<PAGE>
As filed with the Securities and Exchange Commission on November 13, 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>
PAUL H. METZINGER
370 SEVENTEENTH STREET, SUITE 3290 370 SEVENTEENTH STREET, SUITE 3290
DENVER, COLORADO 80202 DENVER, COLORADO 80202
(303) 592-1010 (303) 592-1010
(Address, including zip code, and telephone number, (Name, address, including zip code, and telephone number,
including area code, of registrant's principal executive offices) including area code, of agent for service)
</TABLE>
With copies sent to:
--------------------
Robert J. Ahrenholz, Esq.
Christopher J. Oliver, 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
<TABLE>
<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/(1)/ price/(1)/ fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock underlying Convertible
Series C Preferred Stock............. 12,957,156 $.280 $3,628,003.68 $1099.40
Total Registration Fee................. $1099.40
====================================================================================================================================
</TABLE>
/(1)/ Registration fee calculated pursuant to Rule 457(c) based on the last sale
price of the Common Stock on November 7, 1997. Pursuant to Rule 416 ("Rule 416")
promulgated under the Securities Act of 1933 (the "Securities Act"), this
Registration Statement also covers such shares of Common Stock as may be
issuable pursuant to the anti-dilution provisions and provisions relating to
market price adjustments of the Series C Preferred Stock.
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>
Rule 429 Prospectus
This Registration Statement also constitutes Post-Effective Amendment No. 1
to the Registrant's Registration Statement on Form S-1 (No. 333-21239) declared
effective May 13, 1997 (the "Prior Registration Statement"). Pursuant to Rule
429 under the Securities Act, the Prospectus included in this Registration
Statement is a combined Prospectus that also relates to the Prior Registration
Statement. In accordance with Section 8(c) of the Securities Act, Post-Effective
Amendment No. 1 to the Prior Registration Statement shall hereafter become
effective concurrently with the effectiveness of this Registration Statement.
<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 NOVEMBER 13, 1997
INTERCELL CORPORATION
COMMON STOCK AND COMMON STOCK PURCHASE WARRANTS
___________________
This Prospectus relates to 14,994,606 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 13,157,156
shares of Common Stock issued or 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"). 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 14,994,606 SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, WILL
REPRESENT APPROXIMATELY 39.51% OF THE COMPANY'S THEN ISSUED AND OUTSTANDING
37,953,525 SHARES COMMON STOCK. THE SALE OF SUBSTANTIAL AMOUNTS OF COMMON STOCK
IN THE PUBLIC MARKET SUBSEQUENT TO THIS OFFERING COULD ADVERSELY AFFECT THE
MARKET PRICE OF THE COMMON STOCK. SEE "RISK FACTORS-VOLATILITY OF STOCK PRICE."
THE COMMON STOCK AND WARRANTS OFFERED HEREBY, ARE BEING OFFERED OR SOLD TO
THE PUBLIC BY THE SELLING SHAREHOLDERS AND NOT BY THE COMPANY. THEREFORE,
PROCEEDS FROM ANY SALE WILL BE RECEIVED BY THE SELLING SHAREHOLDERS AND NOT BY
THE COMPANY. THE COMPANY MAY RECEIVE PROCEEDS UPON THE EXERCISE, IF EVER, OF THE
WARRANTS OFFERED 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. 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 September 30, 1997 the
average of the closing bid and asked prices for the Common Stock was $.215.
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 sale 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 through resales pursuant to the provisions of Rule
144 at market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. 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 __________ __, 1997
<PAGE>
This Page Intentionally Left Blank.
<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. The
Company conducts all its operations through its subsidiaries, Sigma 7
Corporation ("Sigma 7"), Particle Interconnect Corporation ("PI Corp.") and
California Tube Laboratory, Inc. ("CTL"). As used in this Prospectus, the term
"Company" includes Intercell Corporation and all of its subsidiaries, and
references to "Sigma 7" include Sigma 7 and all of its subsidiaries. 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
considered 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 and
dispositions made during the 1996 and 1997 fiscal years (see "BUSINESS-Recent
Acquisitions, Dispositions and Transactions"), the Company is currently engaged
in three lines of business: (i) the current testing and assembly of memory
modules; (ii) the current manufacture and rebuilding of specialty electron power
tubes; and (iii) the proposed design, development, validation and
i
<PAGE>
qualification of the manufacturing process specific to a proposed product that
will use the Company's patented particle interconnect technology (the "PI
Technology") and a proprietary trade secret electroplating process (the
"Proprietary Electroplating Process"). The Company does not intend to develop
full production capacity to actively produce products using the PI Technology,
rather it intends to enter into licensing or joint venture relationships with
product manufacturers who will manufacture the products.
The Company currently conducts its operations by and through its wholly
owned subsidiaries, CTL and Particle Interconnect Corporation ("PI Corp."), and
through its majority-owned subsidiary, Sigma 7. The PI Technology requires
significant additional effort to complete validation and documentation and to
establish acceptance of the PI Technology by the market and therefore, the
Company does not anticipate operating revenues from its PI Technology until such
time, if ever, that it enters into licensing or joint venture relationships with
existing manufacturers who desire to use the PI Technology and the PI Technology
is accepted in the market place.
RECENT TRANSACTIONS
DISPOSITION OF ANTENNA TECHNOLOGY
Until recently, the Company had anticipated pursuing a new line of business
involving the development and manufacture of shielded cellular phone antennas.
The Company had obtained the rights to certain patent applications relating to
certain technology (the "Antenna Technology") designed to reduce actual or
perceived potential health hazards that may be associated with exposure to
electromagnetic signals by using a "shielded" antenna that the Company jointly
developed with the Telecommunications Research Center at Arizona State
University ("ASU").
Based on subsequent evaluations of the Antenna Technology by the Company
and the review of the Antenna Technology by an independent investment banking
company, the Company determined that it was in the Company's best interest to
divest itself of the proposed design, development and production of the Antenna
Systems conducted by its wholly owned subsidiary Intercell Wireless Corp.
("Intercell Wireless"), as well as the manufacture of miniature and non-
miniature coils, transformers and other electronic assemblies conducted by its
wholly owned subsidiary Cellular Magnetics, Inc. ("Cellular Magnetics"). On July
18, 1997, the Company sold all of its right, title and interest in the Antenna
Technology and its wholly owned subsidiaries (the "Antenna Transaction") to
Intercell Technologies Corporation ("ITC"), a Colorado corporation, of which
Terry W. Neild and Lou L. Ross own a controlling interest. At the time the
transaction was proposed, Mr. Neild was a director and Executive Vice President
of the Company and Mr. Ross was a consultant to the Company. As consideration
for the sale, the Company received shares and warrants for shares of ITC common
stock, shares of the Company's common stock held by shareholders of ITC and
certain promissory notes. The total consideration received was valued at
approximately $2,300,000. No gain or loss was recorded on this disposition. See
"BUSINESS-Recent Acquisitions, Dispositions and Transactions."
ii
<PAGE>
ACQUISITION OF SIGMA 7
On June 6, 1997, the Company acquired approximately 90% of the outstanding
shares of common stock of Sigma 7, a Delaware corporation, which conducts its
business operations at its facilities located in San Diego, California, through
Sigma 7's wholly owned subsidiary, BMI Acquisition Group, Inc. ("BMI").
The Company acquired control of Sigma 7 in exchange for the payment of
$550,000 and by providing approximately $1,985,000 in additional financing,
consisting primarily of secured loans and standby letters of credit. In
addition, the Company agreed to issue 1,000 shares of a new class of its Series
D Preferred Stock to holders of certain preferred shares of BMI to eliminate
such preferred shares. For the purposes of this exchange the Series D Preferred
Stock was valued at $2,500 per share. See "BUSINESS-Recent Acquisitions,
Dispositions and Transactions."
MEMORY MODULES
The Company, through Sigma 7, designs, tests, markets and sells standard
memory modules. Through its development of proprietary testing technologies,
the Company purchases memory integrated circuits (also referred to as "die" or
"chips") at the wafer level, before they are tested and sorted and uses these
wafers to produce SIMMs (Single Inline Memory Modules), as well as other
products. The Company does not manufacture memory chips or, at this time,
package such memory chips, rather, the Company has entered into various wafer
program agreements with certain major semiconductor manufacturers, wherein such
manufacturers have agreed to sell to the Company, at a discount, packaged,
untested memory chips at the wafer level. The Company believes that this
process provides it with a cost advantage over competitors in the same
marketplace.
With respect to future products, the Company is in the engineering phase
for production of DIMMs (Dual Inline Memory Modules), and is preparing to enter
the final engineering phase for production of chip on board ("COB") memory
modules. The Company has submitted a patent application for new technology that
enables it to use faulty memory products, typically the cause of yield and
margin problems for conventional manufacturers, in producing fully functional
memory modules (the "Patch Technology"). If successful in production, this
Patch Technology will provide significant competitive advantages to the Company
by driving down material costs and, when used to "patch," COB will, it is
believed, represent a significant segment of business for the Company, since it
allows COB to be readily salvaged without damaging the printed circuit board.
The Company believes that this new technology, coupled with the wafer program,
could potentially lower the Company's cost of goods sold compared to traditional
memory module manufacturers, resulting in larger gross profit margins upon the
sale of its products.
See "BUSINESS-The Company's Memory Module Business" for a discussion of the
Patch Technology.
iii
<PAGE>
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 200 KHz
to 18,000 MHz. 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 $5.7 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 200 KHz to 18,000 MHz with power
levels of up to three million watts. The Company's product lines operate within
the following frequency bands: HF and UHF bands - 200 KHz to 1,000 MHz, L-band
500 MHz to 2,000 MHz; S-band 2,000 MHz to 4,000 MHz; C-band 4,000 MHz to 8,000
MHz; X-band 7,000 MHz to 12,000 MHz and Ku-band 12,000 MHz to 18,000 MHz. The
Company primarily manufactures and rebuilds electron power tubes categorized as
follows: CW (continuous waive) magnetrons, pulsed magnetrons, klystrons, power
grid tubes (triodes and tetrodes), linear accelerators guides 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.
iv
<PAGE>
The Company has recently moved its manufacturing operation to a new
facility customized for the Company's operations. 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 is pursuing a new line of business involving the development
and licensing 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 intends to
license the PI Technology and Proprietary Electroplating Process to strategic
partners, which will use the technology to mount, package or attach electronic
devices and other products. This proposed 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 electrical connectivity. 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 contact surface for electronic devices, and
replaces the use of soldering to create such connections.
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 approximately 80
I/O connections to the silicon die, whereas today typical ICs require
approximately 250 or more 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.
v
<PAGE>
The Proprietary Electroplating Process can apply the diamond particles to
many different substrates, both flexible, rigid, metallic and non-metallic.
This ability, coupled with the very low contact force, gives the PI Technology
the capability to make reliable connectors out of materials that could collapse
if exposed to the normally required contact forces. Initially, the Company
planned to develop full production capacity to produce particle interconnect
coatings using the PI Technology. Because of the large capital investment
required to develop full production capacity, however, the Company has decided
to license the PI Technology and Proprietary Electroplating Technology to
interconnect manufacturers and assist such manufacturers in the development,
testing and qualification of the PI Technology for that specific product line.
The Company plans to provide this service to numerous connector
manufacturers, in competing and non-competing applications. The Company may also
enter into joint venture agreements or exclusive or non-exclusive license
agreements with leading connector manufacturers. 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 370 Seventeenth Street, Suite 3290,
Denver, Colorado 80202. Its telephone number is (303) 592-1010.
RISK FACTORS
The Common Stock and Warrants offered hereby involve a high degree of risk.
