.S. federal tax 0 0 0
------ ------ ----
Total income taxes payable $2,400 $2,400 $ 0
====== ====== =====
Deferred tax expense:
CA franchise tax $ 0
U.S. federal tax 0
--------
Total deferred 0
--------
Total tax provision $ 2,400
========
See accountants' audit report
F-37
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 18, 1996
NOTE 7 - INCOME TAXES PAYABLE (Cont.)
The deferred tax asset at December 18, 1996, is as follows:
CA franchise tax $ 15,694
U.S. federal tax 25,314
Valuation allowance (41,008)
---------
Total $ 0
=========
The provision (benefit) for income taxes for December 18, 1996, consists of the
following:
Current provision - California $ 2,400
- Federal 0
----------
Total current provision $ 2,400
==========
Deferred tax provision:
Fixed asset reserves/depreciation $ (35,461)
Inventory reserves 54,064
Allowance for doubtful accounts 185,586
Valuation allowance (204,189)
----------
Total deferred provision 0
----------
Total income tax provision $ 2,400
==========
The provision (benefit) for income taxes in the accompanying statements of
operations differs from the amount of tax based on the statutory income tax
rates as follows:
Provision for income taxes at statutory rate:
CA franchise tax $ 2,400
U.S. federal tax 0
----------
Total provision for income taxes $ 2,400
==========
See accountants' audit report
F-38
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 18, 1996
NOTE 7 - INCOME TAXES PAYABLE (Cont.)
The components of the Company's deferred income tax (benefit) asset as of
December 18, 1996, are as follows:
Fixed asset reserves/depreciation $ (1,951)
Allowance for doubtful accounts 14,285
Inventory reserves 28,674
Valuation allowance (41,008)
----------
Total components of the Company's
deferred income tax (benefit) asset $ 0
==========
An allowance for the deferred income tax (benefit) asset has been set at one
hundred percent (100%) due to a going concern issue (see Note 2) which causes us
to believe that it is more likely than not, that the deferred tax (benefit)
asset will not be realized. No benefit has been recognized for the net operating
losses, due to the fact that the company will be unable to use the net operating
loss as a result of the change in ownership rules.
NOTE 8 - COMMITMENTS
The Company has entered into a five-year lease for 33,938 square feet space
located at 6610 Nancy Ridge Drive. Minimum lease payments are $16,969 per month
plus utilities, insurance and real estate taxes.
The schedule payments for the next five years are as follows:
1997 $203,628
1998 203,628
1999 203,628
2000 203,628
2001 67,876
--------
Total $882,388
========
See accountants' audit report
F-39
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 18, 1996
NOTE 9 - LEASE PAYABLE
Lease payable at December 18, 1996, consist of the following:
a) Lease payable - Colonial $ 41,839
--------
Total lease payable 41,839
Less: current portion (12,934)
--------
Balance at December 18, 1996 $ 28,905
========
b) Lease payable, monthly lease payments are $1,770 including
interest at 19.84% for thirty-six months, with a purchase
option of $4,772 available at the maturity of the lease in
June 1999.
The scheduled principal payments for the next five years are as follows:
1997 $12,934
1998 15,501
1999 13,404
2000 0
2001 0
-------
Total $41,839
=======
NOTE 10 - ECONOMIC DEPENDENCY
The Company obtains a significant amount of its inventory from three major dRAM
manufacturing sources. Although BMI Acquisition Group, Inc. was able to obtain
an acceptable supply of materials during the last year, there can be no
assurance that BMI Acquisition Group, Inc. will be able to secure a continued
supply in the future. If suppliers reduce, terminate, suspend or delay their
shipments to the Company in the near future, there could be substantial negative
effect on the Company's business and results of operations.
See accountants' audit report
F-40
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 18, 1996
NOTE 11 - CONTINGENCIES
The Company has a written warranty program on its products for one year. The
program is novel within the industry, includes potential product liability
claims and thus, the Company is unable to estimate accurately the ultimate cost
of the program. Accordingly, the Company has not accrued for any warranty
expenses or potential product liability claims in the financial statements.
NOTE 12 - INVENTORY WRITE DOWN
Due to the major decline in the market value of dRAM, the cost of goods sold
includes a $3,075,723 write down of the Company's inventory to market value.
NOTE 13 - LEGAL MATTERS
At December 18, 1996, the following lawsuits and claims were pending against the
Company:
(a) Spring Circle Technology, Inc. vs. BMI Acquisition Group, Inc., civil
action filed May 1, 1995, in Los Angeles Superior Court (Case No.
145864), for rescission, breach of contract, breach of express and
implied warranties, fraud, unjust enrichment and cost. Legal counsel
states that legal precedents appear to support the Company's position,
however, they believe that an adverse judgment is possible.
Therefore, $60,000 has been accrued for this potential liability.
Settlement discussions are currently being conducted, which the
Company believes will resolve this matter.
(b) BMI Acquisition Group, Inc. vs. Packard Bell NEC, Inc., civil action
filed January 1, 1996, in San Diego Superior Court (Case No.
00702822), for breach of contract, fraud and intentional
misrepresentation, suppression of facts and cost. Packard Bell has
filed a cross-complaint. This case was dismissed in early 1997.
(c) Micron Electronics, Inc. vs. BMI Acquisition Group, Inc. Legal counsel
states that legal precedents appear to support the Company's position.
The Company, however, has already recorded an account payable in the
amount of $110,000.
See accountants' audit report
F-41
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 18, 1996
NOTE 14 - RELATED PARTY TRANSACTIONS
The following transactions occurred between the Company and its shareholders and
affiliated companies:
1) The Company had a contractual agreement with RAS, LLC. RAS,
LLC was controlled by certain former officers of the Company.
