<PAGE>
As filed with the Securities and Exchange Commission on February 6, 1997
Registration No. 333-____________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_______________
INTERCELL CORPORATION
(Exact name of registrant as specified in its charter)
COLORADO 3672 84-0928627
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Identification No.)
Classification Number)
<TABLE>
<S> <C>
7201 E. CAMELBACK ROAD, SUITE 250 GORDON J. SALES
SCOTTSDALE, ARIZONA 85251 999 WEST HASTINGS STREET, SUITE 1750
(602) 970-5500 VANCOUVER, B.C. CANADA V6C2W2
(Address, including zip code, and telephone number, (604) 684-1533
including area code, of registrant's principal executive offices) (Name, address, including zip code, and telephone number,
including area code, of agent for service)
</TABLE>
With copies sent to:
Robert J. Ahrenholz, Esq.
Brian D. Lewandowski, Esq.
Kutak Rock
717 17th Street, Suite 2900
Denver, Colorado 80202
Approximate date of commencement of the proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
_______________
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
Title of each class Amount Proposed maximum Proposed maximum Amount of
of securities to to be offering price aggregate offering registration
be registered registered per share/(4)/ price/(4)/ fee
<S> <C> <C> <C> <C>
Common Stock, no par value/(1)/.............. 1,804,064 $4.00 $ 7,216,256 $ 2,187.00
Common Stock underlying Convertible
Series B Preferred Stock/(2)/.............. 673,170 $4.00 $ 2,692,680 $ 816.00
Common Stock underlying Convertible
Series C Preferred Stock/(2)/.............. 2,036,475 $4.00 $ 8,145,900 $ 2,468.00
Series B Common Stock Purchase Warrants/(3)/. 1,092,064 $4.00 $ 4,368,256 $ 1,324.00
Common Stock Underlying Series B
Warrants/(3)/............................... 1,092,064 N/A N/A N/A
Series C Common Stock Purchase Warrants/(3)/. 745,386 $4.00 $ 2,981,544 $ 903.00
Common Stock Underlying Series C
Warrants/(3)/............................... 745,386 N/A N/A N/A
------- --- ----------- ----------
Total Registration Fee....................... $25,404,636 $ 7,698.00
=========== ==========
</TABLE>
/(1)/ Common Stock to be distributed to shareholders of Energy Corporation.
Registration fee calculated pursuant to Rule 457(c) based on a share price of
$4.00 per share-the last sale price of the Common Stock on January 31, 1997.
/(2)/ Registration fee calculated pursuant to Rule 457(c) based on the last sale
price of the Common Stock on January 31, 1997. Pursuant to Rule 416 promulgated
under the Securities Act of 1933 ("Rule 416"), this Registration Statement also
covers such shares of Common Stock as may be issuable pursuant to the anti-
dilution provisions of the Series B and Series C Preferred Stock.
/(3)/ Registration fee calculated pursuant to Rule 457(g) based on the last sale
price of the Common Stock on January 31, 1997. Pursuant to Rule 416, this
Registration Statement also covers such shares of Common Stock as may be
issuable pursuant to the anti-dilution provisions of the Warrants. Pursuant to
Rule 457(g), no separate registration fee is payable with respect to the Common
Stock underlying the Warrants.
/(4)/ Estimated solely for purposes of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE>
INTERCELL CORPORATION
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Item Number and Caption Heading in Prospectus
----------------------- ---------------------
<S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus................ Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus............................................ Outside Back Cover Page
3. Summary Information and Risk Factors................... Prospectus Summary; Risk Factors
4. Use of Proceeds........................................ Use of Proceeds
5. Determination of Offering Price........................ Cover Page
6. Dilution............................................... *
7. Selling Security Holders............................... Selling Shareholders
8. Plan of Distribution................................... Cover Page; Plan of Distribution
9. Description of Securities to be Registered............. Prospectus Summary; Price Range of Common
Stock-Dividend Policy; Description of Securities
10. Interests of Named Experts and Counsel................. *
11. Information with Respect to the Registrant............. Prospectus Summary; Risk Factors;
Management's Discussion and
Analysis of Financial Condition and Results
of Operations; Business; Management; Selling
Shareholders; Certain Transactions;
Description of Securities; Financial
Statements
12. Disclosure of Commission Position on Indemnification *
for Securities Act Liabilities........................
</TABLE>
___________
* Omitted because response is negative or inapplicable.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED FEBRUARY 6, 1997
INTERCELL CORPORATION
COMMON STOCK AND COMMON STOCK PURCHASE WARRANTS
___________________
This Prospectus relates to 6,351,159 shares of common stock, no par value (the
"Common Stock") and 1,092,064 Series B Warrants ("Series B Warrants") and
745,386 Series C Warrants ("Series C Warrants" and, together with the Series B
Warrants, the "Warrants") to purchase Common Stock of Intercell Corporation (the
"Company"). Of the securities offered hereby, the Warrants, 1,837,450 shares of
Common Stock issuable upon exercise of the Warrants, and 2,709,645 shares of
Common Stock issuable upon conversion of Series B Preferred Stock, no par value
(the "Series B Preferred Stock") and Series C Preferred Stock, no par value
("Series C Preferred Stock") are being offered by certain shareholders of the
Company (the "Selling Shareholders"); and 1,804,064 shares of Common Stock are
being registered, at this time, for distribution by Energy Corporation
("Energy"), an affiliate of the Company, to Energy's shareholders, pursuant to a
Plan of Liquidating Dissolution adopted by Energy. See "CERTAIN TRANSACTIONS."
The Series B and Series C Preferred Stock are sometime referred to in this
Prospectus as the "Preferred Stock." The Preferred Stock is not being offered
hereby.
THE COMPANY WILL RECEIVE NO PROCEEDS FROM THE COMMON STOCK DISTRIBUTED TO
ENERGY SHAREHOLDERS. THE COMMON STOCK AND WARRANTS OFFERED HEREBY, ARE NOT
OFFERED OR SOLD TO THE PUBLIC BY THE COMPANY, BUT BY THE SELLING SHAREHOLDERS.
PROCEEDS FROM ANY SALE WILL NOT BE RECEIVED BY THE COMPANY BUT BY THE SELLING
SHAREHOLDERS. THE COMPANY MAY RECEIVE PROCEEDS UPON THE EXERCISE, IF EVER, OF
THE WARRANTS REGISTERED HEREBY.
Each Series B Warrant and Series C Warrant entitles the holder to purchase one
share of Common Stock at an exercise price of $3.9375 per share and $3.25 per
share, respectively, subject to adjustment upon the occurrence of certain
events, at any time, with respect to the Series B Warrants, commencing on
October 14, 1996 and ending at 5:00 p.m. Eastern time, on July 1, 2001 and, with
respect to the Series C Warrants, commencing on June 1, 1997 and ending at 5:00
p.m. Eastern time on November 30, 2001 for the Series C Warrants. See
"DESCRIPTION OF SECURITIES-Warrants."
The Common Stock is traded on the over-the-counter market and is quoted on the
OTC Bulletin Board under the symbol "INCE." On January 13, 1997, the Company
submitted an application to have the Common Stock listed on the NASDAQ National
Market (the "NMS"). The Company can provide no assurances that the Common Stock
will be accepted for listing on the NMS. On January 30, 1997 the average of the
closing bid and asked prices for the Common Stock was $4.03. There is currently
no market for the Warrants and there can be no assurance given that a market
will develop. See "PRICE RANGE OF COMMON STOCK."
The distribution of the Common Stock and Warrants being offered by the Selling
Shareholders hereby may be effected from time to time in one or more
transactions directly to third parties or through brokers or dealers in
negotiated transactions or otherwise at market prices prevailing at the time of
sale, at prices related to such prevailing market prices or at negotiated
prices. The distribution of the Common Stock to Energy's shareholders will be
directly made by Energy. The Company has agreed to pay the costs incurred in
connection with the registration of the Common Stock and Warrants offered
hereby, which are estimated to be $____________. The Company has also agreed to
indemnify the Selling Shareholders against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities Act").
See "PLAN OF DISTRIBUTION."
--------------------------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 1 HEREOF FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY EACH PROSPECTIVE INVESTOR.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
___________________
The date of this Prospectus is March ___, 1997
<PAGE>
PHOTOS OR GRAPHICS TO ADDED BY AMENDMENT
2
<PAGE>
PROSPECTUS SUMMARY
The following material is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Certain
technical terms used herein are defined in the "GLOSSARY." This Prospectus
contains forward-looking statements which involve risks and other uncertainties.
The Company's actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including those
set forth under "RISK FACTORS" and elsewhere in this Prospectus.
THE COMPANY
GENERAL
Intercell Corporation (the "Company") was incorporated under the laws of
Colorado on October 4, 1983, and was originally engaged in the marketing of
business and cellular telephone equipment. This business was discontinued and
all remaining assets of the Company were liquidated or otherwise abandoned
during 1991, and all obligations of the Company were paid or otherwise
satisfied.
From 1991 until the acquisition of Modern Industries, Inc. on July 7, 1995,
which subsequently changed its name to Energy Corporation ("Energy"), the
Company was generally inactive and reported no operating revenues prior to the
fiscal year ending December 31, 1994. During that time period, the Company
explored various new business and investment opportunities involving, primarily,
companies engaged in specialty lines of business in the wireless communications
and electronic technology industries.
On July 7, 1995, the Company purchased all of the assets and liabilities of
Energy. Energy's principal asset was its wholly owned subsidiary, California
Tube Laboratory, Inc. ("CTL"). This transaction was accounted for as an
acquisition of the Company by Energy and, as such, the historical financial
statements contained herein reflect the financial statements of Energy. The
results of operations of the Company have been included only since the date of
such acquisition. See "INDEX TO FINANCIAL STATEMENTS" and "PROSPECTUS SUMMARY-
Summary Historical Consolidated Financial Data of the Company."
As a result of the acquisition of Energy and additional acquisitions made
during the 1996 fiscal year (see "BUSINESS-Recent Acquisitions and
Transactions"), the Company is currently engaged in three lines of business: (i)
the design, development and production of shielded cellular phone antennas (the
"Antenna Systems") that use the Company's proprietary antenna technology (the
"Antenna Technology") as well as the manufacture of miniature and non-miniature
coils, transformers and other electronic assemblies; (ii) the manufacture and
rebuilding of specialty electron power tubes; and (iii) the design, development
and production of patented particle interconnect products ("Particle
Interconnect Products") that use the Company's patented
3
<PAGE>
particle interconnect technology (the "PI Technology") and a proprietary trade
secret electroplating process (the "Proprietary Electroplating Process").
The Company's operations are or will be conducted by and through its wholly
owned subsidiaries, CTL, Cellular Magnetics, Inc. ("Cellular Magnetics"),
Intercell Wireless Corp. ("Intercell Wireless"), which was formed after the end
of the 1996 fiscal year, and Particle Interconnect Corporation ("PI Corp.").
Because the Antenna Technology and the PI Technology are in the development
stage, the Company does not anticipate operating revenues from such lines of
business until such time, if ever, as products developed using the Antenna
Technology and PI Technology are completed, developed, manufactured in
commercial quantities, available for commercial delivery, and accepted in the
market place.
ANTENNA TECHNOLOGY
The Company has the rights to certain patent applications relating to the
Antenna Technology that the Company jointly developed with the
Telecommunications Research Center at Arizona State University ("ASU"). The
Antenna Technology is designed to reduce actual or perceived potential health
hazards that may be associated with exposure to electromagnetic signals by using
a "shielded" antenna. The Antenna Technology has been tested in working
prototypes in cellular phones by ASU. These tests indicated a significant
reduction in radiation emissions caused by wireless devices, and cellular phones
in particular. The tests also indicated several other benefits including
increased range and reception, and improved battery life. In addition, the
Antenna Technology results in an antenna that is smaller in size and lighter in
weight than most antennas currently on the market.
The Company anticipates that the initial market for the Antenna Technology
will be the cellular telephone market. The market for cellular technology has
materially increased in the last decade, growing from approximately 92,000
subscribers in the United States in 1983 to more than 33.5 million at the end of
1995. Although industry revenue from the manufacture and sale of cellular
phones is expected by industry analysts to grow just .2% in the 1996 calendar
year to approximately $6.27 billion, the number of cellular phones sold is
expected by industry analysts to increase more than 15% to 16.6 million in the
1996 calendar year.
The Company's Antenna Technology is designed to minimize the radiation
emitted toward the user in order to reduce potential health hazards that may be
associated with exposure to electromagnetic energy. The Company has installed
an external prototype cellular phone antenna that uses the Antenna Technology in
existing cellular phone models. Preliminary testing of the prototype antenna
indicated that it reduced the amount of electromagnetic energy in the near field
by 90% while in use. In such testing, there was also evidence of a significant
increase in transmittal reception and range of the signal and a demonstrable
extension of the life of the cellular phone battery.
In order to bring the Antenna Technology to market as soon as practicable,
the Company will initially manufacture an aftermarket "retrofit" antenna for
existing cellular phones (the
4
<PAGE>
"External Antenna"). The Company has completed all documentation and
specifications for the External Antenna and has several prototypes in place.
The Company intends to commence production of the External Antenna in the 1997
fiscal year. The Company also plans to manufacture prototypes of an internal
antenna (the "Internal Antenna"), which is less complex and cheaper to
manufacture, in the 1997 fiscal year.
The Company purchased AC Magnetics, Inc., doing business as M.C. Davis
Company ("M.C. Davis") to manufacture and build products that use the Antenna
Technology. M.C. Davis, now known as Cellular Magnetics, is currently working
on fixtures and tooling required for the manufacture and sale of the External
Antenna. In addition to manufacturing products that use the Antenna Technology,
Cellular Magnetics will continue to produce miniature and non-miniature coils,
transformers, surface mount coils and other small electronic products at its
8,000 square foot manufacturing facility in Arizona City, Arizona and its 8,600
square foot manufacturing plant in Sonora, Mexico.
See "BUSINESS-The Company's Antenna Technology" for a discussion of the
Antenna Technology.
ELECTRON TUBES
The Company manufactures and rebuilds a wide variety of electron power
tubes in numerous forms and models which service the frequency range of 200KHz
to 18GHz. Currently, the Company provides rebuilt and new electron tubes to a
wide variety of customers who use microwave technology in various types of
applications, including AM and VHF radio, television, linear accelerators,
radar, electron guns and industrial microwave and heating use. This line of
business will continue to be conducted by and through the Company's wholly owned
subsidiary, CTL.
Electron power tubes or electron tubes are enclosed tubes, in which
electrons act as the principal conductors of current between at least two
electrodes. Electron tubes fall into two categories, oscillators and
amplifiers. Oscillators are typically magnetrons and power grid tubes (triodes
and tetrodes), and amplifiers are klystrons and traveling wave tubes. Electron
power tubes are commonly identified by reference to the frequency band of the
electromagnetic spectrum (generally the L-band through KU-band) within which
they operate.
Electron and vacuum tubes are generally recognized as the dominant
technology for the generation of high power radio frequency ("RF") and
microwaves. Consequently, these tubes are used by many companies for widely
varying applications. The manufacturing and rebuilding of these units is a
significant industry. The Company estimates that the annual worldwide rebuilt
market is approximately $5.3 million for magnetron tubes and $20 million for
power grid tubes.
The Company believes that it is one of the more significant domestic
companies engaged in rebuilding electron power tubes in the United States. The
Company manufactures and rebuilds electron tubes in numerous iterations and
models that service the frequency range of
5
<PAGE>
200KHz to 18GHz with power levels of up to three million watts. The Company's
product lines operate within the following frequency bands: the L-band 400KHz to
2MHz; the S-band 2MHz to 3.5MHz; the C-band 4MHz to 7MHz; the X-band 7MHz to
1GHz and the KU-band 1.2GHz to 1.8GHz. The Company primarily manufactures and
rebuilds electron power tubes categorized as follows: magnetrons (continuous
waive ("CW") and pulse ("Pulse")), klystrons, power triodes and tetrodes, linear
accelerators and electron guns. In the markets in which the Company competes,
the Company believes it is the major supplier of L-band, C.W. magnetrons in the
world and one of the major rebuilders of high power and high frequency triodes.
The Company is engaged in a very narrow segment of the microwave technology
industry, the rebuilding of electron and microwave tubes, and has attempted to
avoid direct competition with the major manufacturers of microwave products.
The manufacturing of new microwave products is dominated by several very large
companies in the United States and internationally. To date, these companies
have not chosen to dedicate their resources to the rebuilding of such products
or the manufacture of the electron tubes the Company manufactures.
The Company has recently entered into a lease agreement to move its
manufacturing operation to a new facility customized for the Company's
operations in February 1997. The Company believes that the new facility will
enable it to meet its current and future manufacturing needs.
See "BUSINESS-The Company's Electron Tube Products" for a description of
the Company's electron tube business.
PARTICLE INTERCONNECT TECHNOLOGY
The Company proposes to pursue a new line of business involving the
development and manufacturing of high performance, low-cost interconnect
products. The Company's PI Technology utilizes patents procured and owned by
the Company for the production of electronic interconnect products. The
Company's Proprietary Electroplating Process will be used in the manufacture of
12" x 18" panels used to mount, package or attach electronic devices and other
products utilizing the PI Technology. This new line of business will be
conducted through the Company's wholly owned subsidiary, PI Corp.
The PI Technology utilizes patents owned by the Company for bonding and
joining metal surfaces to enhance electronic connectivity and also uses the
Proprietary Electroplating Process to electroplate panels at an anticipated
lower cost than conventional manufacturing processes. The Company's core
product is similar to "conductive sandpaper" in appearance, and is formed by
attaching conductive diamond particles to a panel. The "conductive sandpaper"
creates a socket or connector for electronic devices, and replaces the use of
soldering to create such connections.
The Company can apply these particles to many different substrates, both
flexible, rigid, metallic and non-metallic. This ability, coupled with the very
low contact force, gives the
6
<PAGE>
Company the capability to make reliable connectors out of materials that could
collapse if exposed to the normally required contact forces. The Company's
initial product line will be a ball grid array ("BGA") production socket for use
in connecting high density IC packages with the underlying substrate.
The Company believes that market trends in IC packaging will lead to
increased demand for emerging high density substrates. As ICs are becoming
increasingly powerful, they produce more heat and require a significantly
greater number of input/output ("I/O") electrical connections to attach the
silicon die, thus placing substantially greater demands on the IC packaging
materials. For instance, a typical IC five years ago required up to
approximately 80 I/O connections to the silicon die, whereas today typical ICs
require up to approximately 250 I/O connections. The Company believes, based on
published industry information, that the number of high density IC packages
requiring more than the typical 250 I/O connections to the silicon die increased
from an estimated 240 million in 1990 to an estimated 777 million in 1995.
Market demands are currently forcing certain ICs toward 1,000 I/O connections.
The Company believes that its PI Technology could potentially provide a
cost effective solution to solving the increasing demands made on IC Packaging
materials. Based on the experiences of current licensees to the PI Technology
and the Company's research and development performed to date, the Company
believes that the PI Technology can establish reliable, rematable connections at
10 grams of force. This means that 10 kg versus 40 to 80 kg of force is
required to interconnect a 1,000 I/O IC socket with the underlying substrate.
The Company believes this reduction in force may enable manufacturers to connect
complex ICs to products through the next several generations of electronics.
The Company intends to initially focus on high speed electroplating of
conductive diamond particles for panels used by third-parties to manufacture BGA
production sockets. The primary objective is to provide this service to
numerous connector manufacturers, in competing and non-competing applications.
The Company intends to provide this service to companies in the form of
teaming/co-manufacturing agreements. The Company believes this approach will
provide it with the ability to penetrate the market utilizing existing customer
bases and reputations of established leaders in the connector industry. In many
cases the Company will attempt to establish long term strategic alliances with
these industry leaders to continue development and manufacture of new products
that will incorporate PI Technology.
See "BUSINESS-The Company's Particle Interconnect Technology" for a
description of the PI Technology.
THE COMPANY
The Company was organized under the laws of the State of Colorado on
October 4, 1983. Unless the context otherwise requires, the "Company" refers to
Intercell Corporation, its predecessors and its subsidiaries. The Company's
principal executive offices are located at
7
<PAGE>
999 West Hastings Street, Suite 1750, Vancouver, B.C. Canada V6C2W2. Its
telephone number is (604) 684-1533.
RISK FACTORS
The Common Stock and Warrants offered hereby involve a high degree of risk.
See "RISK FACTORS."
8
<PAGE>
THE OFFERING
Series B Warrants to Purchase
Common Stock offered by the
Selling Shareholders.......................... 1,092,064 Warrants
Common Stock issuable upon
exercise of Series B Warrants................. 1,092,064 Common Shares
Series C Warrants to Purchase
Common Stock offered by the
Selling Shareholders.......................... 745,386 Warrants
Common Stock issuable upon
exercise of Series C Warrants................. 745,386 Common Shares
Common Stock offered by the
Selling Shareholders upon
conversion of Series B Preferred Stock........ 673,170 Common Shares
Common Stock offered by the
Selling Shareholders upon
conversion of Series C Preferred Stock........ 2,036,475 Common Shares
Common Stock to be distributed to Energy
Shareholders.................................. 1,804,064 Common Shares/(1)/
Common Stock outstanding after the Offering
and assuming exercise of Warrants and
Conversion of Preferred Stock................. 22,342,116 Common Shares/(2)/
9
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Use of proceeds......................... Net proceeds (approximately
$________), if any, which might be
received by the Company from the
exercise of all of the Warrants will be
used for general corporate purposes.
The Company will not receive any
proceeds from the sale of the
Common Stock underlying the
Preferred Stock, or the Common
Stock underlying the Warrants offered
hereby or the Common Stock
distributed to the Energy
Shareholders. See "USE OF
PROCEEDS."
Common Stock Nasdaq symbol (OTC)........ "INCE"
/(1)/ A total of 5,412,191 shares of Common Stock are available for distribution
to the shareholders of Energy, pursuant to the Plan of Liquidating Dissolution
in six installments over the next three years. Each installment includes
approximately 902,032 shares, the first installment of 902,032 shares will be
made promptly after the effective date of this Prospectus and 902,032 shares
ninety (90) days thereafter. For each of the years 1998 and 1999, approximately
902,032 shares will be distributed on or about January 31 and April 30.
/(2)/ Does not include 4,396,000 shares of Common Stock currently issuable upon
the exercise of the Company's stock options outstanding as of the date hereof.
10
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
OF THE COMPANY
On December 4, 1995, the Company changed its fiscal year end from December
31, 1995 to September 30, 1995 due to the acquisition of the assets and
liabilities of Energy on July 7, 1995 for 5,412,191 shares of Common Stock,
which represented 52% of the Common Stock outstanding at that time. As a
result, for accounting purposes, Energy was considered the acquiring corporation
and the comparative information presented herein represents that of Energy prior
to July 7, 1995 and Energy and the Company subsequent to such date. See
"BUSINESS-Recent Acquisitions and Transactions," and "INDEX TO FINANCIAL
STATEMENTS."
The following selected consolidated financial data should be read in
conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" and the Company's Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus. The Consolidated
Statements of Operations data presented below for the fiscal year ended
September 30, 1996, the eleven months ended September 30, 1995 and the fiscal
year ended October 31, 1994 and the Consolidated Balance Sheet data as of
September 30, 1996 have been derived from the Company's Consolidated Financial
Statements included in this Prospectus. The Consolidated Financial Statements
as of and for the fiscal year ended September 30, 1996 and the eleven months
ended September 30, 1995 were audited by KPMG Peat Marwick LLP, independent
public accountants. The Consolidated Financial Statements, as of and for the
fiscal year ended October 31, 1994 were audited by Mark Shelley, CPA,
independent public accountant. The Statements of Operations data set forth
below for the years ended October 31, 1993 and 1992 and the Balance Sheet data
set forth below at October 31, 1994, 1993 and 1992 are derived from audited
financial statements not included in this Prospectus.
11
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<TABLE>
<CAPTION>
Year Eleven Year Year Year
Ended Months Ended Ended Ended Ended
9/30/96 9/30/95/(1)/ 10/31/94 10/31/93 10/31/92
----------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total net sales $ 3,405,000 $ 3,768,000 $2,066,000 $ 60,000 $ 0
Costs & expenses 8,688,000 5,089,000 2,428,000 142,000 43,000
Net loss (5,283,000) (1,321,000) (362,000) (82,000) (43,000)
Net loss per common share $(0.54) $(0.18) $(0.08) $(0.04) $ N/A
Weighted average
Number of common
shares outstanding 13,072,683 7,391,275 4,828,007 2,066,979 1,781,880
At period end:
Current assets $10,625,000 $ 1,796,000 $1,499,000 $ 4,000 $ 0
Current liabilities 2,060,000 1,799,000 1,621,000 82,000 149,000
Working capital (deficit) 8,565,000 (3,000) (122,000) (78,000) (149,000)
Total assets 13,826,000 3,069,000 3,141,000 51,000 0
Long-term debt 86,000 48,000 48,000 175,000 0
Stockholders' equity $11,680,000 1,222,000 $1,472,000 $ (206,000) $ (149,000)
Cash dividends per
common share 0 0 0 0 0
Deemed preferred stock dividend
relating to in-the-money conversion 1,624,648 -- -- -- --
_______________
/(1)/ On December 4, 1995, the Company changed its fiscal year end from December 31 to September 30. The comparative
information presented herein represents that of Energy which was deemed to be the acquiring company in the July 7, 1995
transaction. Energy's fiscal year was previously October 31.
</TABLE>
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RISK FACTORS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended. Actual events or results
could differ materially from those discussed in the forward-looking statements
as a result of various factors, including, without limitation, the risk factors
set forth below and elsewhere in this Prospectus. The following risk factors
should be considered carefully before purchasing the Common Stock offered
hereby.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES
Due to the Company's change of business purpose, the Company has a limited
operating history that is relevant to its proposed future operations. The
Company does not anticipate producing significant operating revenues until such
time, if ever, as products developed using the Antenna Technology and PI
Technology are completely developed, manufactured in commercial quantities and
available for commercial delivery, and accepted in the marketplace. There can
be no assurance that the Antenna Technology and PI Technology, if developed and
manufactured, will be able to compete successfully in the marketplace and/or
generate significant revenue. The Company anticipates incurring significant
costs in connection with the development of its technologies and proposed
products and there is no assurance that the Company will achieve significant
revenues to offset anticipated operating costs. Included in such costs are
research and development expenses, marketing costs, manufacture and assembly,
and general and administrative expenses. Inasmuch as the Company will continue
to have high levels of operating expenses and will be required to make
significant expenditures in connection with its continued research and
development activities, the Company anticipates that such losses will continue
until such time, if ever, as the Company is able to generate sufficient revenues
to exceed its total costs of operation. As of September 30, 1996, the Company
had a cumulative deficit of $7,579,000. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "PROSPECTUS
SUMMARY-Summary Historical Consolidated Financial Data of the Company."
NEW LINES OF BUSINESS
The Company intends to market, manufacture and distribute new Antenna
Systems using the Antenna Technology and Particle Interconnect Products using
the PI Technology, each of which are newly formed business ventures with no
operating history. The Company's viability, profitability and growth depend in
large part upon the successful completion of the development, manufacture and
distribution of its Antenna Systems and Particle Interconnect Products. There
can be no assurance that any of the Company's new technologies or products will
be developed, manufactured, marketed or distributed. In connection with the
development of commercially saleable prototypes, the Company must successfully
complete a testing program for the products before they can be marketed.
Unforeseen technical problems arising out of such testing could materially and
adversely affect the Company's ability to manufacture a commercially acceptable
version. In addition, the Company's success will depend upon its technologies
and proposed
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products meeting acceptable cost and performance criteria and upon their timely
introduction into the marketplace. There can be no assurance the technologies
and proposed products will satisfactorily perform the functions for which they
are designed, that they will meet applicable price or performance objectives or
that unanticipated technical or other problems will not occur that would result
in increased costs and/or material delays in their development.
Other than the operations of CTL and Cellular Magnetics, the Company has no
experience or business history in marketing any of the products it intends to
manufacture and sell. There can be no assurance that the Company will gain the
necessary experience, either through the hiring of experienced personnel or by
acquiring such experience through trial and error, to ever successfully and
profitably conduct its businesses.
NO ASSURANCE OF PRODUCT QUALITY,
PERFORMANCE AND RELIABILITY
The Company has no experience in producing and manufacturing new
technologies from the conceptual phase to a commercially acceptable product.
The Company expects that its customers will establish demanding specifications
for quality, performance and reliability. Specifically, the Company's Antenna
Systems and Particle Interconnect Products will generally be manufactured for
incorporation into high technology products manufactured by original equipment
manufacturers ("OEMs") and, accordingly, will need to meet exacting
specifications. The Company believes that, if its products prove successful, a
substantial portion of the OEMs will require the Company to qualify as an
approved supplier. In order to so qualify, the Company may be required to
satisfy stringent quality control standards and undergo extensive in-plant
inspections of the Company's personnel, manufacturing processes, equipment and
quality control systems. Although the Company's efforts will be devoted to
ensure that its capabilities and quality control standards are adequate to meet
specific OEM customer requirements, there can be no assurance that the Company
will be able to comply with quality control standards established by OEMs or
that the Company will be able, for financial or other reasons, to qualify as an
approved supplier for its existing and prospective customers.
UNCERTAINTY OF MARKET ACCEPTANCE FOR
ANTENNA TECHNOLOGY
The Company's prospective customers, OEMs of cellular telephone equipment,
are currently manufacturing and selling equipment without the Company's Antenna
Systems. To be successful in convincing these potential customers that its
Antenna Systems should be incorporated into new and existing cellular
telephones, the Company must, among many actions, convince its potential
customers that the Antenna Systems reduce the health concerns of users and
increases the telephone range and battery life of a cellular phone. Achieving
market acceptance for new products requires substantial marketing and sales
efforts and expenditure of significant funds to create awareness of and demand
for the Company's products. There can be no assurance that future additions to
the Company's product line will achieve market acceptance
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<PAGE>
or result in significantly increased levels of revenues. See "BUSINESS-The
Company's Antenna Technology-Company Antenna Technology Strategy."
Any delay in the adoption of the Company's Antenna Systems may result in
prospective customers utilizing alternative technologies in their next
generation of cellular telephones, which may have a material adverse effect on
the Company's business, financial condition and results of operations. There
can be no assurance that prospective customers will incorporate the Company's
Antenna Systems into cellular telephones in the future, or that the Antenna
Technology will be viewed to any significant extent as an improvement over
existing technologies and achieve commercial acceptance in the cellular
telephone market. Failure to achieve or sustain commercial acceptance of the
Company's Antenna Systems would materially adversely affect the Company's
business, financial condition and results of operations. See "BUSINESS-The
Company's Antenna Technology-Company Antenna Technology Strategy."
UNCERTAINTY OF MARKET ACCEPTANCE FOR
PI TECHNOLOGY
Similarly, the Company's prospective customers, OEMs and suppliers to OEMs
of electronic products, are currently manufacturing and selling equipment
without the Company's Particle Interconnect Products. To be successful in
convincing these potential customers that its Particle Interconnect Products
should be used in lieu of existing technologies, the Company must, among many
actions, convince its potential customers that the Particle Interconnect
Products make remateable contacts with reduced force and can be manufactured
efficiently and cost effectively. Achieving market acceptance for new products
requires substantial marketing and sales efforts and expenditure of significant
funds to create awareness of and demand for the Company's products. There can
be no assurance that future additions to the Company's product line will achieve
market acceptance or result in significantly increased levels of revenues. See
"BUSINESS-The Company's PI Technology-Company PI Technology Strategy."
Any delay in the adoption of the Company's Particle Interconnect Products
may result in prospective customers utilizing alternative technologies in their
next generation of IC packages or other electronic interconnections, which may
have a material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance that prospective customers
will use the Particle Interconnect Products in the future, or that the PI
Technology will be viewed to any significant extent as an improvement over
existing technologies and achieve commercial acceptance in the electronic
interconnect industry. Failure to achieve or sustain commercial acceptance of
the Particle Interconnect Products would likely materially adversely affect the
Company's business, financial condition and results of operations. See
"BUSINESS-The Company's PI Technology-Company PI Technology Strategy."
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<PAGE>
NO ASSURANCE OF
SUCCESSFUL EXPANSION OF OPERATIONS
The Company's significant increase in the scope and the scale of its
operations, including the hiring of additional personnel, has resulted in
significantly higher operating expenses. As a result, the Company anticipates
that its operating expenses will continue to increase. Expansion of the
Company's operations may also cause a significant demand on the Company's
management, its finances and other resources. The Company's ability to manage
the anticipated future growth, should it occur, will depend upon a significant
expansion of its accounting and other internal management systems and the
implementation and subsequent improvement of a variety of systems, procedures
and controls. There can be no assurance that significant problems in these
areas will not occur. Any failure to expand these areas and implement and
improve such systems, procedures and controls in an efficient manner at a pace
consistent with the Company's business could have a material adverse effect on
the Company's business, financial condition and results of operations.
Any significant sales growth will be dependent in part upon the Company's
expansion of its marketing, selling, manufacturing and customer service
capabilities. This expansion will require significant expenditures to build the
necessary Company infrastructure. There can be no assurance that the Company's
attempts to expand its marketing, sales, manufacturing and customer support
efforts will be successful or will result in additional sales or profitability
in any future period. As a result of the expansion of its operations and the
anticipated increase in its operating expenses, as well as the difficulty in
forecasting revenue levels, the Company expects to continue to experience
significant fluctuations in its results of operations. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
"BUSINESS."