See "RISK FACTORS."
vi
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THE OFFERING
<TABLE>
<S> <C>
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...... 200,000 Common Shares
Outstanding Common Stock offered by
Series C Preferred Stock Selling
Shareholders................................ 7,412,156 Common Shares
Common Stock offered by the
Selling Shareholders upon
conversion of Series C Preferred Stock...... 5,545,000 Common Shares
Common Stock outstanding after the Offering
and assuming exercise of Warrants and
Conversion of Preferred Stock................ 37,953,525 Common Shares/(1)/
Use of proceeds................................. Net proceeds (approximately
$6,558,808), 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. See "USE OF
PROCEEDS."
Common Stock NASDAQ symbol (OTC)................ "INCE"
</TABLE>
______________
/(1)/ Does not include 8,877,000 shares of common stock currently issuable upon
the exercise of outstanding stock options.
vii
<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, Dispositions 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 nine months ended June 30,
1997 and 1996 and 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 June 30, 1997 and September 30, 1996
and 1995 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 certified
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.
The selected historical financial information as of June 30, 1997 and for
the nine months ended June 30, 1997 and 1996 are derived from unaudited
financial statements of the Company. The Company's management believes such
unaudited financial statements have been accounted for on the same basis as the
audited financial statements and include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of such
financial statements.
viii
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<TABLE>
<CAPTION>
Nine Months
Ended 6/30
-----------------------------
Year Eleven Year Year Year
Ended Months Ended Ended Ended Ended
1997 1996 9/30/96 9/30/95/(1)/ 10/31/94 10/31/93 10/31/92
---- ---- ------- ------------ -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Total net sales $ 5,426,000 $ 2,499,000 $ 3,405,000 $ 3,768,000 $2,066,000 $ 60,000 $ --
Costs & expenses 11,265,000 6,164,000 8,688,000 5,089,000 2,428,000 142,000 43,000
Net loss (5,839,000) (3,665,000) (5,283,000) (1,321,000) (362,000) (82,000) (43,000)
Deemed preferred stock
dividend relating to
in-the-money conversion 1,023,000 -- 1,625,000 -- -- -- --
Accretion on Preferred Stock 413,000 -- -- -- -- --
Net loss applicable to
common Stockholders (7,275,000) -- (6,908,000) -- -- -- --
Net loss per common share $(0.42) $(0.28) $(0.54) $(0.18) $(0.08) $(0.04) N/A
Weighted average
Number of common
shares outstanding 17,169,353 13,095,417 13,072,683 7,391,275 4,828,007 2,066,979 1,781,880
At period end:
Current assets $ 7,742,000 2,408,000 $10,625,000 $ 1,796,000 $1,499,000 $ 4,000 $ 0
Current liabilities 2,124,000 2,001,000 2,060,000 1,799,000 1,621,000 82,000 149,000
Working capital (deficit) 5,618,000 407,000 8,565,000 (3,000) (122,000) (78,000) (149,000)
Total assets 16,115,000 5,137,000 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
(deficit) $11,491,000 $ 3,136,000 $11,680,000 $ 1,222,000 $1,472,000 $ (206,000) $ (149,000)
Cash dividends per
common share -- -- -- -- -- -- --
</TABLE>
_______________
See also "BUSINESS-Recent Acquisitions, Dispositions and Transactions."
/(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 end was previously October 31.
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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 or Warrants
offered hereby.
RECENT CHANGE IN BUSINESS
OPERATIONS/CHANGES IN MANAGEMENT
As discussed under "BUSINESS-Recent Acquisitions, Dispositions and
Transactions," since acquiring all of the assets and liabilities of Energy and
its wholly owned subsidiary, CTL, in July of 1995, the Company has changed the
focus of its business operations several times. In addition, the Company has
experienced significant management changes during this period. These changes
have resulted in certain inefficiencies resulting from the interruption and loss
of momentum in the activities of the companies acquired and of those which were
disposed. Although, the Company believes this activity is not unusual for a
company attempting to bring new products to market, continued changes of the
nature experienced in the past two years could likely have a material adverse
effect on the Company's operations.
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 new operating revenues until
such time, if ever, that it begins assembling and selling Dual Inline Memory
Modules ("DIMMs") and commences production of chip on board ("COB") memory
modules using the Patch Technology. There can be no assurance that the DIMMs and
COB memory modules, 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 operating costs are research and development expenses,
marketing costs, manufacture and assembly, and general and administrative
expenses. The Company's financial statements reflect the increased operating
expenses that the Company has incurred. Specifically, the Company's operating
losses increased from $433,000 in 1995 to $5,196,000 in 1996 and from $3,544,000
in the third quarter of fiscal 1996 to $6,025,000 in the third quarter of fiscal
1997. Similarly, the net cash (used in) operating activities increased from
($201,000) in 1995 to ($1,697,000) in 1996 and from $(1,764,000) in the third
quarter of fiscal 1996 to $(5,549,000) in the third quarter of fiscal 1997.
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
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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 June 30, 1997, the Company had an accumulated deficit of
$13,418,000. 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 enter into licensing agreements with various
connector manufacturers to develop and market its products using the PI
Technology. In addition the Company intends to develop a new product line of
DIMMs and COB memory modules using the Patch Technology. The Company's long-term
profitability and growth depend in part upon the successful completion of the
development, manufacture and distribution of DIMMs and COB memory modules and
entering into licensing or joint venture relationships with leading connector
manufacturers. The Company can provide no assurances that, with respect to the
PI Technology, that such agreements and relationships will be entered into, or
that the DIMMs and COB memory modules 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.
Other than the operations of CTL and Sigma 7, the Company has no experience
or business history in marketing any of the products it intends to manufacture
and sell. In addition, the manufacture and sale of COB memory modules using the
Patch Technology has not been tested under full production. 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 bring products that use its
PI Technology to market.
NO IMMINENT JOINT VENTURES OR PARTNERSHIPS
As discussed in more detail herein, the Company intends to license the PI
Technology and Proprietary Electroplating Process with existing interconnect
manufacturers. Although the Company has had discussions with potential
licensees, no agreements, written or otherwise, of any material nature have been
formally or informally entered into with respect thereto and there can be no
assurances given that any such relationships will be entered into in the future.
FUTURE CAPITAL REQUIREMENTS
The Company's capital requirements have been and will continue to be
significant. The Company's need to obtain financing from outside sources, will
primarily depend on the success of Sigma 7 and the Company's ability to
successfully bring its PI Technology to market. If such
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products prove unsuccessful, the Company will need to obtain additional debt or
equity financing and there can be no assurance the Company can successfully
consummate any such future financing on terms favorable to the Company, or at
all. Certain factors, among others, could affect the Company's access to the
capital markets or the cost of such capital, including the perception in the
capital markets of the Company's present businesses, results of operations,
leverage, financial condition and business prospects or concerns in the capital
markets regarding the potential for growth in the particular industries in which
the Company's subsidiaries conduct their businesses. If additional funds are
raised 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.
In this regard, with respect to the development of the PI Technology, the
Company has determined that its future capital requirements will be met in part
by entering into licensing or other similar arrangement with existing connector
manufacturers. The failure to enter into such relationships could result in the
Company requiring substantial additional capital and resources to bring the PI
Technology to market. The Company does not believe that, in the absence of such
relationships, it will have the necessary resources to compete in the Z-axis
interconnect market. The Company can provide no assurances that it will be
successful in entering into such relationships in the future. 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."
RIGHTS TO PI TECHNOLOGY
Pursuant to oral and written representations and warranties of Particle
Interconnect, Inc., a California corporation ("Particle California"), made to
the Company at the time of its merger with and into PI Corp. on September 3,
1996, the Company believed that it was purchasing all right, title and interest
in and to the PI Technology, with the exception of certain licenses granted to
others to practice the inventions. Subsequent to such transaction, the Company
became aware of a purported assignment on February 14, 1991 of a one-half
interest, title and right in and to the then patent application, which is now
U.S. Patent No. 5,083,697 (a basic patent underlying the PI Technology), all
inventions disclosed in the patent description and all patents that might be
granted on those inventions, made by Louis DiFrancesco, the inventor of the PI
Technology, to Mr. Kenneth S. Bahl. To the extent the assignment is valid, which
the company does not concede, Mr. Bahl would have a one-half interest in certain
patents underlying and in and to the PI Technology. As the joint owner of these
patents, Mr. Bahl may sell his interest therein for his own profit, or license
others to import, make, use, sell or offer to sell without regard to the rights
of the Company. Mr. Bahl may have licensed the technology to another company at
or about the time of the assignment of the half interest to him. Mr. Bahl may
sell the interest or any part of it, or grant licenses to others without regard
to the
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Company's wishes. Any other sale or assignment that may have occurred and any
future assignments, sale or license of Mr. Bahl's one-half interest in the
patents to other persons or entities could materially adversely affect the
Company's business, financial condition and results of operations with respect
to the PI Technology. The Company currently is negotiating with Mr. Bahl to
acquire his purported interest in the patents referred to above. See "BUSINESS-
Intellectual Property."
GOING CONCERN QUALIFICATION
The independent auditor's report of Sigma 7, for the fiscal year ended
December 31, 1996 was issued under the assumption that Sigma 7 would continue as
a going concern. As discussed in Note 2 to the Sigma 7 financial statements for
the 1996 fiscal year, Sigma 7 has experienced operating losses over the past two
years, resulting in a deficit equity position. Sigma 7's auditors believed,
based on the financial results of Sigma 7 as of December 31, 1996, that such
results raised substantial doubts about the ability of Sigma 7 to continue as a
going concern. Since such date, Sigma 7 has undergone significant changes-
including the acquisition of Sigma 7 by the Company-resulting in an investment
in Sigma 7 by the Company of approximately $3,664,365 and the implementation of
significant changes to the Company's business operations, including the
installation of a new management team. See "BUSINESS-History of the Company" and
"INDEX TO FINANCIAL STATEMENTS."
DEPENDENCE ON LIMITED SOURCES OF SUPPLY
The Company currently depends on two major semiconductor manufacturers for
the supply of substantially all memory chips used by the Company in assembling
its memory modules. The Company can provide no assurances that this source of
supply will continue in the future or, if this source of supply ceases, that it
can obtain an adequate supply of flawed, when used, and non-flawed memory chips
from one or more additional suppliers. Due to the possibility of creating an
adverse market image, certain semiconductor manufacturers may be hesitant to
provide Sigma 7 with a supply of flawed memory chips at such times when Sigma 7
may desire to purchase such memory chips. At the present time, the interruption
of Sigma 7's main sources of supply would have a material adverse effect on the
Company's business and results of operations.
VOLATILITY OF THE SEMICONDUCTOR
INDUSTRY; RECENT MARKET CONDITIONS
Due to the major decline in the market value of Dynamic Random Access
Memory ("DRAM") chips in the 1996 and 1995 fiscal years, BMI was required to
substantially write down the value of its inventory, consisting primarily of
DRAM chips, by $3,075,723 in 1996 and $5,022,218 in 1995. The charge to BMI's
inventory was primarily the result of the decision of the management of BMI to
accumulate approximately $7,000,000 in DRAM chips, making BMI vulnerable to a
decrease in the price of memory chips. BMI has subsequently changed its
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purchasing operations so that it attempts to acquire only that number of memory
chips that it believes it can use and sell within approximately one week from
the date of purchase.
Nevertheless, the semiconductor memory industry is still characterized by
rapid technological change, frequent product introductions and enhancements,
difficult product transitions, relatively short product life cycles, and
volatile market conditions. These characteristics historically have made the
semiconductor industry highly cyclical, particularly in the market for DRAM
chips, which are the primary memory chips used in the Company's memory modules.