RAS, LLC advanced money on behalf of the Company. At December
18, 1996, RAS, LLC is owed $209,368.58, which includes
$138,000 that was advanced to Silicon Magic on behalf of the
Company. During the year, two vehicles were transferred to
RAS, LLC for payment on account.
2) The Company borrowed $2,000,000 from a bank on December 29,
1995. During 1996, the shareholders personally assumed this
loan on behalf of the Company.
There is no recourse against the Company.
3) The Company owed its shareholders $4,382,275 under a Capital
Entitlement dated January 15, 1995. This Entitlement was
converted to preferred stock on October 17, 1996.
4) The Company owns a provisional patent which was assigned to
the Company by Mr. Peddle.
5) Mr. Peddle owns a company by the name of THStyme which has
been a consultant to the Company for several years.
See accountants' audit report
F-42
<PAGE>
To the Board of Directors
BMI Acquisition Group, Inc.
San Diego, California
Our examination was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information for the
eleven and a half months ending December 18, 1996, is presented for purposes of
additional analysis and is not a required part of the basic financial
statements. The supplementary information has been subjected to the auditing
procedures applied in the examination of the basic financial statements and, in
our opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
Matranga & Correia
/s/ Matranga & Correia
February 11, 1997
San Diego, CA
F-43
<PAGE>
BMI ACQUISITION GROUP, INC.
SCHEDULE A -- COST OF GOODS SOLD
FOR THE ELEVEN AND A HALF MONTHS ENDED DECEMBER 18, 1996
COST OF GOODS SOLD
Commissions $ 18,769
Depreciation 300,620
Direct labor 1,258,725
Freight 179,545
Materials 14,946,387
Inventory write down (Note 12) 3,075,723
Outside processing 473,322
Payroll taxes 68,837
Production repairs 8,033
Production supplies 68,693
-----------
TOTAL COST OF GOODS SOLD $20,398,654
===========
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
BMI ACQUISITION GROUP, INC.
SCHEDULE B - GENERAL AND ADMINISTRATIVE EXPENSES
FOR THE ELEVEN AND A HALF MONTHS ENDED DECEMBER 18, 1996
GENERAL AND ADMINISTRATIVE EXPENSES
Salaries -- Officers $ 10,128
-- Other 1,156,971
Accounting 41,504
Advertising 2,000
Amortization 9,722
Auto expense 34,463
Bank charges 2,725
Charitable contributions 1,500
Computer supplies 7,040
Consulting 171,799
Contract labor 10,760
Depreciation 131,681
Dues and subscriptions 16,002
Equipment rental 14,349
Gifts 3,157
Insurance - general, workers' compensation and health 200,938
Interest expense 8,905
Legal fees 91,700
Licenses and fees 14,425
Meals and entertainment 33,716
Miscellaneous 4,570
Moving expense 48,974
Office expense and supplies 30,946
Payroll preparation charges 12,448
Payroll taxes 168,870
Postage and freight 5,752
Property taxes 33,886
Rent 290,661
Repairs and maintenance 60,385
Research and development 52,066
Sales tax expense 6,664
Security 26,889
Telephone 119,150
Testing supplies 15,770
Training 2,348
Travel 113,270
Utilities 88,077
Warehouse expense 13,912
Warehouse supplies 69,481
----------
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES $3,127,604
==========
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
To the Board of Directors
Sigma 7
San Diego, California
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying consolidated balance sheet of Sigma 7 and its
subsidiary as of December 31, 1996, and the related statements of operations,
retained earnings, and cash flows for the year ending December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted the 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 are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the first
paragraph above, present fairly, in all material respects the financial position
of Sigma 7 and its subsidiary as of December 31, 1996, and the results of their
operations and their cash flows for the year ending December 31, 1996, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's subsidiary has experienced operating losses
over the past two years, resulting in a deficit equity position. The company's
financial position and operating results raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Matranga & Correia
/s/ Matranga & Correia
August 26, 1997
San Diego, California
F-46
<PAGE>
SIGMA 7
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
ASSETS
CURRENT ASSETS
Cash $ 187,054
Accounts receivable - trade, net (Note 4) 21,818
Stock subscription receivable 75,000
Inventories (Notes 1 and 5) 550,425
Prepaid expenses (Note 6) 30,056
-----------
Total current assets 864,353
-----------
PROPERTY & EQUIPMENT (Note 1)
Property and equipment 1,462,722
Accumulated depreciation (18,795)
-----------
Total property and equipment 1,443,927
-----------
OTHER ASSETS
Deferred tax asset (Note 7) 0
Organizational costs, net 34,708
Goodwill 1,527,231
Deposits 22,053
Technology - patent applied for 252,405
Covenants - non compete, net (Note 12) 288,000
-----------
Total other assets 2,124,397
-----------
Total assets $ 4,432,677
===========
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE>
SIGMA 7
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, trade $ 628,697
Accounts payable, other 138,000
Deferred revenue 229,193
Other accrued liabilities 37,941
Contingent liabilities (Note 14) 60,000
Current portion capital lease (Note 9) 12,934
Current portion - covenant (Note 12) 144,000
-----------
Total current liabilities 1,250,765
-----------
NON-CURRENT LIABILITIES
Capital lease (Note 9) 28,905
Note payable - covenant (Note 12) 144,000
-----------
Total non-current liabilities 172,905
-----------
Total liabilities 1,423,670
-----------
PREFERRED STOCK INTEREST IN BMI
ACQUISITION GROUP, INC. (Note 13) 2,500,000
-----------
SHAREHOLDERS' EQUITY
Capital stock, common, $0.0000001 par value,
25,000,000 shares authorized, 500,000 issued
and outstanding 1
Preferred stock $0.00000001 par value,