DEPENDENCE ON KEY PERSONNEL AND NECESSITY
TO HIRE ADDITIONAL QUALIFIED PERSONNEL
The Company's future operating results depend in significant part upon the
continued contributions of its key technical and senior management personnel,
many of whom would be difficult to replace. See "MANAGEMENT." The Company's
future operating results also depend in significant part upon its ability to
attract and retain qualified personnel with experience in manufacturing and
marketing that can be applied to the Company's new and existing products. The
Company must hire additional qualified personnel in order to become successful.
Other than the manufacturing and rebuilding of electron tubes and miniature
electronic assemblies, no members of management have significant experience in
operating a manufacturing company. There can be no assurance that the Company
will be successful in attracting or retaining such personnel. In addition, the
success of the Company is dependent upon its ability to hire and retain
additional qualified technical and financial personnel. There can be no
assurance that the Company will be able to hire or retain such necessary
personnel. The loss of any key employee, the failure of any key employee to
perform in his or her current position or the Company's inability to attract and
retain skilled employees as needed, could materially and adversely affect
16
<PAGE>
the Company's business, financial condition and results of operations. See
"BUSINESS-Employees" and "MANAGEMENT."
DEPENDENCE ON A COMPANY OWNED MANUFACTURING
FACILITIES; RISKS OF BUSINESS INTERRUPTIONS
The Company intends to manufacture its products at company-owned or leased
manufacturing facilities. See "BUSINESS-Properties." Except for the
contemplated move to new manufacturing facilities located in Watsonville,
California, the Company has no present intention of establishing additional
manufacturing locations and, therefore, the Company is dependent on existing
facilities to manufacture its products. If these facilities are not available,
even temporarily, for operations at or near full capacity for any extended
period, the business, operating results and financial condition of the Company
could be materially and adversely affected. Except for the Company's
manufacturing facility for electron tubes, the capacity of the Company's
manufacturing facilities have been estimated by management to be sufficient for
future needs. However, if additional capacity is required as a result of
unplanned increased in demand for the Company's products, the Company may suffer
delays and increased costs in establishing other facilities which could
adversely affect customer relationships, cause a loss of market opportunities
and have a material adverse effect on the Company's business, operating results
and financial condition. In order to remain competitive, the Company will
continue to introduce new products and processes into its manufacturing
environment. These changes can disrupt the manufacturing process which could
adversely affect customer relationship, cause a loss of market opportunities and
have a material adverse effect on the Company's business, operating results and
financial condition. See "BUSINESS."
The Company's internal manufacturing capacity for electron tubes is
currently limited. The Company has entered into a lease arrangement to move
CTL's manufacturing operations to a new, larger manufacturing facility in
Watsonville, California. However, there can be no assurance that the Company's
internal manufacturing capacity will be sufficient to fulfill the Company's
orders. The Company also faces uncertainty over the effects of business
slowdowns relating to the move to the Watsonville facility. In the event
unanticipated difficulties arise in the move, such difficulties could adversely
impact the Company's operations. See "BUSINESS-The Company's Electron Tube
Products-Manufacturing of Electron Tubes."
REQUIREMENT FOR RESPONSE TO RAPID TECHNOLOGICAL
CHANGE AND REQUIREMENT FOR FREQUENT NEW PRODUCT
INTRODUCTIONS
The cellular telephone market and the micro-electronic market are subject
to rapid technological change, frequent new product introductions and
enhancements, product obsolescence and changes in end-user requirements. These
markets may be eroded or replaced with other forms of technology. The Company's
ability to be competitive in these markets will depend in significant part upon
its ability to successfully manufacture, market and sell its products on a
timely and cost-effective basis that responds to changing customer requirements.
17
<PAGE>
Any success of the Company in developing new or enhanced products will depend
upon a variety of factors, including new product selection, integration of the
various elements of its complex technology, timely and efficient completion of
design, timely and efficient implementation of manufacturing and assembly
processes, and development of competitive products by competitors. The Company
may experience delays from time to time in the development and introduction of
its Antenna Systems and Particle Interconnect Products. Moreover, there can be
no assurance that the Company will be successful in selecting, developing,
manufacturing and marketing new products or that errors will not be found in the
Company's new products after commencement of commercial shipments, if any, which
could result in the loss of or delay in market acceptance. The inability of the
Company to introduce in a timely manner products that satisfy market demands
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "BUSINESS."
COMPETITION; TECHNOLOGICAL AND PRODUCT OBSOLESCENCE
The market for the Company's prospective products is highly competitive.
The Company currently competes and will compete with numerous well-established
foreign and domestic companies, including many of which possess substantially
greater financial, marketing, personnel and other resources than the Company and
have established reputations for success in the development, sale and service of
products. The Company expects that companies which have developed or are
developing new technologies or products, as well as other companies which have
the type of expertise which would encourage them to attempt to develop and
market competitive products, may attempt to develop new products directly
competitive with the Company's products. In addition, the markets for the
Company's products are characterized by rapid and significant technological
changes and frequent new product introductions. Current competitors or new
market entrants could introduce new or enhanced products with features that
could render the Company's products obsolete or less marketable. The ability of
the Company to compete successfully will depend in large measure on its ability
to maintain development capabilities in connection with upgrading its products
and quality control procedures and to adapt to technological changes and
advances in the electronics industry, including ensuring continuing
compatibility with evolving generations of electronic components and OEM
manufacturing equipment. There can be no assurance that the Company will be
able to keep pace with the technological demands of the marketplace or
successfully enhance its products or develop new products which are compatible
with products of specific OEMs. See "BUSINESS."
FUTURE CAPITAL REQUIREMENTS
The Company's future capital requirements will depend upon many factors,
including operating profits, cash flow, the success of the its Antenna Systems
and Particle Interconnect Products, the ability to maintain adequate
manufacturing facilities, the progress of the Company's research and development
efforts, expansion of the Company's marketing and sales efforts, and the status
of competitive products. There can be no assurance that the Company will not
require additional financing. There can be no assurance that any additional
financing will be available to the Company on acceptable terms, or at all. If
additional funds are raised
18
<PAGE>
by issuing equity securities, further dilution to the existing stockholders will
result. If adequate financing is not available, the Company may be required to
delay, scale back or eliminate its research and development or manufacturing
programs or obtain financing through arrangements with partners or others that
may require the Company to relinquish rights to certain of its technologies,
patents, potential products or other assets. Accordingly, the inability to
obtain such financing could have a material adverse effect on the Company's
business, financial condition and results of operations. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
UNCERTAINTY REGARDING PROTECTION
OF PROPRIETARY RIGHTS
The Company attempts to protect its intellectual property rights through
patents, trademarks, trade secrets and a variety of other measures. However,
there can be no assurance that such measures will provide adequate protection
for the Company's trade secrets or other proprietary information, that disputes
with respect to the ownership of its intellectual property rights will not
arise, that the Company's trade secrets or proprietary technology will not
otherwise become known or be independently developed by competitors or that the
Company can otherwise meaningfully protect its intellectual property rights.
There can be no assurance that any patent owned by the Company will not be
invalidated, circumvented or challenged, that the rights granted thereunder will
provide competitive advantages to the Company or that any of the Company's
pending or future patent applications will be approved or what the scope of the
patent coverage will be as sought by the Company. Furthermore, there can be no
assurance that others will not develop similar products, duplicate the Company's
products or design around the patents owned by the Company or that third parties
will not assert intellectual property infringement claims against the Company.
In addition, there can be no assurance that foreign intellectual property laws
will adequately protect the Company's intellectual property rights abroad. The
failure of the Company to protect its proprietary rights could have a materially
adverse effect on its business, financial condition and results of operations.
Litigation may be necessary to protect the Company's intellectual property
rights and trade secrets, to determine the validity of and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
infringement, invalidity, right to use or ownership claims by third parties or
claims for indemnification resulting from infringement claims will not be
asserted in the future. If any claims or actions are asserted against the
Company, the Company may seek to obtain a license under a third party's
intellectual property rights. There can be no assurance, however, that a
license will be available under reasonable terms or at all. In addition, should
the Company decide to litigate such claims, such litigation could be extremely
expensive and time-consuming and could materially adversely effect the Company's
business, financial condition and results of operations, regardless of the
outcome of the litigation. See "BUSINESS-Intellectual Property."
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<PAGE>
LICENSE RIGHTS TO PI TECHNOLOGY
Prior to the Company's acquisition of Particle Interconnect, Inc. (see
"BUSINESS-Recent Acquisitions and Transactions"), Mr. Louis DiFrancesco, the
inventor of the PI Technology, or companies he controlled, granted two exclusive
and three non-exclusive licenses to use the patents and patent applications on
the PI Technology to five companies. The exclusive licenses pertain to the use
of the PI Technology for sockets for use in automatic test equipment and for the
manufacture of thin film products. The terms of the licenses do not prohibit
the licensees from directly competing with the Company. Should the licensees do
so, such competition could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, Mr.
DiFrancesco and not the Company will receive any royalty payments or other
compensation received under the terms of these licenses. See "BUSINESS-
Intellectual Property."
ACQUISITION RISKS
An important part of the Company's recent growth strategy has been the
acquisition of companies that complement or supplement the Company's existing
business operations. Any acquisition involves inherent uncertainties, such as
the effect on the acquired business of its integration into the Company and the
availability of managerial resources to oversee the operation of the acquired
business. Integrating acquired products and operations requires a significant
amount of time and skill of the Company's management and may place significant
demands on the Company's operations and its financial resources. Although an
acquired business may have enjoyed profitability and growth prior to its
acquisition, there can be no assurance that such profitability or growth will
continue thereafter.
POTENTIAL LIABILITY AND INSURANCE REGARDING
ENVIRONMENTAL REGULATIONS; GOVERNMENT REGULATION
The Company's operations involve the use and handling of environmentally
hazardous substances. The use of hazardous substances is subject to extensive
and frequently changing federal, state and local laws and substantial regulation
under these laws by governmental agencies, including the United States
Environmental Protection Agency, various state agencies and county and local
authorities acting in conjunction with federal and state authorities. Among
other things, these regulatory bodies impose restrictions to control air, soil
and water pollution. The Company believes that it is in substantial compliance
with all material federal and state laws and regulations governing its
operations. Furthermore, amendments to statutes and regulations and the
Company's expansion into new areas could require the Company to continually
modify or alter methods of operations at costs which could be substantial.
There can be no assurance that the Company will be able, for financial or other
reasons, to comply with applicable laws and regulations. Failure by the Company
to comply with applicable laws and regulations could subject the Company to
civil remedies, including fines and injunctions, as well as potential criminal
sanctions, which could have a material adverse effect on the Company. See
"BUSINESS-Government Regulation."
20
<PAGE>
REGULATORY COMPLIANCE
The various business operations of the Company are subject to numerous
federal, state and local laws and regulations, including those relating to the
use and disposal of hazardous substances discussed above. Any difficulties or
failure to obtain required licenses, permits or authorizations, could adversely
impact the Company's operations. The failure to obtain or retain any licenses
or permits would have a material adverse effect on the Company's business. See
"BUSINESS-Government Regulation."
While the Company believes it is aware of all of the permits it is required
to obtain and all of the governmental regulations with which it is required to
comply, and believes that it has obtained such permits, there can be no
assurance that this will be the case, that such compliance might not increase
the expenses the Company will incur or that such regulations will not be
modified, making it increasingly difficult for the Company to operate its
businesses as anticipated. Additionally, there can be no assurance that the
Company can comply with all such applicable regulations in the future and
maintain any license which is granted.
NO MARKET FOR WARRANTS
There is no public market for the Warrants and the Company does not intend
to apply for listing of the Warrants on any national securities exchange or of
quotation of the Warrants through the NASDAQ automated quotation system. No
assurance can be given as to the liquidity of any markets that may develop for
the Warrants, the ability of holders of the Warrants to sell their Warrants, or
the price at which holders would be able to sell their Warrants. Future trading
prices of the Warrants, if any, will depend on many factors, including among
other things, the Company's operating results and the market for similar
securities.
NECESSITY OF FUTURE REGISTRATION OF WARRANTS AND
STATE BLUE SKY REGISTRATION; EXERCISE OF WARRANTS
The Warrants may trade separately upon the closing of the Offering.
Although the Warrants will not knowingly be sold to purchasers in jurisdictions
in which the Warrants are not registered or otherwise qualified for sale or
exempt, purchasers may buy the Warrants in the after-market or may move to
jurisdictions in which the Warrants and the Common Stock underlying the Warrants
are not so registered or qualified or exempt. In this event, the Company would
be unable lawfully to issue Common Stock to those persons desiring to exercise
their Warrants (and the Warrants will not be exercisable by those persons)
unless and until the Warrants and the underlying Common Stock are registered or
qualified for sale in jurisdictions in which such purchasers then reside or an
exemption from such registration or qualification requirement exists in such
jurisdictions. There can be no assurance that the Company will be able to
effect any required registration or qualification.
The Warrants offered hereby will not be exercisable unless the Company
maintains a current registration statement on file with the Commission either by
filing post-effective
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amendments to the Registration Statement, of which this Prospectus is a part, or
by filing a new registration statement with respect to the exercise of such
Warrants. The Company has agreed to use its best efforts to file and maintain,
so long as the Warrants offered hereby are exercisable, a current registration
statement with the Securities and Exchange Commission (the "SEC") relating to
such Warrants and the shares of Common Stock underlying such Warrants. However,
there can be no assurance that it will do so or that such Warrants or such
underlying Common Stock will be or continue to be so registered.
The value of the Warrants could be adversely affected if a then current
prospectus covering the Common Stock issuable upon exercise of the Warrants is
not available pursuant to an effective registration statement or if such Common
Stock is not registered or qualified for sale or exempt from registration or
qualification in the jurisdictions in which the holders of Warrants reside. See
"DESCRIPTION OF SECURITIES-Warrants."
VOLATILITY OF STOCK PRICE
Sales of substantial amounts of Common Stock in the public market after
this offering, or the perception that such sales could occur, could adversely
affect the market price of the Common Stock. Upon completion of the Offering,
the Company will have outstanding 22,342,116 shares of Common Stock assuming
conversion of the Preferred Stock and Warrants into 4,547,095 shares of Common
Stock and excluding shares subject to currently exercisable stock options. All
of the 6,351,159 shares registered in the Offering will be freely transferable
by the Selling Shareholders, since to the Company's knowledge, based upon
representations and filings, if any, with the Securities and Exchange Commission
(the "SEC") made by the Selling Shareholders, none of the Selling Shareholders
are affiliates of the Company and to the knowledge of the Company no shareholder
of Energy is an affiliate of the Company. Consequently, the Company will have
approximately 20,525,448 shares held by non-affiliates which are freely
transferable, which constitutes the "float" in the public market for the
Company's Common Stock. The remaining 1,816,668 shares of Common Stock are
"restricted" or "control" securities within the meaning of Rule 144 ("Rule 144")
under the Securities Act and may not be sold in the absence of registration
under the Securities Act unless an exemption from registration is otherwise
available, including the exemption contained in Rule 144. The Company has filed
a registration statement on Form S-8 to register 3,581,180 shares of Common
Stock under its 1995 Compensatory Stock Option Plan (the "Plan"). Shares of
Common Stock issued from time to time under the Plan will be available for sale
in the public market, subject to Rule 144 volume limitations applicable to
affiliates. In connection with the issuance of the Preferred Stock the Company
also granted Warrants to purchase shares of Common Stock. As of January 31,
1997, 1,092,064 and 745,386 Warrants to purchase shares of Common Stock with an
exercise price of $3.975 and $3.25 per share, respectively, were issued and
outstanding. See "PLAN OF DISTRIBUTION," "SHARES ELIGIBLE FOR FUTURE SALE" and
"DESCRIPTION OF SECURITIES."
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RISK OF LOW-PRICED SECURITIES
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure relating to the market for penny stocks in connection with
trades in any stock defined as a penny stock. Regulations enacted by the SEC
generally define a penny stock to be an equity security that has a market price
of less than $5.00 per share, subject to certain exceptions. Unless an
exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith.
In addition, if the Company's securities are not quoted on NASDAQ or if the
Company does not meet the other exceptions to the penny stock regulations cited
above, trading in the Company's securities would be covered by Rule 15g-9
promulgated under the Securities Exchange Act of 1934, as amended, for non-
NASDAQ and non-national securities exchange listed securities. Under such rule,
broker/dealers who recommend such securities to persons other than established
customers and accredited investors must make a special written suitability
determination for the purchaser and receive the purchaser's written agreement to
a transaction prior to sale. Securities also are exempt from this rule if the
market price is at least $5.00 per share.
If the Company's securities become subject to the regulations applicable to
penny stocks, the market liquidity for the Company's securities could be
adversely affected. In such event, the regulations on penny stocks could limit
the ability of broker/dealers to sell the Company's securities and thus the
ability of purchasers of the Company's securities to sell their securities in
the secondary market.
The Company has submitted an application to have the Common Stock listed on
the NASDAQ National Market System ("NMS"); however, no assurances can be given
that such application will be grated or that, if granted, the Common Stock may
not later be delisted. A listing of the Common Stock on the NMS will provide an
exemption from the penny stock regulations. No application has been filed to
list the Warrants on any securities exchange or automated quotation system.
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PLAN OF DISTRIBUTION
The distribution of the Common Stock to Energy's Shareholders will be made
directly by Energy and the Company's transfer agent. The sale of the Common
Stock and Warrants being offered by the Selling Shareholders hereby (the
"Offering") may be effected from time to time in one or more transactions by
such Selling Shareholders directly to third parties or through brokers or
dealers in negotiated transactions or otherwise at market prices prevailing at
the time of sale, at prices related to such prevailing market prices or at
negotiated prices. The Company has neither retained in any capacity nor will it
pay compensation to any brokers or dealers in connection with the securities
being distributed or offered hereby.
The Company has registered 1,804,064 shares of Common Stock for
distribution to the shareholders of Energy Corporation's ("Energy"), formerly
known as Modern Industries, Inc., an affiliate of the Company, pursuant to a
Liquidating Plan of Dissolution adopted by Energy and its shareholders on July
8, 1996. In order to minimize the potential adverse effect on the market for
the Company's Common Stock, Energy has agreed to a distribution of Common Stock
to its shareholders commencing on the effective date of this Registration
Statement and ending April 30, 1999. The remaining shares of Common Stock to be
distributed will be registered under the Securities Act at a later date prior to
any distribution. See "CERTAIN TRANSACTIONS."
The Company will not engage any broker-dealers in any capacity in
connection with the Energy distribution. The distribution will be implemented
by the Company and Energy, through the Company's transfer agent. There are no
standby commitments or agreements from any person to purchase all or any part of
the securities offered by this Prospectus.
USE OF PROCEEDS
The Company will not receive any proceeds from the conversion of the
Preferred Stock into Common Stock, the sale of shares of Common Stock by the
Selling Shareholders, or, if sold by the Selling Shareholders, any proceeds from
the sale of the Warrants. However, assuming that all Warrants offered hereby
are exercised, the proceeds to the Company from such exercise are estimated to
be approximately $6,722,506 based on an exercise price of $3.9375 per share with
respect to the Series B Warrants and $3.25 per share with respect to the Series
C Warrants. There can be no assurance given, however, that any Preferred Stock
will be converted or that Warrants will be exercised. The Company expects to
use substantially all of the net proceeds received from exercise of the Warrants
for general working capital purposes.
24
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock is presently traded on the over-the-counter market on the OTC
Bulletin Board maintained by the National Association of Securities Dealers,
Inc. (the "NASD") The NASDAQ symbol for the Common Stock is "INCE." The
following table sets forth the range of high and low bid quotations for the
Common Stock of each full quarterly period during the fiscal year or equivalent
period for the fiscal periods indicated below. The quotations were obtained
from information published by the NASD and reflect interdealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions. The average for the closing bid and asked prices for the Common
Stock was $4.03 on January 30, 1997.
<TABLE>
<CAPTION>
1995 Fiscal Year High Low
---------------- ---- ---
<S> <C> <C>
December 31, 1994 $ 5.13 $ .25
March 31, 1995 3.69 .50
June 30, 1995 2.00 .625
September 30, 1995 .825 .625
1996 Fiscal Year
--------------------
December 31, 1995 $ 1.625 $ .625
March 31, 1996 1.9375 1.00
June 30, 1996 5.75 2.00
September 30, 1996 5.50 2.75
1997 Fiscal Year
--------------------
December 31, 1996 4.00 3.875
</TABLE>
As of January 31, 1997, there were 272 record holders of its Common Stock.
Based upon information provided to the Company by persons holding
securities for the benefit of others, it is estimated that the Company has in
excess of 3,200 beneficial owners of its Common Stock as of January 31, 1997.
Currently there exists no public market for the Warrants and there can be
no assurances given that a public market will develop in the future. See "RISK
FACTORS-No Market for Warrants."
25
<PAGE>
On January 13, 1997, the Company submitted an application to have the
Common Stock listed on the NASDAQ National Market System (the "NMS"). The
Company can provide no assurances that the Common Stock will be accepted for
listing on the NMS.
DIVIDEND POLICY
While there currently are no restrictions prohibiting the Company from
paying dividends to its shareholders, the Company has not paid any cash
dividends on its Common Stock in the past and does not anticipate paying any
dividends in the foreseeable future. Earnings, if any, are expected to be
retained to fund future operations of the Company. There can be no assurance
that the Company will pay dividends at any time in the future.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the "PROSPECTUS
SUMMARY-Summary Historical Consolidated Financial Data of the Company" and
"INDEX TO FINANCIAL STATEMENTS."
The statements contained in this Prospectus, if not historical, are forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995, and involve risks and uncertainties that could cause actual
results to differ materially from the results, financial or otherwise, or other
expectations described in such forward-looking statements. These risks and
uncertainties that may affect the operations, performance, development and
results of the Company's business include those, among others, discussed under
"RISK FACTORS" and "-Trends and Uncertainties" below. Any forward looking
statement or statements speak only as of the date on which such statement was
made, and the Company undertakes no obligation to update any forward looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. Therefore, forward-looking statements should not be relied upon as a
prediction of actual future results.
From 1991 through the fiscal year ended December 31, 1994, the Company was
generally inactive and reported no operating revenues. In July 1995, the
Company completed the acquisition of Energy and its wholly owned subsidiary CTL.
See "BUSINESS-Company Overview" and "-Recent Acquisitions and Transactions."
The Company has substantially expanded the scope of its business and revised its
business strategy subsequent to the Energy transaction through the acquisition
of certain patents, patent applications and proprietary technology relating to
the Antenna Technology and the PI Technology. During this time, the Company has
been engaged primarily in directing, supervising and coordinating the Company's
activities in the continuing development of its new lines of business, in
addition to the recruitment of management and technical personnel and raising
new capital to fund its operations.
The primary asset acquired in the Energy transaction, its wholly owned
subsidiary CTL, continued to generate positive cash flows in the 1996 fiscal
year, although sales decreased 9.6% from the 1995 fiscal year. This decrease in
sales was primarily attributable to a change in product mix, the delayed timing
of certain orders in the fourth quarter of 1996 and production capacity
constraints at CTL's current manufacturing facilities. CTL anticipates moving
to new production facilities in February of 1997, which the Company believes
will eliminate the production capacity constraints.
27
<PAGE>
On November 15, 1995, the Company entered into a research and development
agreement with ASU for the development of the Antenna Technology. To date, the
Company has developed several working prototypes of the External Antenna and
anticipates commencing commercial production of both the External Antenna and
Internal Antenna in the 1997 fiscal year; however there can be no assurance this
will be the case.
On September 30, 1996, the Company formed a wholly owned subsidiary,
Cellular Magnetics, which acquired all the assets and liabilities of M.C. Davis
in exchange for 277,778 shares of Common Stock valued at $1,000,000 and $800,000
in cash. While the Company had initially considered constructing its own
manufacturing facility, this acquisition, accounted for by the purchase method
of accounting, provides the Company with both a facility for the immediate
production of its Antenna Technology and an established manufacturing facility.
The Company intends to continue to produce the miniature and subminiature
electronic components previously produced by M.C. Davis and does not anticipate
that the production of the Antenna Technology will significantly impact its
ability to manufacture these electronic assemblies.
To further diversify the Company's operations and to capitalize on a new
and emerging technology, the Company formed a wholly owned subsidiary, PI Corp.,
which merged with Particle Interconnect, Inc., a California corporation
("Particle California"). The Company exchanged 1,400,000 shares of Common Stock
for all of the outstanding stock of Particle California. The transaction was
accounted for as an immaterial pooling-of-interest as the prior operations of
Particle California are not material to the Company's consolidated financial
position, results of operations or cash flows. Accordingly, the consolidated
financial statements for periods prior to the date of such acquisition have not
been restated, except for loss per common share information. From the date of
such merger, PI Corp. has been engaged primarily in the construction of
production capabilities at its plant and the continuing development of the PI
Technology. PI Corp. expects to commence commercial production of Particle
Interconnect Products in 1997.
On July 7, 1996, the Company completed an offering pursuant to Regulation S
under the Securities Act (the "Regulation S Offering") of 1,000 shares of its
Series B Preferred Stock, with attached warrants, pursuant to which it received
net proceeds of $8,900,000. The Series B Preferred Stock is convertible into
Commmon Stock at the exchange rate in effect at the date of conversion, as
described in the preferred stock agreements. At the date of issuance, the
exchange rate was equal to 85% of the then prevailing market rate, resulting in
a deemed dividend of $1,764,704. The Company recognized $1,624,648 of the
dividend in its fiscal 1996 net loss per common share calculation. The amount
recognized was calculated on a pro rata basis over the period beginning with the
issuance of the security to the first date conversion could occur. To further
improve the Company's working capital position, the Company completed an
offering pursuant to Regulation D to institutional investors on December 15,
1996, of 525 shares of its Series C Preferred Stock, with attached warrants,
pursuant to which it received net proceeds of $4,672,500. The Series C Preferred
Stock is convertible into Common Stock at the exchange rate in effect at the
date of conversion, as described in the preferred stock agreements. At the date
of issuance, the exchange rate was less than the prevailing market rate, which
will result in a deemed dividend that will be recognized by the Company in
fiscal 1997. See "-Liquidity and Capital Resources" below.
RESULTS OF OPERATIONS
Fiscal Year Ended September 30, 1996 compared to Fiscal Year Ended
September 30, 1995 (Eleven Months).
Net Sales. Net sales, which are derived solely from the operations of CTL,
decreased 9.6% in 1996 to $3,405,000 from $3,768,000 in 1995. This decrease in
sales was generally due
28
<PAGE>
to a combination of a change in the Company's product mix and the delayed timing
of significant orders which were originally planned for the fourth quarter of
1996, but were not placed until the end of the 1996 calendar year.
In the 1996 fiscal year, net sales of new magnetrons totaled $1,436,000,
accounting for 42% of sales, compared with $1,455,000 or 39% of net sales in
1995. Net revenues from rebuilding of magnetrons decreased from $1,848,000 or
49% of net sales in 1995 to $1,403,000 or 41% of net sales in 1996. This shift
in sales mix was due primarily to the Company's focus on new and more complex
tube types such as certain Pulse magnetrons in an attempt to broaden the
Company's product line and a slow down in orders for rebuilt magnetrons for the
food processing industry in the last two quarters of 1996. It is anticipated
that the sales mix experienced in the final six months of fiscal 1996 will
continue for the foreseeable future.
The Company obtained a significant contract for the manufacture of new and
rebuilt Pulse magnetrons in June of 1996. However, the initial order under this
contract was not placed until September, 1996. As a result, sales were not
recorded under this contract until the first quarter of fiscal 1997, resulting
in a significant increase in sales in the first quarter of 1997 over the final
quarter of 1996.
In conjunction with the changes in sales mix noted above, the Company
experienced a decrease in gross margins to 17% in the 1996 fiscal year from 23%
in 1995. This decrease was due to the increased development time and costs
associated with the new and more complex tube types now being constructed by the
Company. In particular, direct labor costs increased to 34% of net sales in
1996 compared to 30% in 1995, while direct materials costs increased to 26% in
1996 from 25% in 1995. The Company anticipates that gross margins will improve
in the 1997 fiscal year as development of these new tube types is now complete
and production should therefore become more efficient.
In addition to the above, the Company's current electron tube manufacturing
facility is operating at maximum capacity. The Company believes that its move
to the new Watsonville manufacturing facility in February, 1997 should satisfy
the Company's production needs for the foreseeable future. The Company
anticipates that it may experience minor disruptions in production due to the
movement of equipment and the familiarization of employees with the new
manufacturing facility, which disruptions are not expected to have a material
impact on the Company's operations.
Allowance for Doubtful Accounts. The Company's allowance for doubtful
accounts increased from $81,000 in 1995 to $255,000 in 1996. This increase is
primarily a result of the return of certain Pulse magnetrons, a new product of
the Company, for which rework was requested by the purchasers. The Company does
not believe that similar returns will occur in the future.
Selling, General and Administrative Expense. Selling, general and
administrative ("SGA") expenses increased 331.5% from $1,317,000 in 1995 to
$5,683,000 in 1996. This
29
<PAGE>
increase is primarily attributable to an increase in compensation expense of
$3,686,000 resulting from the vesting of stock options to purchase an aggregate
of 4,841,000 shares of Common Stock granted to the Company's officers,
directors, employees and consultants in 1996 at exercise prices below the fair
value of the Common Stock on the date of grant. The Company recorded deferred
compensation expense of $4,017,000 based on these grants. The options were
granted as an incentive to such persons at a time when the Company did not have
sufficient funds to otherwise compensate such persons. In the future, the
Company does not intend to grant stock options in the amounts granted in 1996 or
at less than the fair value of the Common Stock on the date of grant.
In addition to the above, SGA expenses increased in 1996 due to higher
legal and audit costs ($387,000 in 1996 compared to $102,000 in 1995) associated
with the Company's acquisitions, financings and compensation arrangements, and
increased compensation paid to management and administrative personnel.
In the 1997 fiscal year, it is anticipated that sales and marketing
expenses will increase considerably over 1996 levels. In 1996, sales and
marketing expenses were limited to costs associated with CTL's operations. In
1997, significant costs will be incurred in order to bring the Company's Antenna
Systems and Particle Interconnect Products to market. In addition, the Company
intends to significantly expand its marketing activities for its electron tube
products in an effort to capture a larger share of the market.
Research and Development. Research and development expenses increased from
- -0- in 1995 to $88,000 in 1996. This increase was attributable entirely to
costs associated with research and development of the Company's Antenna Systems.
It is anticipated that research and development activities will materially
increase in 1997 as the Company continues to develop its Antenna Technology and
the PI Technology.
Interest Income and Expense. The Company earned interest income of $36,000
in 1996 compared to -0- in 1995. This increase was due to the investment in
Treasury Bills of undeployed cash resources realized through the sale of its
Series B Preferred Stock. The Company anticipates that interest income will
increase in 1997 as undeployed funds, including those raised through the sale of
its Series C Preferred Stock, will continue to be invested in low risk interest
bearing securities.
Interest expense increased to $90,000 in 1996 compared to $88,000 in 1995
due to continued bank financing and outstanding notes payable to related
parties. The Company repaid these financings and notes with the proceeds
received from the Series B Preferred Stock financing and does not currently
anticipate obtaining further debt financing.
Net Operating Loss Carryforwards for Tax Purposes. As of September 30,
1996 the Company had a net operating loss carryover for federal and California
income tax purposes of approximately $7,376,000 and $3,463,000 respectively.
The federal net operating losses expire from 2007 to 2011. The California net
operating losses expire from 2000 to 2001. The benefit
30
<PAGE>
of these net operating loss carryforwards has not been recorded by the Company
as it is uncertain that the Company will generate sufficient income in future
periods to utilize the loss carryforwards.
Eleven Months Ended September 30, 1995 compared to Fiscal Year Ended
October 31, 1994.
On July 7, 1995, the Company acquired all of the assets and assumed all of
the liabilities of Energy through the issuance of 5,412,191 shares of Common
Stock. The principal asset acquired in this transaction was all of the issued
and outstanding common stock of CTL. Energy had acquired its investment in CTL
on May 1, 1994. In accordance with generally accepted accounting principles,
the results of operations disclosed in the Company's audited consolidated
financial statements include CTL's operations for the eleven-month period ended
September 30, 1995 for the 1995 fiscal year and for the six-month period ended
October 31, 1994 for the comparative 1994 fiscal year.
Net Sales and Gross Margins. The Company's net sales of $3,768,000, which
are attributable entirely to the operations of CTL, increased 82% in the 1995
fiscal year compared to net sales of $2,066,000 in 1994. This increase was due
primarily to the inclusion in the financial statements of eleven months of CTL's
operations in the 1995 fiscal year compared to only six months in fiscal 1994 as
described above. Monthly sales in both the 1995 and 1994 fiscal years averaged
approximately $340,000 due to capacity limitations at CTL's manufacturing
facilities.
Although CTL's average monthly sales remained constant in the 1995 and 1994
fiscal years, the Company experienced a decline in gross margins on sales of
electron tubes to 23% of net sales in 1995 from 42% in 1994. This decrease was
due primarily to increased costs associated with the development and manufacture
of new types of tubes. In addition, the Company sold a greater percentage of
new tubes relative to rebuilt tubes in the 1995 fiscal year compared to 1994.
As new tubes carry a lower gross margin than rebuilt tubes, an overall decline
in gross margins was experienced.
Selling, General and Administrative Expenses. SGA expenses increased by
11% in the 1995 fiscal year due to increased consulting, legal and audit costs
associated with the Energy transaction and the Company's financing activities.
Interest Expense. Interest expense increased to $88,000 in 1995 from
$3,000 in 1994 primarily due to an increase in notes payable to former owners of
CTL and other third parties.