The semiconductor industry has a history of declining average unit sale prices
as products mature. Average decreases in unit sale prices for semiconductor
memory products have approximated 30% on an annualized basis over the last six
years. Growth in worldwide supply of memory chips has outpaced growth in
worldwide demand in recent periods, resulting in a significant decrease in
average unit selling prices for memory modules like those produced by the
Company.
The memory products sector of the semiconductor industry is characterized
by volatility in pricing and, to a lesser extent, seasonality. The selling
prices for the Company's memory modules fluctuate significantly with real and
perceived changes in the balance of supply and demand for these commodity
products. The Company is unable to ascertain whether the stabilization of DRAM
prices in early calendar 1997 was indicative of a change in industry supply and
demand, capacity or inventory levels. In the event that average unit selling
prices decline faster than the rate at which the Company can turn over its
inventory, the Company could be materially adversely affected in its business,
results of operations and financial condition. Additionally, although some of
the semiconductor manufacturers have announced adjustments to the rate at which
they will implement capacity expansion programs, many of the semiconductor
manufacturers have already added significant capacity for the production of
semiconductor memory products. The amount of capacity to be placed into
production and future yield improvements by the semiconductor manufacturers
could dramatically increase worldwide supply of semiconductor memory and
increase downward pressure on pricing.
DRAMs are the most widely used semiconductor memory component in most
personal computer ("PC") systems. The Company believes that the growth rate, on
average, for worldwide sales of PC systems has declined and may remain below
prior periods' growth rates for the foreseeable future. In addition, the growth
rate in the amount of semiconductor memory per PC system may decrease in the
future. Should the growth rate of sales of PC systems or the rate of growth of
memory per PC system decrease, the growth rate for sales of semiconductor memory
could also decrease, placing further downward pressure on selling prices for the
Company's semiconductor memory products.
CUSTOMER CONCENTRATION
Approximately 90% of the net sales of Sigma 7 for fiscal 1996 and the first
six months of fiscal 1997 were to Sigma 7's top three customers. As a result of
this concentration of Sigma 7's customer base, the loss or cancellation of
business from any of these customers,
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significant changes in scheduled deliveries to any of these customers or
decreases in the prices of products sold to any of these customers could have a
material adverse effect on Sigma 7's business, financial conditions and results
of operations. However, the Company believes that it can sell all of its product
into the general memory market, should these customers no longer be available to
the Company.
NO ASSURANCE OF PRODUCT QUALITY,
PERFORMANCE AND RELIABILITY
With respect to the PI Technology, 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 PI Technology and memory modules will generally be
manufactured for incorporation into, or used in, high technology products
manufactured by original equipment manufacturers ("OEMs") or products
manufactured by the Company's joint venture partners, co-manufacturing partners
or licensees, if any, and, accordingly, will need to meet exacting
specifications. The Company believes that if its DIMMs and COB memory modules
prove successful, a substantial portion of the OEMs or the Company's joint
venture partners, co-manufacturing partners or licensees, if any, 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 or the
requirements of the Company's joint venture partners, co-manufacturing partners
or licensees, if any, there can be no assurance that the Company will be able to
comply with quality control standards established by such parties 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 PI TECHNOLOGY
The Company's prospective customers, connector manufacturers and electronic
equipment OEMs, are currently manufacturing and selling equipment without the
Company's PI Technology. To be successful in convincing these potential
customers that its PI Technology should be used in lieu of existing
technologies, the Company must, among many actions, convince its potential
customers that the PI Technology makes rematable 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 Particle Interconnect
Technology-Company PI Technology Strategy."
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Any delay in the adoption of the Company's PI Technology 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. Specifically, the Company believes that it is necessary
to establish a market presence in the 1997 calendar year or the early part of
the 1998 calendar year. To achieve such a presence, the Company plans to enter
into licensing or other similar arrangement with one or more connector
manufacturers. There can be no assurances given that the Company will be able
to enter into such relationships in the future, that prospective customers will
use products manufactured using the PI Technology, 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 PI
Technology may materially adversely affect the Company's business, financial
condition and results of operations. See "BUSINESS-The Company's Particle
Interconnect Technology-Company PI Technology Strategy."
NO ASSURANCE OF SUCCESSFUL
EXPANSION OF OPERATIONS
The Company's significant increase in the scope and the scale of its
operations with the acquisition of Sigma 7, 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.
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."
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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, 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 the Company's business, financial condition and results of
operations. See "BUSINESS-Employees" and "MANAGEMENT."
DEPENDENCE ON 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." 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.
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 be required to introduce new products and
processes into its assembly environment, such as the completion of engineering
and initiation of production of DIMMs and the proposed design and assembly of
COB memory modules. These changes can disrupt the assembly process which could
adversely effect customer relationships, cause a loss of market opportunities
and have a material adverse effect on the Company's business, results of
operations and financial condition. No assurance can be given that the Company
will be successful in introducing new products and processes or, if introduced,
that they will be successful in the market place. See "BUSINESS."
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REQUIREMENT FOR RESPONSE TO RAPID
TECHNOLOGICAL CHANGE AND REQUIREMENT
FOR FREQUENT NEW PRODUCT INTRODUCTIONS
The interconnect and semi-conductor memory markets are subject to rapid
technological change, frequent new product introductions and enhancements,
product obsolescence and changes in end-user requirements. This market may be
eroded or replaced with other forms of technology. The Company's ability to be
competitive in this market 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. 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 DIMM and COB
memory module product lines. 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 current and prospective products is highly
competitive. In the semiconductor memory module market, the Company currently
indirectly competes with numerous well-established foreign and domestic
companies, including Fujitsu, Ltd., Hitachi Ltd., Hyundai Electronics, Co.,
Ltd., Micron Electronics, Inc., Micron Technologies, Inc., Motorola, Inc., NEC
Corp., Samsung Semiconductor, Inc., LG Semicon, and Texas Instruments
Incorporated. In the interconnect market the Company, through its proposed
licensees, would potentially compete with multinational connector manufacturers
such as Berg Electronic, AMP, 3M, Molex and Yamaichie and major OEM electronic
technology leaders, such as Intel, Dupont, Siemens and IBM. All of these well-
established foreign and domestic companies 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 may be at a disadvantage in competing against larger
manufacturers with significantly greater capital resources or manufacturing
capacities, larger engineer and employee bases, larger portfolios of
intellectual property, and more diverse product lines that provide cash flows
counter cyclical to fluctuations in semiconductor memory operations. The
Company's larger competitors also have long-term advantages over the Company in
research and new product development and in their ability to withstand periodic
downturns in the semiconductor memory market. Also, the Company expects that
companies have developed or are developing new technologies or products
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directly competitive with the Company's products. 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. No
assurance can be given that the Company will be successful in such endeavors.
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
(such as the current matter with Mr. Kenneth S. Bahl discussed above under "-
Rights to PI Technology), 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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LICENSE RIGHTS TO PI TECHNOLOGY
Prior to the Company's acquisition of Particle Interconnect, Inc. (see
"BUSINESS-Recent Acquisitions, Dispositions and Transactions"), Mr. Louis
DiFrancesco, the inventor of the PI Technology, or companies he controlled,
granted exclusive and 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 in the field of sockets for use in the
automated handling and testing of integrated circuits and in the field of MCM-D
thin film substrates. While such exclusive licenses are in force, the Company
cannot compete in the fields in which the exclusive license has been granted.
The non-exclusive licenses include a non-exclusive license to use the PI
Technology in the field of electrically conductive components. While the
licenses are generally limited to certain fields of use, the terms of the
licenses do not prohibit the licensees from directly competing with the Company
or any of the Company's future licensees. Should the present 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, and is
expected to continue to be, 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
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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."
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
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<PAGE>
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 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 37,953,525 shares of Common Stock assuming
conversion of the Preferred Stock and Warrants into 7,582,450 shares of Common
Stock and excluding shares subject to currently exercisable stock options. All
of the 14,994,606 shares offered 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. Consequently, the Company will have
approximately 37,262,984 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 690,541 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. See "PLAN OF DISTRIBUTION," "SHARES ELIGIBLE FOR FUTURE SALE" and
"DESCRIPTION OF SECURITIES."
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<PAGE>
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.
To the extent that the Company's securities are 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 regarding 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.
PLAN OF DISTRIBUTION
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 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 distribution will be implemented by the Company, 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
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<PAGE>
by the Selling Shareholders, any proceeds from the sale of the Warrants.
However, assuming that all Warrants offered hereby are exercised, the gross
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 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.
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 $.280 on November 7, 1997.
<TABLE>
<CAPTION>
1996 Fiscal Year Ask Bid
---------------- --- ---
<S> <C> <C>
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
March 31, 1997 2.4375 2.0625
June 30, 1997 .50 .375
September 30, 1997 .270 .220
1998 Fiscal Year
----------------
Through October 31, 1997 $ .290 $ .270
</TABLE>
As of October 3, 1997, there were 773 holders of record of the Company's
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 October 3, 1997.
15
<PAGE>
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."
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.
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. On July 7, 1995 the
Company purchased all of the assets and liabilities of Energy and its wholly
owned subsidiary CTL in exchange for 5,412,191 shares of Common Stock. The
5,412,191 shares issued to Energy 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 the
Company by Energy. The assets of the Company were recorded at their estimated
fair value at the date of acquisition and the Company's results of operations
have been included in the consolidated statements of operations subsequent to
the date of the acquisition. Energy's historical share amounts have been
adjusted on a retroactive basis in a manner similar to a
16
<PAGE>
reverse stock split. See "BUSINESS-Company Overview" and "-Recent Acquisitions,
Dispositions and Transactions."
During the eleven-month period ended September 30, 1995, the Company
changed its fiscal year-end to September 30. Previously, the Company had an
October 31 year-end.
The primary asset acquired in the Energy transaction, Energy's wholly owned
subsidiary CTL, continued to generate positive cash flows from operations 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 at that time. In
June 1997, CTL completed its move to new production facilities. The Company
believes that the new facility will eliminate the current production capacity
constraints.
On November 15, 1995, the Company entered into a research and development
agreement with ASU for the development of the Antenna Technology. The Company
owned the rights to certain patent applications relating to the Antenna
Technology that the Company had jointly developed with the Telecommunications
Research Center at Arizona State University ("ASU"). The Antenna Technology is
designed to reduce actual or perceived health hazards that may be associated
with exposure to electromagnetic signals by using a "shielded" antenna.
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. This acquisition, accounted for by the purchase method of accounting,
provided the Company with a facility for the production of the Antenna
Technology and an established manufacturing facility.
Effective July 18, 1997, the Company entered into a stock purchase
agreement to sell, transfer, assign and deliver certain assets, liabilities,
rights and obligations of the Company related to the Antenna Technology,
including its wholly owned subsidiaries Cellular Magnetics and Intercell
Wireless Corp., a Colorado corporation, to Intercell Technologies Corporation
("ITC"), a Colorado corporation, in exchange for shares and warrants for shares
of ITC common stock, the Company's common stock held by shareholders of ITC and
notes. The total consideration received was valued at approximately $2,300,000.
As a result of the uncertainties with respect to realization of the
consideration received no gain was recorded on the disposition.
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") on September 3, 1996. 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
17
<PAGE>
restated, except for loss per common share information. From the date of such
merger, PI Corp. has been engaged primarily in the continuing development of the
PI Technology. The Company initially planned on developing full production
capacity to manufacture particle interconnect coatings at its facility in
Colorado Springs, but subsequently decided to terminate its lease at the
Colorado Springs facility. The Company currently intends to further develop,
validate and qualify the manufacturing process specific to a licensee's use of
the PI Technology and have the licensee manufacture the products using the PI
Technology.