10,000,000 shares authorized, 500,000 issued
and outstanding 1
Additional paid-in capital 524,998
Retained earnings (deficit) (15,993)
-----------
Total shareholders' equity 509,007
-----------
Total liabilities and shareholders' equity $ 4,432,677
===========
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE>
SIGMA 7
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
SALES, NET $ 6,892
COST OF GOODS SOLD (Schedule A) 13,070
--------
Gross profit (loss) (6,178)
GENERAL AND ADMINISTRATIVE (Schedule B) (9,785)
--------
Net income (loss) before provision for income taxes (15,963)
--------
PROVISION FOR INCOME TAXES (Note 7)
Delaware franchise tax 30
--------
Total provision for income taxes 30
--------
NET INCOME (LOSS) $(15,993)
========
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE>
<TABLE>
SIGMA 7
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
DECEMBER 31, 1996
<CAPTION>
No. of Common No. of Preferred Paid-in Retained
Shares Stock Shares Stock Capital Deficit Total
------ ----- ------ ----- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance
December 11, 1996 0 $ 0 0 $ 0 $ 0 $ 0 $ 0
Issuance of shares:
For services 500,000 1 24,999 25,000
For cash 500,000 1 499,999 500,000
Net income (loss)
Fiscal year 1996 (15,993) (15,993)
------- --------- -------- --------- --------- --------- ---------
Balance
December 31, 1996 500,000 $ 1 500,000 $ 1 $ 524,998 $ (15,993) $ 509,007
======= ========= ======== ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE>
SIGMA 7
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 6,892
Cash paid to suppliers and employers (34,838)
---------
Net cash (used) by operating activities (27,946)
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of subsidiary (200,000)
Organization costs (10,000)
---------
Net cash (used) in investing activities (210,000)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 1
Issuance of preferred stock 1
Additional paid-in capital 424,998
---------
Net cash provided by financing activities 425,000
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 187,054
CASH AND CASH EQUIVALENTS AT DECEMBER 11, 1996 0
---------
CASH AND CASH EQUIVALENTS AT DECEMBER 31, 1996 $ 187,054
=========
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
SIGMA 7
CONSOLIDATED STATEMENT OF CASH FLOWS (Cont.)
FOR THE YEAR ENDED DECEMBER 31, 1996
RECONCILIATION OF NET INCOME (LOSS) TO NET
CASH (USED) BY OPERATING ACTIVITIES:
Net income (loss) $ (15,993)
----------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH (USED) BY OPERATING ACTIVITIES:
Depreciation and amortization 19,087
Decrease in accounts payable (31,040)
----------
Total adjustments (11,953)
----------
NET CASH (USED) BY OPERATING ACTIVITIES: $ (27,946)
==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
The Company purchased all of the capital stock of BMI Acquisition Group, Inc.
for $200,000. In conjunction with the acquisition, liabilities were assumed as
follows:
Fair value of assets acquired $4,156,640
Cash paid for the capital stock (200,000)
----------
Liabilities assumed $3,956,640
==========
Common stock was issued for costs attributable to organization and start-up
costs. The following entry was made on the Company's books to record this
transaction.
Debit Credit
----- ------
Organization costs $25,000
Common stock $ 1
Additional paid-in capital 24,999
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE>
SIGMA 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Sigma 7, a Delaware
corporation (the "Company"), is presented to assist in understanding the
Company's consolidated financial statements. The consolidated financial
statements and notes are representations of the Company's management who is
responsible for their integrity and objectivity. These accounting policies
conform to generally accepted accounting principles and have been applied in the
preparation of the consolidated financial statements.
Business Activity
The Company was established and incorporated on December 11, 1996, in the State
of Delaware. On December 19, 1996, it acquired 100% of the common stock of BMI
Acquisition Group, Inc. BMI is a value-added distributor and tester of
micro-electronic components, and a designer and assembler of computer
sub-assemblies. It purchases untested surplus and non-standard dynamic random
access memory products (dRAMS) from several of the world's foremost dRAM
manufacturers. BMI tests the dRAM and markets the product based on
specifications developed and published by the Company's engineers. It also
performs assembly, testing and repair work on various electronic sub-assemblies.
In addition to its procurement and recycling capabilities, it has developed
highly specialized testing and application design capabilities. It tests large
volumes of non-standard or surplus components, and designs and assembles
applications for these components.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company from inception (December 11, 1996) and its wholly owned subsidiary (BMI
Acquisition Group, Inc.) from date of acquisition (December 19, 1996). All
material intercompany accounts and transactions have been eliminated in
consolidation.
Incorporation/Start-Up Costs
Costs incurred to incorporate and start up the Company have been permanently
capitalized. These costs are being amortized on the straight-line basis over
sixty (60) months.
See accountants' audit report
F-53
<PAGE>
SIGMA 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits with financial institutions
and highly liquid debt instruments with original maturities of 90 days or less.
Revenue Recognition
The Company uses the accrual basis of accounting. Accordingly, revenues are
recorded in the period in which they are earned and expenses are recorded in the
period in which they are incurred. The effect of events on the business is
recognized as services are rendered or consumed rather than when cash is
received or paid.