Loss on Investments. During fiscal 1995, the Company purchased
approximately 15% of the outstanding stock of American Microcell for 712,571
shares of common stock at a fair value of approximately $0.70 per share, or
$500,000. American Microcell was engaged in the research and development of
improved technologies for cellular phones. However, American Microcell proved
unsuccessful in its efforts to finance continuing development of the
31
<PAGE>
technologies acquired, and the rights to these technologies reverted to the
original developers. Accordingly, the Company wrote off its investment in
American Microcell in fiscal 1995.
In addition, the Company sold certain microwave technology rights to a
related party for a note in the face amount of $1,250,000. Due to concerns
about collectibility, the Company reserved the remaining carrying value in
fiscal 1995. In addition, related deferred development costs totalling $44,631
were written off in fiscal 1995. Losses on investments in fiscal 1994 were not
significant.
Net Operating Loss Carryforwards for Tax Purposes. As of September 30,
1995 the Company had a net operating loss carryover for federal and California
income tax purposes of approximately $1,083,000 and $317,000 respectively. The
federal net operating losses expire from 2007 to 2010. The California net
operating losses expire in 2000. The benefit of these net operating loss
carryforwards has not been recorded by the Company as it is uncertain that the
Company will generate sufficient income in future periods to utilize the loss
carryforwards.
Fiscal 1994 compared to Fiscal 1993
On May 1, 1994, Energy acquired all of the issued and outstanding common
shares of CTL for 762,031 shares of Energy's common stock (valued at $1,069,140)
and notes payable to two major stockholders of CTL for $955,860. In addition,
Energy bought out an employment contract with a former owner of CTL for 222,572
shares of Energy common stock (valued at $312,272). From the date of
acquisition of CTL to October 31, 1994, the Company's net sales were $2,066,462.
For the 1994 fiscal year, the Company incurred a net loss of $362,102.
Prior to the acquisition of CTL, Energy had been engaged in the development
of technologies designed to enhance the production of hydrocarbons from oil
properties. Subsequent to the acquisition of CTL, Energy incurred no additional
costs or revenues relating to the development of these technologies. As
discussed above, this technology was sold in the 1995 fiscal year in exchange
for certain royalty payouts and a note in the face amount of $1,250,000 bearing
interest at 6%. Due to concerns about collectibility, this note was fully
reserved as of September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had cash and cash equivalents on hand
of $4,224,000 as compared to $57,000 at September 30, 1995. This increase in
working capital was primarily due to net proceeds of $8,900,000 received from
the issuance of Series B Preferred Stock and warrants and the proceeds of
$1,342,000 received from sales of Common Stock. In addition, the Company
acquired $167,000 in connection with its acquisition of Particle California and
M.C. Davis and realized proceeds of $174,000 on the sale of property. These
proceeds were used to finance the Company's operating activities of $1,697,000,
to repay bank debt of $190,000 and other debt totalling $994,000, and to acquire
property, plant, equipment and other assets of $472,000.
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<PAGE>
The Company acquired assets comprised of working capital and property,
plant and equipment, and recorded related goodwill and other intangibles,
totalling $1,649,000 in 1996 as a result of the business combinations of M.C.
Davis and PI Corp. In addition, the Company acquired land in exchange for
400,000 shares of the Company's common stock valued at $1,000,000, the
assumption of mortgages of $367,000 and acquisition costs of $57,000. The
Company also disposed of equipment held for resale through the return and
cancellation of its Series A Preferred Stock for which it recognized neither a
gain or loss, except for $40,000 in storage costs.
As a result of the transactions described above and the Series C Preferred
Stock financing, the Company believes that current and known future capital
resources will be adequate to fund its operations in the near term. The Company
also believes that sales of its Antenna Systems and Particle Interconnect
Products, both anticipated to commence in the 1997 fiscal year, in combination
with the sales of the electronic assemblies of Cellular Magnetics and the
operations of CTL will provide sufficient funds to meet the Company's capital
requirements for the next two years. At this time, the Company does not intend
to raise additional capital through the sale of additional capital stock or
through the issuance of debt.
In the 1997 fiscal year, the Company expects to make capital expenditures
of approximately $1,700,000. These expenditures will be made on CTL's new
manufacturing facility in Watsonville, California, establishing PI Corp.'s
initial full production line and facility in Colorado Springs, Colorado and
purchasing new equipment for the Company's manufacturing plants in Arizona City,
Arizona and Sonora, Mexico in connection with the manufacture of the Antenna
Systems.
TRENDS AND UNCERTAINTIES
As a result of its activities in 1996, the Company believes that it has
positioned itself to compete in several new markets through the acquisition of
M.C. Davis and by obtaining the rights to the Antenna Technology, the PI
Technology and the Proprietary Electroplating Process. The Company's activities
in fiscal 1997 will focus on bringing these new technologies to market and on
expanding the existing markets for its electron tube products and electronic
assemblies. However, the future operating results of the Company are subject to
certain trends and uncertainties within the industries in which the Company is
operating and within the Company itself.
OVERVIEW
In general, due to the Company's change of business purpose, the Company
has a limited operating history that is relevant to its current business. The
Company does not anticipate producing significant operating revenues until such
time, if ever, as products developed using the Antenna Technology and PI
Technology are completely developed, manufactured in commercial quantities and
available for commercial delivery, and accepted in the marketplace. There can
be no assurance that the Company's technology and products, if developed and
33
<PAGE>
manufactured, will be able to compete successfully in the marketplace and/or
generate significant revenue. The Company anticipates incurring significant
costs in connection with the development of its technologies and proposed
products and there is no assurance that the Company will achieve significant
revenues to offset anticipated operating costs. Included in such costs are
research and development expenses, marketing costs, increased capital
expenditures for the expansion of its manufacturing facilities and the research
and development of its products, and general and administrative expenses. See
"RISK FACTORS-Limited Operating History; History of Losses" and "-New Lines of
Business."
Inasmuch as the Company will continue to have high levels of operating
expenses and will be required to make significant expenditures in connection
with its continued research and development activities, the Company anticipates
that such losses will continue until such time, if ever, as the Company is able
to generate sufficient revenues to exceed its total costs of operation. See
"RISK FACTORS-No Assurance of Successful Expansion of Operations."
SPECIFIC TRENDS AND/OR UNCERTAINTIES
The Company is currently attempting to expand its customer base for its
electron tube business by and through the development of new products and
increased marketing activities. At this time, it is uncertain whether the
Company will be able to create new markets for its products. In addition, the
response of larger competitors in the electron tube markets to the Company's
increased marketing activities is not determinable.
The Company also faces uncertainty over the effects of business slowdowns
relating to the move to its new electron tube manufacturing facilities. While
the Company believes that the impact of this move will be minimal, unanticipated
difficulties may arise, which could result in a negative impact on the Company's
operations. See "RISK FACTORS-Dependence on Company Owned Manufacturing
Facilities; Risk of Business Interruptions."
The acceptance of the Antenna Technology and Antenna Systems by cellular
phone users and OEMs has not yet been tested. While the Company has received
significant expressions of interest from third parties for the Antenna
Technology, the existence and extent of market opportunities for its Antenna
Systems is unknown. In addition, the response of competitors to the marketing
of the Antenna Systems is unknown at this time. See "RISK FACTORS-Uncertainty
of Market Acceptance for Antenna Technology."
The Company's PI Technology is currently in the development stage and the
marketability of the PI products has not yet been tested. The PI Technology is
currently being utilized by third parties in limited applications under licenses
granted from Louis DiFrancesco, the developer of the PI Technology or from
companies he previously controlled, such as Particle California. The wide
spread acceptance of the PI Technology and the Particle Interconnect Products by
the market has yet to be tested by the Company. In addition, no prediction can
be made as to competitive responses in the market place should the PI Technology
and the Particle Interconnect Products prove successful. Moreover, the
licensees of the PI Technology could
34
<PAGE>
compete directly with the Company in the markets it intends to enter. If such
licensees desire to do so, Mr. Louis DiFrancesco, and not the Company, would
receive any increase in royalty payments due to such success. See "RISK
FACTORS-Uncertainty of Market Acceptance for PI Technology."
The Company is operating in three diverse businesses with different
operating and management requirements. As the operations of the Company expand
there will be a requirement for increased management expertise. The Company is
currently seeking to expand its management complement, particularly in the
marketing field, to cope with the anticipated growth in the Company's
operations. See "RISK FACTORS-Dependance on Key Personnel and Necessity to Hire
Additional Qualified Personnel."
PENDING ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets to Be Disposed Of," ("SFAS No. 121") which establishes
methods for determining when an impairment of long-lived assets has occurred and
for measuring the impairment of long-lived assets. The implementation of SFAS
No. 121 in the Company's 1997 fiscal year is not expected to have a material
effect on the Company's consolidated results of operations or financial
condition.
The FASB also issued SFAS No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") which encourages, but does not require,
employers to adopt a fair value method of accounting for employee stock-based
compensation, and which requires increased stock-based compensation disclosures
in lieu of expense recognition. The Company expects to continue to use the
intrinsic value-based method of accounting as allowed under SFAS No. 123. The
implementation of SFAS No. 123 in the Company's 1997 fiscal year is not expected
to have a material effect on the Company's reported consolidated results of
operations or financial position.
35
<PAGE>
BUSINESS
COMPANY OVERVIEW
Intercell Corporation (the "Company") was incorporated under the laws of
Colorado on October 4, 1983, and was originally engaged in the marketing of
business and cellular telephone equipment. This business was discontinued and
all remaining assets of the Company were liquidated or otherwise abandoned
during 1991, and all obligations of the Company were paid or otherwise
satisfied.
From 1991 until the acquisition of Modern Industries, Inc., on July 7,
1995, which subsequently changed its name to Energy Corporation ("Energy"), the
Company was generally inactive and reported no operating revenues prior to the
fiscal year ending December 31, 1994. During that time period, the Company
explored various new business and investment opportunities involving, primarily,
companies engaged in specialty lines of business in the wireless communications
and electronic technology industries.
On July 7, 1995, the Company purchased all of the assets and liabilities of
Energy. Energy's principal asset was its wholly owned subsidiary California Tube
Laboratory, Inc. ("CTL"). This transaction was accounted for as an acquisition
of the Company by Energy and, as such, the historical financial statements
contained herein reflect the financial statements of Energy. The results of
operations of the Company have been included only since the date of such
acquisition. See "INDEX TO FINANCIAL STATEMENTS."
As a result of the acquisition of Energy and additional acquisitions made
during the 1996 fiscal year (see "-Recent Acquisitions and Transactions"), the
Company is currently engaged in three lines of business: (i) the design,
development and production of shielded cellular phone antennas (the "Antenna
Systems") that use the Company's proprietary antenna technology (the "Antenna
Technology") as well as the manufacture of miniature and non-miniature coils,
transformers and other electronic assemblies; (ii) the manufacture and
rebuilding of specialty electron power tubes; and (iii) the design, development
and production of patented particle interconnect products ("Particle
Interconnect Products") that use the Company's patented particle interconnect
technology (the "PI Technology") and a proprietary trade secret electroplating
process (the "Proprietary Electroplating Process").
The Company's operations are or will be conducted by and through its wholly
owned subsidiaries, CTL, Cellular Magnetics, Inc. ("Cellular Magnetics"),
Intercell Wireless Corp. ("Intercell Wireless"), which was formed after the end
of the 1996 fiscal year, and Particle Interconnect Corporation ("PI Corp.").
Because the Antenna Technology and the PI Technology are in the development
stage, the Company does not anticipate operating revenues from such lines of
business until such time, if ever, as products developed using the Antenna
Technology and PI Technology are completed, developed, manufactured in
commercial quantities, available for commercial delivery, and accepted in the
market place.
36
<PAGE>
The statements contained in this Prospectus, if not historical, are
forward-looking statements and involve risks and uncertainties that could cause
actual results to differ materially from the results, financial or otherwise, or
other expectations described in such forward-looking statements. Therefore,
forward-looking statements should not be relied upon as a prediction of actual
future results or occurrences. In this regard, see "RISK FACTORS,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS-General" and "-Trends and Uncertainties."
RECENT ACQUISITIONS AND TRANSACTIONS
ACQUISITION OF M.C. DAVIS
Effective September 30, 1996, the Company, through its wholly owned
subsidiary Cellular Magnetics, an Arizona corporation, acquired AC Magnetics,
Inc., an Arizona corporation doing business as M.C. Davis Company ("M.C.
Davis"), for an aggregate purchase price of $1,800,000, comprised of a cash
payment equal to $800,000 and the issuance of 277,778 shares of the Company's
restricted Common Stock at a fair value of approximately $3.60 per share. M.C.
Davis was acquired by the Company to provide industrial engineering and
production capabilities for the Antenna Technology. M.C. Davis has production
facilities located in Arizona City, Arizona and Sonora, Mexico and has been
engaged in the production of miniature and subminiature electronic components
since 1968.
PARTICLE INTERCONNECT TRANSACTION
On September 3, 1996, the Company completed the merger (the "PI Merger") of
Particle Interconnect Inc., a California corporation ("Particle California"),
with and into the Company's wholly owned Colorado subsidiary, Particle
Interconnect Corporation ("PI Corp."). The PI Merger resulted in PI Corp.
obtaining all of the properties, assets, liabilities and business operations of
Particle California, including, with certain exceptions, the entire right, title
and interest in and to the improvements of seven United States patents and six
patent applications involving the PI Technology and the Proprietary
Electroplating Process. The exceptions relate to the right to receive royalty
payments from five companies that previously obtained licenses to the PI
Technology and certain know-how relating to its electroplating application from
Mr. Louis DiFrancesco, the inventor of the PI Technology, or companies that he
controlled. See "-Intellectual Property." In exchange for the PI Technology
and the Proprietary Electroplating Process, the Company issued 1,400,000 shares
of restricted Common Stock to the shareholders of Particle California. The PI
Merger was accounted for as an immaterial pooling-of-interest. The Company
plans to incur expenditures of not less than $1,500,000 to develop and equip PI
Corp.'s new manufacturing facility in Colorado Springs, Colorado.
RIGHT TO DUAL RESONANCE CELLULAR PHONE ANTENNA
On November 15, 1995, the Company entered into an agreement with Arizona
State University ("ASU") in connection with the development of a new form of
cellular phone antenna
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with certain features designed to reduce potential health hazards that may be
associated with electromagnetic signals and to increase transmittal reception
and range of cellular telephones. The Agreement required the Company to pay to
ASU a total amount of approximately $78,000. On June 5, 1996, Dr. El-Badawy El-
Sharawy ("Dr. Sharawy"), a tenured professor of ASU, assigned to the Company, on
a royalty-free basis, his entire right, title and interest in, and to
improvements on his U.S. Patent application entitled "Dual Resonance Antenna
with Portable Telephone Therewith" (the "Dual Resonance Application"), and any
and all patent applications thereon for nominal consideration. The Dual
Resonance Application and additional patent extensions thereon constitute the
basis of the Antenna Technology.
The Company subsequently entered into a license agreement with the Arizona
Board of Regents, on behalf of ASU, under which the Company, as licensor,
granted to the Arizona Board of Regents, strictly for education and scientific
purposes, a non-exclusive right and license to publish, make, use and sell the
technology covered by the Dual Resonance Application and any patents that may
issue thereon for the life of the patent upon which no royalties need be paid.
The Company believes the grant of such license will have a minimal impact, if
any, on any revenues the Company may earn on the Antenna Technology. To the
extent the Company acquires the rights to any future antennas developed by ASU,
it will be required to pay ASU a royalty for the licensing rights on mutually
agreed upon terms and prices.
MISCELLANEOUS TRANSACTIONS
Arizcan Properties, Ltd. On March 13, 1996, Arizcan Properties, Ltd., a
wholly-owned subsidiary of the Company ("Arizcan"), entered into an agreement
with a group, including certain minority shareholders of the Company, to acquire
a 94-acre development property located in Pinal County, Arizona for a total
purchase price of $1,424,362. This transaction was completed on June 18, 1996.
As consideration, the Company issued 400,000 shares of restricted Common Stock
at a fair value of $2.50 per share, and made cash payments of $57,000. In
addition, Arizcan assumed first and second mortgages on the property totaling
$367,000. The Company acquired this property for the purpose of constructing a
manufacturing facility for the products developed under the Antenna Technology.
Due the Company's acquisition of M.C. Davis, this property is no longer required
for manufacturing purposes and it is currently being held for sale.
Asia Skylink Corp. On December 29, 1994, the Company executed an Asset
Purchase Agreement with Asia Skylink Corp., to acquire certain microwave
transmission and associated support equipment, in exchange for 210,000 shares of
the Company's Series A Preferred Stock (the "Series A Preferred Stock"). On
August 30, 1996, in return for the cancellation of all of the Series A Preferred
Stock outstanding, the Company re-assigned the microwave transmission and
associated support equipment to the original seller and paid the holders of the
Series A Preferred Stock an aggregate of $40,000 as storage charges for the
period July 7, 1995 through August 30, 1996.
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THE COMPANY'S ANTENNA TECHNOLOGY
OVERVIEW OF ANTENNA TECHNOLOGY
The Company has the rights to certain patent applications relating to the
Antenna Technology that the Company jointly developed with the
Telecommunications Research Center at ASU. The Antenna Technology is designed
to reduce actual or perceived potential health hazards that may be associated
with exposure to electromagnetic signals by using a "shielded" antenna. The
Antenna Technology has been tested in working prototypes in cellular phones by
ASU. These tests indicated a significant reduction in radiation emissions
caused by wireless devices, and cellular phones in particular. The tests also
indicated several other benefits including increased range and reception, and
improved battery life. In addition, the Antenna Technology results in an
antenna that is smaller in size and lighter in weight than most antennas
currently on the market.
ANTENNA TECHNOLOGY INDUSTRY BACKGROUND
General
The wireless communications industry is relatively young and is
characterized by continual change. Currently, the wireless communications
industry is experiencing significant worldwide growth. Contributing to this
growth are improvements in wireless communication products, such as cellular,
personal communication service networks, global satellite telephones and
wireless data systems.
Wireless Communication Market Segments and Technology
Cellular Communication Services. The market for cellular technology, a
subset of the wireless communications market, has materially increased in the
last decade, growing from approximately 92,000 subscribers in the United States
in 1983 to more than 33.5 million at the end of December 1995. The Company
believes that there are over 30 brand names and in excess of 70 models of
portable cellular phones for sale in the United States; however, there are only
approximately 18 manufacturers of cellular phones in the world and eight of
these manufacturers are original equipment manufacturers ("OEMs"). No one
company dominates the market and there are only two manufacturers with more than
10% of the market. Although industry revenue from the manufacture and sale of
cellular phones is expected by industry analysts to grow just .2% in the 1996
calendar year to approximately $6.27 billion, the number of cellular phones sold
is expected by industry analysts to increase more than 15% to 16.6 million in
the 1996 calendar year.
The cellular communications process begins by carving a service area into
small areas called cells, which can range from one mile in diameter to 20 miles
in diameter. Each cell is equipped with a radio transmitter and receiver, which
are connected through the cellular phone company's switching center to the local
phone network. Currently, cellular phones primarily
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transmit data through the cellular phone antenna by means of analog transmission
and, to a lesser extent, through digital transmission.
Personal Communications Services. New digital communication standards and
technologies are rapidly emerging to provide the performance improvements
necessary to address overcrowding of existing cellular systems and provide
increased performance of communication equipment including Personal
Communications Services ("PCS").
PCS is a term encompassing a wide range of wireless mobile technologies,
primarily two-way paging and cellular-like calling services that are transmitted
at lower power and higher frequencies than other cellular services. Unlike
current cellular technology, plans call for broadband PCS to be digital from the
start. Because PCS services are digital, it is expected that PCS telephone sets
will be smaller and lighter in weight than most cellular sets.
The Federal Communications Commission ("FCC") has stated that it expects
the PCS industry to compete with existing cellular and private advanced mobile
communications services, thereby yielding lower prices for existing users of
those services. In addition, the FCC has stated that it believes PCS service
will promote the development of a wide range of services and devices such as,
among others, smaller, lighter, multi-function portable phones; portable
facsimile and other imaging equipment; and multi-channel cordless phones. The
development of PCS services is also expected to permit the United States
industry to develop services and technologies for international markets.
Narrowband PCS, which operate in the 900-901 MHz, 930-931 MHz and 940-941
MHz range, will largely be used for advanced paging services, such as two-way
paging, in which a recipient can respond to a sender's message with a message of
his or her own, and voice messaging. The Company believes that, in the near
term, broadband PCS will consist of cellular-like services including new
categories of wireless voice and data transmissions over both local and wide
areas using low power, lightweight pocket phones and hand-held computers, all of
which require the use of an antenna.
Current Cellular Phone Technology
Operation of Cellular Phones and Related Potential Health Risk. Cellular
phones and their antennas must comply with a particular bandwidth and
directionality constraints. Conventional cellular telephones operate over a
relatively wide bandwidth of approximately 824 MHz to 896 MHz, or approximately
8% of the entire frequency. For a portable telephone to communicate more than a
few hundred feet, it must radiate a substantial amount of L-band (approximately
915 MHz) or S-band electromagnetic energy (approximately 2,000-3,500 MHz). A
typical cellular portable telephone transmits at a power level of around 600
microwatts. In normal use, electromagnetic energy radiates from a cellular
phone or portable telephone antenna which is used in a position immediately
adjacent to the user's head. Electromagnetic energy in the L-band and S-band is
absorbed by and may otherwise influence organic matter, such as the
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human brain and other tissues. Research has indicated that up to 50% of the
energy radiated from a traditional antenna can be absorbed by the body tissue of
a user's head and hand.
Since many portable telephone users spend a significant amount of time
using portable telephones, the possibility exists for cumulative adverse health
effects to the extent that the electromagnetic energy is harmful to cellular
phone users. In this regard, there is growing concern both in the scientific
community and among the general public that cellular phone use could be
hazardous to the health of humans. In response to this concern, the Cellular
Telecommunications Industry Association commenced a multi-year, multi-million
dollar program to award grants to researchers who will investigate this issue.
In addition, certain cellular phone OEMs caution users in their advertisements
against prolonged usage of their cellular phones. To date, the Company is not
aware of any definitive studies that provide conclusive evidence on the
potential adverse health effect of electromagnetic energy on cellular phone
users.
Current Antenna Technology and Products
Existing cellular phones must meet weight, size and cost constraints in
attempting to limit the amount of electromagnetic energy radiated toward the
user's head and hand. For example, a cellular phone that uses a remote antenna
so that antenna emissions do not emanate from a location in close proximity to a
user's head or hand, would seriously diminish the convenience of the cellular
phone. Other technologies and techniques that might reduce radiation emission
solutions generally lead to increases in cellular phone cost, weight or require
excessively large antennas. For instance, many microstrip antennas have been
adapted to various applications having L-band and S-band frequencies.
Generally, however, microstrip antennas are too heavy, costly, and fragile for
use in cellular and similar portable telephones. Attempts to modify a monopole
antenna by mounting it on a ground plane and applying a metallic shield coated
with an isotropic magnetic material have succeeded in reducing the emission of
electromagnetic radiation in the near field but have encountered problems
similar to those encountered by microstrip antennas.
A more conventional technique of using shielding with a traditional antenna
design to decrease near-field radiation in one direction is generally not
practicable because such a technique tends to narrow bandwidth. Moreover, this
technique limits the omnidirectional antenna patterns necessary to ensure that
the quality of communication service will not vary with the direction a user
faces at any given point in time when using a cellular phone.
THE COMPANY'S ANTENNA TECHNOLOGY
Characteristics of Company's Antenna Technology
The Company's Antenna Technology is designed to minimize the radiation
emitted toward the user in order to reduce potential health hazards that may be
associated with exposure to electromagnetic energy. The Company has installed a
prototype External Antenna in existing cellular phone models. Preliminary
testing of the prototype External Antenna showed that it
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reduced the amount of electromagnetic energy in the near field by 90% while in
use. In such testing, there was also evidence of a significant increase in
transmittal reception and range of the signal, and a demonstrable extension of
the life of the cellular phone battery.
Due to the novel nature of the Antenna Technology, the prototype antennas
the Company has developed are also physically smaller in size, lighter in
weight, and therefore should not require cellular phone OEMs to modify their
existing cellular phone antenna housing designs in order to use the Company's
Antenna Systems.
In addition, the Company believes that the simplicity, combined with the
size advantage, will enable it to manufacture the Antenna Systems at a cost
attractive to both consumers and OEMs. The Company also believes its Antenna
Systems will prove attractive to OEMs due to the continuing trend in lighter
weight and smaller cellular phones, which trend should continue as a result of
the emerging PCS market.
Operation of Technology
The Company's Antenna Technology reduces the electromagnetic energy
emanating toward the user primarily through the use of a conductive ground plane
attached to existing substrates in cellular phones. The ground plane reflects
the electromagnetic energy away from the user. The Company's antenna resonates
at two distinctly different frequencies above and below the required or target
bandwidth. The frequencies are spaced sufficiently apart so that, after
impedance (the total opposition to current flow), the subject bandwidth resides
between the two resonances. Neither lower nor higher resonances alone achieve
the desired impedance for the antenna throughout the bandwidth, while also
reducing the radio frequencies near the user and maintaining omnidirectionality
in distances farther away.
In addition, attaching the ground plane to existing substrates adds no
appreciable cost or weight to the cellular phone. Moreover, radiating elements
of the antenna are assembled from a relatively rigid conductive material that
can support its own shape, weight and condition without the use of additional
structural substrates. As a result, the absence of additional substrates
reduces the weight of the antenna and, therefore, reduces the weight of the
cellular phones.
The Antenna Technology was designed to be used with both analog and digital
cellular phones and, therefore, if accepted in the market, should be available
for use in the emerging PCS market.
COMPANY ANTENNA TECHNOLOGY STRATEGY
The Company intends to manufacture its Antenna Systems in two models, an
internal and an external unit. The internal version (which does not have an
external antenna application) will be used by cellular phone OEMs that design
new cellular phones or modify existing cellular phone designs to incorporate the
antenna internally (the "Internal Antenna"). The Company has
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designed the Internal Antenna to minimize the amount of modification that
cellular phone OEMs will need to perform to use the Internal Antenna. The
External Antenna will permit the cellular phone antenna to be used as an
aftermarket "retrofit" on existing cellular phones.
In order to bring the Antenna Technology to market as soon as practicable,
the Company will initially manufacture the External Antenna. The Company has
completed all documentation and specifications for the External Antenna and has
several prototypes in place. The Company intends to commence production of the
External Antenna in the 1997 fiscal year. The Company also plans to manufacture
prototypes of the Internal Antenna, which is less complex and cheaper to
manufacture than the External Antenna, in the 1997 fiscal year.
While the safety of cellular phones is subject to question by consumers and
scientists, the Company believes there currently exists a marketing opportunity
for the development, manufacture and sale of its Antenna Systems. The Company
believes the overriding benefit of protection, whether perceived or
scientifically proven, will result in market demand for the Antenna Technology.
The Company also believes that the cellular phone industry will find the Antenna
Systems attractive due to their increased signal strength, range, and battery
life and their small and lightweight size.
Antenna Technology Sales and Marketing
Antenna Systems. The Company recently hired a full-time employee with
substantial sales and marketing experience in the cellular phone industry to be
responsible for managing and coordinating the development and marketing of the
Antenna Technology. Intercell Wireless, the Company's wholly-owned subsidiary,
will be responsible for the marketing, sale and distribution of the Antenna
Systems.
The Company is preparing to work with cellular service providers who are
interested in assessing the new technology for range, signal strength, and other
significant benchmarks. The Company has had discussions with cellular
manufacturers in Europe and the Asia-Pacific Rim region and is working on
establishing sales arrangements with distributors and expanding the production
facilities of Cellular Magnetics to accommodate additional production. The
Company has received requests for working phone models incorporating the
Company's Antenna Technology from Telstar, one of the largest carriers and
providers of cellular technology in Australia, and Optus Communications, one of
the largest telecommunication carriers in Australia operating a nation-wide
cellular network. Although the terms of the testing and evaluation have not
been formalized, both Telstar and Optus Communications expressed interest in
evaluating the Company's Antenna Systems to determine the compatibility of the
Antenna Systems with their respective technologies and for potential performance
enhancements. The Company will also continue to work on prototypes for models
with several cellular phone OEMs. There can be no assurance that, after testing
and evaluations, any orders will be placed by Telstar or Optus Communications
with the Company or any other cellular service providers.
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The Company also plans to exhibit prototypes of its Antenna Systems at
industry trade shows as well as other public events.
Other Electronic Assemblies. The Company will continue to market miniature
and non-miniature coils, transformers, surface mount coils and electronic
assemblies previously produced by M.C. Davis. The customer base for these
products consists principally of electronic companies that manufacture their own
electronic equipment. The Company intends to sell these products primarily in
the Southwest region of the United States.
PRODUCT DEVELOPMENT OF ANTENNA SYSTEMS
The Company is currently working on engineering designs to manufacture
additional prototypes of the External and Internal Antennas for use by cellular
phone OEMs. The Company also plans to continue the development of the Antenna
Technology and related technologies in other markets, including the development
of its "strip" antenna system for use in specialty applications with exposure to
extreme conditions, such as those encountered in the military, and for satellite
communications.
The strip antenna is a form of micro-strip antenna that is currently being
designed by ASU. The Company is currently working with ASU in the development
of this technology and is in the process of negotiating an exclusive licensing
agreement for this technology. The strip antenna system is designed to transmit
at 500MHz to 20GHz. The strip antenna system consists of combining ("stacking")
several micro-strip antennas, which have a long range, at reduced power, but
which transmit only in a specified direction. Because antennas used for
satellite transmission and military use require omnidirectional transmission and
reception, the Company believes that stacking the micro-strip antennas in
certain configurations will allow the completed product to have omnidirectional
transmission and reception. The strip antenna is currently in the development
stage and the Company can provide no assurances that it will operate as planned
or will be accepted by the industry. In addition, the Company can provide no
assurance that it will enter into an exclusive licensing agreement with ASU with
respect to this technology.
MANUFACTURING OF ANTENNA SYSTEMS
The Company will manufacture its Antenna Systems and continue to produce
electronic assemblies at its 8,000 square foot manufacturing facility in Arizona
City, Arizona and its 8,600 square foot plant in Sonora, Mexico. The Company is
currently working on the fixtures and tooling required for the manufacture and
sale of the External Antenna. The Internal Antenna is less complex and easier
to manufacture and should not require substantial changes in the Company's
manufacturing facilities.
These manufacturing facilities will also manufacture the electronic
assemblies previously manufactured by M.C. Davis. The Company does not
anticipate that the manufacture of its Antenna Systems will affect the Company's
ability to continue to manufacture its electronic assembly products.
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ANTENNA TECHNOLOGY COMPETITION
At present, the Company is not aware of any major OEMs that have indicated
a change in the conventional approach to power or emissions with respect to
their portable phones; however, there can be no assurances that such a change
may not be instituted in the future or that, in fact, such changes may not
currently be contemplated. Currently, cellular phone OEMs either manufacture
cellular phone antennas themselves or purchase such antennas from companies that
manufacture the antennas to their specifications. The Company believes that
many of these manufacturers have greater financial and other resources than the
Company. The Company is also aware of one development stage company that is
seeking to modify existing antenna technology with the intent of lowering
radiation emissions.
THE COMPANY'S ELECTRON TUBE PRODUCTS
OVERVIEW OF COMPANY'S ELECTRON TUBE BUSINESS
The Company manufactures and rebuilds electron power tubes in numerous
forms and models which service the frequency range of 200KHz to 18GHz.
Currently, the Company provides rebuilt and new electron tubes to a wide variety
of customers who use microwave technology in various types of applications,
including AM and VHF radio, television, linear accelerators, radar, electron
guns and industrial microwave and heating use. This line of business will
continue to be conducted by and through the Company's wholly owned subsidiary,
CTL. The Company believes that it is one of the more significant domestic
companies engaged in rebuilding electron power tubes in the United States.
ELECTRON TUBE INDUSTRY BACKGROUND AND TECHNOLOGY
General
Electron power tubes or electron tubes are enclosed tubes, in which
electrons act as the principal conductors of current between at least two
electrodes. Electron tubes fall into two categories, oscillators and
amplifiers. Oscillators are typically magnetrons and power grid tubes (triodes
and tetrodes) and amplifiers are klystrons and traveling wave tubes. Electron
power tubes are commonly identified by reference to the frequency band of the
electromagnetic spectrum (generally the L-band through KU-band) within which
they operate.
Electron tubes are used in a wide variety of products, including induction
heating and AM radio transmission using the 200KHz to the 5MHz range; VHF radio
and television and linear accelerators using the 5MHz to 600MHz range;
industrial microwave cooking and heating which use the 400MHz to 2.45GHz range;
and radar and electron guns using the 3GHz to 18GHz range. See "-The Company's
Electron Tube Products."
Electron and vacuum tubes are generally recognized as the dominant
technology for the generation of high power radio frequency ("RF") and
microwaves. Consequently, these tubes
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are used by many companies for widely varying applications. The manufacturing
and rebuilding of these units is a significant industry.
The Company has focused on creating its own "niche" in this large industry.
Discussed below is relevant industry information for that segment of the
microwave technology industry in which the Company is engaged. The Company is
not aware of any industry trade associations or government statistics that
describe the electron tube industry segments in which the Company currently
competes. The information in the tables below is management's estimate of the
world-wide market for the industry segments in which the Company competes based
on its knowledge of industry needs and the activities of other competitors in
the industry. Accordingly, the information below should be considered a rough
approximation.