Effective June 6, 1997, the Company acquired a controlling interest in
Sigma 7. Sigma 7 conducts its business through its wholly owned subsidiary BMI
Acquisition Group, Inc. BMI has developed and currently assembles standard
memory modules and, on a limited basis uses the Patch Technology to produce
fully functional computer memory modules from defective memory chips.
The Company acquired control of Sigma 7 through the acquisition of 90% of
the outstanding shares of Sigma 7's common stock in exchange for the payment of
$550,000 and by providing approximately $1,985,000 in additional financing,
consisting primarily of secured loans and standby letters of credit. In
addition, the Company has agreed to issue 1,000 shares of a new class of its
Series D Preferred Stock to holders of certain preferred shares of BMI to
eliminate such preferred shares. For the purposes of this exchange the Series D
Preferred Stock was valued at $2,500 per share. The total cash purchase price
for Sigma 7 has been allocated for accounting purposes on a preliminary basis
based on the net assets acquired calculated on the estimated fair values. The
actual allocation of the purchase price will depend upon the valuation of the
purchased technology at the acquisition date. The valuation of the purchased
technology is currently being performed. Consequently, the ultimate allocation
of the purchase price could differ. To date the Company has advanced an
additional $1,129,000 to Sigma 7 in secured loans.
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
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 equal to 85% of the then prevailing market rate, resulting in
a deemed dividend of $1,765,000. The Company recognized on a pro rata basis
$1,625,000 of the dividend in its 1996 fiscal year net loss per common share
calculation and the balance of $140,000 in the first quarter of the 1997 Fiscal
year.
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, resulting in
18
<PAGE>
a deemed dividend of $932,000, of which $883,000 has been recognized on a pro
rata basis as of June 30, 1997. See "-Liquidity and Capital Resources" below.
RESULTS OF OPERATIONS
Nine Months Ended June 30, 1997 compared to Nine Months Ended June 30,
1996.
Net Sales. Net sales in the nine months ended June 30, 1997 were
$5,426,000, a 117% increase over net sales in the nine month period ending June
30, 1996 of $2,499,000. The increase in net sales was primarily attributable
to the inclusion of net sales from the Company's electronic components
operations of $1,480,000 for the nine months ended June 30, 1997 and a
$1,000,000 increase in sales of electron tube products in the current fiscal
year over the corresponding period of the prior fiscal year. In addition, net
sales for the third quarter of 1997 included $448,000 of sales by Sigma 7.
In September 1996, the Company, through its then wholly owned subsidiary
Cellular Magnetics, merged with AC Magnetics, Inc. doing business as M.C. Davis.
M.C. Davis was acquired by the Company to provide industrial engineering and
production capabilities for the Company's antenna technology. M.C. Davis has
production facilities located in Arizona City, Arizona and Sonora, Mexico, and
is engaged in the production of miniature and subminiature electronic
components. The 1997 fiscal year represents the first year in which the results
of the Company's new electronic components operations were consolidated with the
Company's. As discussed above, on July 18, 1997 the Company sold Cellular
Magnetics to ITC.
Sales of electron tube products increased by 33% in the first nine months
of 1997 compared to the first nine months of the 1996 fiscal year. This
increase was primarily due to new defense related contracts entered into in the
final quarter of the 1996 fiscal year for which production commenced in the
first quarter of the 1997 fiscal year and continued through the second and third
quarters. The Company anticipates that sales under these contracts will
decrease for the remainder of the year from the rate experienced in the first
three quarters of the 1997 fiscal year.
On June 6, 1997, the Company acquired a majority interest in Sigma 7, a
manufacturer of computer memory modules. The third quarter of the 1997 fiscal
year represents the first period in which the results of Sigma 7 were
consolidated with the Company.
Gross Profits. For the nine months ended June 30, 1997 gross profits were
25% compared to 25% for the nine months ended June 30, 1996. Higher margins
were experienced on the sale of electronic components in the nine months ended
June 30, 1997 compared to the nine months ended June 30, 1996. In addition,
several major defense contracts for the rebuild of electron tube products which
generally carry higher margins than the manufacture and sale of new electron
products were completed in 1997. These increases in margins were offset by the
inclusion of lower margin memory module operation in the nine months ended June
30, 1997.
19
<PAGE>
General, Selling and Administrative. For the nine months ended June 30,
1997, general, selling and administrative expenses increased by 41% to
$5,834,000 compared to $4,139,000 in the nine months ended June 30, 1996. The
increase for the nine months ended June 30, 1997 was primarily attributable to
the inclusion of compensation recognized on the transfer of stock options from
three principal shareholders to an officer and director of the Company
($530,000) in the first quarter of the 1997 fiscal year; additional legal and
accounting costs in the 1997 fiscal year related to the filing of a Registration
Statement on Form S-1 in January 1997; the buyout of four management Contracts
($920,000); and the inclusion of general, selling and administrative expenses
for the Company's new electronic components, cellular antenna, particle
interconnect and memory module operations for the first time in the 1997 fiscal
year. General, selling and administrative expenses for the nine months ended
June 30, 1996 consisted primarily of compensation expense resulting from the
vesting of stock options granted at exercise prices below the fair value of
common stock on the date of grant.
Research and Development. Research and development expenses increased to
$1,537,000 in the nine months ended June 30, 1997 compared to $38,000 in the
nine months ended June 30, 1996. This increase was primarily attributable to
research and development activities incurred in connection with the Company's PI
Technology as the Company commenced design, assembly and testing of its
production line and continued testing of the technology. In addition, the
Company continued its developmental work on the Antenna Technology in
conjunction with ASU.
Other Income/Expense. Other income/expense includes $238,000 in interest
income earned on cash and short-term investments in the nine months ended June
30, 1997. In the first nine months of the 1996 fiscal year, the amount of
interest income earned by the Company was insignificant. The remaining balance
of other income/expense is comprised of miscellaneous expense accruals.
Income Taxes. As of June 30, 1997 the Company had a net operating loss
carryover for federal and California income tax purposes. The benefit of these
net operating loss carryforwards has not been recorded by the Company as it is
uncertain that the Company will generate sufficient income in future periods to
utilize the loss carryforwards.
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 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
20
<PAGE>
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 Pulsed 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 Pulsed 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, completed in November 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 Returns and Doubtful Accounts. The Company's allowance for
returns and doubtful accounts increased from $81,000 in 1995 to $255,000 in
1996. This increase is primarily a result of the return of certain Pulsed
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 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
21
<PAGE>
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 DIMMs and COB
memory modules and PI Technology 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 the fiscal year ending September 30, 1998, as the Company continues
to develop its PI Technology and the patch technology owned by its subsidiary,
Sigma 7. The research and development expenses incurred in connection with PI
Technology will primarily involve the testing, validation, documentation and
transfer of the technology in connection with any proposed licensees or industry
partners. It is anticipated that most of the research and development expenses
incurred in connection with the development of the patch technology will be
related to the application of such technology to chip on board.
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 in October 1996 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 of these net operating
loss carryforwards has not been recorded by the Company as it is
22
<PAGE>
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 11-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
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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
During the nine months ended June 30, 1997, cash and cash equivalents
decreased by $2,698,000. Net cash used in operations was $5,549,000, due
primarily to an operating loss of $5,839,000 and increases in accounts
receivable of $55,000 and inventories of $972,000, partially offset by
depreciation and amortization of $484,000, amortization of deferred compensation
of $784,000 and an increase in current liabilities of $116,000. Net cash used
in investment activities was $568,000 due primarily to the acquisition of
property, plant and equipment, cash payments for the purchase of and cash
advances to Sigma 7 offset by the maturity of short-term investments and the
disposition of other assets. Net cash provided by financing activities was
$3,419,000. This was due primarily to net proceeds of $4,673,000
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from the private placement of 525 Series C Preferred Shares and warrants in
December 1996. A portion of these proceeds were used to pay off liabilities of
$1,198,000 assumed on the acquisition of PI Corp. and M.C. Davis and to repay
long-term debt of $206,000.
In the 1997 fiscal year, the Company intends to make capital expenditures
of approximately $1,500,000 in addition to amounts allocated to property, plant
and equipment on the acquisition of the majority interest of Sigma 7. These
expenditures will be made on the Company's new manufacturing facility in
Watsonville, California and on purchasing new memory module testing equipment
for Sigma 7. In the nine months ended June 30, 1997, capital expenditures
totaled $1,149,000.
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
obtained $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. The
Series B proceeds were used to finance the Company's operating activities of
$1,697,000, to repay bank debt of $190,000 during the 1996 fiscal year and other
debt totalling $994,000 after the end of the Company's 1996 fiscal year, and to
acquire property, plant, equipment and other assets of $472,000.
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.
The Company believes that current and known future capital resources will
be adequate to fund its operations over the next 12 months. The Company
believes the sale of electron tube products of CTL and memory modules of Sigma 7
will, in addition, to funds derived from a private placement by Sigma 7 and
anticipated further institutional and other financing of Sigma 7, provide
sufficient funds to satisfy the Company's capital requirements for the next two
years. This assumption is based on the Company's belief that it will be
successful in entering into licensing or other similar arrangement with existing
connector manufacturers with respect to the manufacture of products using the PI
Technology. The failure to enter into such relationships could result in the
Company requiring substantial additional capital and resources develop the PI
Technology and bring products using the PI Technology to market.
To the extent the Company's operations are not sufficient to fund the
Company's capital requirements, the Company may enter into a revolving loan
agreement with a financial
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institution, or attempt to raise additional capital through the sale of
additional capital stock or through the issuance of debt. At the present time
the Company does not have a revolving loan agreement with any financial
institution nor can the Company provide any assurances that it will be able to
enter into any such agreement in the future or be able to raise funds through
the issuance of debt or equity in the Company.
TRENDS AND UNCERTAINTIES
As a result of its activities in 1997 and 1996, the Company believes that
it has positioned itself to compete in new markets through the acquisition of
Sigma 7 and by obtaining the rights to the PI Technology and the Proprietary
Electroplating Process. The Company's activities in fiscal 1997 will focus on
expanding the existing markets for its electron tube products and memory
modules. 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.
Pursuant to the Company's initial business plans prepared in October of 1996,
the Company believed it would commence the sale of its external retrofit antenna
in December of 1996 and commence limited sales of products using the PI
Technology in January of 1997. As discussed under "BUSINESS," the Company
subsequently has reconsidered its initial business plans and has sold its
rights, title and interest in the Antenna Technology and does not plan to
directly manufacture products using the PI Technology.
The Company does not anticipate producing operating revenues until it
enters into licensing agreements with respect to the PI Technology and
Proprietary Electroplating Process and it begins assembling, marketing and
selling DIMMs and producing significant operating revenues until COB memory
modules using the Patch 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 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."
As a reflection of these increased costs and expenses, the Company's
operating losses increased from $433,000 in 1995 to $5,196,000 in 1996 and from
$3,544,000 in the third
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quarter of fiscal 1996 to $6,025,000 in the third quarter of fiscal 1997.
Similarly net cash used in operating activities increased from $201,000 in 1995
to $1,697,000 in 1996 and from $1,764,000 in the nine months ended June 30, 1996
to $5,549,000 used in operations in the nine months ended June 30, 1997.