Property and Equipment
Property and equipment are carried at cost. Depreciation of property and
equipment is provided using the straight-line method for financial reporting
purposes over their estimated useful lives as follows:
Office furniture and equipment 5 and 7 years
Leasehold improvements Life of Lease
Testing equipment 5 years
Warehouse equipment 5 years
Computer equipment and software 5 years
For federal income tax purposes, depreciation is computed using the modified
accelerated cost recovery system. Repairs and maintenance that do not extend the
useful life of the assets are charged to operations as incurred.
Leases
Leases are classified as either capital or operating leases. Leases that
substantially transfer all of the benefits and risks of ownership of property to
the Company are accounted for as capital leases. At the time a capital lease is
entered into, an asset is recorded together with its related long-term
obligation to reflect the acquisition and financing. Rental payments under
operating leases are expensed as incurred. As of December 31, 1996, all of the
Company's lease agreements have been properly classified.
See accountants' audit report
F-54
<PAGE>
SIGMA 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Inventories
Inventories are valued at moving-average cost method, not in excess of market.
Concentration of Credit Risk
The Company sells its products to original equipment manufacturers and third
party distributors in the electronics industry worldwide. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. As of December 31, 1996, the Company has established provisions for
potential credit losses and sales returns that are reasonably expected to be
incurred.
Income Taxes
Income taxes are computed under the provisions of the Financial Accounting
Standards Board (FASB) Statement 109 - "Accounting for Income Taxes." Certain
items of income and expense are recognized for income tax purposes in different
periods from those in which such items are recognized for financial reporting
purposes. These items include depreciation expense. Deferred income taxes are
provided for the tax effect of these differences.
NOTE 2 - STATUS AS A GOING CONCERN
There has been a rapid decline in the price of memory components, which has
caused a substantial decrease in BMI's inventory valuation. If this decrease in
the industry persists throughout the following year, the Company's ability to
meet maturing obligations without selling operating assets, or restructuring
debt based on these outside pressures, will be strained.
Based on the status of the industry at this time, there is a possibility of
discontinuance of operations in 1997.
See accountants' audit report
F-55
<PAGE>
SIGMA 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 2 - STATUS AS A GOING CONCERN (Cont.)
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. During the two years ended
December 31, 1996, the Company experienced operating losses and negative
operating cash flows which have been funded primarily from banks, privately
financed loans, and proceeds from the sale of assets. The Company has incurred
consolidated net losses of ($2,243,186) and ($5,276,389) for the year ended
December 31, 1995 and eleven and a half months ended December 18, 1996,
respectively, and a total retained deficit of ($6,328,303) at December 18, 1996,
and continues to operate at a loss. In addition, current liabilities exceed
current assets by $386,412 at December 31, 1996. These factors, as well as the
uncertain conditions that the Company faces, creates an uncertainty as to the
Company's ability to continue as a going concern. The Company has recently
obtained significant financing for operations and has obtained substantial
equity capital. See Note 17 regarding subsequent events.
NOTE 3 - OWNERSHIP CHANGE
On December 19, 1996, Sigma 7 Corporation, a Delaware Corporation, entered into
a stock purchase agreement and purchased all of the outstanding common stock of
BMI Acquisition Group, Inc. (the Company) from its previous shareholders, for an
acquisition cost of $2,700,000 plus a covenant not to complete agreement (See
Note 13), consisting of $200,000 in cash and the issuance of $2,500,000 of
preferred stock in the Company. For accounting purposes, this acquisition was
treated as an asset purchase. The statement of operations includes BMI's results
of operations for the 13 days ended December 31, 1996, since BMI was acquired
December 19, 1996.
NOTE 4 - ACCOUNTS RECEIVABLE - TRADE
Trade accounts receivable is shown net of allowance for bad debts, returns,
allowances and discounts as follows:
Accounts receivable $ 80,602
Less: Allowance for bad debts (58,784)
--------
Net trade receivables $ 21,818
========
See accountants' audit report
F-56
<PAGE>
SIGMA 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 5 - INVENTORIES
Inventories at December 31, 1996, consisted of the following:
Raw materials/work in progress/finished goods $ 668,425
Reserve for slow moving items (118,000)
---------
Total net inventory $ 550,425
=========
Inventories are stated at the lower of cost or market. Cost is determined by the
moving-average cost method. Inventory values were significantly reduced during
the year to reflect the decline in market value of computer chips.
NOTE 6 - PREPAID EXPENSES
Prepaid expenses at December 31, 1996, consisted of the following:
Prepaid service contracts $ 432
Prepaid expenses 121
Prepaid insurance 29,503
--------
$ 30,056
========
NOTE 7 - INCOME TAXES PAYABLE
The components of the provision for (benefit from) income taxes on income are as
follows:
Total Paid Payable
----- ---- -------
Current tax expense:
CA franchise tax $ 0 $ 0 $ 0
U.S. federal tax 0 0 0
Delaware franchise tax 30 0 30
--- --- ---
Total income taxes payable $30 $ 0 $30
=== === ===
Deferred tax expense:
CA franchise tax $ 0
U.S. federal tax 0
Delaware franchise tax 0
---
Total deferred 0
---
Total tax provision $30
===
See accountants' audit report
F-57
<PAGE>
SIGMA 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 7 - INCOME TAXES PAYABLE (Cont.)