Magnetron Tubes
A "magnetron tube" is a vacuum tube in which the flow of electrons is
controlled by an exterior applied magnetic field to generate power at microwave
frequencies (400 MHz to 18 GHz). Magnetrons are generally categorized as either
continuous wave ("CW") or pulse ("Pulse") units. CW magnetrons are used
primarily in heating and drying applications. Pulse magnetrons are used
primarily in measuring devices, such as radar and other applications.
New and rebuilt magnetron tubes are used in both commercial and military
radar units, high power industrial heating equipment and for medical and
industrial x-ray machines. The radar market consists of civilian weather radar
and military airborne and ground-based radar systems, among others. Industrial
heating magnetrons are used in food processing and drying systems at L-band
(approximately 915MHz) and S-band (approximately 2,000-3,500MHz) frequency
levels. Microwave heating is used for food cooking, drying and processing, wood
glue drying, waste management, clothes drying, oil reclamation and plasma
generation for production of diamond films.
Magnetrons used in x-ray equipment typically operate in the S-band or X-
band frequency range, focusing a beam of electrons on a tungsten target, which
produces x-rays.
Annual Rebuilt Market
---------------------
Radar $40 million
Medical $10 million
Industrial $ 3 million
Klystron Tubes
A "klystron tube" is an electron tube in which bunching of electrons is
produced by electric fields, which are then used for the amplification of
microwave energy. Klystrons tubes (both external cavity and internal cavity)
are commonly used in UHF television transmission,
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medical and nonmedical accelerators, and navigational equipment. Klystron tubes
are rebuilt for television broadcasting firms and are used to transmit data from
the studio transmitter to land-based receivers, such as television, and from
satellite uplinks to satellites for further transmission. Some types of
clinical x-ray machines use klystron tubes, which can also be rebuilt.
Published
Annual Annual Approximate Company
New Units Units New Price/*/
Produced Rebuilt Price Rebuilt
--------- ------- ----------- ---------
Television Broadcasting 2500 50 $40,000 $16,000
Transmission of Data 2000 10 $13,000 $ 6,000
Medical Use 200 or more 6 $40,000 $15,000
Navigation 400 or more 25 $12,000 $ 4,000
/*/ Subject to change depending on prevailing market and other financial
conditions.
Power Grid Tubes
Power grid tubes, also known as triode or tetrode tubes, are used in the
steel industry for radio frequency ("RF") heating and welding of all types of
steel products. They are also used in radio and VHF television transmission,
environmental test equipment and as switch tubes in high voltage pulsers. A
"triode tube" is an electron tube with three electrodes: an anode, a cathode and
a controlling grid; "tetrode tubes" are similar to triode tubes except that they
have four electrodes: an anode, cathode, a control grid and an additional grid.
Annual Rebuilt Market
---------------------
Power Grid $20 million
Other Industry Products
An "electron gun" is an electron-emitting cathode with its surrounding
assembly for directing, controlling and forcing a stream of electrons to a
target. A "linear accelerator" is a device in which charged particles are
accelerated in a straight line by successive impulses from a series of
alternating electric fields. One of the principal uses of linear accelerators
is in the medical field for the generation of high energy x-rays for the
therapeutic treatment of tumors.
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THE COMPANY'S ELECTRON TUBE PRODUCTS
The Company, through CTL, manufactures and rebuilds a wide variety of
electron tubes in numerous iterations and models that service the frequency
range of 200KHz to 18GHz with power levels of up to three million watts. The
Company's product lines operate within the following frequency bands: the L-band
400KHz to 2MHz; the S-band 2MHz to 3.5MHz; the C-band 4MHz to 7MHz; the X-band
7MHz to 1GHz and the KU-band 1.2GHz to 1.8GHz. The Company primarily
manufactures and rebuilds electron power tubes categorized as follows:
magnetrons (CW and Pulse), klystrons, power triodes and tetrodes, linear
accelerators and electron guns.
The Company offers warranties for its rebuilt electron tubes that meet or
exceed the original manufacturer's warranty. The rebuilt electron tubes can be
purchased for approximately one half the cost of a new tube and are often
technologically superior to a new tube due to the Company's analysis of the
reasons for failure of the original manufacturers technology, which analysis
often results in the usage of components incorporating the latest technological
improvements, designs and performance specifications. The Company also
manufactures new electron power tubes for use in the industry.
The Company rebuilds and manufactures new electron tubes in the following
industry segments:
Magnetrons
General. The Company believes that it is one of the major suppliers of L-
band (operating in the 915 MHz frequency range), CW magnetrons in the world. The
Company services and sells magnetrons with power levels from 5 KW through 75 KW.
It has developed its own 30 KW S-band, CW magnetron, which is used primarily for
industrial heating applications. The Company believes that this product has the
highest power rating at this frequency in the industry.
The Company is not considered a major supplier in the medical x-ray market,
since such market is essentially dominated by two major companies, Varian/CPI
and Siemens. The electron power tubes utilized by Varian/CPI and Siemens
operate in the S-band frequency range. The Company does not manufacture
electron power tubes operating in the S-band frequency range for the medical
x-ray market. Consequently, the Company only offers repair services for the
electron power tubes used in such medical systems.
The Company, however, believes that it can effectively compete in the
X-band industrial and "medical systems" x-ray market (a relatively new, small
and growing market), where new magnetron tubes are being manufactured. To the
knowledge of the Company, it manufactures the only magnetron operating in the
X-band frequency range, which is used in x-ray machines for medical
applications. The Company supplies magnetron tubes, operating in the X-band
frequency range, for x-ray applications for companies such as Accuray and
Schaumberg Research.
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Rebuilding Process. The rebuilding of magnetrons includes an incoming cold
test involving a microwave reflectometer, a hot test, disassembly and inspection
of the internal structure. Generally at a minimum, and if required, the cathode
heater assembly is replaced. Other damaged sub-assemblies can be replaced
depending on the cost effectiveness of such a repair. This product line
accounted for approximately 83% of the Company's net revenues in fiscal year
1996. Approximately 42% of these net revenues are generated from the
manufacturing and sale of new magnetrons, with the remaining 41% derived from
rebuilding magnetrons.
Klystrons and Linear Accelerators
General. The Company's rebuilding program for klystrons has, until
recently, been limited by a lack of suitable testing equipment. The Company has
recently obtained two test sets for klystron data transmission tubes and has
purchased a surplus television transmitter to test television klystrons. The
Company has entered into an agreement with a manufacturer of x-ray machines to
test the Company's rebuilt klystrons for the medical market. This line of
products accounted for less than 5% of the Company's net revenues in fiscal year
1996.
Rebuilding Process. The rebuilding process includes opening the vacuum
envelopes either by machining in the case of ceramic insulator tubes or by
cutting the glass on those tubes with glass insulators. The grids are removed
and salvaged and the cathodes are replaced. Typically, cathodes are directly
heated tungsten or thoriated tungsten filaments. These are replaced and
processed, the cleaned grids replaced and the envelope resealed. Tubes are then
pumped and baked for 48-hours, at which time they are burned-in and tested. All
klystron tubes are cleaned and finished in bright nickel plate. Workmanship and
material warranties prorated over 3,000 hours are provided with every klystron
tube. In rebuilding linear accelerators, as with klystron tubes, the electron
gun is removed and rebuilt, then the rebuilt unit is pumped, boiled and
processed.
High Power and High Frequency Triodes and Tetrodes
The Company believes that it is one of the major rebuilders of high power
and high frequency triode and tetrode tubes in the world. These units are
available with power output ranging from 10KW up to 300KW. These units
comprised approximately 7% of the net revenues of the Company in fiscal year
1996.
Electron Guns
The Company rebuilds various sizes and powers of electron guns up to 120
KV, 20A gridded electron sources for research application. Rebuilt electron
guns are also used on rebuilt medical accelerators. The rebuilding of electron
guns typically requires the removal of the old cathode and heater structure and
the replacement with a new unit. The electron gun is rebuilt under vacuum
conditions.
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COMPANY ELECTRON TUBE STRATEGY
The Company, as one of the largest rebuilders of electron tubes in the
industry, intends to continue to strengthen its reputation for quality, customer
service, warranty and the performance of its rebuilt electron tubes by
continuing to emphasize these business characteristics.
For magnetron tubes, the Company concentrates on markets where the unit
price is high and competition is the least. For power grid tubes (i.e., triode
and tetrode tubes), the Company concentrates on the high power, and more
expensive units where new tubes are no longer manufactured and rebuilding is
necessary to avoid replacement of large, expensive equipment. With the addition
of two new test sets for klystron tubes, the Company also intends to focus more
heavily on this segment of the market.
Electron Tube Sales and Marketing
The Company recently hired a full-time, experienced marketing employee to
increase the Company's existing market and to create new markets for its
products and services. The efforts of such employee, to date, have resulted in
an increase in new orders from existing and new customers.
CUSTOMERS
The Company currently has approximately 100 customers in its electron tube
business and has shipped over 25,000 electron tubes to 350 customers. The
Company's client base is comprised of industrial companies, commercial service
firms and government agencies in the United States, Canada, Mexico, Europe, Asia
and Australia. The two largest customers of the Company, Amana Refrigeration,
Inc. and Ferrite Components System, accounted for approximately 14% and 12%,
respectively, of its annual revenues for fiscal year 1996. The loss of any one
such customer could have a materially adverse effect on the business of the
Company.
MANUFACTURING OF THE ELECTRON TUBES
The Company's existing 8,000 square foot manufacturing facility for its
electron tube business is currently operating at maximum capacity. In
recognition of these constraints, the Company has entered into an agreement with
the City of Watsonville, California for the lease, development and construction
of a 21,600 square foot manufacturing facility. Construction of this facility
began in March of 1996 with an expected final occupancy date in February 1997.
Initially, the Company will occupy approximately 12,000 square feet of the
building and will sublet the balance until such time as it requires the
additional space. Upon completion of the Watsonville manufacturing facility,
the Company intends to apply for ISO 9000 certification, which will enable it to
more effectively compete in overseas sales.
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Since the Company is engaged in manufacturing and rebuilding of electron
tubes designed by major manufacturers of such tubes, the Company does not
experience and does not contemplate encountering any substantial difficulties
relating to the sources or availability of materials with which to conduct its
principal business operations. The components to remanufacture and rebuild
these tubes are commonly available from numerous sources.
BACKLOG OF ELECTRON TUBES
As of September 30, 1996, the Company's production backlog represented by
customer orders in its electron tube business was approximately $3,170,000. For
the preceding year ended (or equivalent) September 30, 1995, the Company had
approximately $1,300,000 in firm backlog. The Company anticipates completing
all production backlog during its current fiscal year. There is no guarantee,
however, that the Company will recognize sales from any or all of the backlog
orders.
ELECTRON TUBE COMPETITION
The Company is engaged in a very narrow segment of the microwave technology
industry, the rebuilding of electron and microwave tubes, and has attempted to
avoid direct competition with the major manufacturers of microwave products.
The manufacturing of new microwave products is dominated by several very large
companies in the United States and internationally. These companies, however,
have not chosen to dedicate their resources to the rebuilding of such products
or the manufacture of the electron tube the Company manufactures.
The principal competitors of the Company are relatively few, but have with
the Company, significant segments of the narrow market area in which the Company
competes. Principal among these competitors are Litton Industries, Varian
Associates, English Electric Valve and Burle Industries, Inc. Although there
are a few small competitors, management believes that, based upon the Company's
latest internal market information, it has the largest market share in certain
product lines, such as the CW magnetrons.
Because of its perceived reputation for quality, customer service, warranty
and the performance of its new and rebuilt units, the Company believes that it
offers a competitive advantage equal to or superior to what is otherwise
provided by its competitors.
PRODUCT DEVELOPMENT OF ELECTRON TUBES
Research and development activities to be conducted for the Company with
respect to electron tubes will be conducted through institutions or other firms
qualified to conduct such research and development activities as independent
contractors to the Company. To the extent that the Company does engage in
business activities which will require research and development, it will seek to
decrease such costs by entering into joint ventures or other types of business
relationships wherein the costs of research and development activities will be
paid for by other parties, who in consideration of such payments will enjoy
partial ownership or other
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rights relating to any technologies or products which might develop from such
research and development.
THE COMPANY'S PARTICLE INTERCONNECT TECHNOLOGY
OVERVIEW OF PARTICLE INTERCONNECT TECHNOLOGY
The Company proposes to pursue a new line of business involving the
development and manufacturing of high performance, low-cost interconnect
products. The Company's PI Technology utilizes patents procured and owned by
the Company for the production of electronic interconnect products. The
Company's Proprietary Electroplating Process will be used in the manufacture of
12" x 18" panels used to mount, package or attach electronic devices and other
products utilizing the PI Technology. This new line of business will be
conducted through the Company's wholly owned subsidiary, PI Corp.
PI TECHNOLOGY INDUSTRY BACKGROUND
Electronics Industry Trends
Over the past decade, consumers and OEMs have demanded electronic products
that provide a significant increase in performance accompanied by reduced size,
weight and cost. These factors have forced manufacturers to produce smaller,
lighter and higher performing components while reducing their costs in order to
remain competitive. New developments in printed circuit boards (including
flexible circuitry), integrated circuits ("ICs"), IC packaging techniques, and
new forms of interconnect assemblies for connecting the various electronic
components, have contributed to the ability of electronic system manufacturers
to accomplish these objectives.
As these products have decreased in size and increased in complexity,
conventional techniques of connecting their components together have begun to
become inadequate. The conventional methods of interconnecting electronic
components in a rematable fashion have limits to the miniaturization the
electronic components can tolerate, while at the same time remaining cost
effective. The interconnect industry that serves the personal computer ("PC"),
automotive, communication and workstation markets is aggressively pursuing
technologies that will allow it to move to the next level of performance and
size.
Integrated Circuits
The Company believes that market trends in IC packaging will lead to
increased demand for emerging high density substrates. ICs have historically
been packaged by connecting the silicon die to a lead frame or by bonding the
silicon die to an interconnect substrate using fine wires. As ICs are becoming
increasingly powerful, they produce more heat and require a significantly
greater number of input/output ("I/O") electrical connections to attach the
silicon die, thus placing substantially greater demands on the IC packaging
materials. For instance, a
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typical IC six years ago required up to approximately 80 I/O connections to the
silicon die, whereas today typical ICs require up to approximately 250 I/O
connections. The number of high density IC packages requiring more than the
typical 250 I/O connections to the silicon die increased from an estimated 240
million in 1990 to an estimated 777 million in 1995, based on published industry
information. Market demands are currently forcing certain IC toward 1,000 I/O
connections. Further, IC packaging demands arise when multiple silicon dies are
integrated into one powerful package, known as a "Multi Chip Module" or "MCM."
The international interconnect market in 1995 was estimated by an
independent research organization, to be $26.3 billion. The Company believes
that the typical integrated circuit package is a 40 billion unit per year
market. The market for the "Ball Grid Array" technology ("BGAs"), a product
line in which the Company intends to compete, is approximately 150 million units
per year (for both micro and mini BGA's).
The Company believes, based on interviews and contact with industry leaders
and experts, that the PI Technology has the potential and the capability to
solve this miniaturization problem and allow electronics manufacturers to move
to the next level of high-performance, low cost interconnect systems. The
potential advantage of PI Technology, in addition to potentially providing
increased performance and reliability, is that it replaces the fragile leads
which extend from the perimeter of current IC packages, resulting in improved
assembly yields and reduced size.
PI TECHNOLOGY-TECHNOLOGY AND PRODUCTS
General
Interconnect technology has not kept pace with micro-miniaturization in the
electronics industry. Thus, component packages and the connectors used to form
an electrical and/or mechanical interface between various components and
assemblies in electronic products are now the most expensive portion of such
products. Component packages, connectors, sockets, plugs and the like are also
the bulkiest and heaviest portion of such products.
Conventional interconnect technology complicates the electronic equipment
design and manufacturing processes by introducing special considerations into
such processes with regard to component placement, heat generation, power loss,
and signal propagation delay (the time it takes a signal to traverse a given
distance). These considerations have an adverse impact on potential gains in
performance being realized by new and emerging technologies.
Wiping Action Technology
Wiping Action Technology is still the prevailing means for interconnecting
electronic components. Wiping action interconnect technology (for example,
sockets, plugs, and needle pins) forms a temporary electrical interconnect and
thus readily allows the remating of various components and assemblies (for
example, when replacing a defective component, such as a
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random access memory chip in a personnel computer). A problem with using such
technology is that it is subject to the persistent formation of oxides (a non-
conductive material) along a contacting surface, which increases contact
resistance. In time, these oxides build up, hastening connection failure and
thus equipment failure.
Wiping action technology is only available in the form of various
connectors and sockets. These devices usually provide a contact surface formed
from a limited range of special metals, alloys, and other expensive materials,
as are suitable for maintaining a sliding connection. The devices themselves
have interfering electrical properties due to their size and orientation on a
circuit board, among others, and thus degrade signal propagation through the
interconnect (by introducing resistive, capacitive, and inductive components
into the signal path).
Wiping action technology provides high ohmic connections that produce
excessive and unwanted wear and heat, and therefore contribute to equipment
failure while wasting energy. The wiper mechanism, as in the case of a socket,
requires significant space on a circuit board. Thus, potential circuit
operating speeds are degraded due to propagation delays. In addition, sockets,
plugs, and similar interconnect devices are only available in a limited number
of configurations and materials. Thus, the evolution of electronic technology
is constrained by the limitations wiper interconnects impose upon a designer.
Additionally, wiper interconnects are unreliable in punishing environments
such as that in which a laptop computer is used. Wiper connections subject to
shock, intense vibration, temperature extremes, and/or high levels of
contamination tend to induce disruption in the continuity of connections made at
a wiper interconnect. As wiper interconnects are mechanical devices, they
corrode and are subject to wear. Thus, they have a limited useful life.
Identification of Problem
The Company and others in the industry are aware of the physical
constraints imposed upon the development of new products using existing
technologies. The problem is simple to identify and define, but difficult to
solve. As IC packages increase in I/O count and complexity while remaining
constant or decreasing in physical size, a problem arose in accommodating this
complexity in a reliable, technically efficient fashion. Whether the package is
connected to the device via solder, adhesive or socket, the connection process
as I/O counts move ever higher becomes difficult to achieve.
Designers of rematable connections, however, find this issue especially
troubling. As pin counts rise, the amount of force the device to package
interface must support also increases. Using conventional contact technology
like a gold to gold wiping connection, contact force measures around 40 grams
per contact. When IC packages had I/O counts of 100, this force was easy to
accommodate, but as I/O counts move toward 1,000 and beyond, current contact
technologies are inadequate. For example, at 40 grams per contact, a 1,000 I/O
BGA socket must effectively accommodate 40 kg of force, equivalent to half the
weight of an average man.
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Requiring a plastic substrate, barely 2 cm on a side to support half the
weight of a man is unreasonable, even with today's excellent plastic
technologies. Such force, concentrated in a small space contained by petroleum
based products that are almost always re-heated is very likely to fail because
of board warp, package warp, or outright physical failure.
This difficulty, when coupled with increasing intolerance from the market
to pay premium prices, presents today's socket manufacturer with an immense
task: create a socket that can:
. Accommodate very high I/O count devices.
. Receive high speed devices without seriously degrading their
performance (have as short a circuit path as possible).
. Be very low-cost.
The Company's Solution
The Company believes that its PI Technology provides a cost effective
solution to solving this industry-wide problem. As discussed below, the
Company believes the PI Technology can establish reliable, rematable connections
at only 10 grams of force. This means that only 10 kg versus 40 to 80 kg of
force is required to interconnect a 1,000 I/O IC socket with the underlying
substrate. The Company believes this reduction in force may enable
manufacturers to connect complex ICs to products through the next several
generations of electronics.
Additionally, the connection pathway provided by a connection using the PI
Technology is exceptionally short and has very low resistance. These features
allow the connection of very high speed ICs without seriously degrading their
performance as conventional techniques sometimes do. Moreover, the Company
believes that it can apply the PI Technology using its Proprietary
Electroplating Process at a very low cost.
There is no assurance, however, that the market place will accept the PI
Technology and proposed Particle Interconnect Products. In connection with the
development of commercially saleable prototypes, the Company must successfully
complete a testing program for such products before they can be marketed.
Unforeseen technical problems arising out of such testing could adversely affect
the Company's ability to manufacture a commercially acceptable version of its
Particle Interconnect Products.
THE COMPANY'S PI TECHNOLOGY
Overview
Background. The PI Technology was conceived in 1986, with the initial
patent thereon issued in 1987. A major aerospace firm took a special evaluation
contract in August 1988 to
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use the PI Technology for the development of the Space Defense Initiative
("SDI") "Super Computer Program" and for use in other portions of the SDI ("Star
Wars") Programs. The results of the SDI Programs demonstrated that the PI
Technology could meet and surpass military IC packaging and interconnect
requirements, designated MIL-STD 883C and MIL-STD 38510, which the Company
believes are more stringent than the requirements in the commercial marketplace.
The Company received the rights to seven patents and six patent
applications and the Proprietary Electroplating Process from Particle
California. See "BUSINESS-Recent Transactions." Five companies operate under
licenses from the Company to use the PI Technology. These licensee's are
utilizing the PI Technology to produce products that do not currently compete
with the Company's proposed Particle Interconnect Products; however, nothing in
the license agreements would prohibit these companies from doing so in the
future.
General. The PI Technology utilizes patents owned by the Company for
bonding and joining metal surfaces to enhance electronic connectivity and also
uses the Proprietary Electroplating Process to electroplate panels at an
anticipated lower cost than conventional manufacturing processes. The Company's
core product is similar to "conductive sandpaper" in appearance, and is formed
by attaching conductive diamond particles to a panel. The "conductive
sandpaper" creates a socket or connector for electronic devices, and replaces
the use of soldering to create such connections.
Operation of the Technology
PI Technology begins with sharp, metallized, doped diamond particles which
have been closely screened as to size. The particles are tightly classified in
sizes ranging from 10 microns to 125 microns, depending upon the end-product
application. Small particle size, 8 to 12 micron range, are for small pad
sizes, less than 5 mm in diameter, and have a small amount of penetration.
Medium particle size, in the 20 to 30 micron range, are for medium pads sizes, 5
mm to 100 mm in diameter, and have a medium amount of penetration. Large
particle size, 115 to 135 micron range, are for large pads sizes, greater than
100 mm in diameter, and have a large amount of penetration.
These electrically conductive diamond particles are attached onto contact
sites using standard masking and electroplating processes. The sharp, embedded
particles create a surface with many sharp points that make many parallel
electrical paths by penetrating though an oxide without requiring the wiping
action of conventional contacts. The Company believes that its non-wiping
action, oxide penetrating Particle Interconnect Products are capable of
penetrating surface contamination and oils to create a gas-tight electrical
contact.
The sharpness of the diamond particles concentrates insertion force
transmitted by a contact into a very small area or point. This gives the
diamond particle the force per square inch required to pierce oxides and other
contaminates on most surfaces without requiring large amounts of force on the
contact. Reliable, gas-tight connections can be made with PI
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Technology with as little as 10 grams of force per contact. This low-level of
force is sufficient to drive the particles into the mating surface (for example
a I/O pad on a silicon die) and provide low contact resistance. Moreover, the
diamond particles do very little damage to the mating surface. This provides
very long remate life with very little degradation of the connection. Since
there is no wiping action, contact coatings stay intact.
The Company can apply these particles to many different substrates, both
flexible, rigid, metallic and non-metallic. This ability coupled with the very
low contact force gives the Company the capability to make reliable connectors
out of materials that could collapse if exposed to the normally required contact
forces.
Proprietary Process of PI Technology Manufacturing
The Company's ability to compete on a cost-effective basis is driven by two
factors; the high-speed Proprietary Electroplating Process and a re-cycling,
pollution reduction process.
The Company believes it will be able to offer its Particle Interconnect
Products at costs competitive with conventional techniques because of its high
speed Proprietary Electroplating Process. This Proprietary Electroplating
Process allows the Company to electroplate at rates substantially higher than
industry standards while investing larger capital amounts in automated
equipment. Additionally, the Proprietary Electroplating Process uses fewer raw
materials and eliminates ancillary processes that cost competing technologies
both time and money.
The Company expects to additionally benefit from the Proprietary
Electroplating Process because the entire manufacturing operation is cleaner and
less environmentally hazardous with its recycling design, than existing plating
processes used in the electronics industry. Since electroplating is typically
an environmentally hostile process, the Company expects to gain advantages over
competitors by minimizing the costs associated with the control, removal and
processing of these pollutants.
COMPANY PI TECHNOLOGY STRATEGY
The PI Technology has application in many different industries where
electrical connections and interconnections are made. The Company initially has
selected the connector industry as its primary industry to potentially
penetrate. The PI Technology has been in use in the connector industry for
several years, mainly in test and burn-in socket applications by the Company's
licensees. There is a current demand in the connector industry for reliable
Ball Grid Array (BGA) and Land Grid Array (LGA) production sockets. The Company
believes the PI Technology offers immediate advantages for these products. As a
result, the Company has developed the following short term and long term
strategies.
Initially, the Company intends to focus on high speed electroplating of
conductive diamond particles. The primary objective is to provide this service
to numerous connector manufacturers, in competing and non-competing
applications. The Company intends to provide
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this service to companies in the form of teaming/co-manufacturing agreements.
The Company believes this approach will provide it with the ability to penetrate
the market utilizing existing customer bases and reputations of established
leaders in the connector industry. In many cases the Company will attempt to
establish long term strategic alliances with these industry leaders to continue
development and manufacture of new products that will incorporate the PI
Technology.
The Company's initial product line will be a BGA production socket.
Assuming there is market demand for this product, the Company expects to produce
this socket in moderate quantities at its existing facility and using domestic
subcontractors, until co-manufacturing partner(s) are able to produce in larger
quantities. If or when this occurs, the Company will attempt to expand with
proposed partners into numerous other BGA and LGA applications and new products
as they are designed. As these business relationships mature, the Company
intends to begin expansion into other industries in a similar fashion. The
Company currently contemplates that some of these industries will include the
printed circuit board ("PCB") industry with alternative interconnect attachment
solutions, automotive electronics and the utility power industry (splices and
switches).
PI Technology Sales and Marketing
Phase I Corporate Image. The Company, as an emerging Company with respect
to the design, manufacture, marketing and sales of its proposed Particle
Interconnect Products must become recognized in the industry. The Company's
focus on establishing a solid corporate image is based on management's belief
that OEMs and suppliers to OEMs will not put their own production schedules and
reputations at risk with companies they feel are unstable regardless of how
revolutionary the product or service may be. This is exceptionally true in the
connector industry. The Company believes that it has been successful at
projecting an image acceptable to the industry as evidenced by the willingness
of industry leaders to enter teaming and strategic alliance discussions with the
Company prior to production. The Company will continue to use conventional
methods such as attending industry conventions, meeting with high-level
executives in the industry's leading companies and contacting key analysts in
the industry to enhance and stabilize the Company's corporate image. In the
future the Company expects to expand its efforts to include:
. Traveling to meet individually with key executives.
. Generating interest through the trade press and presentations at trade
shows.
. Exhibiting with display booths at certain industry trade shows.
. Publishing and publicizing test results as they become available.
The Company believes this approach will provide it with an image that will
enhance the formation of relationships with key industry leaders.
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Phase II - Forming Strategic Alliances. The Company believes that
establishment of a sound business image and an appropriate level of exposure for
PI Technology in the market place is only the first step in successfully
penetrating the market through a strategic partner. To be successful with this
approach, the Company must select an appropriate partner, convince this partner
of the viability and advantages of the PI Technology at its Proprietary
Electroplating Process, negotiate a mutually beneficial agreement, and perform
on the agreement. There is no guarantee that the Company will be able to
accomplish these tasks.
In each industry in which the Company decides to compete, the Company will
select market leaders that have key characteristics such as:
. Significant market share and strong distribution channels.
. Manufacturing competencies that compliment that of the Company.
. A corporate culture that allows them to quickly respond to a new
technology.
. Sufficient capital and sales strength.
The Company is currently in preliminary discussions with two industry
leaders that satisfy all of the above criteria, however, there can be no
assurances given that any agreements will be consummated or, if consummated,
that any such agreements will be profitable to the Company.
Phase III - Penetrate Other Industries and Application Areas. Combinations
of the Company's intended strategies in Phases I and II above will be used in
Phase III to allow access to all the markets where PI Technology is potentially
viable. The steps the Company has taken and will take in the electronics
industry in Phases I and II, will be repeated in other industries in which the
Company may compete.
PI TECHNOLOGY COMPETITION
Competition in the electronic connector market is fierce. The principal
competitive factors are product quality, performance, price and service.
Multinational companies with established manufacturing facilities and tremendous
economies compete with each other daily on both price and quality. The
Company's approach of supplying rather than competing with these large firms
means that it will not directly compete with such well established leaders. The
Company will face competition to its PI Technology primarily through the
development of competing technologies.
Technologies currently exist that offer features similar to the PI
Technology. These technologies include: dendrite crystals, gold dot technology,
fuzz button technology, elastromerics, z-axis conductive adhesives and others.
These technologies are currently produced by materials suppliers, flexible and
rigid PCB manufacturers, as well as electronics
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manufacturers who produce their own materials and interconnect systems. Many of
these competitors have substantially greater financial and other resources than
the Company. The Company believes that each of these technologies has drawbacks
that will not be surmounted in the near future. In addition, the Company
believes that each technology currently has unacceptable limitations with regard
to electrical/mechanical performance, manufacturability or cost.
The risk of organizations developing new and competitive technologies also
exists. The Company will continually monitor the technical environment to
identify these risks early and develop strategies to respond to them quickly.
PI TECHNOLOGY PRODUCT DEVELOPMENT
While the Company believes the area of quickest return and greatest initial
growth is in the electronics connector market, PI Technology has applications in
many other areas. These areas include:
. Direct IC attachment.
. Manufacture of complex PCB cards at low-costs.
. Multi-Chip Modules.
. Heat Dissipation Products (Heat Sinks).
. High Voltage Splicing Products.
. High Voltage Contractors and Switches.
The Company will consider researching the potential of these markets and
develop appropriate manufacturing and penetration strategies for them, as
discussed in "-Company Strategy" above, whenever the electronic connector market
begins to show signs of maturation with declining profit margins, increased
competition and lack of opportunity.
GOVERNMENT REGULATION
The various business operations of the Company are subject to numerous
federal, state and local laws and regulations, including those relating to the
use and disposal of hazardous substances. Specifically, the operations of CTL
and PI Corp. involve the use and handling of environmentally hazardous
substances. The use of hazardous substances is subject to extensive and
frequently changing federal, state and local laws and substantial regulation
under these laws by governmental agencies, including the United States
Environmental Protection Agency, various state agencies and county and local
authorities acting in conjunction with federal and state authorities. Among
other things, these regulatory bodies impose restrictions to control air, soil
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and water pollution. Furthermore, amendments to statutes and regulations and
the Company's expansion into new areas could require the Company to continually
modify or alter methods of operations at costs which could be substantial. The
Company believes that it is in substantial compliance with all material federal
and state laws and regulations governing its operations.
The Company believes that its Proprietary Electroplating Process will be
subject to less environmental regulation because the Company's Proprietary
Electroplating Process does not use a lead based interconnect technology and
generates very small quantities of hazardous waste. As a result, the Company
has applied for and anticipates receiving a zero percent (0%) emissions permit
from the EPA.
Compliance with federal and state environmental laws and regulations did
not have a material effect on the Company's capital expenditures, earnings or
competitive position during fiscal year ended September 30, 1996. Similarly,
capital expenditures to comply with such laws and regulations are not expected
to be material in the fiscal year ending September 30, 1997.
INTELLECTUAL PROPERTY
CELLULAR PHONE ANTENNAS AND PARTICLE INTERCONNECT TECHNOLOGY
The Company will rely on a combination of patents, patent applications,
trademarks, copyrights and trade secrets to establish and protect its
proprietary rights in the Antenna Technology and PI Technology and the
Proprietary Electroplating Process. The electron tube technology utilizes no
intellectual property rights belonging to the Company. The Company currently
owns seven U.S. patents (which expire from February 14, 2006 to October 15,
2013) on the PI Technology and seven patent applications, six related to the PI
Technology and one relating to the Antenna Technology.
Prior to the Company's acquisition of Particle California, Mr. Louis
DiFrancesco, the inventor of the PI Technology, or companies he controlled,
granted two exclusive and three nonexclusive licenses to use the patents and
patent applications on the PI Technology to the following Companies: Exatron
Automatic Test Equipment Inc., with an exclusive license to use the PI
Technology for sockets for use in automatic test equipment; Acsist Associates
Inc., now known as Johnson-Matthey Laminates Division; MicroModule Systems Inc.,
with an exclusive license for thin film products; Multiflex Inc.; and Myers
Consulting Inc. Mr. DiFrancesco, and not the Company, will receive any royalty
payments or other compensation received under the terms of these licenses. In
addition, nothing prohibits these licensees from competing with the Company in
the future. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-Trends and Uncertainties" and "RISK FACTORS-License
Rights to PI Technology."
A basic Dual Resonance Application was filed in the United States Patent
and Trademark Office. The Company has subsequently filed a continuation to the
Dual Resonance Application to cover additional features made available through
the use of the Antenna Technology. The
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Company can provide no assurance that a patent will be issued on the Dual
Resonance Application.