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's PI Technology requires significant additional effort to
complete validation and documentation, and to establish acceptance of the PI
Technology by the market. 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. In addition, no prediction can be made
as to competitive responses in the market place should the PI Technology prove
successful. Moreover, the current licensees of the PI Technology could compete
directly with the Company in the markets it intends to enter provided such
markets are within the scope of the licenses granted. The marketability of the
PI Technology may also be effected by Louis D. DiFrancesco's purported
assignment of a one-half interest in certain patents underlying the PI
Technology to Mr. Kenneth Bahl. To the extent the assignment is valid, Mr. Bahl
could assign an additional interest in the PI Technology to competitors of the
Company. If such licensees or Mr. Bahl desire to do so, Mr. Louis DiFrancesco
or Mr. Bahl, as the case may be, and not the Company, would receive any increase
in royalty payments or other consideration due to such success. See "RISK
FACTORS-Uncertainty of Market Acceptance for PI Technology" "-Rights to PI
Technology."
The semiconductor memory industry is characterized by rapid technological
change and volatile market conditions. The selling prices for the Company's
memory modules fluctuate significantly with real and perceived changes in the
balance of supply and demand for these commodity products. The Company cannot
currently determine whether the stabilization of DRAM prices in the 1997
calendar year is indicative of a change in supply and demand, capacity or
inventory levels. In the event that average unit selling price of DRAM chips
declines faster than the rate at which the Company can turn over its inventory,
the Company's business, results of operations and financial condition could be
adversely affected.
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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
In March 1995, 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.
In October 1995, 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.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share" (SFAS
No. 128). SFAS No. 128 establishes a different method of computing net income
per share than is currently required under the provisions of Accounting
Principles Board Opinion No. 15. Under SFAS No. 128, the Company will be
required to present both basic net loss per share and diluted net loss per
share. Basic net loss per share is expected to be lower than the currently
presented loss per share as the effect of dilutive stock options will not be
considered in computing basic net loss per share. Diluted net loss per share is
expected to be comparable to net loss per share as presented in the accompanying
consolidated financial statements. The Company plans to adopt SFAS No. 128 in
its fiscal quarter ending December 31, 1997 and at that time all historical net
loss per share data presented will be restated to conform to the provisions of
SFAS No. 128.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and displaying
comprehensive income and its components in the financial statements. It does
not, however, require a specific format for the statement, but requires the
Company to display an amount representing total comprehensive income for the
period in that financial statement. The Company is in the process of
determining
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its preferred format. This Statement is effective for fiscal years beginning
after December 15, 1997.
Also, in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information. "The Statement establishes
standards for the manner in which public business enterprises report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to stockholders. This Statement is effective for
financial statements for periods beginning after December 15, 1997, and the
Company is currently evaluating the impact of the Statement on the reporting of
its segment information.
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
considered 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 and
dispositions made during the 1996 and 1997 fiscal years (see "-Recent
Acquisitions, Dispositions and Transactions"), the Company is currently engaged
in three lines of business: (i) the testing and assembly of memory modules; (ii)
the manufacture and rebuilding of specialty electron power tubes; and (iii) the
proposed design, development, validation and qualification of the manufacturing
process specific to a proposed product that will use the Company's patented
particle interconnect technology (the "PI Technology") and a proprietary trade
secret electroplating process (the "Proprietary Electroplating Process").
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The Company's operations are or will be conducted by and through its wholly
owned subsidiaries or majority owned subsidiaries, Sigma 7, CTL and Particle
Interconnect Corporation ("PI Corp.").
The Company's officers and directors are responsible for the oversight of
the Company and its subsidiaries (i.e., Sigma 7, CTL and PI Corp.), and for
resolving any conflicts of interest that may arise between the Company and its
subsidiaries or among the subsidiaries. The officers and directors of each
subsidiary are responsible for the day to day operations of that subsidiary and,
in turn, are accountable to the Company, as the sole or majority controlling
shareholder of each subsidiary. Major decisions relating to the scope of each
subsidiary's operations or a subsidiary's capital needs are reviewed and
approved by the Company's board of directors in accordance with relevant law.
However, notwithstanding the foregoing, in view of the affiliations among the
Company and its affiliates, no assurance can be given that any such conflicts
can be resolved to the satisfaction of all parties involved.
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,
DISPOSITIONS AND TRANSACTIONS
DISPOSITION OF INTERCELL WIRELESS CORP. AND CELLULAR MAGNETICS, INC.
Until recently, the Company had anticipated pursuing a new line of business
involving the development and manufacture of shielded cellular phone antennas.
The Company had obtained 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 was designed to reduce actual or perceived potential health
hazards that may be associated with exposure to electromagnetic signals by using
a "shielded" antenna.
Based on subsequent evaluations of the Antenna Technology by the Company
and the review of the Antenna Technology by an independent investment banking
company, the Company determined that it was in the Company's best interest to
divest itself of the proposed design, development and production of the Antenna
Systems conducted by its wholly owned subsidiary Intercell Wireless Corp.
("Intercell Wireless"), as well as the manufacture of miniature and non-
miniature coils, transformers and other electronic assemblies conducted by its
wholly owned subsidiary Cellular Magnetics, Inc. ("Cellular Magnetics"). On
July 18, 1997, the Company sold all of its right, title and interest in the
Antenna Technology and its wholly
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owned subsidiaries (the "Antenna Transaction") to Intercell Technologies
Corporation, a Colorado corporation ("ITC"), of which Terry W. Neild and Lou L.
Ross own a controlling interest. At the time the transaction was proposed, Mr.
Neild was a director and Executive Vice President of the Company and Mr. Ross
was a consultant to the Company. As consideration for the sale, the Company
received shares of ITC common stock, shares of the Company's common stock and
certain promissory notes. The total consideration received was valued at
approximately $2,300,000. As a result of uncertainties with respect to
realization of the consideration received, no gain was recorded.
ACQUISITION OF SIGMA 7
On June 6, 1997, the Company acquired 4,500,000 shares of Sigma 7's common
stock in exchange for the payment of $550,000 for the shares and for providing
approximately $1,985,000 in additional financing, consisting primarily of
secured loans and standby letters of credit. The funds were used for inventory
purchases, standby letters of credit to a major memory manufacturer, payment of
obligations, the settlement of litigation, working capital and the redemption of
preferred stock from two individuals holding such preferred stock. As a result
of the transaction, the Company acquired approximately 90% of the 5,000,000
issued and outstanding common shares of Sigma 7. In addition, the Company has
agreed to issue 1,000 shares of a new class of its Series D Preferred Stock (the
"Preferred Series"), to the holders of certain preferred shares of BMI, to
eliminate such preferred shares of BMI. For the purposes of this exchange the
Series D Preferred Stock was valued at $2,500 per share. See "DESCRIPTION OF
SECURITIES-Preferred Stock-Series D Preferred Stock. "The total cash purchase
price for Sigma 7 has been allocated for accounting purposes on a preliminary
basis based on the net assets acquired calculated on the estimated fair value
thereof. The actual allocation of the purchase price will depend upon the
valuation of the purchased technology at the acquisition date. The valuation of
the purchased technology is currently being performed. Consequently, the
ultimate allocation of the purchase price could differ.
ACQUISITION AND DISPOSITION 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. The Company sold Cellular Magnetics to ITC effective July 18, 1997.
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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 and a purported assignment of a one-half interest in certain patents
underlying the PI Technology from Mr. DiFrancesco to Mr. Kenneth S. Bahl in
February 1991. See "-Intellectual Property." In exchange for the PI Technology
and the Proprietary Electroplating Process, the Company issued 1,400,000 shares
of Common Stock to the shareholders of Particle California in a transaction not
involving a public offering. The PI Merger was accounted for as an immaterial
pooling-of-interest.
Effective October 14, 1997, the Company entered into an agreement with Dr.
Herbert J. Neuhaus, Managing Director of PI Corporation, and Mr. Ronald A.
Morley, an employee of the Company, to form a new entity to increase the
likelihood of obtaining additional funding for the development of the PI
Technology and to increase the probability of engaging an industry partner, with
sufficient personnel and financial resources to successfully commercialize the
PI Technology. PI Corporation will transfer all of its intellectual property,
which has a book value of zero, to the new entity for the Company's 72.5%
interest and ownership in the new entity. The remaining 27.5% will be owned by
Dr. Herbert J. Neuhaus and Ronald A. Morley who will become executive officers
and directors of the new entity. The Company deemed it an important part of its
new policy of making each subsidiary a self-financed operation to provide such
ownership to Dr. Herbert J. Neuhaus and Ronald A. Morley to provide them an
incentive to devote their time, expertise and industry contacts to obtain an
industry partner and financing for the commercialization of the PI Technology
and PI Corporation's proprietary electroplating technology. This transaction is
not expected to have a significant effect on Intercell's results of operations.
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 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
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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 Company
subsequently sold the rights to the Antenna Technology to ITC effective July 18,
1997.
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.
Particle Interconnect. In connection with the realization of a change in
business strategy and objective which occurred in September 1997, PI Corporation
determined that certain leasehold improvements, manufacturing equipment, raw
materials and office furniture and equipment were no longer necessary to achieve
its objectives and, accordingly, such leasehold improvements, manufacturing
equipment, raw materials and office furniture and equipment were sold between
September 19, 1997 and October 3, 1997 to non-affiliated parties for
approximately $50,000 which resulted in a loss of approximately $370,000.
MEMORY MODULE PRODUCTS
OVERVIEW
The Company, through Sigma 7, is primarily engaged in the testing and
assembly of standard semi-conductor memory module products. Through its
development of proprietary testing technologies, the Company can purchase memory
integrated circuits (also referred to as "die" or "chips") at the wafer level,
before they are tested and sorted and use these memory
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chips to produce standard SIMMs (Single Inline Memory Modules), as well as other
products. The Company does not manufacture memory chips or, at this time,
package such memory chips; rather, the Company has entered into various wafer
program agreements with certain major semiconductor manufacturers, wherein such
manufacturers have agreed to sell to the Company, at a discount, packaged,
untested memory chips at the wafer level. The Company believes that this gives
it a cost advantage over competitors in the same marketplace. The Company is
also in the engineering phase for production of DIMMs (Dual Inline Memory
Modules) with respect to future products, and has entered the final engineering
phase for production of chip on board ("COB") memory modules.
The Company has submitted a patent application for new technology that
enables it to use faulty memory products, typically the cause of yield and
margin problems for conventional manufacturers, in producing fully functional
memory modules (the "Patch Technology"). If successful in production, this
Patch Technology will provide significant competitive advantages to the Company
by driving down material costs and, when used to "patch" COB will, it is
believed, represent a significant segment of business for the Company, since it
allows COB to be readily salvaged without damaging the printed circuit board.
This new technology, coupled with the wafer program, could potentially lower the
Company's cost of goods sold compared to traditional memory module
manufacturers, resulting in larger gross profit margins upon the sale of its
products.
THE SEMICONDUCTOR MEMORY INDUSTRY
Overview
The demand for semiconductor memory devices in digital electronic systems
has substantially increased over the last several years as a result of the
increasing importance of memory in determining system performance. Memory
integrated circuits encompass several types of devices designed to perform
specific functions within computer and other electronic systems. The three most
significant categories of semiconductor memory are Dynamic Random Access Memory
("DRAM"), Static Random Access Memory ("SRAM") and nonvolatile memory, including
Flash memory. DRAM provides large capacity "main" memory; SRAM provides
specialized high-speed memory; and Flash and other nonvolatile memory provide
low-power memory which retains data after a system is turned off. In addition,
within each of these broad categories of memory products, semiconductor
manufacturers are offering an increasing variety of memory devices which are
designed for application-specific uses.
Memory Module Market
Memory modules are compact circuit board assemblies consisting of DRAM,
SRAM, Flash or other semiconductor memory devices and related circuitry. The
use of memory modules enables original equipment manufacturers ("OEMs") to offer
a relatively easy path for upgradeability of a personal computer or work
station, a feature of system design which is increasingly required by end users.