The deferred tax asset at December 31, 1996, is as follows:
CA franchise tax $ 0
U.S. federal tax 0
Delaware franchise tax 0
Valuation allowance (0)
-----------
Total $ 0
===========
The provision (benefit) for income taxes for December 31, 1996, consists of the
following:
Current provision --California $ 0
--Federal 0
--Delaware 30
---------
Total current provision $ 30
=========
Deferred tax provision:
Fixed asset reserves/depreciation $ (35,461)
Inventory reserves 54,064
Allowance for doubtful accounts 185,586
Valuation allowance (204,189)
---------
Total deferred provision 0
---------
Total income tax provision $ 30
=========
The provision (benefit) for income taxes in the accompanying statements of
operations differs from the amount of tax based on the statutory income tax
rates as follows:
Provision for income taxes at statutory rate:
CA franchise tax $ 0
U.S. federal tax 0
Delaware franchise tax 30
--------
Total provision for income taxes $ 30
========
See accountants' audit report
F-58
<PAGE>
SIGMA 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 7 -- INCOME TAXES PAYABLE (Cont.)
The components of the Company's deferred income tax (benefit) asset as of
December 31, 1996, are as follows:
Fixed asset reserves/depreciation $ 0
Allowance for doubtful accounts 0
Inventory reserves 0
Valuation allowance 0
-------
Total components of the Company's
deferred income tax (benefit) asset $ 0
=======
An allowance for the deferred income tax (benefit) asset has been set at one
hundred percent (100%) due to a going concern issue (see Note 2) which causes us
to believe that it is more likely than not, that the deferred tax (benefit)
asset will not be realized. No benefit has been recognized for the net operating
losses, due to the fact that the company will be unable to use the net operating
loss as a result of the change in ownership rules.
NOTE 8 - COMMITMENTS
The Company has entered into a five-year lease for 33,938 square feet space
located at 6610 Nancy Ridge Drive. Minimum lease payments are $16,969 per month
plus utilities, insurance and real estate taxes.
The schedule payments for the next five years are as follows:
1997 $203,628
1998 203,628
1999 203,628
2000 203,628
2001 67,876
--------
Total $882,388
========
See accountants' audit report
F-59
<PAGE>
SIGMA 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 9 - LEASE PAYABLE
Lease payable at December 31, 1996, consist of the following:
a) Lease payable - Colonial $ 41,839
--------
Total lease payable 41,839
Less: current portion (12,934)
--------
Balance at December 31, 1996 $ 28,905
========
b) Lease payable, monthly lease payments are $1,770 including
interest at 19.84% for thirty-six months, with a purchase
option of $4,772 available at the maturity of the lease in
June 1999.
The scheduled principal payments for the next five years are as follows:
1997 $12,934
1998 15,501
1999 13,404
2000 0
2001 0
-------
Total $41,839
=======
NOTE 10 - ECONOMIC DEPENDENCY
The Company obtains a significant amount of its inventory from three major dRAM
manufacturing sources. Although BMI Acquisition Group, Inc. was able to obtain
an acceptable supply of materials during the last year, there can be no
assurance that BMI Acquisition Group, Inc. will be able to secure a continued
supply in the future. If suppliers reduce, terminate, suspend or delay their
shipments to the Company in the near future, there could be substantial negative
effect on the Company's business and results of operations.
NOTE 11 - CONTINGENCIES
The Company has a written warranty program on its products for one year. The
program is novel within the industry, includes potential product liability
claims and thus, the Company is unable to estimate accurately the ultimate cost
of the program. Accordingly, the Company has not accrued for any warranty
expenses or potential product liability claims in the financial statements.
See accountants' audit report
F-60
<PAGE>
SIGMA 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 12 - COVENANT - NON-COMPETE
Note payable to the former owners for their covenant not to compete is a non
interest bearing note. Payments in the amount of $6,000 per month each for
twenty-four (24) months are scheduled until the note is paid in full in December
1998. The Company is currently in default, as no payments have been made to
date. The scheduled principal payments are as follows:
1997 $144,000
1998 144,000
--------
Total $288,000
========
NOTE 13 - PREFERRED STOCK INTEREST IN BMI ACQUISITION GROUP, INC.
Pursuant to the stock purchase agreement (See Note 3) dated December 19, 1996,
BMI Acquisition Group, Inc. issued convertible preferred stock in the amount of
$2,500,000. The preferred stock consists of 1,000 shares at $2,500 per share and
is convertible into common stock of Sigma beginning on January 1, 1999 at the
option of the holder. In addition, the preferred stock is entitled to receive a
six percent (6%) dividend commencing in 1998.
NOTE 14 - LEGAL MATTERS
At December 31, 1996, the following lawsuits and claims were pending against the
Company:
(a) Spring Circle Technology, Inc. vs. BMI Acquisition Group, Inc., civil
action filed May 1, 1995, in Los Angeles Superior Court (Case No.
145864), for rescission, breach of contract, breach of express and
implied warranties, fraud, unjust enrichment and cost. Legal counsel
states that legal precedents appear to support the Company's position;
however, they believe that an adverse judgment is possible.
Therefore, $60,000 has been accrued for this potential liability.
Settlement discussions are currently being conducted, which the
Company believes will resolve this matter.
(b) BMI Acquisition Group, Inc. vs. Packard Bell NEC, Inc., civil action
filed January 1, 1996, in San Diego Superior Court (Case No.
00702822), for breach of contract, fraud and intentional
misrepresentation, suppression of facts and cost. Packard Bell has
filed a cross-complaint. This case was dismissed in early 1997.
See accountants' audit report
F-61
<PAGE>
SIGMA 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 14 -- LEGAL MATTERS (Cont.)
(c) Micron Electronics, Inc. vs. BMI Acquisition Group, Inc. Legal counsel
states that legal precedents appear to support the Company's position.
The Company, however, has already recorded an account payable in the
amount of $110,000.
NOTE 15 - RELATED PARTY TRANSACTIONS
The following transactions occurred between the Company and its shareholders and
affiliated companies:
1) BMI Acquisition Group, Inc. had a contractual agreement with RAS, LLC.