The Company also owns certain proprietary techniques and trade secrets
relating to a Proprietary Electroplating Process. The Company recognizes the
benefits associated with developing a portfolio of corporate intellectual
property, particularly during the new product development process, and is
pursuing patentability searches and activities on several technologies. There
can be no assurance that patents will be issued from any of the pending
applications, or that any claims allowed from existing or pending patents will
be sufficiently broad enough to protect the Company's technology. While the
Company intends to vigorously protect its intellectual property rights, there
can be no assurance that any patents held by the Company will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
competitive advantages to the Company. Litigation may be necessary to enforce
the Company's patents, patent applications, trade secrets, licenses and other
intellectual property rights, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business and results of
operations regardless of the final outcome of the litigation. Despite the
Company's efforts to maintain and safeguard its proprietary rights, there can be
no assurances that the Company will be successful in doing so or that the
Company's competitors will not independently develop or patent technologies that
are substantially equivalent or superior to the Company's technologies.
The telecommunications and interconnect industries are characterized by
uncertain and conflicting intellectual property claims. The Company has in the
past and may in the future become aware of the intellectual property rights of
others that it may be infringing, although it does not believe that it is
infringing any third party proprietary rights at this time. To the extent that
it deems necessary, the Company may license the right to use certain technology
patented by others in certain products that it manufactures. There can be no
assurance that the Company will not in the future be notified that it is
infringing other patent and/or intellectual property rights of third parties.
In the event of such infringement, there can be no assurance that a license to
the technology in question could be obtained on commercially reasonable terms,
if at all, that litigation will not occur or that the outcome of such litigation
will not be adverse to the Company. The failure to obtain necessary licenses or
other rights, the occurrence of litigation arising out of such claims or an
adverse outcome from such litigation could have a material adverse effect on the
Company's business. In any event, patent litigation is expensive, and the
Company's operating results could be materially adversely affected by any such
litigation, regardless of its outcome.
The Company also seeks to protect its trade secrets and proprietary
technology, in part, through confidentiality and non-competition agreements,
among other practices and procedures, with employees, consultants and other
parties. There can be no assurance that these agreements will not be breached,
that the Company will have adequate remedies for any breach, or that the
Company's trade secrets, such as the Proprietary Electroplating Process, will
not otherwise
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<PAGE>
become known to or independently developed by others. In addition, the laws of
some foreign countries do not offer protection of the Company's proprietary
rights to the same extent as do the laws of the United States.
EMPLOYEES
As of January 31, 1997, the Company and its three active wholly owned
subsidiaries had approximately 125 employees. None of the Company's employees
is represented by a labor union or is subject to a collective bargaining
agreement. The Company believes that its relations with its employees are
satisfactory.
PROPERTIES
PRINCIPAL EXECUTIVE OFFICES
The principal executive office of the Company is located at 999 West
Hastings Street, Suite 1750, Vancouver, B.C., Canada V6C 2W2. The Company
leases this office space from a company controlled by Alan M. Smith, an
executive officer and director of the Company, pursuant to a lease that expires
on July 31, 2001. The monthly lease payments are $3,000. The Company believes
that the lease payments are on terms at least as favorable as could be obtained
from an independent lessor.
PRINCIPAL CORPORATE OFFICES
The principal corporate office of the Company is located at 7201 E.
Camelback Road, Suite 250, Scottsdale, Arizona 85251. The Company leases this
office space. The monthly lease payments are approximately $3,500 pursuant to a
lease that expires July 31, 2001.
PI CORP.
The Company conducts operations on a 10-acre site located at 3550 South
Marksheffel Road, Colorado Springs, Colorado. The building has 45,000 square
feet with 22,000 square feet currently allocated for production. The facility
also includes two 1000 square feet security vaults for storage of finished
products prior to shipping. The Company leases this facility pursuant to a
lease that expires on July 31, 1998. The monthly lease payments for the first
year are approximately $23,000, and approximately $23,500 for the remainder of
the term.
CELLULAR MAGNETICS
The Company will manufacture its Antenna Systems and continue to produce
electronic assemblies at its 8,000 square foot manufacturing facility in Arizona
City, Arizona and its 8,600 square foot plant in Sonora, Mexico. The Company
owns the land on which these facilities are located.
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CTL
The Company's manufacturing facilities are presently located at 1305 17th
Avenue, Santa Cruz, California 95062. The current leased premises comprise
approximately 8,000 square feet at a monthly lease cost of approximately
$10,000. The Company has entered into a lease agreement dated June 16, 1995
with the City of Watsonville, California, for a new manufacturing facility
consisting of approximately 21,600 square feet. Construction of this facility
began in March 1996, with an anticipated final occupancy date of February 1997.
The Company will initially occupy approximately 12,000 square feet at the
facility and will sublet the remainder until such time as it requires additional
space. The lease is for a period of 15 years with an option to renew for 3
successive five-year terms. The total lease cost will be approximately $15,000
per month, exclusive of any sublease revenues.
LEGAL PROCEEDINGS
The Company has recently been notified of a potential litigation matter
(the "Complaint") which has been filed by American Microcell Corp. ("AMC") and
MicroAntenna, Inc. (collectively, "Plaintiffs") against but not yet served upon,
among others, the Company, Terry Neild, a director and Executive Vice President
of the Company, and Lucius Ross, a consultant to the Company (collectively, the
"Defendants"), in the Superior Court of Maricopa County, No. CV 96-___. The
Complaint alleges that Messrs. Ross and Neild were, at the relevant time, former
directors of Plaintiffs and breached their fiduciary duties to Plaintiffs by
usurping a corporate opportunity, the acquisition of the Antenna Technology from
Plaintiffs for their personal benefit and the benefit of the Company. The
Complaint requests both compensatory damages, an assignment of all rights to the
Antenna Technology and a lien or constructive trust on the Antenna Technology
and all proceeds therefrom.
The Company is currently conducting an extensive factual analysis of the
threatened litigation. Based upon such information, the Company believes the
Complaint lacks substantial merit and further believes it has and intends to
assert meritorious counterclaims against the Plaintiffs.
Other than the Complaint, no material legal proceedings (other than routine
litigation incidental to the business) to which the Company (or any officer or
director of the Company, or any affiliate or owners of record or beneficially of
more than 5% of the common stock) to management's knowledge, is a party or to
which the property of the Company is subject, is pending and no such material
proceedings are known by management of the Company to be contemplated.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, directors and significant employees of the Company
are as follows:
<TABLE>
<CAPTION>
Name and Age Position Period of Service
------------ -------- -----------------
<S> <C> <C>
Gordon J. Sales (59) Director, President and Chief July 7, 1995 to Present
Executive Officer
Terry W. Neild (56) Director and Executive Vice July 7, 1995 to Present and
President Director since October 23,
1996 to Present
Alan M. Smith (45) Director, Secretary, Treasurer July 7, 1995 to Present and
and Chief Financial Officer Director since June 1996 to
Present
Theodore A. Waibel (59) Director November 22, 1996 to Present
Charles E. Bauer, Ph.D. (46) Director November 22, 1996 to Present
Steven D. Clark (38) President of PI Corp. October 22, 1996 to Present
Lawrence DiFrancesco (48) Executive Vice President and September 3, 1996 to Present
Chief Operations Officer of PI
Corp.
Jerry W. Tooley (53) President and Chief Executive October 14, 1996 to Present
Officer of Cellular Magnetics
David Putnam (50) Chief Financial Officer of October 14, 1996 to Present
Cellular Magnetics
James D. Martin (40) Vice President, CTL February, 1977 to Present
Anthony P. Wynn (53) Vice President, CTL January, 1979 to Present
David E. Blank (62) Vice President, CTL July, 1989 to Present
</TABLE>
The directors hold office until the next annual meeting of shareholders and
until their successors have been duly elected and qualified. The officers are
elected by the Board of Directors at its annual meeting immediately following
the shareholders' annual meeting and hold office until they resign or are
removed from office. There are no family relationships that exist between any
director, executive officer, significant employee or person nominated or chosen
by the Company to become a director or executive officer. The Company has not
established an
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<PAGE>
executive committee of the Board of Directors or any committee that would serve
similar functions such as an audit, incentive compensation or nominating
committee.
In connection with its merger with Particle California, the Company agreed
to appoint Lawrence DiFrancesco to the Board of Directors and elected Louis
DiFrancesco as Chief Technical Officer of PI Corp. Mr. Lawrence DiFrancesco
subsequently resigned from the Board of Directors on October 23, 1996. Mr.
Louis DiFrancesco resigned as Chief Technical Officer of PI Corp. and now serves
as a paid consultant to PI Corp.
In connection with the Company's acquisition of Energy, Mr. Sales was
appointed as Director and Chief Executive Officer of the Company and Messrs.
Neild and Smith were appointed as officers of the Company.
BIOGRAPHICAL INFORMATION ON OFFICERS AND DIRECTORS AND SIGNIFICANT EMPLOYEES
GORDON J. SALES. Mr. Sales has been President, Chief Executive Officer and
a Director of the Company since July 7, 1995. In addition, he has been
President and Chief Executive Officer of CTL since May 1, 1994 and of PI Corp.
from September 3, 1996 to October 22, 1996. Mr. Sales also has been President,
Chief Executive Officer and a Director of Energy since March of 1993. Prior to
his association with the Company, its parent and subsidiary, Mr. Sales was
involved in the building supply, forest products and real estate industries.
During the years 1977 to 1993, Mr. Sales was President of his privately owned
holding company, which had interests in truck parts manufacturing, wood fibre
processing and commercial real estate development. Mr. Sales devotes
substantially all of his professional time to the business affairs of the
Company.
TERRY W. NEILD. Mr. Neild became an Executive Vice President of the
Company on July 7, 1995 and was appointed to the Board of Directors on October
23, 1996. From August 1, 1993 to September 26, 1995, he served as President and
Chief Operating Officer of Energy. Prior to that time Mr. Neild was self-
employed as a business and financial consultant. Mr. Neild is a Certified
Management Accountant. Mr. Neild served as Chairman and Chief Executive Officer
of Clearly Canadian Beverage Corp. ("Clearly Canadian") from February 1986 to
March 1989, and as Chairman and Chief Executive Officer of Clearly Canadian's
majority shareholder, Camfrey Resources, Ltd., from March 1989 to February 1990.
Mr. Neild has been a Director of Baywest Capital Corp., MacNeill International
Corp., North American Contractors, Ltd., Barwell Development Corp., and Crest
Realty and Development Ltd. Mr. Neild devotes substantially all of his
professional time to the business affairs of the Company.
ALAN M. SMITH. Mr. Smith has been Secretary, Treasurer and Chief Financial
Officer of the Company since July 7, 1995 and a director since June 12, 1996.
Mr. Smith is a Chartered Accountant practicing in Vancouver, British Columbia,
Canada. Mr. Smith established a financial consulting practice in Vancouver,
Canada in 1985 and in 1990 obtained his license to practice as an independent
accountant. He has been a member of the Institute of Chartered Accountants of
Ontario since 1978 and of the Institute of Chartered Accountants of
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<PAGE>
British Columbia since 1981. Mr. Smith devotes substantially all of his
professional time to the business affairs of the Company.
THEODORE A. WAIBEL. Mr. Waibel has served as a director of the Company
since November 22, 1996. Mr. Waibel has been the President and Chief Executive
Officer of T.A.W. Vehicle Concepts, Inc. (an importer of magnesium wheels for
race cars) since March 1996. From March 1991 to March 1996, Mr. Waibel was the
President and Chief Executive Officer of TVX, Inc. (a high technology company
that has developed the placement of a camera on a computer chip for security
applications).
From July 1980 through February 1991, Mr. Waibel was President and Chief
Executive Officer of Ultrak, Inc. (NASDAQ: ULTK), a company he co-founded in
1980. From July 1975 until June 1980, he was Executive Vice President of
Marketing for Alarm Device Manufacturing Co., ADEMCO Division of Pittway
Corporation, Tyosset, New York which had purchased Sontrix, Inc., a public
company co-founded by Mr. Waibel. From October 1969 through July 1975, Mr.
Waibel served as President of Sontrix, Inc., Boulder, Colorado, which developed
a successful multi-head ultrasonic system for the security market.
Mr. Waibel is past National Director of the American Electronics
Association, a past member of the Dean's Advisory Council to Dean Firman of the
University of Denver and founded the Alarm Industry Telecommunications Committee
in Washington, D.C.
Mr. Waibel received his BS/BA from the University of Denver with a major in
marketing in 1967.
CHARLES E. BAUER, PH.D. Dr. Bauer has served as a director of the Company
since November 22, 1996. Dr. Bauer has been the Managing Director of TechLead
Corporation, an international consulting firm, since 1990. During his career,
Dr. Bauer has served as Director, Research and Technology of MicroLithics
Corporation, Golden, Colorado. At MicroLithics Corporation, Dr. Bauer was
responsible for a variety of technology programs with the Coors Advanced
Electronics Group, including, MicroLithics Coors Electronic Packaging Company,
two internal research groups of the Coors Ceramic Company and a joint venture
with W. R. Grace & Company. From 1978 through 1989 he was employed by
Tektronix, Incorporated, Beaverton, Oregon, in various capacities as a Material
Scientist/Engineer, Materials Science/Engineering Manager, Engineering
Scientific Manager, Bipolar Products Packaging Unit Manager and Integrated
Circuit Packaging Operations Manager.
Dr. Bauer received his BS in Materials Science and Engineering from
Stanford University in 1972, his MS in Metallurgical Engineering from Ohio State
University in 1975, his PhD in Materials Science and Engineering from Oregon
Graduate Center, Beaverton, Oregon in 1980 and his MBA from the University of
Portland in 1988.
Dr. Bauer has served as Assistant Adjunct Professor in Mechanical
Engineering and Business Administration with the University of Portland, as an
Associate Professor (visiting) in
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Mechanical Engineering with Florida International University, Miami, Florida and
is currently associated as Assistant Adjunct Professor, with dual appointment in
Mechanical Engineering and Electrical and Computing Engineering with the
University of Colorado. He is currently Director, Industrial Relations for the
Center for Advance Manufacturing and Packaging of Microwave, Optical and Digital
Electronics for the University of Colorado.
Dr. Bauer served as the President of the Rocky Mountain Chapter, the
Microelectronic Society (ISHM) (1995-96). He has received the Fellow of Society
Award of ISHM (1993) and served as National Technical Vice President (1988-90).
Dr. Bauer is a Director and the Secretary of the Surface Mount Technology
Association (SMTA) and is currently serving as President of the Rocky Mountain
Chapter (1995-96). Dr. Bauer has been a member of the following professional
societies: ASM International (ASM) since 1971, International Electronics
Packaging Society (IEPS) since 1983 and Institute of Electronic and Electrical
Engineering (IEE) since 1993.
Dr. Bauer holds one U.S. Patent on Multilayer Interconnect Circuitry and
has five Patent Applications pending, relating to interconnect circuitry and
packaging. Dr. Bauer has published over 50 technical papers and presentations
in journals and conferences around the world. He founded and is currently
General Chair of Pan Pacific Microelectronics Symposium and Chip Scale Packaging
Advanced Technology Workshop.
SIGNIFICANT EMPLOYEES. The Company considers the following officers of its
subsidiaries as significant employees of the Company
STEVEN D. CLARK. Mr. Clark has served as President of PI Corp. since
October 22, 1996. Prior thereto, Mr. Clark worked on the B2 Bomber program as a
project manager in charge of new business acquisitions with Northrop Grumman
Corporation from 1981 to 1996. In addition, Mr. Clark has served as a
consultant in the development of the PI Technology for the past ten years.
LAWRENCE DIFRANCESCO. Mr. DiFrancesco has served as Director, Executive
Vice President and Chief Operating Officer of PI Corp. since September 3, 1996
and he served as a Director of the Company from September 3, 1996 to October 23,
1996. From March 1995 through May 1996, Mr. DiFrancesco was employed as an
engineer with Sheldahl Inc., Northfield, Minnesota, a large manufacturer of flex
circuits. From March 1994 through March 1995, Mr. DiFrancesco was employed by
Particle California, working jointly with his brother, Louis DiFrancesco, in the
further development of the PI Technology and the Proprietary Electroplating
Process. From December 1992 through March 1994, he was employed at Exatron-
Acsist Associates where he served as Program Coordinator and Process Engineer
for the development of a new, high density, fine pitch, surface mount
interconnect technology. From July 1992 through December 1992, he was employed
as an Engineer with Logical Services, Inc. From 1982 to 1991, he served as a
Project Leader for Hughes Aircraft Company where his responsibilities related to
high volume manufacturing operations.
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<PAGE>
Mr. DiFrancesco is the co-developer of the PI Technology and the
Proprietary Electroplating Process. He served as the Senior Scientist for
Particle California in an advisory capacity or as an employee from 1991 until
September 3, 1996 when it assigned the PI Technology and the Proprietary
Electroplating Process to the Company.
Mr. DiFrancesco received an AAE Electronic Technology degree from Chabot
College, Hayward, California and a Bachelor of Science degree in Electrical
Engineering from Cal Poly, San Luis Obispo, California.
JERRY W. TOOLEY. Mr. Tooley has served as President and Chief Executive
Officer of Cellular Magnetics since October 14, 1996. Prior thereto, Mr. Tooley
served as the President of M.C. Davis.
DAVID PUTNAM. Mr. Putnam has served as the Chief Financial Officer of
Cellular Magnetics since October 14, 1996. Prior thereto, Mr. Putnam served as
Vice President and Treasurer of M.C. Davis.
JAMES D. MARTIN, VICE PRESIDENT, CTL. Mr. Martin has been employed by CTL
since February, 1977 and has served as Vice President of CTL since 1993. He has
worked in every department of CTL from production and sales to customer service.
Mr. Martin provides technical support to customers in this highly technical
business and organizes and runs production lines for rebuilding triodes,
cyclotrons and medical linear accelerators.
ANTHONY P. WYNN, VICE PRESIDENT, CTL. Mr. Wynn has served as Vice
President of CTL since January, 1979. Mr. Wynn is a design engineer responsible
for developing a 50KW L-band magnetron and rebuilds high power magnetrons,
cyclotrons, triodes, medical linear accelerators, electron guns and ion pumps.
He has worked with English Electric Valve Co. (U.K.) and Litton Industries
(U.S.) as a professional microwave engineer in the magnetron tube divisions.
DAVID E. BLANK, VICE-PRESIDENT, CTL. Mr. Blank has been Vice-President of
Engineering at CTL since July, 1989. A graduate of Brunel College, London
University, England and a member of the Institute of Mechanical Engineers, he
has worked in senior engineering positions with Varian Associates, EEV Inc.'s
Relmag Division of Litton Industries. He has designed and developed numerous
magnetrons at various power levels during his career.
69
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning compensation
paid by the Company to the Chief Executive Officer ("CEO") and any other
executive officer whose total annual salary and bonus exceeded $100,000 for the
fiscal year ended September 30, 1996 (the "Named Executive Officers"):
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
--------------------- ----------------
Securities
Fiscal Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Options (#) Compensation($)
- --------------------------- ------ --------- -------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Gordon J. Sales, President 1996 $105,917 -0- 700,000/(2)/ -0-
and Chief Executive Officer 1995 -0- -0- 500,000/(2)/ $82,265/(1)/
Alan M. Smith, Director, 1996 93,371 -0- 550,000/(3)/ -0-
Secretary, Treasurer and 1995 15,000 -0- -0- 40,000/(4)/
Chief Financial Officer
Terry W. Neild, Director 1996 40,000 -0- 700,000/(2)/ -0-
and Executive Vice 1995 -0- -0- 500,000/(2)/ -0-
President
</TABLE>
________________
/(1)/ Received as compensation as an officer of CTL.
/(2)/ An option to purchase 500,000 shares of Common Stock was originally
granted to Messrs. Sales and Neild on July 7, 1995 at an exercise price of
$.625 per share. On November 9, 1995 these options were repriced at an exercise
price of $.50 per share. Concurrently, an option to purchase an additional
200,000 shares of Common Stock was granted by the Company to Messrs. Sales and
Neild at the same exercise price. Messrs. Sales and Neild each subsequently
transferred options to purchase 50,000, of the 200,000 shares originally
granted, on November 11, 1996 to Alan M. Smith as a gift.
/(3)/ Mr. Smith received additional options to purchase 150,000 shares of Common
Stock from Messrs. Sales, Neild and the Company's general counsel. These
options have not been included in the above table as the options were not
granted by the Company.
/(4)/ Received as compensation as a consultant to Energy Corporation and CTL.
The foregoing compensation table does not include certain fringe
benefits made available on a nondiscriminatory basis to all Company employees
such as group health insurance, dental insurance, long-term disability
insurance, vacation and sick leave. In addition, the Company makes available
certain non-monetary benefits to its executive officers with a view to acquiring
and retaining qualified personnel and facilitating job performance. The Company
considers such benefits to be ordinary and incidental business costs and
expenses. The aggregate value of such benefits in the case of each executive
officer listed in the above table, which cannot be precisely ascertained but
which is less than 10% of the cash compensation paid to each such executive
officer, is not included in such table.
70
<PAGE>
OPTION GRANTS TABLE
The following table provides information relating to the grant of stock
options to the Company's executive officers during the fiscal year ended
September 30, 1996.
OPTION GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT ASSUMED
ANNUAL RATES OF STOCK PRICE
INDIVIDUAL GRANTS APPRECIATION FOR OPTION TERM/(1)/
- ------------------------------------------------------------------------------------------ -------------------------------------
PERCENT
OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES FAIR MARKET
OPTIONS IN FISCAL EXERCISE VALUE ON EXPIRATION
NAME GRANTED(#) YEAR/(3)/ PRICE($/SH) GRANT DATE/(2)/ DATE 0% ($) 5% ($) 10% ($)
- ----------------- ------------ ---------- ---------- --------------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gordon J. Sales 200,000/(4)/ 4.1% .50 .625 11/9/2005 $ 25,000 $ 103,760 $ 223,760
500,000/(4)/ 10.3% .50 .625 7/7/2005 62,500 259,400 559,400
Alan M. Smith 50,000 4.1% .50 .625 11/9/2005 6,250 25,940 55,940
300,000 6.2% .50 4.860 6/12/2006 654,000 1,113,270 1,813,110
200,000 4.1% 4.00 4.750 9/3/2006 150,000 748,500 1,660,500
Terry W. Neild 200,000/(4)/ 4.1% .50 .625 11/9/2005 25,000 103,760 223,760
500,000/(4)/ 10.3% .50 .625 7/7/2005 62,500 259,400 559,400
</TABLE>
_________________
/(1)/ Potential realizable value is based on an assumption that the stock price
of the Common Stock appreciates at the annual rate shown (compounded annually)
from the date of grant until the end of the ten-year option term. These numbers
are calculated based on the requirements promulgated by the Securities and
Exchange Commission and do not reflect the Company's estimate of future stock
price growth which may or may not occur.
/(2)/ Computed based on the average closing bid and asked prices on the date the
options were granted.
/(3)/ All options granted were immediately exercisable on the date of grant.
/(4)/ An option to purchase 500,000 shares of Common Stock was originally
granted to Messrs. Sales and Neild on July 7, 1995 at an exercise price of $.625
per share. On November 9, 1995 these options were repriced at an exercise price
of $.50 per share. Concurrently, an option to purchase an additional 200,000
shares of Common Stock was granted by the Company to Messrs. Sales and Neild at
the same exercise price.
/(5)/ The Company granted options to other officers, directors, consultants and
employees, including employees of the Company's subsidiaries, to purchase an
aggregate of 4,841,180 shares of Common Stock during fiscal 1996.
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<PAGE>
AGGREGATED OPTION EXERCISE AND FISCAL YEAR-END OPTION TABLE
The following table provides information relating to the exercise of stock
options during the fiscal year ended September 30, 1996 by the Company's
executive officers and the 1996 fiscal year-end value of unexercised options.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR,
AND FISCAL YEAR-END OPTION VALUES
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
AT FY-END/(1)/ AT FY-END($)/(1)/
-------------- -----------------
SHARES
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
---- ------------ ----------- ------------- -------------
Gordon J. Sales -0- -0- 650,000/0/(2)/ $2,315,625/0
Alan M. Smith 200,000 $687,500/(3)/ 150,000/0 534,375/0
200,000/0 12,500/0
Terry W. Neild -0- -0- 650,000/0/(2)/ 2,315,625/0
______________
/(1)/ The average of the closing bid and asked price of the Common Stock on
December 20, 1996 ($4.0625) was used to calculate the option value.
/(2)/ The holders transferred 50,000 out of an original 200,000 stock options
issued to them on November 9, 1995 to Alan M. Smith at no cost.
/(3)/ The market value of the Common Stock on the date of exercise, June 27,
1996, minus the exercise price of $.50 per share. The average of the closing
bid and asked price of the Common Stock on June 27, 1996 was $3.9375.
DIRECTOR COMPENSATION
An option to purchase 100,000 shares of Common Stock was originally granted
to Mark S. Pierce on July 7, 1995 at an exercise price of $.625 per share. On
November 7, 1995 these options were repriced at an exercise price of $.50 per
share. Concurrently, an option to purchase an additional 100,000 shares of
Common Stock was granted by the Company to Mr. Pierce at the same exercise
price. Mr. Pierce resigned as an officer of the Company effective July 7, 1995
and as a director of the Company on June 12, 1996.
In the future, the Company's Board of Directors intends to pay its non-
employee directors $1,500 for their attendance at each regular or special
meeting of the Board of Directors and award each non-employee director options
to purchase 100,000 shares of Common Stock, which options shall vest 25,000
shares per year for each full year served as a director of the Company.
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<PAGE>
EMPLOYMENT AGREEMENTS
On September 1, 1996, the Company entered into certain employment
agreements (the "Employment Agreements"), with Gordon J. Sales to serve as
President and Chief Executive Officer of the Company, Alan M. Smith to serve as
Chief Financial Officer of the Company, and Terry W. Neild to serve as Executive
Vice President of the Company (collectively, the "Employees" and individually an
"Employee"). The Employment Agreements are for a period of sixty months
beginning September 1, 1996 and ending August 31, 2001. Any extension or
renewal of the Employment Agreements must occur at least three months prior to
the end of the initial term or any renewal term and absent mutual agreement of
the parties, the failure to conclude such extension or renewal by such date
shall be deemed notice to the Company and the Employee, that the relevant
Employment Agreement shall not be extended. Under each Employment Agreement,
each Employee will be paid an annual salary of $120,000 ("Annual Salary") for
the first year, which amount will be increased to $180,000, $240,000, $270,000
and $300,000 on September 1, 1997, 1998, 1999 and 2000, respectively. Each
Employee also is entitled to participate in the Company's bonus and stock option
plans and participate in the customary employee benefits programs maintained by
the Company, including health, life and disability insurance to the extent
provided to other senior executives of the Company.
The Company or an Employee may terminate the applicable Employment
Agreement at any time with or without cause. In the event the Company
terminates an Employment Agreement for cause or an Employee terminates his
Employee Agreement without cause, all of such Employee's rights to compensation
would cease upon the date of his termination. If the Company terminates an
Employment Agreement without cause or the Employee terminates his Employment
Agreement for cause (which is limited to the Company's failure to pay the
Employee his monthly compensation) the Company will pay to the Employee, within
15 days of the effective date of such termination, all compensation and other
benefits that would have accrued and/or been payable to the Employee during the
full term of the Employment Agreement.
In the event of a change in control of the Company, each Employee is be
entitled to receive a lump sum payment equal to $400,000, if the change of
control occurs prior to August 31, 1999, and $430,000 if the change of control
occurs thereafter. A change of control is considered to have occurred when, as
a result of any type of corporate reorganization, execution of proxies, voting
trusts or similar arrangements, a person or group of persons (other than
incumbent officers, directors and principal shareholders of the Company)
acquires sufficient control to elect more than a majority of the Company's Board
of Directors. The Employment Agreements also include a non-compete and non-
disclosure provisions in which each Employee agrees not to compete with or
disclose confidential information regarding the Company and its business during
the term of the Employment Agreement and for a period of one year thereafter.
Additional Employment Agreements. The Company has entered into an
employment agreement with the Company's general counsel under terms
substantially similar to those discussed above. The Company, through its wholly
owned subsidiaries, has also entered into
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<PAGE>
employment agreements with the following individuals, among others, Steven
Clark, Lawrence DiFrancesco, Jerry W. Tooley and David Putnam.
COMPENSATION PURSUANT TO PLANS
STOCK OPTION PLANS
The Company has one stock option plan entitled the Intercell Corporation
1995 Compensatory Stock Option Plan (the "1995 Plan"). The Company has reserved
7,000,000 shares of Common Stock for issuance. In the 1996 fiscal year, the
Company granted options to purchase 4,841,180 shares of Common Stock to
directors, officers, employees and consultants of the Company and its
subsidiaries.
EMPLOYEE STOCK OWNERSHIP PLAN
In 1988, CTL established an Employee Stock Ownership Plan (the "ESOP") and
a related trust for substantially all of its employees. To participate in the
ESOP, employees of CTL must have worked at least 1,000 hours during the year and
must be employed at the end of the ESOP year. Participants do not vest until
their third year of employment and then vest 20% per year through year seven.
Employer contributions are voluntary and are generally based on a percentage of
eligible payroll, limited to 15%. The contributions for 1995 and 1994 were
approximately $158,000 and $247,000, respectively, and were recognized as
compensation expense. The Company discontinued the ESOP in 1996.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not have a compensation committee, all decisions on the
compensation of executive officers and directors of the Company are made by the
full Board of Directors. In the preceding fiscal year, the following members of
the Board of Directors participated in discussions involving the compensation of
executive officers of the Company: Messrs. Sales, Neild, Smith and Pierce.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, and the
rules thereunder require the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission and to furnish the Company with copies.
Based solely on its review of the copies of the Section 16(a) forms
received by it, or written representations from certain reporting persons, the
Company believes that, during the last fiscal year, all Section 16(a) filing
requirements applicable to its officers, directors and greater than ten-percent
beneficial owners were complied with except that Alan M. Smith failed
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<PAGE>
to timely file a report on Form 4 reporting the grant of an option to purchase
50,000 shares of Common Stock on November 9, 1995 until June 1996.
CERTAIN TRANSACTIONS
As of September 30, 1996, the Company had an outstanding promissory note
due to Jerry W. Tooley, the Chief Financial Officer of Cellular Magnetics in the
amount of $80,000 with an interest rate of 8%, due annually. The promissory
note was issued as part of the consideration paid for the purchase of M.C. Davis
consummated on September 30, 1996. This note was repaid in October 1996.
The Company had noninterest bearing notes payable totaling $800,000 due to
the former owners of M.C. Davis in consideration for the purchase of M.C. Davis
consummated on September 30, 1996. These notes were repaid in October 1996.
See also Note 11 to the Company's Consolidated Financial Statements and Notes
thereto included elsewhere herein.
The Company leases its principal executive office from Alan M. Smith, Ltd.,
a company controlled by Alan M. Smith, an executive officer and director of the
Company. The Company leases this office space pursuant to a lease that expires
on July 31, 2001. The monthly lease payments are $3,000. The Company believes
that the lease payments are on terms at least as favorable as could be obtained
from an independent lessor.
On September 3, 1996, the Company granted options to purchase 400,000
shares of Common Stock, with an exercise price of $4.00 per share, to 521508
B.C. Ltd. ("B.C. Ltd.") in return for which B.C. Ltd. agreed to promote the sale
of the Company's products and services in Canada. B.C. Ltd, which has its own
management, is beneficially owned by the adult children of Mr. Gordon J. Sales
and by the father-in-law of Mr. Terry W. Neild. Both Mr. Sales and Mr. Neild
disclaim any direct or indirect beneficial ownership of or interest in B.C. Ltd.
On July 8, 1996, Energy, which does not currently conduct any operations
and whose only assets consist of the Company's Common Stock and the Company
entered into a certain Plan of Liquidating Dissolution (the "Plan"). The Plan
was approved by a majority of the shareholders of Energy on October 21, 1996 in
accordance with the provisions of the Delaware General Corporation Law. Under
the Plan, the Company has agreed to register the shares of Common Stock issued
to Energy over a period of three years. The 5,412,191 shares of Common Stock
owned by Energy will be distributed to the beneficial owners of the shares of
common stock of Energy as of July 8, 1996, pro-rata as follows: 902,032 on each
of January 31 and April 30, 1997, January 30 and April 30, 1998 and January 31
and April 30, 1999.
The Blonde Bear Trust, the beneficiary of which is the spouse of Alan
M. Smith and Messrs. James D. Martin, Anthony P. Wynn and David E. Blank,
significant employees of the Company, own shares of Energy and will receive
approximately 32,500, 20,000, 20,000 and 20,000 shares of Common Stock,
respectively, in the distribution. The Blonde Bear Trust has
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an independent trustee and Mr. Smith does not have the authority to revoke the
trust or direct the trustee in the voting or disposition of the trust proceeds.
Accordingly, Mr. Smith disclaims any beneficial ownership interest in the shares
of Common Stock the trust will receive from Energy.
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<PAGE>
BENEFICIAL OWNERSHIP
The following table sets forth certain information regarding the beneficial
ownership of outstanding shares of Common Stock as of January 31, 1997, by (i)
each person known by the Company to own beneficially five percent or more of the
outstanding shares of Common Stock, (ii) the Company's directors, Chief
Executive Officer and executive officers whose total compensation exceeded
$100,000 for the last fiscal year, and (iii) all directors and executive
officers of the Company as a group.