To achieve this upgradeability and flexibility, both personal
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computer ("PC") and communications OEMs frequently design their systems to use
memory modules as a "daughter card," reducing the need to include memory devices
on the motherboard.
The market for memory modules includes both standard and specialty modules.
The high-volume standard memory module market includes modules that can be
sourced from many module suppliers, and are designed to be incorporated into a
wide variety of equipment. These modules employ designs meeting widely used
industry specifications primarily utilizing DRAM memory and are available with a
variety of options to address the needs of multiple OEMs. Standard memory
modules are typically used in desktop personal computers and printers and are
sold both to OEMs and through computer resellers directly to end users.
Specialty memory modules include both custom and application specific
modules. These modules are usually based on either DRAM, SRAM or Flash
technologies and may include additional control circuitry. Specialty memory
modules are typically sourced (purchased) from a limited number of suppliers and
are generally used in mobile computers, work stations and telecommunications
devices such as routers and switches, and are primarily sold to OEMs.
As the variety of memory devices available to address specific applications
has expanded, the design and manufacture of memory modules has increasingly
become an area in which electronics OEMs employ outsourcing strategies. The
suppliers of memory modules include semiconductor manufacturers which maintain
captive memory module production capabilities and independent memory module
manufacturers which source memory devices from a wide variety of suppliers.
Because independent manufacturers, such as the Company, do not produce
their own semiconductor devices, they have the ability to mix and match devices
from a variety of semiconductor suppliers in a single memory module.
Independent manufacturers of memory modules currently address two primary market
segments: the OEM channel and the reseller channel. Suppliers to the OEM
channel typically offer custom and application-specific modules to the work
station and telecommunications industries, as well as standard memory modules
for use by computer and peripheral OEMs. Suppliers to the reseller channel
typically offer standard DRAM memory modules as an upgrade product sold through
computer distributors and retail channels.
Industry Technology
It is common practice in the industry to use an excess number of partially
good chips, packages or modules to assemble a complete memory unit that normally
would require a lesser number of parts. For example, a 1 megabyte ("M" or
"MByte") x9 SIMM can be made with three partially good 1Mx3 DRAM chips in lieu
of two flawless 1Mx4 chips and one flawless 1Mx1 chip. The identification,
isolation and combination of operating segments of partially defective chips,
packages or modules often requires complex procedures and bulky circuits due to
the great number of possible combinations. The new higher density memory
modules have compounded the complexity of such combinations.
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<PAGE>
Due to economies of scale, the production of flawed memory chips by
semiconductor manufacturers is an integral part of their wafer manufacturing and
packaging process. Approximately 7-8% of all computer chips are defective at
the wafer level, with an additional 7-8% of memory chips being found defective
after packaging. Despite semiconductor manufacturers use of increasingly
sophisticated or refined techniques to improve the quality of their chips,
defects are still detected in chips before or after they are encapsulated into
packages or assembled on chip on board ("COB") modules (i.e., where the
packaging step is avoided and the bare die are attached directly to the PC
board).
The high cost of high-density chips makes the use of less-than-perfect
chips economically desirable. The Company is aware of three companies that
manufacture memory modules using partial memory chips. The Company believes the
Patch Technology as well as its extensive design and manufacturing expertise
provides it with a competitive advantage over other memory module manufacturers
that use partial memory chips.
THE COMPANY'S PATCH TECHNOLOGY
The Company's Patch Technology is predicated upon the fact that the
combination or re-routing of input/output ("I/O") lines between chips, packages
or modules is subject to mechanical limitations both in terms of circuit size
and the number of cross-over leads that can be crowded upon a printed circuit
("PC board"). These limitations require some trade-offs between the types, sizes
and distribution of chips and packages that can be used to assemble a particular
memory unit. The Patch Technology provides a logical approach to the combination
of chips and/or packages using decision-guiding programs as well as versatile
I/O line combining hardware.
Upon receiving a shipment of packaged memory chips, the Company retests the
chips, using industry standard testers, to identify non-flawed chips and
operating segments of flawed memory chips, and then sorts and classifies the
flawed chips as to type, number and concentration of working quadrants within
the chips. The Company attaches a computer generated bar code, disclosing all
relevant characteristics, to all tested memory chips and assembled memory
modules in order to ensure accurate tracking, inventory control and product
quality. For flawed chips, the Company uses its proprietary Patch Technology.
The Patch Technology uses a systematic, logical process to design and assemble
the memory modules by combining their working segments in the most effective
manner in a cohesive memory assembly in order to make the module fully
functional.
An integral part of this process is the use of proprietary PC boards that
provide the Company with a large number of alternative patching connections.
The PC boards are designed by the Company's engineers and manufactured by third
parties.
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Testing
In order to ensure the highest quality of memory modules, the Company has
developed an intensive burn-in and multi-level memory module testing program
which it believes is more extensive than common industry practice. After
initial sort and classification testing, the Company tests completed memory
modules on industry standard testers. The Company then conducts high
temperature and voltage burn-in to eliminate early field failures. The memory
modules are then tested on Pentium/TM//133 boards that run a pattern test
program using proprietary software developed by the Company for up to 16 hours.
This process is constantly updated as new mother boards and central processing
units become available. The Company also conducts more than a one hour local
area network based test under Windows 95/TM/ at 60 nano seconds, a Windows
95/TM/ screen test and a final test screen with the Company's Xincom testers.
THE COMPANY'S PRODUCTS
Current Products and Markets
Currently, the Company offers custom and application-specific memory
modules, as well as standard memory modules that comply with industry standards
established by the Joint Electronic Development Engineering Council. The
Company's PC boards comply with industry standards established by the Personal
Computer Memory Card International Association. Although the Company currently
uses the Patch Technology on a limited basis, currently its primary focus is on
assembling modules composed on 4X4 memory chips using non-flawed chips. The
bulk of these memory modules are 4X32 memory modules, with certain limited
variations to use old inventory.
The Company's memory modules include DRAM and Flash memory. The Company
offers a comprehensive line of DRAM memory modules, including a wide range of
SIMMs. The Company's DRAM modules are available in various configurations of up
to 72 pins and densities of up to 16 MBytes. Many of these products are offered
in both 5.0 volt and 3.3 volt versions, with fast page mode ("Fast Page") and
extended data output ("EDO") architectures. The majority of the Company's
products are standard SIMM memory modules. The Company also produces a limited
amount of standard VGA memory modules using partial memory chips.
The Company sells the completed memory modules under the Company name and
with full service support and industry standard product warranties (e.g., if a
memory module is determined to be defective within one year, it will be
replaced, upon return, at no cost). Until recently, the Company sold the
majority of its memory modules to independent memory resellers. The Company has
recently ceased this practice and now sells its memory modules to small OEMs and
memory distributors in the computer industry. The Company will continue its
attempts to expand its distribution network to include additional wholesale and
retail outlets that sell computer equipment as well as small and medium sized
OEMs.
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In order to obtain market share, the Company currently sells its memory
modules at a discount, usually $1.00 to $1.50 per module. While the Company
currently intends to continue this practice, it plans to reduce the discount to
$.50 per memory module in the future.
Future Products
The Company is currently engineering DIMMs for production. Tooling and
testing software design are underway. Current plans call for DIMM production to
integrate into the production process by mid-November 1997. The Company intends
to enter the DIMM market because it believes such products offer higher margins
and less intense competition. In addition to the above products, the Company is
currently designing proprietary PC boards for use in assembling memory modules
using static DRAM and SRAM memory chips.
The Company believes the COB memory module market provides the greatest
opportunity for using the Patch Technology. The Company believes the Patch
Technology is the only viable method for using partial memory chips to
manufacture COB memory modules and to correct defective COB memory modules
already manufactured. As noted above, due to the nature of the semiconductor
manufacturing process, between 7-8% of all die manufactured are found to be
defective after initial wafer level testing. On 16 chip 2X32 or 8X32 COB memory
modules, up to 80% of such modules could have a single die fail.
The Patch Technology will enable the Company to repair flawed COB memory
modules without detaching the memory chips currently encapsulated on the module.
If the Patch Technology proves effective, the Company can offer substantial cost
savings to COB memory module OEMs, which savings the Company does not believe
its competitors can match without using the Patch Technology. The Company
believes it can obtain substantial cost savings using the Patch Technology based
on the Company's estimates of basic yields for packaging full wafers and testing
full wafers and bare die at the Company's facilities. Since the Company has not
entered this market to date, the validity and accuracy of the such estimates
cannot be reasonably determined.
To assemble COB memory modules using the Patch Technology, the Company will
be required to obtain a regular source of supply of whole wafers and bare,
unpackaged die from semiconductor manufacturers and obtain additional bare die
burn-in and testing equipment, which it can lease. The Company has entered into
discussions with certain major semiconductor manufacturers to obtain a regular
supply of whole wafers and bare die. The Company will also be required to
design, and currently is in the process of designing, proprietary PC boards for
use in assembling COB memory modules.
COMPETITION
The memory module industry is intensely competitive, comprised of a large
number of competitive companies, several of which have achieved a substantial
share of their respective markets. Generally, all of the Company's competitors
in this market have substantially greater
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financial, marketing, technical, distribution and other resources, greater name
recognition, lower cost structures and larger customer bases than the Company.
The Company currently indirectly competes with numerous, well established
foreign and domestic companies engaged in the fabrication of wafers, some of
which maintain captive memory module production, divisions, subsidiaries or
capabilities, including Fujitsu Ltd., Hitachi, Ltd., Hyundai Electronics, Co.,
Micron Technologies, Inc., Motorola, Inc., NEC Corp., Samsung Semiconductors,
Inc., LG Semicon, Siemens, and Texas Instruments Incorporated. In the OEM memory
module market, the Company competes against semiconductor manufacturers that
maintain captive memory module production capabilities, including Integrated
Device Technology, Inc., Micron Electronics, Inc. (a subsidiary of Micron
Technology Inc.) and Multichip Technology, Inc. (a division of Cypress
Semiconductor Corporation). The Company also competes with independent memory
module manufacturers, including Celestica, Inc., PNY Electronics, Inc. and
Simple Technology Incorporated. In the computer systems reseller market for
memory modules, the Company competes with Kingston Technology, Inc., Viking
Technology, Inc. and Vision Tek, Inc. The Company faces competition from current
and prospective customers that evaluate the Company's capabilities against the
merits of manufacturing products internally. In addition, the Company competes
and expects to continue to compete with certain of its suppliers. These
suppliers may have the ability to manufacture competitive products at lower
costs than the Company as a result of their higher levels of integration. The
Company also faces and may face competition from new and emerging companies that
have recently entered or may in the future enter the markets in which the
Company serves.
The Company expects its competitors to continue to improve the performance
of their current products, to reduce their current product sales prices and to
introduce new products that may offer greater performance and improved pricing,
any of which could cause a decline in sales or loss of market acceptance of the
Company's products and thereby have a material adverse effect on the Company's
business, financial condition and results of operations.
There can be no assurance that enhancements to or future generations of
competitive products will not be developed that offer superior prices and
technical performance features compared to the Company's products. To be
competitive, the Company must continue to provide technologically advanced
products and manufacturing services, maintain quality levels, offer flexible
delivery schedules, deliver finished products on a reliable basis and compete
favorably on the basis of price. In addition, increased competitive pressure
has led in the past and may continue to lead to intensified price competition,
resulting in lower prices and gross margin, which could materially adversely
affect the Company's business, financial condition and results of operations.
There can be no assurance that the Company will be able to compete successfully
in the future.
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<PAGE>
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 200 KHz to 18,000 MHz.