RAS, LLC was controlled by certain former officers of BMI Acquisition
Group, Inc. RAS, LLC advanced money on behalf of BMI Acquisition
Group, Inc. At December 31, 1996, RAS, LLC is owed $209,368.58, which
includes $138,000 that was advanced to Silicon Magic on behalf of BMI
Acquisition Group, Inc. During the year, two vehicles were transferred
to RAS, LLC for payment on account.
2) BMI Acquisition Group, Inc. borrowed $2,000,000 from a bank on
December 29, 1995. During 1996, the shareholders personally assumed
this loan on behalf of the Company. There is recourse against BMI
Acquisition Group, Inc.
3) BMI Acquisition Group, Inc. owed its shareholders $4,382,275 under a
Capital Entitlement dated January 15, 1995. This Entitlement was
converted to preferred stock on October 17, 1996. Pursuant to the
stock purchase agreement (see Note 3) with Sigma dated December 19,
1996, the above preferred stock was cancelled and Reclassified as
additional paid in capital. Pursuant to this stock purchase agreement,
new preferred stock (1,000 shares) was issued in the amount of
$2,500,000 to the previous common shareholders of BMI Acquisition
Group, Inc.
4) As a result of this new convertible preferred stock, issued December
19, 1996, the previous common shareholders are still major
shareholders in the Company.
5) BMI Acquisition Group, Inc. owns a provisional patent which was
assigned to BMI Acquisition Group, Inc. by Mr. Peddle, who is BMI
Acquisition Group, Inc.'s current C.E.O.
6) Mr. Peddle owns a company by the name of THStyme which has been a
consultant to BMI Acquisition Group, Inc. for several years.
See accountants' audit report
F-62
<PAGE>
SIGMA 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 16 -- STOCK WARRANTS
The Company has issued 100,000 warrants at $0.10 per share convertible into
common stock. The warrants must be exercised by April 3, 1998.
NOTE 17 -- SUBSEQUENT EVENTS
On June 6, 1997, Intercell Corporation acquired control of Sigma 7 Corporation
("Sigma 7"). Sigma 7 conducts its business through its wholly owned 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. Intercell 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 the shares and for providing approximately $1,985,000 in
additional financing, consisting primarily of secured loans and standby letters
of credit. As a result of the transaction, Intercell owns approximately 90% of
the 5,000,000 issued and outstanding common shares of Sigma 7. In addition,
Intercell 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.
See accountants' audit report
F-63
<PAGE>
To the Board of Directors
Sigma 7
San Diego, California
Our examination was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The supplementary
information for the period ending December 31, 1996, is presented for purposes
of additional analysis and is not a required part of the basic consolidated
financial statements. The supplementary information has been subjected to the
auditing procedures applied in the examination of the basic consolidated
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic consolidated financial statements taken as a
whole.
Matranga & Correia
/s/ Matranga & Correia
August 26, 1997
San Diego, California
F-64
<PAGE>
SIGMA 7
SCHEDULE A -- COST OF GOODS SOLD
FOR THE YEAR ENDED DECEMBER 31, 1996
COST OF GOODS SOLD
Depreciation $13,070
-------
TOTAL COST OF GOODS SOLD $13,070
=======
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE>
SIGMA 7
SCHEDULE B - GENERAL AND ADMINISTRATIVE EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
GENERAL AND ADMINISTRATIVE EXPENSES
Amortization $ 292
Consulting 3,768
Depreciation 5,725
-------
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES $ 9,785
=======
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE>
SIGMA 7 CORPORATION AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
ASSETS
CURRENT ASSETS:
Cash $ (10,000)
Accounts Receivable 149,000
Inventory 502,000
Prepaids 37,000
-----------
Total Current Assets $ 678,000
===========
Property, Plant and Equipment, Net $ 1,325,000
Goodwill and Other Intangible Assets 1,544,000
Deposits 22,000
Technology 252,000
Covenants (Noncompete) 252,000
-----------
$ 4,073,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Accrued Liabilities $ 924,000
Deferred Revenue 229,000
Notes Payable 468,000
-----------
Total Current Liabilities $ 1,621,000
===========
Minority Interest in Subsidiary $ 2,500,000
Stockholders' Equity
Common Stock: $0.0000001 par value,
25,000,000 shares authorized,
500,000 issued and outstanding
Preferred Stock: $0.00000001 par value,
10,000,000 shares authorized,
500,000 issued and outstanding 525,000
Additional paid-in capital (573,000)
Deficit (48,000)
-----------
$ 4,073,000
===========
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE>
SIGMA 7 CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND
BMI ACQUISITION GROUP, INC.
UNAUDITED CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
Three Months Ended March 31
---------------------------
1997 1996
---- ----
Net Sales $ 229,000 $ 10,261,000
Cost of Goods Sold 351,000 10,795,000
------------ ------------
Gross Profit $ (122,000) $ (534,000)
Selling, General and Administrative Expenses 436,000 1,178,000
------------ ------------
Operating Loss $ (558,000) $ (1,712,000)
Other Income -- 486,000
------------ ------------
Net Loss $ (558,000) $ (1,226,000)
============ ============
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE>
SIGMA 7 CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND
BMI ACQUISITION GROUP, INC.