Name and Address of Percentage of
Beneficial Owner Number of Shares Class/(6)/
- ------------------- ---------------- -------------
Energy Corporation
999 West Hastings St., Suite 1750
Vancouver, B.C., V6C 2W2 5,412,191/(1)/ 30.41%
Gordon J. Sales, Chief Executive Officer
999 West Hastings St., Suite 1750
Vancouver, B.C., V6C 2W2 1,383,334/(1)(2)/ 7.77
Terry W. Neild, Executive Vice President
7201 E. Camelback Rd., Suite 250
Scottsdale, AZ 85251 1,383,334/(2)/ 7.77
Alan M. Smith, Chief Financial Officer
999 West Hastings St., Suite 1750
Vancouver, B.C., V6C2W2 850,000/(3)/ 4.78
Cheri L. Perry
3236 Jellison Street
Wheat Ridge, CO 80033 1,351,340/(4)/ 7.59
Theodore A. Waibel, Director
890 S. Coors Drive
Lakewood, CO 80228 -0-/(5)/ -0-
Charles E. Bauer, Director
31321 Island Drive
Evergreen, CO 80439 -0-/(5)/ -0-
All officers and directors as a group
(5 persons) 3,616,668 20.32
_______________
/(1)/ Mr. Sales is President and a Director of Energy but does not beneficially
own any shares of common stock of Energy. Accordingly, the Company does not
believe Mr. Sales is the beneficial owner of any shares of Common Stock held by
Energy. Mr. Sales disclaims beneficial ownership thereof and, consequently, its
ownership is not attributed to or included in his ownership. Energy currently
acts as a holding company, whose only assets are the Common Stock which is being
held for distribution to Energy's shareholders.
/(2)/ Includes 650,000 shares of Common Stock subject to presently exercisable
stock options held by Messrs. Sales and Neild. The options are exercisable at
$0.50 per share and expire July 7, 2005 with respect to 500,000 shares and
November 9, 2005 with respect to 150,000 shares. The holders transferred 50,000
out of an original 200,000 stock options issued to them on November 9, 1995 to
Alan M. Smith at no cost.
/(3)/ Includes 500,000 shares of Common Stock subject to presently exercisable
stock options held by Mr. Smith. The options are exercisable at $0.50 per share
and expire on June 12, 2006 with respect to 150,000 shares; $0.50 per share and
expire on November 9, 2005 with respect to 150,000 shares (transferred to him,
at no cost by certain other shareholders) and at $4.00 per share and expire on
October 21, 2006 with respect to 200,000 shares.
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<PAGE>
/(4)/ Includes 850,000 shares of Common Stock subject to presently exercisable
stock options held by such individual. The options are exercisable at $0.50 per
share and expire on July 7, 2005 with respect to 500,000 shares and on November
9, 2005 with respect to 150,000 shares; and at $4.00 per share and expire on
October 21, 2006 with respect to 200,000 shares.
/(5)/ The ownership indicated does not include options granted effective
November 22, 1996 to acquire up to one hundred thousand (100,000) shares of the
Common Stock at $4.00 per share. The options vest at the rate of twenty-five
thousand (25,000) shares per year for each year served as a director. As the
options are not presently exercisable, the option holder is not considered to be
the beneficial owner of the shares of Common Stock underlying the Options. The
Options have a term expiring on November 22, 2006.
/(6)/ Based upon 17,795,021 shares issued and outstanding on January 31, 1997.
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SELLING SHAREHOLDERS
This Prospectus covers 6,351,159 shares of Common Stock and 1,837,450
Warrants being offered by the Selling Shareholders. The table below sets forth
(i) the identity of the Selling Shareholders, (ii) the nature of any position or
other material relationship, if any, which the Selling Shareholder has had with
the Company, its predecessors or affiliates during the past three years, (iii)
the amount of shares of Common Stock owned by the Selling Shareholder prior to
the offering, (iv) the amount of shares of Common Stock offered by the Selling
Shareholder hereby, and (v) the amount and (if one percent or more) the
percentage of shares of the outstanding Common Stock that will be owned by the
Selling Shareholder after the offering is complete and assuming that all shares
of Common Stock offered hereby are sold.
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<PAGE>
<TABLE>
<CAPTION> Amount of
Warrants Owned Shares/Warrants
Amount of Amount of Prior to Amount To Be Owned
Name of Selling Common Stock Common Stock Owned Offering-Series of Shares/(4)/ after the Offering
Name of Selling Owned Prior to Prior to ------ Warrants ------------------
Shareholder Offering-Series Offering-Series C/(3)/ B/Series C Offered Amount/(5)/
--------------- --------------- ---------------------- ---------------- -------------- ------------------
B/(2)/
-
<S> <C> <C> <C> <C> <C>
Energy Corporation/(1)/ 1,804,064/-0- -0-/-0-
AG Super Fund
International Partners L.P. -0- -0- 7,619/-0- 7,619/7,619 -0-/-0-
Banque Scandinave en Suisse -0- 193,950 30,476/38,462 262,888/68,938 -0-/-0-
Cameron Capital Ltd. -0- -0- 76,191/-0- 76,191/76,191 -0-/-0-
Capital Ventures
International 177,150 155,160 53,333/61,538 447,181/114,871 -0-/-0-
Darissco Diversified
Investments Inc. -0- -0- 11,429/-0- 11,429/11,429 -0-/-0-
Faisal Finance
(Switzerland) -0- -0- 49,524/-0- 49,524/49,524 -0-/-0-
GAM Arbitrage Investments,
Inc. -0- -0- 7,619/-0- 7,619/7,619 -0-/-0-
Global Bermuda, L.P. 24,801 174,555 15,238/69,231 283,825/84,469 -0-/-0-
Gracechurch & Co. -0- -0- 38,095/-0- 38,095/38,095 -0-/-0-
KA Investments LDC 31,887 -0- 11,429/-0- 43,316/11,429 -0-/-0-
Lake Management LDC -0- 193,950 38,095/38,462 270,507/76,557 -0-/-0-
Lakeshore International
Ltd. -0- 135,765 -0-/53,846 189,611/53,846 -0-/-0-
Leonardo, L.P. -0- -0- 53,333/-0- 53,333/53,333 -0-/-0-
Olympus Securities Ltd. 354,300 -0- 76,191/-0- 430,491/76,191 -0-/-0-
Queensway Financial
Holdings -0- 193,950 22,857/38,462 255,269/61,319 -0-/-0-
Rana Investment Company 14,172 -0- 34,286/-0- 48,458/34,286 -0-/-0-
Raphael, L.P. -0- -0- 7,619/-0- 7,619/7,619 -0-/-0-
RIC Investment Fund Ltd. -0- -0- 34,286/-0- 34,286/34,286 -0-/-0-
Richcourt $ Strategies,
Inc. -0- -0- 26,667/-0- 26,667/26,667 -0-/-0-
Santander Merchant Bank,
Ltd. -0- 387,900 -0-/153,846 541,746/153,846 -0-/-0-
Swartz Investments, LLC -0- -0- 330,159/214,615 544,774/544,774 -0-/-0-
The Gifford Fund Ltd. -0- 193,950 38,095/38,462 270,507/76,557 -0-/-0-
The Matthew Fund N.V. 70,860 193,950 15,238/38,462 318,510/53,700 -0-/-0-
The Otato Limited
Partnership -0- 96,975 38,095/0 135,070/38,095 -0-/-0-
The Tail Wind Fund, Ltd. -0- 116,370 -0-/-0- 116,370/-0- -0-/-0-
Windward Island Limited -0- -0- 38,095/0 38,095/38,095 -0-/-0-
Wood Gundy London Ltd. -0- -0- 38,095/0 38,095/38,095 -0-/-0-
------- --------- ----------------- ------------------- -------
Total 673,170 2,036,475 1,092,064/745,386 6,351,159/1,837,450 -0-/-0-
======= ========= ================= =================== =======
_______________
</TABLE>
/(1)/ Energy Corporation is a holding company whose only assets are the
shares of the Company's Common Stock being held for distribution to its
shareholders. See "PLAN OF DISTRIBUTION" and "BUSINESS-Recent Acquisitions
and Transactions."
/(2)/ Assumes all holders of Series B Preferred Stock convert their shares
to Common Stock one year and one day after July 10, 1996, the last closing
date, in accordance with the conversion formula at a conversion price of
$3.9375 per share. See "DESCRIPTION OF SECURITIES-Preferred Stock").
/(3)/ Assumes all holders of Series C Preferred Stock convert their shares
to Common Stock one year and one day after December 16, 1996, the last
closing date, in accordance with the conversion formula at a conversion
price of $3.25 per share. See "DESCRIPTION OF SECURITIES-Preferred
Stock").
/(4)/ Includes the number of shares of Common Stock issuable upon
conversion of the Series B Preferred Stock and the Series C Preferred Stock
and underlying the Warrants offered hereby.
/(5)/ Assumes that all of the shares of Common Stock and Warrants being
offered hereby are sold by such Selling Shareholders unless otherwise
indicated. There is no assurance that the Selling Shareholders will sell
any or all of the Common Stock or Warrants offered pursuant to this
Prospectus.
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DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 100 million shares
of the Company's common stock, no par value per share (the "Common Stock"), and
10,000,000 shares of the Company's preferred stock, no par value per share. Of
the Preferred Stock, 210,000 shares of Series A Non-Dividend Bearing,
Convertible, Redeemable Preferred Stock ("Series A Preferred Stock"), 1,000
shares of the Series B Preferred Stock and 600 shares of the Series C Preferred
Stock have been reserved for issuance. No shares of the Series A Preferred
Stock are currently outstanding. In addition, the Company has Warrants
outstanding to purchase 1,837,450 shares of Common Stock.
COMMON STOCK
As of January 31, 1997, there were 17,795,021 shares of Common Stock issued
and outstanding. Holders of the Common Stock are entitled to one vote per share
of record on each matter submitted to a vote of shareholders, the right to
receive such dividends, if any, as may be declared by the Board of Directors out
of assets legally available therefor and the right to receive net assets in
liquidation after payment of all amounts due to creditors and any liquidation
preference due to Preferred Stock shareholders. Holders of Common Stock have no
conversion rights and are not entitled to any preemptive or subscription rights.
The Common Stock is not subject to redemption or any further calls or
assessments. The Common Stock has noncumulative voting rights in the election
of directors.
PREFERRED STOCK
SERIES B PREFERRED STOCK
General
As of January 31, 1997, there were 190 shares of Series B Preferred Stock
(the "Series B Preferred Stock") outstanding. Each share of Series B Preferred
Stock is currently convertible at the option of the holder into Common Stock.
In general, each share of Series B Preferred Stock is convertible into
shares of Common Stock pursuant to the following formula: (1,000) x (N/365) +
10,000/Conversion Price (with N being the number of days that have expired
between the date of conversion and July 10, 1996, and the "Conversion Price"
being the lessor of: $3.9375 or 85% of average closing bid price (the "Closing
Bid Price") of the Common Stock for the 5 trading days immediately preceding the
date of conversion). Each holder is also entitled to convert shares of the
Series B Preferred Stock pursuant to the above formula with the Conversion Price
equal to the closing bid price on the over-the-counter market on the date of
conversion. Under the latter method, the Company may elect to redeem the shares
of Series B Preferred Stock offered for conversion where the Conversion Price
is less than $3.9375 per share of Common Stock on the conversion date pursuant
to the following formula (the "Redemption Formula"):
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Closing Bid Price on Date of Conversion
1,000 x (N/365) = 10,000 x --------------------------------------
Conversion Price
The Company also has the right to redeem the Series B Preferred Stock on or
after July 11, 1997, provided that the Company purchases Series B Preferred
Stock with an aggregate value $1,500,000 (using the Original Issuance Price, as
defined below), for a price equal to 130% of the Stated Value (Original Issuance
Price plus any accrued and unpaid Premium as defined below) of the shares of the
Series B Preferred Stock being redeemed for the first 18 months, which
percentage is decreased by 5% for every 6 month period that expires thereafter.
The holders of the Series B Preferred Stock are not entitled to receive
dividends thereon and shall have no voting power whatsoever, except as otherwise
provided by the Colorado Business Corporation Act (which generally provides
voting rights for any action that directly adversely affects the rights of the
holders of the Series B Preferred Stock). In the event of any liquidation,
dissolution or winding up of the Company with respect to distributions of assets
upon liquidation, dissolution or winding up of the Company's affairs
(collectively "Distributions"), the holders of Series B Preferred Stock shall be
entitled to receive, after any Distribution to senior securities, if any, and
prior to any Distribution to any junior securities (including holders of Common
Stock) the sum of $10,000 per share (the "Original Issuance Price") and an
amount equal to ten percent (10%) of the Original Issuance Price (the "Premium")
per annum for the period that has passed since July 10, 1996. In addition, at
the option of each holder of Series B Preferred Stock, a sale, conveyance or
disposition of substantially all of the assets of the Company or the
effectuation by the Company of a transaction, or series of transactions, in
which more than 50% of the voting power of the Company is disposed of, shall be
deemed to be a liquidation, dissolution or winding up as set forth above.
So long as shares of Series B Preferred Stock are outstanding, the Company
may not, without the written approval of the holders of at least 75% of the then
outstanding shares of Series B Preferred Stock (i) alter or change the rights,
preferences or privileges of the Series B Preferred Stock or any senior
securities, if any, that would adversely effect the holders of the Series B
Preferred Stock, and (ii) create any class or series of capital stock having a
preference over or on parity with the Series B Preferred Stock with respect to
Distributions.
Regulation S Subscription Agreement
The Regulation S Subscription Agreement (the "Subscription Agreement")
under which shares of the Series B Preferred Stock were sold, granted the
holders of the Series B Preferred Stock certain additional rights, which
include, among others, the following:
Subscriber's Rights in the Event Shares Issued with a Restrictive Legend.
Generally, in the event the Company issues shares of Common Stock with a
restrictive legend upon conversion by the holder of Series B Preferred Stock,
then the holder of Common Stock, at its option, may
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<PAGE>
require the Company immediately to either (i) redeem the Series B Preferred
Stock submitted for conversion at the redemption price determined under the
Redemption Formula or (ii) demand (without any other holder's participation)
that the Company file a registration statement under the Securities Act covering
the registration of the Common Stock which has been issued with such restrictive
legend and the Common Stock issuable upon conversion of such holders's remaining
Preferred Stock then outstanding pursuant to the terms of the Registration
Agreement (as defined below).
Payments for Failure to Register. The Company shall pay to a holder who
has demanded registration, as set forth above, an amount equal to five percent
(5%) per month of the Original Issue Price of such holders's shares of Series B
Preferred Stock that were outstanding immediately prior to the delivery of the
notice of conversion, compounded monthly and accruing daily, payable in cash by
the fifth (5th) day of the month following such demand and the fifth (5th) day
of each month thereafter (i) if a demand registration is not effective, or (ii)
if the Company has not re-issued and delivered to the holder of Series B
Preferred Stock shares of Common Stock without a restrictive legend, whichever
is earlier.
Capital Raising Limitations. The Company also agreed to provide the Series
B shareholders with a right of first refusal in proportion to the percentage of
Series B Preferred Stock purchased in the Series B Offering for any offering
conducted within 240 days of July 10, 1996, (the limitations referred to in this
paragraph are collectively referred to as the "Capital Raising Limitation"). In
general, the Capital Raising Limitation does not apply to any transaction
involving the Company's commercial banking arrangements or issuances of
securities in connection with a merger, consolidation or purchase or sale of
assets, or exercise of options by employees, consultants or directors or any
transaction with a strategic corporate partner.
SERIES C PREFERRED STOCK.
General
As of January 31, 1997, there were 525 shares of Series C Preferred Stock
(the "Series C Preferred Stock") outstanding. Each share of Series C Preferred
Stock is convertible at the option of the holder into Common Stock as described
below during the following periods: (i) up to 20% of the Series C Preferred
Stock initially issued to the holder at any time on and after April 16, 1997;
and (ii) an additional 20% per month on the 16th day of each month thereafter;
provided, however, that the holder of the Series C Preferred Stock may not
convert more than 25% of the aggregate Series C Preferred Stock initially issued
to such holder in any given one month period beginning on April 16, 1997 and
ending on August 16, 1997.
In general, each share of Series C Preferred Stock is convertible into
shares of Common Stock pursuant to the following formula (the "Conversion
Formula"): (800) x (N/365) + 10,000/Conversion Price (with N being the number of
days that have expired between the date of conversion and December 16, 1996, and
the "Conversion Price" being the lessor of: $3.25 (the "Fixed Conversion Price")
or 85% of average closing bid price (the "Closing Bid Price")
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<PAGE>
of the Common Stock for the 5 trading days immediately preceding the date of
conversion (the "Variable Conversion Price")). If at the time of conversion the
Variable Conversion Price is less than the Fixed Conversion Price, the Company
may elect, in its sole discretion, to redeem each share of Series C Preferred
Stock offered for conversion in an amount equal to the Stated Value ($10,000
plus any Accrued Premium, as defined below) x 117.60%.
The Company also has the right to redeem the Series C Preferred Stock on or
after December 16, 1997, provided the Company purchases at least $1,500,000 of
Series C Preferred Stock (based on the Original Issuance Price defined below)
for a price equal to 130% of the Original Issuance Price for the first 18
months. For each six months thereafter, the redemption percentage decreases by
5% until the expiration of three years.
Each share of Series C Preferred Stock outstanding on December 16, 1999,
automatically shall either be converted in accordance with the Conversion
Formula or, if the Company provides the holders of the Series C Preferred Stock
with a notice of redemption by December 11, 1999, at the Original Issuance Price
plus an accrued premium of 8% per year (the "Accrued Premium").
The holders of the Series C Preferred Stock are not entitled to receive
dividends and shall have no voting power, except as otherwise provided by the
Colorado Business Corporation Act. In the event of any liquidation, dissolution
or winding up of the Company (a "Liquidation Event"), the holders of Series C
Preferred Stock shall be entitled to receive, after any distribution to the
holders of the Series B Preferred Stock and other senior securities, if any, and
prior to any Distribution to any junior securities (including holders of Common
Stock) the sum of $10,000 per share (the "Original Issuance Price") and the
Accrued Premium. At the option of each holder of Series C Preferred Stock, a
sale, conveyance or disposition of substantially all of the assets of the
Company or the effectuation by the Company of a transaction, or series of
transactions, in which more than 50% of the voting power of the Company is
disposed of, will generally be deemed to Liquidation Event.
So long as shares of Series C Preferred Stock are outstanding, the Company
may not, without the written approval of the holders of at least 75% of the then
outstanding shares of Series C Preferred Stock (i) alter or change the rights,
preferences or privileges of the Series C Preferred Stock or any senior
securities, if any, that would adversely effect the holders of the Series C
Preferred Stock, and (ii) create any class or series of capital stock having a
preference over or on parity with the Series C Preferred Stock with respect to
Distributions; (iii) cause the holders of the Series C Preferred Stock to be
taxed under Section 305 of the Internal Revenue Code; or (iv) issue any
additional shares of Series C Preferred Stock.
Regulation D Subscription Agreement
The Regulation D Subscription Agreement (the "Subscription Agreement")
under which shares of the Series C Preferred Stock were sold, granted the
holders of the Series C Preferred Stock certain additional rights, which
include, among others, the following:
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Payments for Failure to Register. The Company shall pay to a holder who
has demanded registration an amount in Common Stock equal to two percent (2%)
per month of the amount of Series C Preferred Stock sold to the holder in the
offering, compounded monthly and accruing daily until the registration statement
is declare effective. In addition, if the Company is unable to issue Common
Stock upon conversion of the Series C Preferred Stock or upon exercise of the
Series C Warrants, and is unable to cure the default within 75 days, the Company
shall pay a Conversion Default Payment equal to: (N/365) x (.24) x the sum of
the Original Issuance Price of all shares of Series C Preferred Stock held by
each holder (where N equals the number of days from the date of default to the
date that the Company cures the default).
Capital Raising Limitations. The Company shall not issue any debt or
equity securities for cash in capital raising transactions ("Future Offerings")
for a period beginning on December 16, 1996 and ending one hundred twenty (120)
days thereafter without obtaining the prior written approval of the holders
holding a majority of the purchase price of Series C Preferred Stock then
outstanding. The Company also agreed to provide the Series C shareholders with
a right of first refusal in proportion to the percentage of Series C Preferred
Stock purchased in the Series C Offering for any offering conducted within 240
days of December 16, 1996, (the limitations referred to in this paragraph are
collectively referred to as the "Capital Raising Limitation"). In general, the
Capital Raising Limitation does not apply to any transaction involving the
Company's commercial banking arrangements or issuances of securities in
connection with a merger, consolidation or purchase or sale of assets, or
exercise of options by employees, consultants or directors or any transaction
with a strategic corporate partner.
Miscellaneous Provisions
Assuming all shares of Preferred Stock currently issued and outstanding are
converted during the term of this Offering, the Company will be authorized to
issued up to an additional 10,000,000 shares of Preferred Stock. The Board of
Directors has authority to issue the Preferred Stock in one or more series and
to fix the number of shares constituting any such series, and the voting powers,
designations, preferences, and relative participating, optional or other special
rights and qualifications, limitations or restrictions thereof, including the
dividend rights, dividend rate, terms of redemptions, redemption prices,
conversions and voting rights, and liquidation preferences, without any further
vote or action by the holders of the Common Stock.
Although the Board of Directors currently has no intention of doing so, its
authority to issue preferred stock, without further vote or action by the
holders of the Common Stock, could be used to discourage attempts by others to
obtain control of the Company through a merger, tender offer, proxy or consent
solicitation, or otherwise, by making such attempts more difficult to achieve
and more costly. The Board of Directors may also issue preferred stock with
voting rights that could adversely affect the voting power of the then existing
holders of Common Stock. There are currently no agreements or understandings
for the issuance of additional
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<PAGE>
preferred stock, and the Board of Directors has no present intention of issuing
any additional shares of preferred stock.
Reference is made to the Company's Articles of Incorporation, as amended
(which is filed as an exhibit to the Registration Statement) for a complete
description of the terms and conditions of the Preferred Stock and the
description of the Preferred Stock contained herein is qualified in its entirety
by reference thereto.
WARRANTS
GENERAL. As of January 31, 1997, 24 persons held Warrants to purchase an
aggregate of 1,092,064 shares of Common Stock at an exercise price of $3.9375
per share (the "Class B Warrants"), and 10 persons held Warrants to purchase an
aggregate of 745,386 shares of Common Stock at an exercise price of $3.25 per
share (the "Class C Warrants" and together with the Class B Warrants, the
"Warrants"), subject to adjustments in certain events. The Warrants may be
exercised at any time commencing on October 14, 1996 and ending at 5:00 p.m.
Eastern time, on July 1, 2001 for the Class B Warrants and June 1, 1997 and
ending at 5:00 p.m. Eastern time on November 30, 2001 for the Class C Warrants.
If all Warrants are exercised, the Company will receive proceeds of
approximately $6,722,506 million.
The Warrants may also be exercised pursuant to a cashless exercise
procedure. The cashless exercise procedure is not available if shares of Common
Stock to be issued upon such exercise would be (i) immediately transferable,
free of restrictive legend under Rule 144 of the Securities Act; (ii) then
registered pursuant to an effective registration statement under Registration
Rights Agreement (hereinafter defined); or (iii) otherwise registered under
Securities Act. The Company has registered all shares of Common Stock issuable
upon exercise of the Warrants for sale under the Registration Statement of which
this Prospectus is a part. Therefore, the cashless exercise procedure will be
unavailable after the time the Registration Statement is declared effective.
The exercise price and number of shares of Common Stock or other securities
issuable on exercise of the Warrants are subject to adjustment in certain
circumstances, including in the event of a stock dividend, recapitalization,
reorganization, merger or consolidation or the Company's distribution to the
holders of Common Stock cash, evidences of indebtedness or other securities or
assets (other than cash dividends or distributions payable out of earned surplus
or net profits for the current or preceding year) of the Company.
The Company will not issue fractional shares or scrip representing
fractional shares of Common Stock upon exercise of the Warrant. If, on exercise
of the Warrant, the holder would be entitled to a fractional share of Common
Stock or a right to acquire a fractional share of Common Stock, such fractional
share shall be disregarded and the number of shares of Common Stock issuable
upon conversion shall be the next higher number of shares.
86
<PAGE>
Reference is made to the Warrant Agreements (which are filed as exhibits to
the Registration Statement) for a complete description of the terms and
conditions of the Warrants and the description of the Warrants contained herein
is qualified in its entirety by reference thereto.
REGISTRATION RIGHTS AGREEMENT
The Registration Rights Agreements for the Series B Preferred Stock and the
Series C Preferred Stock (the "Registration Agreement") grants certain
registration, demand and piggyback registration rights to the holders of the
Preferred Stock and applies to shares of the Common Stock issuable upon
conversion of the Preferred Stock and upon exercise of the Warrants. The Common
Stock subject to the Registration Agreement is referred to herein as "Registered
Securities."
The Registration Agreement requires the Company to file a registration
statement (the "Initial Registration Statement") by October 8, 1996 (the "Series
B Due Date") and January 16, 1997 which must become effective by April 16, 1997
(the "Series C Due Date" and together with the Series B Due Date, the "Due
Date"). Any holder of Registerable Securities may elect not to have their
shares included in the registration statement. Such holder (together with
holders owing at least 25% of the Registerable Securities) may, after expiration
of the Due Date, require the Company to effect a Demand Registration (as defined
below) or at any time following the Due Date to have their shares included in a
registration statement subsequently filed by the Company (a "Piggyback
Registration").
If the registration statement is not filed by the Due Date, at least 25% of
the shareholders owning Registerable Securities may demand that the Company file
a registration statement under the Securities Act (a "Demand Registration"). To
date neither the holders of the Series B Preferred Stock or Series C Preferred
Stock have requested a Demand Registration.
In the event any Registrable Securities are included in a registration
statement of the Company, to the extent permitted by law, the Company and the
holders of the Preferred Stock and Warrants have agreed to indemnify and hold
harmless each other against any losses, claims, damages, expenses, or
liabilities (joint or several) (hereinafter referred to singularly as "Loss" and
collectively as "Losses") to which they may become subject under the Securities
Act, the Securities Exchange Act of 1934, as amended, or other federal or state
law, insofar as such Losses (or actions in respect thereof) arise out of or are
based upon any of the following statements, omissions or violations.
If the Initial Registration Statement required is not filed on or prior to
the Due Date or, with respect to holders of the Series B Preferred Stock, if a
Demand Registration is not effective within ninety (90) days of demand or if the
Company fails to respond to any request for information from the Securities and
Exchange Commission related to such registration statement within fifteen (15)
days of such request, then the Company shall pay to all holders of outstanding
Preferred Stock an aggregate amount equal to two percent (2%) per month of the
aggregate
87
<PAGE>
amount of Preferred Stock sold in the Regulation S Offering or Resolution D
Offering, compounded monthly, and accruing daily, payable in Common Stock.
With respect to Holders of the Series B Preferred Stock, if the Company is
not eligible to effect a registration statement under Form S-1 or SB-2 or S-3 or
other appropriate registration statement at the time of a Demand Registration
under the terms of the Registration Agreement, solely through the act or failure
to act by the Company, the Company shall pay the holders of outstanding
Preferred Stock an amount equal to the "Conversion Default Payment" for each day
beyond sixty (60) days on the receipt of the request for a Demand Registration
until such registration statement is effective. In addition, if, on the date
that the Preferred Stock becomes eligible for conversion into Common Stock or
the Warrants are exercisable, the Common Stock is not listed on the OTC Bulletin
Board or other national stock exchange or automated quotation system, then the
Company shall pay to all holders of outstanding Preferred Stock an aggregate
penalty equal to the amount of the Conversion Default Payment.
The Conversion Default Payment is equal to the amount of (N/365) x (.24) x
the sum of the Original Issuance Price of all shares of Series B Preferred Stock
held by each holder (where N equals the number of days from the date of default
to the date that the Company cures the default).
TRANSFER AGENT AND REGISTRANT
The transfer agent and registrar for the Common Stock is Corporate Stock
Transfer, Inc., 870 Seventeenth Street, Suite 2350, Denver, Colorado 80202.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
22,342,116 shares of Common Stock (giving effect to the exercise of 1,837,450
Warrants, but assuming no exercise of outstanding stock options). Of these
shares, all of the 6,351,159 shares sold in the Offering will be freely
transferable by persons other than "affiliates" of the Company, without
restriction or further restriction under the Securities Act.
An aggregate of 1,816,668 shares of Common Stock are "restricted" or
"control" securities within the meaning of Rule 144 under the Securities Act and
may not be sold in the absence of registration under the Securities Act unless
an exemption from registration is available, including the exemption contained
in Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned his or her shares for at
least two years, including an "affiliate" of the Company (as that term is
defined under the Securities Act), is entitled to sell, within any three-month
period, the number of shares that does not exceed the greater of (i) 1% of the
then outstanding shares of Common Stock or (ii) the average weekly trading
volume of the then outstanding shares during the four calendar weeks preceding
each such sale. A person
88
<PAGE>
(or persons whose shares are aggregated) who is not deemed an "affiliate" of the
Company and who has beneficially owned shares for at least three years is
entitled to sell such shares under Rule 144 without regard to the volume
limitations described above. Affiliates, including members of the Board of
Directors and senior management, continue to be subject to such limitations.
The Company has filed a registration statement on Form S-8 to register
3,581,180 shares of Common Stock. The Company has reserved 7,000,000 shares of
Common Stock under its 1995 Compensatory Stock Option Plan. As of January 31,
1997, options to purchase 4,396,000 shares of Common Stock were outstanding.
Sales of substantial amounts of Common Stock in the public market, or the
perception that such sales could occur, could have an adverse impact on the
market price of the Common Stock.
LEGAL MATTERS
Certain legal matters with respect to the Common Stock will be passed upon
for the Company by Kutak Rock, Denver, Colorado.
The statements in the Prospectus under the captions "RISK FACTORS-
Uncertainty Regarding Protection of Proprietary Rights" and "BUSINESS-
Intellectual Property" have been reviewed by Michael A. Glenn, Esq., with
respect to the PI Technology, and Meschkow & Gresham, P.L.C., with respect to
the Antenna Technology, each of whom serves as patent counsel for the Company,
and are included herein in reliance upon that review.
EXPERTS
The financial statements and schedule of Intercell Corporation as of
September 30, 1996 and 1995 and for the year ended September 30, 1996 and the
eleven month period ended September 30, 1995 have been included herein and in
the registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of the Company as of October 31, 1994
included in this Prospectus and Registration Statement have been audited by Mark
Shelley, CPA, to the extent and for the periods indicated in their report, and
are included in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy
89
<PAGE>
statements and other information with the Securities and Exchange Commission
(the "Commission"). Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the following Regional Offices of the Commission: Northeast
Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048; and
Midwest Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can be obtained from the
Public Reference Section of the Commission, Washington, D.C. 20549 upon payment
of prescribed fees. Such reports, proxy statements and other information may
also be inspected at the offices of The National Association of Securities
Dealers, 1735 K Street, N.W., Washington, D.C. 20006, which supervises the
NASDAQ system in which the Common Stock is traded. In addition, the Commission
maintains a worldwide web site that contains reports, proxy and information
statements and other information regarding the Company, which the Company is
required to file electronically with the Commission, at the following internet
address: http://www.sec.gov.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on
Form S-1, including amendments thereto, relating to the Common Stock and
Warrants offered hereby (the "Registration Statement"). This Prospectus, which
is a part of the Registration Statement, does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules thereto.
For further information with respect to the Company and the Common Stock and
Warrants offered hereby, reference is hereby made to the Registration Statement
and the exhibits and schedules filed as a part thereof, which may be obtained
from the Commission in the manner set forth above. Statements contained in this
Prospectus concerning the provisions or contents of any contract, agreement or
any other document referred to herein are not necessarily complete. With
respect to each such contract, agreement or document filed as an exhibit to the
Registration Statement, reference is made to such exhibit for a more complete
description of the matters involved, and each statement shall be deemed
qualified in its entirety by such reference to the copy of the applicable
document filed with the Commission.
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<PAGE>
GLOSSARY
The following are definitions of certain technical terms used in this
Prospectus.
"AM" amplitude modulation, which means the encoding of an electromagnetic
wave by variation of its amplitude in accordance with its input signal.
"Antenna Systems" means the Company's products developed using the Antenna
Technology.
"Antenna Technology" means the technology included within the scope of
patent applications assigned to the Company from Arizona State University.
"Analog Transmission" means the transmission of information in continuous
form which is transmitted by electrical signals. This is the traditional method
of modulating radio signals so that they can carry information. AM (amplitude
modulation) and FM (frequency modulation) are the two most common methods of
analog modulation.
"Anode" means a positively charged electrode.
"Ball Grid Array" or "BGA" means an advanced IC package in which the
silicon die is attached to a high density substrate which is in turn placed on
an array of small solder balls forming the base of the package. The Ball Grid
Array is soldered directly to an electronic circuit, without using pins or wire
leads coming out of the perimeter of the package.
"Band Width" means a relative range of frequencies that can carry a signal
without distortion on a transmission medium.
"Cathode" means a negatively charged electrode.
"Die" see "IC" and "IC Package."
"Dielectric" means a nonconductive material, such as a plastic film or
coating used to provide an insulating layer on a printed circuit or other
substrate.
"Digital Transmission" means the conversion of voice communications to
computer binary language of zeros and ones. Digital transmission offers a
cleaner signal and solves many of the problems that plague analog such as fading
and static.
"Electrode" means a conductor through which an electric current passes.
"Electron Gun" is an electron-emitting cathode and its surrounding assembly
for directing, controlling and forcing a stream of electrons to a target. It is
sold separately for use as an electron source in medical linear accelerators for
generation of high energy x-rays.
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<PAGE>
"Electron Power Tubes" or "Electron Tubes" are enclosed tubes, in which
electrons act as the principal conductors of current between at least two
electrodes. Electron tubes fall into two categories, oscillators and
amplifiers. Oscillators are typically magnetrons and power grid tubes (triodes
and tetrodes) and amplifiers are klystrons and traveling wave tubes.