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 200 KHz to the 500 MHz range; VHF
radio and television and linear accelerators using the 500 MHz to 600 MHz range;
industrial microwave cooking and heating which use the 400 MHz to 2,450 MHz
range; and radar and electron guns using the 3,000 MHz to 18,000 MHz 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 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.
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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 18,000 MHz). Magnetrons are generally categorized as
either continuous wave ("CW") or pulsed ("Pulsed") units. CW magnetrons are
used primarily in heating and drying applications. Pulsed 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
(between 500 MHz and 2,000 MHz) and S-band (approximately 2,000-4,000 MHz)
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.
<TABLE>
<CAPTION>
Annual Market (New and Rebuilt)
-------------------------------
<S> <C>
Pulsed Magnetrons (Radar and Medical) $35.5 million
CW Magnetrons (Industrial use) 4.1 million
</TABLE>
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, 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.
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<PAGE>
<TABLE>
<CAPTION>
Published
Annual Annual Approximate Company
New Units Units New Price/*/
Produced Rebuilt Price Rebuilt
-------------- ---------- -------------- -----------
<S> <C> <C> <C> <C>
Television Broadcasting 2,500 50 $40,000 $16,000
Transmission of Data 2,000 10 13,000 6,000
Medical Use 200 or more 6 40,000 15,000
Navigation 400 or more 25 12,000 4,000
</TABLE>
_______________
/*/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.
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 200 KHz to 18,000 MHz with power levels of up to three million watts.
The Company's product lines operate within the following frequency bands: HF and
UHF bands - 200 KHz to 1,000 MHz, L-band 500 MHz to 2,000 MHz; S-band 2,000 MHz
to 4,000 MHz; C-band 4,000 MHz to 8,000 MHz; X-band 7,000 MHz to 12,000 MHz and
Ku-band 12,000 MHz to 18,000 MHz. The Company primarily manufactures and
rebuilds electron power tubes categorized as follows: CW (continuous waive)
magnetrons, pulsed magnetrons, klystrons, power grid tubes (triodes and
tetrodes), linear accelerators guides and electron guns.
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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
Medical and Siemens Medical. The electron power tubes utilized by Varian Medical
and Siemens Medical operate in the S-band frequency range and are used for
diagnostic x-ray machines. Because the Company does not manufacture electron
power tubes operating in the S-band frequency range for the medical x-ray
market, it only offers repair services for these electron power tubes.
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 for use in
therapeutic x-ray systems, which systems are typically used in newer treatment
methods for certain cancer patients. 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 therapeutic medical applications. The Company
supplies magnetron tubes, operating in the X-band frequency range, for
therapeutic x-ray applications for companies such as Accuray, Schonberg Research
and Intraop.
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
1997. Approximately 39% of these net revenues are generated from the
manufacturing and sale of new magnetrons, with the remaining 44% derived from
rebuilding magnetrons.
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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 3.6% of the Company's net revenues in fiscal
year 1997.
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 6% of the net revenues of the Company in fiscal year 1997.
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.
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
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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 150 customers in its electron tube
business and has shipped over 25,000 electron tubes to 500 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, Hughes Aircraft, Inc.
and Ferrite Components System, accounted for approximately 14% and 15%,
respectively, of its annual revenues for fiscal year 1997. 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 entered into an agreement with the City of Watsonville,
California for the lease of a 21,600 square foot manufacturing facility. The
Company will complete its move to this new facility by November 30, 1997. The
Company occupies approximately 12,000 square feet of the building and is
subletting 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 markets.
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, 1997, the Company's production backlog represented by
customer orders in its electron tube business was approximately $1,900,000. For
the preceding year ended (or equivalent) September 30, 1996, the Company had
approximately $1,500,000 in firm backlog. The Company anticipates completing
all production backlog during its current fiscal
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<PAGE>
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 rights relating to any technologies or products which
might develop from such research and development.
THE COMPANY'S PARTICLE INTERCONNECT TECHNOLOGY
OVERVIEW OF PI TECHNOLOGY
The Company proposes to pursue a new line of business involving the
development and licensing 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 transferred to strategic partners
that will use the PI Technology to mount, package or attach electronic
46
<PAGE>
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 PC, automotive,
communication and work station 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 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.
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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.
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 or upgrading a memory module in a PC). 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,
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
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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 arises 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.
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.
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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 the PI Technology can be applied using its Proprietary
Electroplating Process at a very low cost.
There is no assurance, however, that the market place will accept the PI
Technology or that the Company can successfully complete a testing program
before it can market the PI Technology. Unforeseen technical problems arising
out of such testing could adversely affect the Company's ability to develop a
commercially acceptable version of the PI Technology.
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 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 Acquisitions, Dispositions and Transactions."
Five companies operate under licenses from the Company to use the PI Technology.
These licensees use the PI Technology to produce products that do not currently
compete with products the Company believes potential licensees of the PI
Technology will produce; however, nothing in the license agreements would
prohibit these companies from doing so in the future, provided the licensees
have a right to use the PI Technology in that field. In addition, Mr. Louis
DiFrancesco, the inventor of the PI Technology, purportedly assigned a one-half
interest in certain patents underlying the PI Technology to Mr. Kenneth S. Bahl
in 1991. See "BUSINESS-Intellectual Property."
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General. The PI Technology utilizes patents owned by the Company for
bonding and joining metal surfaces to enhance electrical connectivity. 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 may replace
the use of soldering to create such connections.
Operation of the Technology
PI Technology begins with 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 embedded
particles create a surface with many points that provide numerous 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 PI Technology are capable of penetrating surface
contamination and oils to create a gas-tight electrical contact.
The diamond particles concentrate 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 contaminants on most surfaces
without requiring large amounts of force on the contact. Reliable, gas-tight
connections can be made with PI 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 substantially intact.
These particles can be applied to many different substrates; flexible,
rigid, metallic and non-metallic. This ability coupled with the very low
contact force gives the capability to make reliable connectors out of materials
that could collapse if exposed to the normally required contact forces.
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 electronic interconnect industry as the primary industry in which
to license the PI Technology and
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Proprietary Electroplating process. The PI Technology has been in use in the
connector industry for several years, mainly in test and burn-in socket
applications by licensees of the PI Technology. There is a current demand in
the connector industry for reliable Ball Grid Array (BGA) and Land Grid Array
(LGA) production sockets as well as other forms of Z-axis interconnect such as
direct chip attachment and MCMs. 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 planned to develop full production capacity to
produce panels using the PI Technology. Because of the large capital investment
required to develop full production capacity, however, the Company has decided
to license the PI Technology and Proprietary Electroplating Technology to
interconnect manufacturers and assist such manufacturers in the development,
testing and qualification of the PI Technology for that specific product line.
The Company's primary objective is to provide this service to numerous connector
manufacturers, in competing and non-competing applications.
The Company believes that entering into joint venture relations with a
leading connector manufacturer or a leading electronic technology OEM is the
only practicable method of bringing the PI Technology to market given the
Company's current capital position. The Company believes that such
relationships are necessary to gain worldwide access for the PI Technology
(i.e., the Company believes approximately 60% of its potential market for Z-axis
interconnects exists outside the United States). The Company contemplates that
a licensee or joint venture partner will provide access to its existing
distribution channels and be responsible for marketing and engineering costs for
the relevant Z-axis package. 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. While the Company continues to discuss such relationships and
alliances with industry participants, no agreements or understandings exist
currently, and there can be no assurances given that any such relationships or
alliances will be established or if established that they would be profitable to
the Company.
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, marketing and licensing of its PI Technology 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
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that it has had success 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. 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.
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 succeed with this
approach, the Company must select an appropriate licensee or 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. The Company can provide no guarantee that it can
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 has entered into preliminary discussions with two industry
leaders that satisfy all of the above criteria, however, the Company can provide
no assurances that any agreements will be consummated or, if consummated, that
such agreements will prove profitable.
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
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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 connector manufacturers (such as Berg Electronic, AMP, 3M, Molex
and Yamaichie), and major OEM electronic technology leaders (such as Intel,
Siemens and IBM), each with established manufacturing facilities and tremendous
economies, compete with each other daily on both price and quality. In the
event the Company enters into a license or joint venture relationship with a
major connector manufacturer, its products will directly compete with the
products of the other connector manufacturers. The Company's current approach
of licensing or partnering rather than competing with these large firms means
that it will not directly compete with such well established leaders. The
Company, however, will face competition to its PI Technology primarily through
the development of competing technologies and technologies that currently exist.
There currently exists approximately 28 different sources/technologies for
use in creating Z-axis interconnects. 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 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 technology
currently has unacceptable limitations with regard to electrical/mechanical
performance, manufacturability or cost as compared to the PI Technology.
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 Z-axis electronic interconnect market, PI Technology has
applications in many other areas. These areas include:
. Manufacture of complex PCB cards at low costs.
. Heat Dissipation Products (Heat Sinks).
. High Voltage Splicing Products.
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. 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,
PI Corp. and Sigma 7 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. 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 less hazardous waste compared to current industry practices due to
improvements made in the Company's electroplating process.
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, 1997. Similarly,
capital expenditures to comply with such laws and regulations are not expected
to be material in the fiscal year ending September 30, 1998.
INTELLECTUAL PROPERTY
PATCH TECHNOLOGY 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 Patch Technology, 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 Patch Technology.
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Prior to the Company's acquisition of Particle California, Mr. Louis
DiFrancesco, the inventor of the PI Technology, or companies he controlled,
granted exclusive and 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 in the
field of sockets for use in the automated handling and testing of integrated
circuits and a non-exclusive license to use the PI Technology in the field of
electrically conductive components; a non-exclusive license to Acsist Associates
Inc., now known as Johnson-Matthey Semiconductor Packagings, Inc., to use the PI
Technology in the field of laminate-based substrate products; an exclusive
license to Micro Module Systems, Inc., to use the PI Technology in the field of
MCM-D thin film substrates, except attached or associated products including
integrated circuits, sockets, lids, heat sinks, housings and printed circuit
boards; a non-exclusive license to Multiflex Inc., to use the PI Technology in
the field of laminate-based substrates and metal substrates; and a non-exclusive
license to Myers Consulting Inc., to use the PI Technology in the field of
laminate-based substrates, metal substrates, and wafer or semi-conductor
products. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-Trends and Uncertainties" and "RISK FACTORS-License Rights
to PI Technology."
Subsequent to date of the Company's acquisition of Particle California, the
Company became aware of a purported assignment on February 14, 1991 of a one-
half interest, title and right to the then patent application, which is now U.S.
Patent No. 5,083,697 (a basic patent underlying the PI Technology) made by Mr.
Louis Difrancesco, the inventor of the PI Technology, to Mr. Kenneth Bahl.
Based upon documentation the Company has been able to obtain to date, the
Company believes the assignment was given in consideration of the formation of a
business that was never formed and, thus, the assignment appears to be invalid
due to a failure of consideration and appears to be voidable for failure of
performance. Mr. Bahl may have licensed at least one company, PI Materials,
Inc., to practice the inventions that are the subject of the assignment. To the
extent the assignment is valid, Mr. Bahl would have a one-half interest in
certain patents based on the PI Technology. Any future activity by Mr. Bahl
including assignment, sale or license of these patents by Mr. Bahl to other
persons or entities could materially adversely affect the Company's business,
financial condition and results of operations. The Company is currently
vigorously pursuing a resolution to this matter, including the possibility of
initiating all legal remedies available to it to obtain the full and
unconditional rights to the PI Technology. See "RISK FACTORS-Rights to PI
Technology."
Consequently, PI retains the right, subject to any interest which Mr. Bahl
may retain, to exclude all other companies from using the patented technology
without a license. Concomitantly the company may license such other companies
as it chooses, provided the licenses are consistent with the exclusive licenses
previously granted and other licensing restrictions that may appear in such
prior licenses.