UNAUDITED CONDENSED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
Three Months Ended March 31
---------------------------
1997 1996
---- ----
CASH FLOWS FROM OPERATION ACTIVITIES:
Net Loss $ (558,000) $(1,226,000)
Adjustments to Reconcile Net Loss to
Cash Used in Operating Activities:
Depreciation and Amortization 135,000 123,000
Changes in Operating Assets and Liabilities:
Accounts Receivable (127,000) (525,000)
Inventory 48,000 1,124,000
Prepaid Expenses (7,000) 78,000
Accounts Payable and Accrued Liabilities 18,000 382,000
----------- -----------
Net Cash Used in Operating Activities $ (491,000) $ (44,000)
=========== ===========
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets -- $ (47,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Sale of Assets $ 39,000 $ 192,000
Proceeds from Loan 180,000 --
Stock Subscriptions Received 75,000 --
----------- -----------
Net Cash Provided by Financing Activities $ 294,000 $ 193,000
=========== ===========
Net Increase (Decrease) in Cash $ (197,000) $ 101,000
Cash at Beginning of Period 187,000 235,000
----------- -----------
Cash at End of Period $ (10,000) $ 336,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-69
<PAGE>
SIGMA 7 CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Sigma 7 Corporation and its majority-owned subsidiary (the
"Company"). All intercompany transactions have been eliminated.
The condensed 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 and operating results for
the periods presented. The condensed consolidated financial statements
should be read in conjunction with the December 31, 1996 audited
financial statements of Sigma 7 Corporation and the December 18, 1996
audited financial statements of BMI Acquisition Group, Inc., and the
notes thereto. The results of operations for the three months ended
March 31, 1997 are not necessarily indicative of the results for the
entire year ended December 31, 1997, or any future period.
F-70
<PAGE>
UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
The accompanying unaudited pro forma condensed combined financial
statements present pro forma financial information for the Company giving effect
to the Company's acquisition of 90% of the outstanding Common Stock of Sigma on
June 6, 1997 (the "Transaction"). The unaudited pro forma condensed combined
balance sheet as of March 31, 1997 is presented as if the transaction had
occurred as of that date. The unaudited pro forma condensed combined statement
of operations for the six months ended March 31, 1997 and for the year ended
September 30, 1996 are presented as if the transaction had occurred on October
1, 1996 and October 1, 1995, respectively. The pro forma results of operations
for the year ended September 30, 1996 is based on Intercell's fiscal year end of
September 30 and BMI's and Sigma's fiscal year end of December 31. The
accompanying unaudited pro forma condensed combined financial information and
notes thereto do not purport to represent what the Company's results of
operations or financial position would have been if such Transaction had in fact
occurred on such dates and should not be viewed as predictive of the Company's
financial results or condition in the future. The unaudited pro forma condensed
combined financial information should be read in conjunction with the
consolidated financial statements of the Company and subsidiaries in the
Company's Annual Report on Form 10-K for the year ended September 30, 1996 and
Quarterly Report on Form 10-Q for the period ending June 30, 1997.
F-71
<PAGE>
<TABLE>
INTERCELL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 1997
<CAPTION>
Pro Forma
March 31, Adjustments Pro Forma
1997 (Note 3) Combined
---- -------- --------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and Investments 7,029,000 (1,945,000) 5,084,000
Accounts Receivable, Net 967,000 103,000 1,070,000
Inventories 1,398,000 812,000 2,210,000
Prepaid Expenses and other current assets 137,000 37,000 174,000
Investment land held for sale 1,424,000 -- 1,424,000
Property, plant and equipment 2,248,000 1,293,000 3,541,000
Unallocated Purchase Price -- 3,341,000 3,341,000
Goodwill and other intangibles 1,438,000 -- 1,438,000
Other assets 54,000 125,000 179,000
----------- ----------- -----------
Total Assets 14,695,000 3,766,000 18,461,000
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable and accrued liabilities 868,000 961,000 1,829,000
Notes payable -- 288,000 288,000
Non-current Liabilities:
Capital leases -- 17,000 17,000
Minority interest -- 2,500,000 2,500,000
Stockholder's Equity:
Convertible preferred stock 4,800,000 -- 4,800,000
Warrants 3,051,000 -- 3,051,000
Common stock 17,135,000 -- 17,135,000
APIC -- -- --
Deferred Compensation (199,000) -- (199,000)
Accumulated Deficit (10,960,000) -- (10,960,000)
----------- ----------- -----------
13,827,000 -- 13,827,000
Total Liabilities and Stockholder's Equity 14,695,000 3,766,000 18,461,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-72
<PAGE>
<TABLE>
INTERCELL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1996
<CAPTION>
Intercell BMI Sigma 7
Year Ended January 1 to December 19 to Pro Forma
September 30, December 18, December 31, Adjustments Pro Forma
1996 1996 1996 (Note 3) Combined
---- ---- ---- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue $ 3,405,000 $ 18,021,000 $ 7,000 -- $ 21,433,000
Cost of Sales 2,830,000 20,399,000 13,000 -- 23,242,000
------------ ------------ ------------ ------------ ------------
Gross Profit 575,000 (2,378,000) (6,000) -- (1,809,000)
Selling, General and Administrative Expenses 5,683,000 3,124,000 10,000 668,000 9,485,000
Research and Development 88,000 -- -- -- 88,000
------------ ------------ ------------ ------------ ------------
Operating Loss (5,196,000) (5,502,000) (16,000) (668,000) (11,382,000)
Other Income (Expense), Net (87,000) 243,000 -- -- 156,000
------------ ------------ ------------ ------------ ------------
Loss Before Provision for Income Taxes (5,283,000) (5,259,000) (16,000) (668,000) (11,226,000)