"External Antenna" means the Company's Antenna System that will be used as
an aftermarket "retrofit" on existing cellular phones.
"Flexible Circuit" is a circuit manufactured from a Flexible Laminate.
Flexible circuits can be single-sided, double-sided or multi-layer.
"FM" means frequency modulation, which operates through the encoding of a
electromagnetic wave by variation of its frequency in accordance with its input
signal.
"Frequency" means a measure of the energy, as one or more waves per second,
in an electrical or lightwave information signal. A signal's frequency is
stated in either cycles-per-second or Hertz.
"GHz" means gigahertz (one billion cycles per second).
"Hertz" or "Hz" means a measurement of electromagnetic energy, equivalent
to one "wave" or one cycle per second.
"High Density Substrate" are electronic circuits manufactured from thin
film flexible laminates with very thin circuit traces down to 1 millimeter
(.001").
"High Power and High Frequency Triode Tubes and Tetrode Tubes" is an
electron tube with three electrodes: an anode, a cathode and a controlling grid.
Tetrode Tubes are similar to triode tubes except that it has four electrodes: an
anode, cathode, a control grid and an additional grid. Tetrodes and triodes are
used in RF induction heaters in the steel industry, AM-FM radio communications,
plastic sealing units, wood gluing units, silicone crystal growing, induction
heat treating of gears and other metals requiring hardening, environmental
vibration tables and numerous other applications.
"IC" and "IC Package" means an integrated circuit, which is a type of
semiconductor in which a number of transistors and other elements are combined
to form a more complicated circuit. These elements are fabricated in a small
chip of silicon, known as a "silicon die," which is attached to a substrate and
then encased in plastic, ceramic or other advanced forms of packaging to prevent
damage and facilitate handling. This package is known as an IC package.
"Interconnect" and "Interconnect Products" means a circuit used to provide
electrical connection between components and electronic systems and also as a
substrate to support electronic devices. Interconnect products are those
products or methods of connection used to
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<PAGE>
connect electrical components (e.g., a computer chip) to other substrates (e.g.,
a printed circuit board) which are required to operate electronic equipment.
"Internal Antenna" means the Company's Antenna System that is internally
incorporated into cellular phones and has no external antenna.
"KHz" means kilohertz (one thousand cycles per second).
"Klystron Tube" is an electron tube in which bunching of electrons is
produced by electric fields, which are then used for the amplification of
microwave energy. Klystron tubes (both external cavity and internal cavity) are
commonly used in UHF television transmission, medical and nonmedical
accelerators, and navigational equipment.
"Linear Accelerator" is a device in which charged particles are accelerated
in a straight line by successive impulses from a series of electric fields. One
of the principal uses of linear accelerators is in the medical field for the
generation of high energy x-rays for therapeutic treatment of tumors.
"Magnetron Tube" is a vacuum tube in which the flow of electrons is
controlled by an exterior applied magnetic field to generate power at microwave
frequencies (400 MHz to 18 GHz). The principal use of magnetrons is in
industrial microwave cooking and heating units. Some of the applications are:
drying foods such as pasta; pre-cooking bacon, potato chips and snacks; thawing
of meats and butter; processing chicken: dewater oil and heat, and reprocess
asphalt. Pulsed X-Band Magnetrons are used in radar and accelerator
applications.
"MHz" means megahertz (one million cycles per second).
"Micro-Strip Antenna" means an antenna that does not use wires like a
conventional antenna, but rather transmits data through a transmission line
configuration which consists of a substrate.
"Multi-Chip Module" or "MCM" is a high performance IC package containing
more than one silicon die on a single high density substrate.
"Near Field Radiation" means radiation within a few feet of the Antenna.
"OEMs" means original equipment manufacturers.
"Panel" as used in the electronic industry means the substrate used to
mount, package or attach electronic devices.
"Particle Interconnect Products" means products produced using the PI
Technology.
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<PAGE>
"PI Technology" means the particle interconnect technology described and
covered by certain patents and patent applications assigned to the Company by
Particle Interconnect, Inc.
"Printed Circuit" is a generic term referring to a circuit fabricated by
transferring a circuit pattern to a copper or other laminate through imaging,
etching and plating processes.
"Proprietary Electroplating Process" means the Company's proprietary trade
secret electroplating process used to manufacture the Particle Interconnect
Products.
"RF" means radio frequency.
"Silicon Die" see "IC" above.
"Substrate" means a material that provides a supporting surface.
"Vacuum Tube" means an electron tube having an internal vacuum sufficiently
high to permit electrons to move with low interaction with any remaining gas
molecules.
"UHF" means ultra high frequency.
"VHF" means very high frequency.
"Wireless" means a radio-based system allowing transmission of telephone
and/or data signals through the air without a physical connection, such as a
metal wire or fiber optic cable.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 1996,
THE ELEVEN MONTH PERIOD ENDED SEPTEMBER 30, 1995,
AND THE YEAR ENDED OCTOBER 31, 1994
INTERCELL CORPORATION
Page
----
Independent Auditors' Reports......................................... F-2, F-3
Consolidated Balance Sheets - September 30, 1996 and
September 30, 1995.................................................... F-4
Consolidated Statements of Operations - Year ended September 30, 1996,
Eleven-month period ended September 30, 1995 and the Year ended
October 31, 1994...................................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit) -
Year ended September 30, 1996, Eleven-month period ended
September 30, 1995 and the Year ended October 31, 1994................ F-6
Consolidated Statements of Cash Flows - Year ended September 30, 1996,
Eleven-month period ended September 30, 1995 and the Year
ended October 31, 1994................................................ F-7
Notes to Consolidated Financial Statements................................ F-8
Schedule II - Valuation and Qualifying Accounts........................... F-23
The remaining schedules for which provision is made in Regulation S-X are
not required under the instructions contained therein, are inapplicable, or
the information required is included in the financial statements or
footnotes.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Intercell Corporation:
We have audited the accompanying consolidated balance sheets of Intercell
Corporation and subsidiaries (the Company), formerly Modern Industries, Inc. and
subsidiaries, as of September 30, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year ended
September 30, 1996, and for the eleven-month period ended September 30, 1995.
In connection with our audits of the aforementioned consolidated financial
statements, we also have audited the financial statement schedule as listed in
the accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Intercell
Corporation and subsidiaries as of September 30, 1996 and 1995, and the results
of their operations and their cash flows for the year ended September 30, 1996,
and for the eleven-month period ended September 30, 1995, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
San Jose, California
December 6, 1996
F-2
<PAGE>
MARK SHELLEY, CPA
110 S. Mesa Drive #31
Mesa, Arizona 85210
(602) 833-4054
INDEPENDENT AUDITOR'S REPORT
The Shareholders and Board of Directors
Intercell Corporation:
I have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows for the year ended October 31, 1994 of
Intercell Corporation and subsidiary, formerly Modern Industries, Inc. and
subsidiaries, (the Company). These consolidated financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these consolidated financial statements based on my audit.
I have conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I 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.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows for the year ended October 31, 1994 of Intercell Corporation and
subsidiary in conformity with generally accepted accounting principles.
This updated report above and corresponding financial statements do not
include the balance sheet of the Company as of October 31, 1994. This balance
sheet is not required to be included in the current 1996 filings. This balance
sheet was included in previous filings of the Company. At those times an
unqualified opinion was given for the October 31, 1994 balance sheet.
/s/ Mark Shelley, CPA
March 14, 1995
Updated December 31, 1996
F-3
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30,
--------------
Assets 1996 1995
- ------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,224,000 57,000
Short-term investments 3,063,000 -
Accounts receivable, less allowance for returns
and doubtful accounts of $255,000 and $81,000
in 1996 and 1995, respectively 746,000 637,000
Inventories 1,066,000 773,000
Prepaid expenses and other current assets 102,000 79,000
Investment land held for sale 1,424,000 -
Equipment held for sale - 250,000
----------- ----------
Total current assets 10,625,000 1,796,000
Property, plant, and equipment, net 1,418,000 885,000
Goodwill and other intangible assets, net 1,583,000 388,000
Other assets 200,000 -
----------- ----------
$13,826,000 3,069,000
=========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Loan payable to bank $ - 190,000
Note payable 266,000 71,000
Notes payable to related parties 932,000 495,000
Current portion of long-term debt 120,000 2,000
Accounts payable and accrued liabilities 742,000 829,000
Accounts payable to related parties - 212,000
----------- ----------
Total current liabilities 2,060,000 1,799,000
Long-term debt, less current portion 86,000 48,000
Commitments
Stockholders' equity:
Convertible preferred stock; 10,000,000 shares
authorized:
Series A; 210,000 shares issued and outstanding
as of September 30, 1995 - 250,000
Series B; 787 shares issued and outstanding
as of September 30, 1996 (liquidation preference
of $10,225 per share) 5,533,000 -
Warrants to acquire common stock 1,870,000 -
Common stock; no par value; 100,000,000 shares
authorized;
15,734,229 and 10,409,244 shares outstanding,
respectively 12,187,000 3,109,000
Deferred compensation (331,000) -
Accumulated deficit (7,579,000) (2,137,000)
----------- ----------
Total stockholders' equity 11,680,000 1,222,000
----------- ----------
$13,826,000 3,069,000
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Eleven-month
Year ended period ended Year ended
September 30, September 30, October 31,
1996 1995 1994
-------------- ------------- ------------
<S> <C> <C> <C>
Net sales $ 3,405,000 3,768,000 2,066,000
Cost of goods sold 2,830,000 2,884,000 1,208,000
----------- ---------- ---------
Gross profit 575,000 884,000 858,000
Selling, general, and
administrative expenses 5,683,000 1,317,000 1,182,000
Research and development 88,000 - -
----------- ---------- ---------
Operating loss (5,196,000) (433,000) (324,000)
Other income (expense):
Interest income 36,000 - -
Interest expense (90,000) (88,000) (3,000)
Loss on investments - (795,000) -
Other (33,000) (3,000) (16,000)
----------- ---------- ---------
(87,000) (886,000) (19,000)
----------- ---------- ---------
Loss before income taxes (5,283,000) (1,319,000) (343,000)
Income taxes - 2,000 19,000
----------- ---------- ---------
Net loss $(5,283,000) (1,321,000) (362,000)
Deemed Preferred Stock Dividend
relating to in-the-money
conversion terms 1,624,648 -- --
----------- --------- -------
Net loss applicable to
common stockholders (6,907,648) (1,321,000) (362,000)
=========== ========== =========
Net loss per common share $(.54) (.18) (.08)
=========== ========== =========
Weighted average number of shares
of common stock outstanding 13,072,683 7,391,275 4,828,007
=========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Year ended September 30, 1996, eleven-month period ended
September 30, 1995, and year ended October 31, 1994
<TABLE>
<CAPTION>
Convertible
preferred stock Warrants Common stock Additional
------------------------ to acquire ------------------------ paid-in
Shares Amount common stock Shares Amount capital
---------- ----------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances as of October 31, 1993 - $ - - 2,352,081 $ 7,000 242,000
Conversion of debt to equity - - - 676,777 2,000 473,000
Shares issued in exchange for prepaid
promotion - - - 35,637 - 50,000
Shares issued in exchange for consulting
services - - - 14,255 - 20,000
Acquisition of California Tube Laboratory,
Inc. - - - 762,031 2,000 1,067,000
Employment contract buy out - - - 222,572 1,000 311,000
Shares issued in exchange for microwave
technology - - - 178,188 500 250,000
Shares issued in exchange for services - - - 178,188 500 69,000
Purchase of treasury stock - - - - - (206,000)
Net loss - - - - - -
--------- ----------- ------------ ---------- ----------- ----------
Balances as of October 31, 1994 - - - 4,419,729 13,000 2,276,000
Shares issued in lieu of interest payment
to related party - - - 17,819 - 13,000
Shares issued in exchange for
investment in American Microcell - - - 712,751 2,000 498,000
Shares issued in private placement - - - 85,530 - 60,000
Contribution to ESOP - - - 176,362 1,000 246,000
Conversion of additional paid-in capital
to common stock - - - - 3,093,000 (3,093,000)
Acquisition of Intercell 210,000 250,000 - 4,997,053 - -
Net loss - - - - - -
--------- ----------- ------------ ---------- ----------- ----------
Balances as of September 30, 1995 210,000 250,000 - 10,409,244 3,109,000 -
Repurchase of shares of Series A
preferred stock (210,000) (250,000) - - - -
Shares of Series B preferred stock
and warrants issued in private
placement, net of issuance costs of
$1,100,000 1,000 7,030,000 1,870,000 - - -
Shares issued in exchange for land - - - 400,000 1,000,000 -
Contribution to ESOP - - - 126,761 158,000 -
Shares issued to effect business
combination with Particle Interconnect,
Inc. treated as an immaterial pooling - - - 1,400,000 8,000 -
Deferred compensation related to stock
option grants - - - - 4,017,000 -
Amortization of deferred compensation - - - - - -
Exercise of stock options - - - 2,295,180 1,342,000 -
Conversion of Series B preferred stock
to common stock (213) (1,497,000) - 588,880 1,497,000 -
Shares issued in exchange for services - - - 236,386 56,000 -
Shares to be issued for acquisition of
M.C. Davis - - - 277,778 1,000,000 -
Net loss - - - - - -
--------- ----------- ------------ ---------- ----------- ----------
Balances as of September 30, 1996 787 $ 5,533,000 1,870,000 15,734,229 $12,187,000 -
========= =========== ============ ========== =========== ==========
Total
stockholders'
Deferred Accumulated equity
compensation deficit (deficit)
------------ ----------- -------------
<S> <C> <C> <C>
Balances as of October 31, 1993 - (454,000) (205,000)
Conversion of debt to equity - - 475,000
Shares issued in exchange for prepaid
promotion - - 50,000
Shares issued in exchange for consulting
services - - 20,000
Acquisition of California Tube Laboratory,
Inc. - - 1,069,000
Employment contract buy out - - 312,000
Shares issued in exchange for microwave
technology - - 250,500
Shares issued in exchange for services - - 69,500
Purchase of treasury stock - - (206,000)
Net loss - (362,000) (362,000)
-------- ---------- ----------
Balances as of October 31, 1994 - (816,000) 1,473,000
Shares issued in lieu of interest payment
to related party - - 13,000
Shares issued in exchange for
investment in American Microcell - - 500,000
Shares issued in private placement - - 60,000
Contribution to ESOP - - 247,000
Conversion of additional paid-in capital
to common stock - - -
Acquisition of Intercell - - 250,000
Net loss - (1,321,000) (1,321,000)
-------- ---------- ----------
Balances as of September 30, 1995 - (2,137,000) 1,222,000
Repurchase of shares of Series A
preferred stock - - (250,000)
Shares of Series B preferred stock
and warrants issued in private
placement, net of issuance costs of
$1,100,000 - - 8,900,000
Shares issued in exchange for land - - 1,000,000
Contribution to ESOP - - 158,000
Shares issued to effect business
combination with Particle Interconnect,
Inc. treated as an immaterial pooling - (159,000) (151,000)
Deferred compensation related to stock
option grants (4,017,000) - -
Amortization of deferred compensation 3,686,000 - 3,686,000
Exercise of stock options - - 1,342,000
Conversion of Series B preferred stock
to common stock - - -
Shares issued in exchange for services - - 56,000
Shares to be issued for acquisition of
M.C. Davis - - 1,000,000
Net loss - (5,283,000) (5,283,000)
-------- ---------- ----------
Balances as of September 30, 1996 (331,000) (7,579,000) 11,680,000
======== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Eleven-month
Year ended period ended Year ended
September 30, September 30, October 31,
1996 1995 1994
-------------- -------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(5,283,000) (1,321,000) (362,000)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 59,000 97,000 136,000
Loss on investments - 795,000 102,000
Loss on sale of property 36,000 - -
Common stock issued for interest, services 56,000 13,000 -
Accrual of ESOP contributions - 158,000 247,000
Amortization of deferred compensation 3,686,000 - -
Changes in operating assets and liabilities:
Accounts receivable 47,000 (167,000) 119,000
Inventories (28,000) (275,000) (208,000)
Prepaid expenses and other current assets 21,000 32,000 -
Accounts payable and accrued liabilities (79,000) 344,000 326,000
Accounts payable to related parties (212,000) 123,000 -
----------- ---------- --------
Net cash (used in) provided by operating
activities (1,697,000) (201,000) 360,000
----------- ---------- --------
Cash flows from investing activities:
Acquisition of property, plant, and equipment (273,000) (31,000) (19,000)
Acquisition of land (57,000) - -
Other assets (142,000) 9,000 (8,000)
Cash acquired in connection with acquisitions 167,000 - 262,000
Purchase of short-term investments (3,063,000) - -
Proceeds from sale of property 174,000 - -
----------- ---------- --------
Net cash (used in) provided by investing activities (3,194,000) (22,000) 235,000
----------- ---------- --------
Cash flows from financing activities:
Proceeds from (payments on) loan payable to bank (190,000) 190,000 -
Payments on notes payable to related parties (495,000) (460,000) -
Proceeds from notes payable - 110,000 -
Payments on note payable (71,000) (40,000) -
Proceeds from issuance of Series B preferred
stock and warrants 8,900,000 - -
Stockholders' repayment - - (175,000)
Proceeds from sale of common stock 1,342,000 60,000 -
Repayments of long-term debt (428,000) - -
----------- ---------- --------
Net cash provided by (used in) financing activities 9,058,000 (140,000) (175,000)
----------- ---------- --------
Net increase (decrease) in cash and cash equivalents 4,167,000 (363,000) 420,000
Cash and cash equivalents beginning of year/period 57,000 420,000 -
----------- ---------- --------
Cash and cash equivalents end of year/period $ 4,224,000 57,000 420,000
=========== ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996 and 1995 and October 31, 1994
(1) DESCRIPTION OF BUSINESS
General
Intercell Corporation (the Company or Intercell), is a Colorado corporation
that invests in companies in the technology industries.
Acquisition of Modern Industries, Inc.
In July 1995, Intercell entered into an Agreement and Plan of
Reorganization with Modern Industries, Inc. (Modern) a Delaware
Corporation. The Company issued 5,412,191 shares of common stock to Modern
in exchange for all of the assets and liabilities of Modern and its wholly
owned subsidiary, California Tube Laboratory, Inc. (CTL).
The 5,412,191 shares issued to Modern represented approximately 52% of the
Company's outstanding common stock upon completion of the transaction. As
such, the transaction was treated for financial reporting purposes as a
purchase of Intercell by Modern. The assets of Intercell have been
recorded at their estimated fair value at the date of acquisition and
Intercell's results of operations have been included in the consolidated
statements of operations subsequent to the date of the acquisition.
Modern's historical share amounts have been adjusted on a retroactive basis
in a manner similar to a reverse stock split.
Acquisition of California Tube Laboratory, Inc.
In May 1994, Modern acquired all of the issued and outstanding shares of
CTL for 762,031 shares of its common stock (valued at $1,069,000) and notes
payable to two major stockholders of CTL for $956,000. Modern also bought
out an employment contract with a former owner of CTL for 222,572 shares of
Modern common stock (valued at $311,000).
CTL is an electronic parts manufacturer located in Northern California.
CTL manufactures, rebuilds, and repairs magnetrons, klystrons, high power
triodes and tetrodes, electron guns, and linear accelerators for customers
located primarily in the United States.
Acquisition of Particle Interconnect, Inc.
In September 1996, Intercell formed a wholly owned subsidiary, Particle
Interconnect Corp. (PI Corp.), a Colorado corporation, which merged with
Particle Interconnect, Inc. (Particle), a California corporation. Particle
is engaged in the development and manufacturing of particle-coated
substrates for integrated circuits and is located in Colorado Springs,
Colorado. The Company exchanged 1,400,000 shares of Intercell common stock
for all of the outstanding stock
F-8 (Continued)
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
of Particle. The transaction was accounted for by the pooling-of-interest
method of accounting. The results of operations of Particle are not
material to the Company's consolidated financial position, results of
operations, and cash flows. Accordingly, the consolidated financial
statements for periods prior to the date of acquisition have not been
restated, except for loss per common share information. The weighted
average number of shares of common stock outstanding and loss per common
share has been restated for all periods presented to reflect the 1,400,000
shares of common stock issued in the transaction.
Acquisition of A.C. Magnetics, Inc.
On September 30, 1996, Intercell formed a wholly owned subsidiary, Cellular
Magnetics Inc., an Arizona corporation, which acquired all the assets and
liabilities of A.C. Magnetics, Inc. dba M.C. Davis, Co. Inc. (M.C. Davis)
in exchange for 277,778 shares of Intercell common stock (valued at
$1,000,000) and $800,000 in cash. M.C. Davis is a manufacturer and
distributor of electrical devices and equipment with manufacturing
facilities near Phoenix, Arizona, and in the province of Sonora, Mexico.
The transaction was accounted for by the purchase method of accounting.
The results of operations for M.C. Davis have not been included in the
Company's consolidated results of operations as the transaction occurred on
the last day of Intercell's fiscal year. The total purchase price of
$1,800,000 has been allocated to the net assets acquired based on their
relative fair values as follows:
Current assets $ 544,000
Property, plant, and equipment 383,000
Goodwill and other intangibles 1,223,000
Current liabilities (293,000)
Other liabilities assumed (57,000)
----------
Total purchase price $1,800,000
==========
The following table presents unaudited pro forma results of operations as
if the acquisition had occurred on November 1, 1994. These pro forma
results have been prepared for comparative purposes only and do not purport
to be indicative of what would have occurred had the acquisition been made
at the beginning of 1995, or indicative of results which may occur in the
future.
1996 1995
---------- ---------
Net sales $5,164,000 5,471,000
Operating loss 5,323,000 531,000
Net loss 5,427,000 1,451,000
Net loss per common share .53 .20
F-9 (Continued)
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Change in Fiscal Year
During the eleven-month period ended September 30, 1995, Intercell changed
its fiscal year-end to September 30. Previously, Intercell had an October
31 year-end. The accompanying consolidated financial statements include
the results of operations and cash flows of Intercell for the year ended
September 30, 1996, the eleven-month period ended September 30, 1995, and
the year ended October 31, 1994.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant
intercompany transactions and accounts have been eliminated in
consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Cash Equivalents and Short-Term Investments
Cash equivalents are highly liquid investments with a maturity of less than
three months at the date of purchase. Short-term investments consist of
certificates of deposit and short-term debt securities with maturities
greater than three months and less than one year. As of September 30, 1996,
the Company's investments consisted of U.S. government treasury bills of
$3,925,000 and certificates of deposit of $126,000. As of September 30,
1996, investment securities of $988,000 and $3,063,000 are classified as
cash equivalents and short-term investment, respectively.
Investments in debt securities are classified as "available for sale."
Such investments are recorded at fair value, as determined from quoted
market prices, and the cost of securities sold is determined based on the
specific identification method. Unrealized gains and losses, if any, are
reported as a component of stockholders' equity. Unrealized gains and
losses were not significant for any period presented.
Revenue Recognition
Revenues are recognized when earned, generally upon product shipment.
Provision is made for estimated customer returns and warranty costs at the
time of sale.
F-10 (Continued)
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Inventories
Inventories generally are stated at the lower of cost (first in, first out)
or market. Costs incurred in the manufacture of new tubes is recorded on a
standard cost basis, which approximates the first-in, first-out method,
with the costs of raw materials, labor, and overheads adjusted periodically
when actual costs change. Each tube repair is unique and is costed out on
a specific item basis with costs accumulated as incurred. Tubes rebuilt
for the U.S. government follow governmental cost allocation guidelines.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation expense is
provided by use of the accelerated and straight-line methods over the
estimated useful lives of the assets, generally 5 to 12 years for
furniture, equipment, and vehicles and 31 years for buildings.
Goodwill and Other Intangibles
Goodwill and other intangibles, which include costs in excess of fair value
of net assets of businesses acquired, proprietary technology, and trade
names are being amortized over 3 to 15 years using the straight-line
method. The Company periodically evaluates the carrying amount of its
intangibles to determine whether any impairment of the assets has occurred
based on estimated undiscounted future cash flows. This evaluation
necessarily involves significant management judgment and actual results
could differ from the estimates and forecasts used. There were no
adjustments to the carrying value of intangible assets resulting from these
evaluations in 1996, 1995, and 1994. Accumulated amortization amounted to
$61,000 and $28,000 as of September 30, 1996 and 1995, respectively.
Income Taxes
Income taxes are accounted for by the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. Valuation allowances are established
when necessary to reduce deferred tax assets to the amounts expected to be
realized.
F-11 (Continued)
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Net Loss Per Common Share
Net loss per common share is computed by dividing the sum of net loss and
deemed preferred stock dividend by the weighted average number of common
shares and dilutive common equivalent shares outstanding during each period
presented. Net loss per common share in the accompanying 1996 consolidated
statement of operations has been increased by $.09 per share from amounts
previously reported to reflect a deemed dividend on Series B Preferred
Stock in accordance with recently published views of the Staff of the
Securities and Exchange Commission (Note 7). Common equivalent shares
consist of stock options that are computed using the treasury stock method.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting, for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. SFAS No. 121 will be effective for fiscal years beginning after
December 15, 1995, and requires long-lived assets to be evaluated for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company will adopt
SFAS No. 121 in fiscal 1997 and does not expect its provisions to have a
material effect on the Company's consolidated results of operations.
FASB also has issued SFAS No. 123, Accounting for Stock-Based Compensation.
SFAS No. 123 will be effective for fiscal years beginning after December
15, 1995, and will require that the Company either recognize in its
consolidated financial statements costs related to its employee stock-based
compensation plans, such as stock option and stock purchase plans, or make
pro forma disclosures of such costs in a footnote to the consolidated
financial statements.
The Company expects to continue to use the intrinsic value-based method of
Accounting Principles Board Opinion No. 25, as allowed under SFAS No. 123,
to account for all of its employee stock-based compensation plans.
Therefore, in its consolidated financial statements for fiscal 1997, the
Company will make the required pro forma disclosures in a footnote to the
consolidated financial statements. SFAS No. 123 is not expected to have a
material effect on the Company's consolidated results of operations or
financial position.
(3) BALANCE SHEET COMPONENTS
Inventories
A summary of inventories follows:
September 30,
--------------------
1996 1995
---- ----
Raw materials $ 422,000 296,000
Work in process 453,000 477,000
Finished goods 191,000 -
---------- -------
$1,066,000 773,000
========== =======
F-12
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Property, Plant, and Equipment
A summary of property, plant, and equipment follows:
September 30,
-------------------------
1996 1995
---------- ----------
Furniture and fixtures $ 339,000 76,000
Equipment and machinery 845,000 690,000
Land and buildings 282,000 230,000
Leasehold improvements 71,000 -
Vehicles 23,000 -
---------- ----------
1,560,000 996,000
Less accumulated depreciation 142,000 111,000
---------- ----------
$1,418,000 885,000
========== ==========
Accounts Payable and Accrued Liabilities
A summary of accounts payable and accrued liabilities follows:
September 30,
-------------------------
1996 1995
---------- ----------
Accounts payable $ 376,000 208,000
Warranty reserves 130,000 130,000
Accrued employee compensation 191,000 153,000
Accrued ESOP contribution - 158,000
Other liabilities 45,000 180,000
---------- ----------
$ 742,000 829,000
========== ==========
(4) SUPPLEMENTAL CASH FLOW INFORMATION
For the year ended September 30, 1996, and the eleven-month period ended
September 30, 1995, cash paid by the Company for interest was $87,000 and
$15,000, respectively. Cash paid by the Company for interest in 1994 was
not significant.
F-13 (Continued)
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A summary of noncash investing and financing activities follows:
<TABLE>
<CAPTION>
Eleven-month
Year ended period ended Year ended
September 30, September 30, October 31,
1996 1995 1994
------------- ------------- -----------
<S> <C> <C> <C>
Shares issued in acquisition of Intercell -$250,000 -
Shares issued in exchange for investment in
American Microcell - 500,000 -
Shares issued in exchange for microwave technology - 250,000 -
Contribution to ESOP 158,000 247,000 -
Shares issued in lieu of interest payment to
related party - 13,000 -
Shares issued in acquisition of CTL - - 2,025,000
Conversion of debt to equity - - 475,000
Shares issued in exchange for prepaid promotion - - 140,000
Employment contract buy out - - 311,000
Shares issued in exchange for microwave technology - - 250,000
Shares issued in exchange for services 56,000 - -
Net assets acquired in business combinations 1,649,000 - -
Shares issued in exchange for land 1,000,000 - -
Debt assumed in land acquisition 367,000 - -
Shares to be issued for acquisition of M.C. Davis 1,000,000 - -
Debt incurred in acquisition of M.C. Davis 800,000 - -
Deferred compensation related to stock option grants 4,017,000 - -
Repurchase of shares of Series A preferred stock 250,000 - -
Conversion of Series B preferred stock to
common stock 1,497,000 - -
</TABLE>
(5) EQUIPMENT HELD FOR SALE
On December 29, 1994, Intercell executed an Asset Purchase Agreement with
Asia Skylink Corp. to acquire microwave transmission and associated support
equipment in exchange for 210,000 shares of Series A redeemable convertible
preferred stock. In August 1996, the shares were returned to the Company,
and the equipment was returned to Asia Skylink, Corp. No gain or loss was
recognized by the Company in connection with the reversal of this
transaction.
(6) BANK BORROWINGS
Loan Payable to Bank
In June 1995, the Company obtained a revolving loan for up to $500,000
based on a percentage of eligible assets. This loan expires on December
31, 1996, bears interest at the bank's base rate (8.25% as of September 30,
1996) plus 1/2% for administration fees and an additional 6%, and is
secured by all assets of the Company.
F-14
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Long-Term Debt
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
September 30,
----------------
1996 1995
-------- ------
<S> <C> <C>
Note payable to bank; interest at prime plus 2%; due
April 4, 1997; collateralized by various assets; repaid
in October 1996 $100,000 -
Note payable; noninterest bearing; due June 1998;
collateralized by building 47,000 -
Note payable to bank; interest at 9.75%;
due in 36 monthly payments of $481;
collateralized by a vehicle; repaid in October 1996 15,000 -
Note payable to bank; interest at 9.75%; due May 2008;
secured by real property; repaid in April 1996 - 50,000
Other 44,000 -
-------- ------
206,000 50,000
Less current portion 120,000 2,000
-------- ------
Long-term debt, net $ 86,000 48,000
======== ======
Future maturities of long-term debt as of September 30, 1996, are as follows:
Year ending
September 30,
-------------
1997 $120,000
1998 86,000
--------
Total $206,000
========
</TABLE>
F-15
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) STOCKHOLDERS' EQUITY
Preferred Stock
As of September 30, 1996 and 1995, the Company is authorized to issue
10,000,000 shares of preferred stock.
In December 1994, the Company issued 210,000 shares of Series A redeemable
convertible preferred stock (Series A preferred) in exchange for microwave
transmission equipment. During 1996, the Series A preferred shares were
surrendered to and canceled by the Company in exchange for the return of
the microwave transmission equipment (see Note 5).
In July 1996, the Company issued 1,000 shares of Series B redeemable
convertible preferred stock (Series B preferred) and detachable warrants
for proceeds of $8,900,000 (net of issuance costs of $1,100,000). Each
share of Series B preferred stock is convertible into common stock at the
exchange rate in effect at the time of the conversion, as described in the
preferred stock agreements, and is subject to appropriate adjustment for
common stock splits, stock dividends, and other similar transactions.
Conversion of the Series B preferred is automatic upon the expiration of
three years from the original date of issuance. At the date of issuance,
the exchange rate was equal to 85% of the then prevailing market rate,
resulting in a deemed dividend of $1,764,704. The Company recognized
$1,624,648 of the dividend in its fiscal 1996 net loss per common share
calculation. The amount recognized was calculated on a pro rata basis over
the period beginning with the issuance of the security to the first date
conversion could occur.
The Series B preferred contain a liquidation preference equal to the
original issue price plus 10% of the original issue price per annum to the
date of liquidation. Series B preferred shares are not entitled to voting
rights.
Each share of Series B preferred is accompanied by a detachable warrant to
purchase a number of shares of common stock of the Company equal to 30% of
the original aggregate purchase price of the shares of Series B preferred
divided by a fixed conversion rate of $3.9375 per share, exercisable 105
days after original issuance. As of September 30, 1996, warrants to
acquire 1,092,063 shares of common stock were outstanding. The warrants
will expire if not exercised by July 1, 2001.
Stock Options
In July 1995, Intercell established a Compensatory Stock Option Plan (the
Plan) and reserved 5,000,000 shares of common stock for issuance under the
Plan. In June 1996, an additional 2,000,000 shares were reserved for
issuance under the Plan. Incentive stock options can be granted under the
Plan, at prices not less than 110% of the fair market value of the stock at
the date of grant, and nonqualified options can be granted at not less than
50% of the stock's fair market value at the date of grant or the date the
exercise price of any such option is modified. All stock options expire 10
years from the date of grant.
F-16
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A summary of stock option activity under the Plan follows:
<TABLE>
<CAPTION>
Options outstanding
Shares -------------------------
available Price
for grant Shares per share
----------- ----------- ------------
<S> <C> <C> <C>
Balances as of July 1995 5,000,000 - $ -
Options granted (1,600,000) 1,600,000 0.50
---------- ---------- ------------
Balances as of September 30, 1995 3,400,000 1,600,000 0.50
Additional shares authorized 2,000,000 - -
Options granted (4,841,000) 4,841,000 0.50 - 4.00
Options canceled 150,000 (150,000) 0.50
Options exercised - (2,295,000) 0.50 - 2.00
---------- ---------- ------------
Balances as of September 30, 1996 709,000 3,996,000 0.50 - 4.00
========== ==========
</TABLE>
As of September 30, 1996, options to purchase approximately 3,366,000
shares of common stock were exercisable.
The Company recorded deferred compensation of $4,017,000 for the difference
between the exercise price and the fair value of the common stock related
to stock options granted in 1996. Certain of the options vested
immediately and, therefore, the related compensation expense of $3,686,000
was recorded at the grant date. The remaining deferred compensation will
be amortized over the vesting period of the options, generally four years.
(8) EMPLOYEE STOCK OWNERSHIP PLAN
CTL has established an Employee Stock Ownership Plan (the Employee Plan)
and a related trust for substantially all of its eligible employees. To
participate in the Employee Plan, employees must have worked at least 1,000
hours during the year and must be employed at the end of the plan year.
Participants do not vest until their third year of employment and then vest
20% per year through year seven. Employer contributions are voluntary and
generally are based on a percentage of eligible payroll, limited to 15%.
In 1995, the Company elected to contribute 126,761 shares of the Company's
common stock valued at $158,000 to the Employee Plan. The Employee Plan
was terminated in 1996, and, as such, the Company has not made any
additional contributions.
F-17
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) PURCHASE OF AMERICAN MICROCELL
During fiscal 1995, the Company acquired approximately 15% of the
outstanding stock of American Microcell in exchange for 712,751 shares of
common stock at a deemed value of approximately $0.70 per share. American
Microcell was engaged in the research and development of improved
technologies for cellular phones. However, American Microcell proved
unsuccessful in its efforts to finance continuing development of
technologies acquired, and the rights to these technologies reverted to the
original developers. Accordingly, the Company's investment in American
Microcell has been written off as a charge to income in the accompanying
1995 consolidated statement of operations.
(10) ADVANCES TO INTERPRETEL, INC.
In anticipation of a merger, the Company advanced $100,000 to Interpretel,
Inc. in January 1995. The proposed merger was not completed and
Interpretel, Inc. repaid $45,000 of the advance and will issue 100,000
shares of Wavetech, Inc. common stock to the Company in fiscal 1997.
(11) RELATED PARTY TRANSACTIONS
Notes Payable
As of September 30, 1995, the Company had an outstanding promissory note
due to a former owner of CTL in the amount of $495,000, bearing interest at
8%. The note was repaid during fiscal 1996.
As of September 30, 1996, the Company had an outstanding promissory note
due to a former owner and current president of M.C. Davis in the amount of
$80,000, bearing interest at 8%, due December 15, 1996. The note was
repaid in October 1996.
As of September 30, 1996, the Company had an outstanding promissory note
due to a former owner of Particle in the amount of $52,000, bearing
interest at 8%, due on demand.
The Company has noninterest bearing notes payable totaling $800,000 due to
the former owners of M.C. Davis in consideration for the purchase of M.C.
Davis consummated on September 30, 1996 (see Note 1). The notes were paid
in full in October 1996.
Purchase of Land
During April 1996, the Company entered into an agreement with a related
party whereby in exchange for 400,000 shares of the Company's common stock
(valued at $1,000,000) and assumption of mortgages of $367,000, the Company
acquired development land located in Arizona. In connection with the
exchange, the Company incurred acquisition costs of $57,000. The land,
including acquisition costs, is recorded on the accompanying 1996
consolidated balance
F-18
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
sheet as investment land held for sale.
Purchase and Sale of Microwave Technology
In June 1994, the Company purchased one half of the rights to a technology
that utilizes microwaves to enhance the production of oil wells for 178,188
shares of its common stock. The Company already owned the one half interest
in the technology. In January 1995, the Company sold these rights to
Reland International, Inc. (Reland) for certain royalty payouts and a note
receivable with a face amount of $1,250,000, bearing interest at 6%, with
accrued interest payable annually on or before January 15 of each year, and
principal payable on or before January 16, 2000. Due to concerns about
collectibility, this note and related accrued interest was written off as a
charge to income in the accompanying 1995 consolidated statement of
operations.
Operating Leases
CTL leases its principal facility on a month-to-month basis from a
significant stockholder. Monthly rental payments for the facility lease are
$10,000, and the lease expires in August 1999. The Company paid rent
related to this lease of $118,000, $106,000, and $29,000, during 1996,
1995, and 1994, respectively.
The Company leases a facility in Vancouver, Canada, from a executive and
director of the Company with monthly rental payments of $3,000. The lease
expires in August 2001.
(12) COMMITMENTS
Operating Leases
The Company leases office space, manufacturing facilities, and certain
equipment under various operating lease agreements. Future minimum lease
payments under noncancelable leases as of September 30, 1996, are as
follows:
Year ending
September 30,
-------------
1997 $ 513,000
1998 475,000
1999 262,000
2000 254,000
Thereafter 2,048,000
----------
Total $3,552,000
==========
Rent expense under operating leases was approximately $277,000, $145,000,
and $116,000
F-19
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
during 1996, 1995, and 1994, respectively.
Litigation
The Company is subject to various legal proceedings and claims. In the
opinion of management, the ultimate liability with respect to these actions
will not materially affect the Company's consolidated financial position or
results of operations.
(13) INCOME TAXES
Income tax expense in 1996 was not significant. In 1995 and 1994, income
tax expense was $2,000 and $19,000, respectively.
Income tax expense differed from amounts computed by applying the federal
statutory income tax rate of 34% to pretax loss as a result of the
following:
<TABLE>
<CAPTION>
Eleven-month
Year ended period ended Year ended
September 30, September 30, October 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax benefit $(1,616,000) (448,000) (117,000)
State income taxes (442,000) 2,000 19,000
Change in valuation allowance 1,912,000 249,000 117,000
Net operating loss carryforwards for
state purposes not available
for future utilization 146,000 142,000 -
Other - 57,000 -
----------- ---------- ------------
$ - 2,000 19,000
=========== ========== ============
</TABLE>
F-20
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets are as follows:
1996 1995
---------- ------------
Deferred tax assets:
Stock options $ 688,000 -
Net operating loss carryovers 1,610,000 398,000
Allowance for returns and doubtful accounts 47,000 35,000
---------- ------------
2,345,000 433,000
Less valuation allowance 2,345,000 433,000
---------- ------------
Net deferred tax assets $ - -
========== ============
The change in the valuation allowance was an increase of $1,912,000 and
$164,000 in fiscal 1996 and 1995, respectively. The valuation allowance
applies primarily to those temporary differences that are expected to be
deductible at a point in the future when taxable income is uncertain.
Since the Company is entitled to a deduction for federal and state tax
purposes resulting from the exercise of nonqualified stock options and
employees' early dispositions of stock acquired through incentive stock
options, a portion of the deferred tax asset, when recognized by a
reduction of the valuation allowance, will be credited to additional paid-
in capital. As of September 30, 1996, approximately $1,262,000 of the
deferred asset will be credited to additional paid-in capital when
recognized.
As of September 30, 1996, the Company had a net operating loss carryover
for federal and California income tax purpose of approximately $7,376,000
and 3,463,000, respectively. The federal net operating losses expire from
2007 to 2011. The California net operating losses expire from 2000 to
2001. The difference between the federal and California loss carryforwards
results primarily from a 50% limitation on California net operating losses.
The Tax Reform Act of 1986 and the California Conformity Act of 1987 impose
substantial restrictions on the utilization of net operating loss
carryforwards in the event of an ownership change, as defined by Internal
Revenue Code, Section 382. Federal loss carryforwards of approximately
$439,000 are subject to an annual limitation of approximately $176,000.
Any unused annual limitation can be carried forward and added to the
succeeding years annual limitation, subject to the expiration dates
discussed above.
F-21
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) SIGNIFICANT CUSTOMER AND INDUSTRY SEGMENT INFORMATION
Two customers individually accounted for 10% or more of the Company's net
sales in 1996, 1995, and 1994. Sales and the related receivable
percentages to these customers as of September 30, 1996 and 1995, and
October 31, 1994 are summarized as follows:
Percentage of Percentage of
net sales accounts receivables
------------------- --------------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
Customer A 14% 15% 22% 6% 9% 15%
Customer B 12% 12% 35% 11% 12% 17%
As of and through September 30, 1996, substantially all of the Company's
net sales and gross profits from operations have been generated by CTL.
As of September 30, 1996 and 1995, identifiable assets of CTL and M.C.
Davis, a business purchased by Intercell in September 1996, were as
follows:
1996 1995
---------- ---------
CTL $3,371,000 3,950,000
M.C. Davis 2,150,000 -
(15) SUBSEQUENT EVENT (UNAUDITED)
In December 1996, the Company issued 525 shares of no par value Series C
preferred stock (Series C preferred) and detachable warrants in a private
placement for $4,672,500 (net of issuance costs of $577,500).
Each share of Series C preferred is convertible into common stock at the
exchange rate in effect at the time of the conversion, as described in the
preferred stock agreements, and is subject to appropriate adjustment for
common stock splits, stock dividends, and other similar transactions.
Conversion of the Series C preferred is automatic upon the expiration of
three years from the original date of issuance. The Series C preferred
is convertible into common stock at the exchange rate in effect at
the date of conversion, as described in the preferred stock agreements. At
the date of issuance, the exchange rate was less then the prevailing market
rate, which will result in a deemed dividend that will be recognized by the
Company in fiscal 1997. The Series C preferred are junior to the Company's
Series B preferred shares and contain a liquidation preference equal to the
original issue price plus 8% of the original issue price per annum to the
date of liquidation. Series C preferred shares are not entitled to voting
rights.
Shares of Series C preferred purchased in excess of certain quantities as
described in the preferred stock agreements, or purchased in addition to
previous purchases of Series B preferred shares are accompanied by
detachable warrants to purchase a number of shares of common stock of the
Company equal to between 25% and 50% of the original aggregate purchase
price of the Series C preferred shares divided by a fixed conversion rate
of $3.25 per share, exercisable 105 days after original issuance.
F-22
<PAGE>
INTERCELL CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance
at Charged to
Beginning Costs and Balance at
Classification of Year Expenses Deductions End of Year
-------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Allowance for returns and doubtful accounts
Year ended October 31, 1994 $-- $15 $-- $15
== == == ==
Eleven months ended September 30, 1995 $15 $81 $(15) $81
== == === ==
Year ended September 30, 1996 $81 $174 $-- $255
== === == ===
</TABLE>
F-23
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE SELLING SHAREHOLDERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY ANY OF THE SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE SUCH DATE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUMMARY....................... 3
RISK FACTORS............................. 13
PLAN OF DISTRIBUTION..................... 24
USE OF PROCEEDS.......................... 24
PRICE RANGE OF COMMON STOCK.............. 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 27
BUSINESS................................. 36
MANAGEMENT............................... 65
EXECUTIVE COMPENSATION................... 70
CERTAIN TRANSACTIONS..................... 75
BENEFICIAL OWNERSHIP..................... 77
SELLING SHAREHOLDERS..................... 79
DESCRIPTION OF SECURITIES................ 81
SHARES ELIGIBLE FOR FUTURE SALE.......... 88
LEGAL MATTERS............................ 89
EXPERTS.................................. 89
AVAILABLE INFORMATION.................... 89
ADDITIONAL INFORMATION................... 90
GLOSSARY................................. 91
INDEX TO FINANCIAL STATEMENTS............ F-1
</TABLE>
INTERCELL CORPORATION
Common Stock
Common Stock Purchase Warrants
-----------------
PROSPECTUS
-----------------
March __, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses to be borne by the registrant,
other than underwriting discounts and commissions, in connection with the
issuance and distribution of the Common Stock hereunder.
<TABLE>
<CAPTION>
Payable
by
the
Registrant
----------
<S> <C>
SEC registration fee.......... $7,698.00
Accounting fees and expenses.. *
Legal fees and expenses....... *
Printing costs................ *
Blue Sky fees and expenses.... *
Miscellaneous................. *
----------
Total.................... $ *
==========
</TABLE>
The foregoing items, except for the SEC registration fee are estimated.
/*/To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 7-109-103 and 7-109-107 of the Colorado Business Corporation Act
(the "CBCA") provides generally and in pertinent part that a Colorado
corporation may indemnify its directors and officers against expenses,
judgements, fines and settlements actually and reasonably incurred by them in
connection with any civil suit or action, except actions by or in the right of
the corporation, or any administrative or investigative proceeding if, in
connection with the matters in issue, they acted in good faith and in a manner
they reasonably believed to be in, or not opposed to, the best interests of the
corporation, and in connection with any criminal suit or proceeding, if in
connection with the matters in issue, they had no reasonably cause to believe
their conduct was unlawful. Sections 7-109-103 and 7-109-107 further provide
that in connection with the defense or settlement of any action by or in the
right of the corporation, a Colorado corporation may indemnify its directors and
officers against expenses actually and reasonably believed to be in, or not
opposed to, the best interests of the corporation. Sections 7-109-103 and 7-
109-107 permit a Colorado corporation to grant its directors and officers
additional rights of indemnification through bylaw provisions and otherwise to
the extent
II-1
<PAGE>
such provisions do not conflict with the CBCA and to purchase indemnity
insurance on behalf of its directors and officers.
Article VII of the Articles of Incorporation of the registrant states that
the registrant may indemnify, to the fullest extent permitted by Colorado law,
all directors and officers of the registrant, which it has the power to
indemnify, from and against any and all expenses, liabilities or other matters
referred to in Section 7-109-103.
The registrant's Articles of Incorporation also provide in Article XIII
that directors shall not be personally liability to the registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (a) for any breach of a director's duty of loyalty to the
registrant or this stockholders, (b) for acts or omissions not in good faith or
which involve intentionally misconduct or knowing violations of law, (c) under
Section 7-108-403 of the CBCA or (d) for any transaction from which the director
derived an improper personal benefit.
Article IX of the registrant's bylaws, provides, in general, that the
registrant shall indemnify its directors and officers to the fullest extent
permitted by the CBCA.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Company made the following unregistered sales of its securities from
January 31, 1994 through January 31, 1997./(1)/
<TABLE>
<CAPTION>
TITLE OF
DATE OF SALE SECURITIES AMOUNT CONSIDERATION PURCHASER
- ------------- ------------------- --------- ----------------------- -----------------------
<C> <S> <C> <C> <C>
1) 12/30/94 Preferred Series A 210,000 Equipment valued at Asia Skylink Corp.
and Warrants 210,000 $2,100,000.00
2) 7/7/95 Common 5,412,191 Assets & Liabilities of Modern Industries, Inc.
Modern Industries
Recorded at $3,093,000
3) 7/7/95 Options to Purchase 1,600,000 Agreement to serve as Terry W. Neild
Common Shares directors, officers and Gordon J. Sales
counsel to Registrant Mark S. Pierce
Corporate Advisors, Inc.
4) 11/9/95 Options to Purchase 700,000 Agreement to serve as Gordon J. Sales
Common Stock, at Officers, Directors & Mark S. Pierce
an exercise price of Counsel to the Company Terry W. Neild
$.50 per share Corporate Advisors, Inc.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
<C> <C> <S> <C> <C>
5) 11/9/95 Options to Purchase 265,000 Agreement to Continue 10 Employees of California Tube
Common Stock, at Employment at CTL and to Laboratories, Inc.;
an exercise price of provide consulting services S. Wilde and Alan M. Smith
$.50 per share to the Company
6) 12/22/95 Options to Purchase 716,180 Agreement to Provide 1. Communique Media Services, Ltd.
Common Stock, at Consulting Services to the 2. Financial Power Network, Inc.
an exercise price of Company 3. James O. Gray
$.50 per share 4. Admiral House
7) 2/1/96 Options to Purchase 800,000 Agreement to provide James O. Gray
Common Stock, at consulting services to the L.L. Ross
an exercise price of Company and for past Wendy S. Gobbett
$.75 per share for services of consultants
650,000 shares and
$1.25 per share for
150,000 shares
8) 3/3/96 Common Stock 96,606 Legal Services - valued at Corporate Consultancy Services, Ltd.
$39,751
9) 3/28/96 Common Stock 126,761 Contribution to ESOP California Tube Laboratory, Inc.
valued at $1.25 per share Stock Bonus Employee Stock
for $158,451.15 Ownership Plan & Trust
10) 3/29/96 Options to Purchase 550,000 Agreement to provide Quidquia Management
Common Stock, at consulting services to the Rocha Holdings, Ltd.
an exercise price of Company
$.50 per share for
300,000 shares and
$.75 per share for
250,000 shares
11) 5/9/96 Common Stock 400,000 Conveyance of Land, Sonora Station, Ltd.
Recorded at $1,000,000 Muriel J. Fulton
Barbara J. Drew
Darren Begley
12) 6/3/96 Options to Purchase 380,000 As consideration for past David Blank
Common Stock, at services as employees of James Martin
an exercise price of CTL Lance Mullins
$.50 per share Tony Wynn
13) 6/12/96 Options to Purchase 400,000 As consideration for Jeffrey Halbirt
Common Stock, at consulting services and as Alan M. Smith
an exercise price of an incentive to remain an
$.50 per share officer of the Company
14) 5/17/96 Common Stock 14,780 Legal Services - valued at Charmirathor, Inc.
$16,554
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
<C> <C> <S> <C> <C> <C>
15) 7/10/96 Series B Preferred 1,000 $10,000,000 Accredited Investors who are Non-
Stock and attached U.S. Persons (23)
Warrants to acquire 761,905
shares of Common
Stock
16) 7/10/96 Warrants to acquire 330,159 Services as Placement Swartz Investments, LLC.
Common Stock, at Agent
a price of $3.9375
per share
17) 9/3/96 Common Stock 1,400,000 Exchange of shares of Five (5) shareholders of Particle
Particle Interconnect, Inc. Interconnect, Inc.
in a Triangular Merger,
which was accounted for
as an immaterial pooling
of interests.
18) 9/3/96 Options to Purchase 800,000 Agreement to serve as Alan M. Smith
Common Stock, at Officers, Counsel or Corporate Advisors, Inc.
an exercise price of Consultant to Company 521508 B.C. Ltd.
$4.00 per share
19) 9/3/96 Options to Purchase 230,000 Agreement to serve as Certain employees of PI Corp.
Common Stock, at officers or employees of
an exercise price of the Company.
$4.00 per share
20) 10/8/96 Common Stock 277,778 Exchange of shares of Three (3) shareholders of
A.C. Magnetics, Inc. in A.C. Magnetics, Inc.
Triangular Merger, with a
total share value of
$1,000,000.
21) 12/16/96 Series C Preferred 525 $5,250,000 Accredited Investors (11)
Stock and attached 530,771
Warrants to acquire
Common Stock
22) 12/16/96 Warrants to acquire 214,615 Services as Placement Swartz Investments, LLC and
Common Stock Agent Assignees
</TABLE>
_______________
/(1)/ During the period commencing September, 1996 through January 31, 1997,
certain holders of the Series B Preferred Stock, pursuant to the Certificate of
Designation, converted a total of 810 shares of Series B Preferred Stock into
2,636,530 shares of Common Stock which were issued without registration pursuant
to the exemption provided by Regulation S.
UNDERWRITERS
Other than Swartz Investments, LLC ("Swartz"), no underwriter or selling or
placement agent was involved in any of the transactions described above. Swartz
was engaged as selling
II-4
<PAGE>
agent in connection with the sale of the Series B Preferred Stock and Series C
Preferred Stock and was paid compensation equivalent to 11% of the aggregate
funds raised in such placements. In addition, it received warrants to purchase
shares of Common Stock equal to 10% of the aggregate securities sold, assuming
that the holders of the Series B Preferred Stock and Series C Preferred Stock
and related warrants, converted their Series B and Series C Preferred Stock or
exercised their warrants at the Fixed Conversion Price. See "DESCRIPTION OF
SECURITIES" in the Prospectus.
EXEMPTION FROM REGISTRATION CLAIMED
All of the sales by the Company of its unregistered securities (except for
those described in Item 15, which were made pursuant to Regulation S and those
described in Item 21, which were made pursuant to Rule 506 of Regulation D
adopted under the Securities Act of 1933, as amended) were made by Registrant in
reliance upon Section 4(2) of the Securities Act of 1933, as amended. All of
the individuals who purchased the unregistered securities were all known to the
Company and its management, through pre-existing business relationships, as long
standing business associates, friends, employees, relatives or members of the
immediate family of management. All purchasers were provided access to all
material information which they requested and all information necessary to
verify such information and were afforded access to management of the Company in
connection with their purchases. All purchasers of the unregistered securities
acquired such securities for investment and not with a view toward distribution,
acknowledging such intent to the Company. All certificates or agreements
representing such securities that were issued contained restrictive legends,
prohibiting further transfer of the certificates or agreements representing such
securities, without such securities either being first registered or otherwise
exempt from registration in any further resale or disposition.
The sale of One Thousand (1,000) convertible Class B Preferred Stock was
made pursuant to and in compliance with Regulation S. The offering was
restricted to and entirely purchased by Twenty-Three (23) institutional
accredited investors. Extensive documentation was prepared and utilized to
insure compliance with the terms, conditions and provisions of Regulation S.
All purchasers and the Registrant were represented by their own independent
counsel, tax advisors, accounting firms and other advisors. The Company
undertook and implemented control procedures to assure compliance with the terms
and conditions of Regulation S.
The sale of Five Hundred and Twenty-Five (525) Convertible Class C
Preferred Stock was made pursuant to and in compliance with Rule 506 of
Regulation D. The offering was restricted to and entirely purchased by eleven
institutional accredited investors. Extensive documentation was prepared and
utilized to insure compliance with the terms, conditions and provisions of
Regulation D. All purchasers, including the Company were represented by their
own independent counsel, tax advisors, accounting firms and other advisors. The
Company and its transfer agent undertook and implemented control procedures to
assure compliance with the terms and conditions of Regulation D.
II-5
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS. Certain of the following exhibits, designated with an
asterisk (*), are filed herewith. The exhibits not so designated have been
filed previously and are hereby incorporated herein by reference to the
documents indicated in the footnote reference.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1/(1)/ Agreement and Plan of Reorganization, dated July 7, 1995, between
the Company and Modern Industries, Inc.
2.2/(4)/ Plan and Agreement of Merger dated September 3, 1996, by and
between Particle Interconnect, Inc., Particle Interconnect Corporation
and the Company.
2.3/(5)/ Agreement and Plan of Merger dated October 14, 1996, by and
between AC Magnetics, Inc., doing business as M.C. Davis Company,
Cellular Magnetics, Inc. and the Company.
3.1/(1)/ Articles of Incorporation of the Company, and all amendments
thereto, as amended.
3.2/(1)/ Bylaws of the Company.
4.1/(1)/ Form of Common Stock Certificate.
4.2 Certificate of Designation for Series B Preferred Stock is included in
the Company's Articles of Incorporation filed as Exhibit 3.1 and
incorporated herein by reference.
4.3/(2)/ Specimen of Warrant attached to Series B Preferred Stock.
4.4 Certificate of Designation for Series C Preferred Stock is included in
the Company's Articles of Incorporation filed as Exhibit 3.1 and is
incorporated herein by reference.
4.5/(1)/ Form of Warrant attached to Series C Preferred Stock.
4.6/(1)/ Specimen of Registration Rights Agreement for Series B Preferred
Stock.
4.7/(1)/ Specimen of Registration Rights Agreement for Series C Preferred
Stock.
4.8/(1)/ Plan of Liquidating Dissolution of Energy Corporation dated July
8, 1996.
II-6
<PAGE>
5.1/(6)/ Opinion of Kutak Rock as to the legality of the Common Stock
being registered.
10.1/(3)/ 1995 Compensatory Stock Option Plan.
10.2/(1)/ Assignment Agreement dated September 3, 1996, assigning certain
Patents and Patent Applications and trade secrets relating to the PI
Technology to the Company, as assignee, and Particle Interconnect,
Inc. as assignor.
10.3/(1)/ Assignment Agreement dated June 5, 1996, assigning the Patent
Application for the Antenna Technology to the Company, as assignee,
and El-Badawy Amien El-Sharawy, as assignor.
10.4/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996, between Gordon J. Sales and the Company.
10.5/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996, between Alan M. Smith and the Company.
10.6/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996 between Terry W. Neild and the Company.
10.7/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 22, 1996 between Steven D. Clark and PI Corp.
10.8/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996 between Lawrence DiFrancesco and PI Corp.
10.9/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 8, 1996 between Jerry W. Tooley and Cellular Magnetics.
10.10/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 8, 1996 between David Putnam and Cellular Magnetics.
11 Statement regarding Computation of Per Share Earnings.
21/(1)/ Subsidiaries of the Company.
23.1/*/ Consent of KPMG Peat Marwick LLP.
23.2/*/ Consent of Mark Shelley, CPA.
23.3/*/ Consent of Michael A. Glenn, Esq.
23.4/*/ Consent of Meschkow & Gresham, P.L.C.
II-7
<PAGE>
23.5 Consent of Kutak Rock is included in Exhibit 5.1 and incorporated
herein be reference.
27/*/ Financial Data Schedule.
_________________
/*/
/(1)/ Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended September 30, 1996.
/(2)/ Incorporated by reference to the Company's Current Report on Form 8-K
dated July 10, 1996.
/(3)/ Incorporated by reference to the Company's Current Registration Statement
on Form S-8, Registration No. 333-604, effective January 24, 1996.
/(4)/ Incorporated by reference to the Company Current Report on Form 8-K dated
September 3, 1996.
/(5)/ Incorporated by reference to the Company Current Report on Form 8-K dated
October 14, 1996.
/(6)/ To be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULES. See "Index to Financial
Statements" on page F-1.
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes the following:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(A) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the "Act");
(B) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(C) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Act, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities
II-8
<PAGE>
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) Insofar as indemnification for liabilities arising under the Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Denver, State of
Colorado, on February 3, 1997.
INTERCELL CORPORATION
Dated: February 3, 1997 By /s/ Alan M. Smith
------------------
Alan M. Smith, Secretary, Treasurer,
Chief Financial Officer and Director
II-10
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Alan M. Smith his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto such attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary to be done, to all intents
and purposes and as full as he might or could do in person, hereby ratifying and
confirming all that such attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------------------- ---------------------------------- ----------------
/s/ Gordon J. Sales President, Chief Executive Officer
- --------------------- and Director February 1, 1997
Gordon J. Sales (Principal Executive Officer)
/s/ Alan M. Smith Secretary, Treasurer, Chief
- --------------------- Financial Officer and Director February 2, 1997
Alan M. Smith (Principal Financial and
Accounting Officer)
/s/ Terry W. Neild Executive Vice President and February 2, 1997
- --------------------- Director
Terry W. Neild
/s/ Charles E. Bauer Director February 2, 1997
- --------------------
Charles E. Bauer
/s/ Theodore A. Waibel Director February 2, 1997
- ----------------------
Theodore A. Waibel
II-11
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1/(1)/ Agreement and Plan of Reorganization, dated July 7, 1995, between
the Company and Modern Industries, Inc.
2.2/(4)/ Plan and Agreement of Merger dated September 3, 1996, by and
between Particle Interconnect, Inc., Particle Interconnect
Corporation and the Company.
2.3/(5)/ Agreement and Plan of Merger dated October 14, 1996, by and
between AC Magnetics, Inc., doing business as M.C. Davis Company,
Cellular Magnetics, Inc. and the Company.
3.1/(1)/ Articles of Incorporation of the Company, and all amendments
thereto, as amended.
3.2/(1)/ Bylaws of the Company.
4.1/(1)/ Form of Common Stock Certificate.
4.2 Certificate of Designation for Series B Preferred Stock is
included in the Company's Articles of Incorporation filed as
Exhibit 3.1 and incorporated herein by reference.
4.3/(2)/ Specimen of Warrant attached to Series B Preferred Stock.
4.4 Certificate of Designation for Series C Preferred Stock is
included in the Company's Articles of Incorporation filed as
Exhibit 3.1 and is incorporated herein by reference.
4.5/(1)/ Form of Warrant attached to Series C Preferred Stock.
4.6/(1)/ Specimen of Registration Rights Agreement for Series B Preferred
Stock.
4.7/(1)/ Specimen of Registration Rights Agreement for Series C Preferred
Stock.
4.8/(1)/ Plan of Liquidating Dissolution of Energy Corporation dated July
8, 1996.
5.1/(6)/ Opinion of Kutak Rock as to the legality of the Common Stock
being registered.
10.1/(3)/ 1995 Compensatory Stock Option Plan.
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.2/(1)/ Assignment Agreement dated September 3, 1996, assigning certain
Patents and Patent Applications and trade secrets relating to the
PI Technology to the Company, as assignee, and Particle
Interconnect, Inc. as assignor.
10.3/(1)/ Assignment Agreement dated June 5, 1996, assigning the Patent
Application for the Antenna Technology to the Company, as assignee,
and El-Badawy Amien El-Sharawy, as assignor.
10.4/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996, between Gordon J. Sales and the Company.
10.5/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996, between Alan M. Smith and the Company.
10.6/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996 between Terry W. Neild and the Company.
10.7/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 22, 1996 between Steven D. Clark and PI Corp.
10.8/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996 between Lawrence DiFrancesco and PI Corp.
10.9/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 8, 1996 between Jerry W. Tooley and Cellular Magnetics.
10.10/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 8, 1996 between David Putnam and Cellular Magnetics.
11/*/ Statement regarding Computation of Per Share Earnings.
21/(1)/ Subsidiaries of the Company.
23.1/*/ Consent of KPMG Peat Marwick LLP.
23.2/*/ Consent of Mark Shelley, CPA.
23.3/*/ Consent of Michael A. Glenn, Esq.
23.4/*/ Consent of Meschkow & Gresham, P.L.C.
23.5 Consent of Kutak Rock is included in Exhibit 5.1 and incorporated
herein be reference.
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27/*/ Financial Data Schedule.
_________________
/*/
/(1)/ Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended September 30, 1996.
/(2)/ Incorporated by reference to the Company's Current Report on Form 8-K
dated July 10, 1996.
/(3)/ Incorporated by reference to the Company's Current Registration Statement
on Form S-8, Registration No. 333-604, effective January 24, 1996.
/(4)/ Incorporated by reference to the Company Current Report on Form 8-K dated
September 3, 1996.
/(5)/ Incorporated by reference to the Company Current Report on Form 8-K dated
October 14, 1996.
/(6)/ To be filed by amendment.
<PAGE>
Exhibit 11
-----------
INTERCELL CORPORATION
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Year ended September 30,
------------------------------------
Statement of operations data: 1996 1995 1994
---- ---- ----
Net (loss) (5,283,000) (1,321,000) (362,000)
Deemed preferred stock dividend
relating to in-the-money conversion
terms(2) 1,624,648 -- --
---------- ---------- ---------
(6,907,648) (1,321,000) (362,000)
========== ========== =========
Weighted average shares outstanding 13,072,683 7,391,275 4,828,007
Common equivalent shares from stock
options
Average common and equivalent shares
outstanding(1) -- -- --
---------- ---------- ---------
13,072,683 7,391,275 4,828,007
========== ========== =========
Net (loss) per common share(2) (.54) (.18) (.08)
========== ========== =========
________________
(1) The difference between primary and fully diluted earnings per share is not
material.
(2) Net (loss) per common share has been increased by $.09 per share from
amounts previously reported to reflect a deemed dividend on Series B
preferred stock in accordance with recently published views of the Staff of
the Securities and Exchange Commission. See Note 7 to the Consolidated
Financial Statements.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Intercell Corporation
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
San Jose, California
February 5, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF MARK SHELLEY, CPA
I hereby consent to the reference to my name under the heading of
"Experts" included in the Registration Statement of Intercell Corporation of
which this Exhibit is a part, and in any amendments to the Registration
Statement.
Date: Januray 24, 1997 By:/s/ Mark Shelley
---------------------
Mark Shelley, CPA
<PAGE>
EXHIBIT 23.3
CONSENT OF MICHAEL A. GLENN, ESQ.
We hereby consent to the reference to our name under the heading of
"Experts" included in the Registration Statement of Intercell Corporation of
which this Exhibit is a part, and in any amendments to the Registration
Statement.
Date: January 31, 1997 /s/ Michael A. Glenn
--------------------
Michael A. Glenn, Esq.
<PAGE>
EXHIBIT 23.4
CONSENT OF MESCHKOW & GRESHAM, P.L.C.
We hereby consent to the reference to our name under the heading of
"Experts" included in the Registration Statement of Intercell Corporation of
which this Exhibit is a part, and in any amendments to the Registration
Statement.
MESCHKOW & GRESHAM, P.L.C.
Date: January 30, 1997 By:/s/ Lowell W. Gresham
---------------------
Lowell W. Gresham
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 4,224,000
<SECURITIES> 3,063,000
<RECEIVABLES> 746,000
<ALLOWANCES> 255,000
<INVENTORY> 1,066,000
<CURRENT-ASSETS> 10,625,000
<PP&E> 1,418,000
<DEPRECIATION> 142,000
<TOTAL-ASSETS> 13,826,000
<CURRENT-LIABILITIES> 2,060,000
<BONDS> 86,000
0
5,533,000
<COMMON> 12,187,000
<OTHER-SE> (6,040,000)
<TOTAL-LIABILITY-AND-EQUITY> 13,826,000
<SALES> 3,405,000
<TOTAL-REVENUES> 3,441,000
<CGS> 2,830,000
<TOTAL-COSTS> 8,601,000
<OTHER-EXPENSES> 33,000
<LOSS-PROVISION> 47,000
<INTEREST-EXPENSE> 54,000
<INCOME-PRETAX> (5,283,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> ( 5,283,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,283,000)
<EPS-PRIMARY> (.54)
<EPS-DILUTED> (.54)
</TABLE>