Provision for Income Taxes -- (2,000) -- -- (2,000)
------------ ------------ ------------ ------------ ------------
Net Loss (5,283,000) (5,261,000) (16,000) (668,000) (11,228,000)
Deemed Preferred Stock Dividend Relating to
In-the-money Conversion Terms 1,625,000 -- -- -- 1,625,000
------------ ------------ ------------ ------------ ------------
Net Loss Applicable to
Common Shareholders $ (6,908,000) $ (5,261,000) $ (16,000) $ (668,000) $(12,853,000)
============ ============ ============ ============ ============
Net Loss Per Share (.54) -- -- -- (.98)
============ ============ ============ ============ ============
Weighted Average Shares 13,072,683 -- -- -- 13,072,683
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-73
<PAGE>
<TABLE>
INTERCELL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1997
<CAPTION>
Intercell BMI Sigma 7
Six Months October 1, December 19,
Ended 1996 to 1996 to Pro Forma
March 31, December 18, March 31, Adjustments Pro Forma
1997 1996 1997 (Note 3) Combined
---- ---- ---- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue $ 3,448,000 $ 473,000 -- -- $ 3,921,000
Cost of Sales 2,441,000 1,359,000 -- -- 3,800,000
------------ ------------ ------------ ------------ ------------
Gross Profit 1,007,000 (886,000) -- -- 121,000
Selling, General and Administrative Expenses 3,290,000 565,000 208,000 334,000 4,397,000
Research and Development 1,189,000 -- -- -- 1,189,000
------------ ------------ ------------ ------------ ------------
Operating Loss (3,472,000) (1,451,000) (208,000) (334,000) (5,465,000)
Other Income (Expense), Net 91,000 (323,000) -- -- (232,000)
------------ ------------ ------------ ------------ ------------
Loss Before Provision for
Income Taxes (3,381,000) (1,774,000) (208,000) (334,000) (5,697,000)
Provision for Income Taxes -- (2,000) -- -- (2,000)
------------ ------------ ------------ ------------ ------------
Net Loss (3,381,000) (1,776,000) (208,000) (334,000) (5,699,000)
Deemed Preferred Stock Dividend Relating to
In-the-money Conversion Terms 717,000 -- -- -- 717,000
Accretion on Preferred Stock 295,000 -- -- -- 295,000
------------ ------------ ------------ ------------ ------------
Net Loss Applicable to
Common Shareholders $ (4,393,000) $ (1,776,000) $ (208,000) $ (334,000) $ (6,711,000)
============ ============ ============ ============ ============
Net Loss Per Share (.26) -- -- -- (0.39)
============ ============ ============ ============ ============
Weighted Average Shares 16,996,221 -- -- -- 16,996,221
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-74
<PAGE>
INTERCELL CORPORATION
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
On June 6, 1997, Intercell acquired 90% of the outstanding common stock of Sigma
for a cash purchase price of $550,000. Sigma was formed in December 1996.
Through Intercell's acquisition of Sigma, Intercell also acquired BMI
Acquisition Group, Inc. ("BMI"), the predecessor of Sigma. The acquisition of
Sigma has been accounted for by the purchase method.
Sigma was formed on December 19, 1996 at which time it acquired all of the
outstanding Common Stock of BMI Acquisition Group, Inc. ("BMI"). Sigma's
acquisition did not include the acquisition of the outstanding convertible
preferred stock of BMI.
On September 2, 1997, the Company offered 1,000 shares of a new class of its
preferred stock at a par value of $2,500 per share (the "Preferred Series"), to
the existing holders of the preferred shares of BMI Acquisitions Group, Inc.
("BMI"), which offer the holder of the BMI preferred shares accepted on
September 11, 1997. When issued, the Preferred Series will contain terms and
conditions similar to the preferred shares of BMI which they replace, except
that as a result of such offer, the BMI preferred shareholders no longer have
the right to convert their shares into shares of common stock of BMI, but may
convert the preferred shares into shares of the Company's common stock.
NOTE 2: ALLOCATION OF PURCHASE PRICE
The total cash purchase price of $550,000 has been allocated on a preliminary
basis to the net assets acquired based on the estimated fair values below. The
actual allocation of the purchase price will depend upon the valuation of the
purchased technology as of the acquisition date. Consequently, the ultimate
allocation of the purchase price could differ from that presented below:
See accountants' audit report.
F-75
<PAGE>
INTERCELL CORPORATION
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 2: ALLOCATION OF PURCHASE PRICE (CONT.)
Accounts Receivable 103,000
Inventory 812,000
Prepaid Expenses 37,000
Property, Plant and Equipment 1,293,000
Unallocated purchase price 3,341,000
Other assets 125,000
Current liabilities assumed (961,000)
Note payable to related party (288,000)
Capital leases (17,000)
Minority interest (2,500,000)
-----------
Total cash paid/advanced to Sigma $ 1,945,000
Less advances to Sigma 1,395,000
-----------
Total purchase price $ 550,000
===========
In addition to the above advances, Intercell provided letters of credit to Sigma
for future inventory purchases.
NOTE 3: PRO FORMA ADJUSTMENTS
1. Represents $550,000 paid by Intercell for the acquisition of 4,500,000 shares
of common stock of Sigma. The purchase price has been allocated to the assets
acquired and the liabilities assumed on a preliminary basis as shown above. Cash
paid also includes advances of $1,395,000 made by Intercell to Sigma and BMI
during the period from April through June 1997.
2. The pro forma adjustments applied to the historical statement of operations
to arrive at the pro forma combined statement of operations as of September 30,
1996 and March 31, 1997 reflects amortization expenses of $668,000 and $334,000,
respectively, related to long-lived assets resulting from the acquisition of
Sigma over an assumed estimated useful life of five years. The unallocated
purchase price consists primarily of purchase technology, patent applications
and goodwill.
See accountants' audit report.
F-76