As of September 30, 1997, the Company has filed one patent application
titled "Memory Module Assembly Using Partially Defective Chips," relating to the
Patch Technology. The
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Company can provide no assurance that a patent will be issued or that, if
issued, such patent will provide adequate protection to the Company with respect
to its products.
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 semiconductor 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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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 September 30, 1997, the Company and its subsidiaries had
approximately 81 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 370 Seventeenth
Street, Suite 3290, Denver, Colorado 80202. The monthly lease payments are
$1,834.18.
PI CORP.
The Company originally conducted its operations on a 45,000 square feet,
10-acre site located at 3550 South Marksheffel Road, Colorado Springs, Colorado.
In September 1997, the Company prematurely terminated on this lease and the
landlord took possession on October 4, 1997, prior to which the Company removed
all assets and equipment from the building. The research and development
equipment is currently being held in rented storage, and management, financial
and clerical activities are being conducted at temporary facilities. As
previously disclosed, the Company entered into an agreement to form a new
corporation with Dr. Herbert J. Neuhaus and Ronald A. Morley in order to better
promote the likelihood of obtaining an industry partner and financing to secure
the successful commercialization of the PI Technology. A new corporation,
Microlink Technologies Corporation, entered into a lease agreement, which the
Company guaranteed, dated October 14, 1997, to lease approximately 4,000 sq.
feet for a term of three years commencing November 1, 1997 and ending October
31, 2000 at a monthly rental of $1,833.33. The facility is located at 2291-C&D
Waynoka Road, Colorado Springs, Colorado 80915.
SIGMA 7
With the exception of its proprietary PC boards manufactured by third
parties, Sigma 7 currently assembles all of its products in a 33,938 square foot
facility located at 6610 Nancy Ridge Dr., San Diego, CA. 92121. Sigma 7's
executive offices are also located at this facility. The Company estimates the
facility has a capacity to remove and attach from PC boards over 400,000
computer chips per month and the ability to test 196,550 chips per month. The
facility currently operates 24 hours per day, using three eight-hour shifts.
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The Company's facility in San Diego is leased from an unaffiliated party,
which lease expires in June of 1999. The monthly lease payments are $17,647.76,
with a purchase option of $2,000,000 which expires on September 30, 1997. The
Company elected not to exercise the purchase option on the facility. The
Company is actively considering possible subleasing of excess space in order to
further reduce overhead cost. The Company believes that the current lease terms
are very favorable to the Company as the lease rate per square foot under the
Company's lease is significantly below the per square foot rental cost being
charged on similar facilities.
CTL
The Company's manufacturing facilities are located at 125 Aviation Way,
Watsonville Municipal Airport, City of Watsonville, California, and consists of
approximately 21,600 square feet. The Company currently leases this facility
pursuant to a lease agreement dated June 16, 1995 with the City of Watsonville,
California. Construction of this facility began in March 1996, and the Company
plans to complete its move into this new facility in November of 1997. The
Company occupies approximately 12,000 square feet at the facility and is
subletting 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 three successive
five-year terms. The total lease cost is approximately $15,000 per month,
exclusive of any sublease revenues.
LEGAL PROCEEDINGS
On September 30, 1997, the landlord of the property formerly occupied by PI
Corp. at 3550 S. Marksheffel Road, Colorado Springs, Colorado, filed a complaint
against, among others, Particle Interconnect Corporation and the Company,
seeking damages for premature termination of the lease which includes a rental
payment of $23,823.38 for the month of September 1997, and monthly rental
payments of $23,587.50 for the months of October 1997 through July 1998. In
addition, certain costs incurred by the landlord in connection with clean-up of
the building and legal fees also may be incurred by the Company and its
subsidiary. The Company estimates that its subsidiary, PI Corp., may have a
liability approximating $275,000.00 in connection with default on the lease.
The Company currently is conducting negotiations to settle the matter with the
landlord. Further, the Company has reason to believe, based upon
representations made by the landlord, that such liability may be significantly
reduced as a result of the landlord re-leasing the premises to another party.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, directors and significant employees of the Company
are as follows:
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<TABLE>
<CAPTION>
Name and Age Position Period of Service
- ------------------------------ ---------------------------------- -----------------------------
<S> <C> <C>
Paul H. Metzinger (58) Director, President and Chief May 28, 1997 to Present
Executive Officer
Charles E. Bauer, Ph.D. (46) Director Chief Operations Officer
from
May 28, 1997 to October 1,
1997 and Director from
November 22, 1996 to Present
Alan M. Smith (46) Director, Secretary, Treasurer July 7, 1995 to Present and
and Director since June 1996 to
Chief Financial Officer Present
Gilbert Olachea (42) Executive Director of Product September 2, 1997 to Present
Development
Herbert J. Neuhaus (38) Managing Director of Particle August 18, 1997 to Present
Interconnect Corporation
Charles Peddle (59) Executive Vice President of August 21, 1997 to Present
Technology of Sigma 7
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 executive committee of the Board of Directors or any committee
that would serve similar functions such as an audit, incentive compensation or
nominating committee.
BIOGRAPHICAL INFORMATION ON OFFICERS
AND DIRECTORS AND SIGNIFICANT EMPLOYEES
PAUL H. METZINGER. Mr. Metzinger has been President, Chief Executive
Officer and a director of the Company since May 28, 1997. In addition, he has
been a director of Sigma 7 since June 6, 1997 and has served as President and
Chief Executive Officer and a director of Sigma 7 since August 21, 1997. Mr.
Metzinger is currently serving as Chief Executive Officer of Sigma 7 on an
interim basis until Sigma 7 can locate a permanent qualified CEO. Prior to
becoming a director and officer of the Company, Mr. Metzinger served as
Intercell's General Counsel and has practiced securities law and represented
large and small public companies for over 25 years.
60
<PAGE>
CHARLES E. BAUER, PH.D. Dr. Bauer has served as Chief Operating Officer of
the Company since May 28, 1997 to October 1, 1997 when he resigned. He has
served as a director of the Company since November 22, 1996 to the present. Dr.
Bauer served as a director and Chief Executive Officer of Sigma 7 from June 6,
1997 to August 21, 1997. 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 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.
61
<PAGE>
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 British
Columbia since 1981. Mr. Smith devotes substantially all of his professional
time to the business affairs of the Company.
SIGNIFICANT EMPLOYEES
The Company considers the following individuals as significant employees of
the Company.
GILBERT OLACHEA. Executive Director of Product Development of Intercell
Corporation since September 2, 1997. Although currently employed by Intercell
Corporation, Mr. Olachea will be devoting substantially all of his time in the
next few months as the Operating Executive of Sigma 7. From July 1993 to
September 1, 1997, Mr. Olachea served as Vice President Corporate Marketing and
Communications of Amkor Electronics, the world's largest service and product IC
package provider in the semiconductor industry. At Amkor, Mr. Olachea had
management responsibility for company market positioning, new product
implementation and training, public relations and authoring technical articles.
Mr. Olachea coordinated sales, customer service and technical teams to effect a
successful promotion and communication of products, service and value to
customers. His efforts contributed to a marked increase in brand equity, market
awareness and revenue of Amkor. From August 1988 to July 1993 Mr. Olachea
served as Regional Account Manager for Amkor.
HERBERT J. NEUHAUS. Dr. Neuhaus has been Managing Director of Particle
Interconnect Corporation since August 18, 1997. From August 1989 to August
1997, he was associated with the Electronic Material Venture Group in the New
Business Development Department of Amoco Chemical Company, Naperville, Illinois.
While associated with Amoco Chemical Company he held among other positions:
Business Development Manager/Team Leader; Project Manager-High Density
Interconnect; Product Manager MCM Products and as a research scientist.
During his tenure with Amoco, his professional efforts and responsibilities
were directed towards the identification, analysis and development of new market
opportunities for Amoco's electronic materials products, the development of new
applications for such products, including multichip module products, polymide
coatings and processes for multichip module applications.
Dr. Neuhaus received his Ph.D. degree in Physics from the Massachusetts
Institute of Technology, Cambridge, Massachusetts in 1989 and his BS in Physics
from Clemson University, Clemson, South Carolina in 1980.
62
<PAGE>
Dr. Neuhaus is associated with numerous professional associations and has
served with such associations in the capacity of project leader or the technical
chair for conferences. Dr. Neuhaus will devote substantially all of his
professional efforts to the business affairs of Particle Interconnect
Corporation.
CHARLES PEDDLE. Director of Sigma 7 since June 6, 1997 and Executive Vice
President of Technology for Sigma 7 since August 21, 1997. President and Chief
Operating Officer of Sigma 7 from June 6, 1997 to August 21, 1997. Mr. Peddle
invented the Commodore PET personal computer and 6502 microprocessor. He is the
inventor of the Patch Technology and currently holds over 20 patents on
computers, microprocessors and disc drives and developed much of the basic I/O
structure used in microprocessors today. His company, Thystyme, has been
working with partial memories since 1989. Thystyme is not currently conducting
business and Mr. Peddle is employed by Sigma 7 full time.
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
Presiadent 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.
63
<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 $100,000 for the
fiscal year ended September 30, 1997 (the "Named Executive Officers"):
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
-----------------------------------------------------------
Securities
Fiscal Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Options (#) Compensation($)
- ------------------------------------ ------------ ------------------- -------------- --------------------- --------------------
<S> <C> <C> <C> <C> <C>
Paul H. Metzinger, 1997 $70,000/(1)/ -0- 2,350,000/(1)/ -0-
Director, President and
Chief Executive Officer
Gordon J. Sales, Former 1997 50,000 -0- -0- $ 400,000
Director, President 1996 105,917 -0- 200,000/(3)/ -0-
and Chief Executive 1995 -0- -0- 500,000/(3)/ $82,265/(2)/
Officer/(6)/
M. Smith, Director, 1997 146,667 -0- 1,850,000 -0-
Secretary, Treasurer and 1996 93,371 -0- 500,000/(4)/ -0-
Chief Financial Officer 1995 15,000 -0- -0- 40,000/(5)/
Dr. Charles E. Bauer/(7)/ 1997 66,666 -0- 1,600,000 -0-
Director, former Chief
Operating Officer
Terry W. Neild, former 1997 80,000 -0- -0- -0-
Director and Executive Vice 1996 40,000 -0- 200,000/(3)/ -0-
President/(6)/ 1995 -0- -0- 500,000/(3)/ -0-
</TABLE>
64
<PAGE>
________________
/(1)/ Paul Metzinger was elected President and Chief Executive Officer on May
28, 1997. He is compensated pursuant to a written Employment Agreement, dated
June 1, 1997 at an annual salary of $210,000.00. For the period June 1, 1997 to
September 30, 1997, Mr. Metzinger was paid $70,000. The wife of Mr. Metzinger is
the holder of presently exercisable options to acquire 650,000 shares at $0.50
per share and 1,700,000 shares at $0.3750 per share issued September 30, 1997
and expiring September 30, 2007. Mr. Metzinger should be deemed the beneficial
owner of such shares.
/(2)/ Received as compensation as an officer of CTL.
/(3)/ 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 to them to
Alan M. Smith as a gift on October 21, 1996.
/(4)/ Mr. Smith is the holder of presently exercisable options to acquire
150,000 shares at $0.50 per share and 1,700,000 at $0.3750 per share, issued
September 30, 1997 and expiring September 30, 2007. Of the 500,000 options
issued to him by the Company in the fiscal year ended September 30, 1996, Mr.
Smith exercised 150,000 of such options in the fiscal year ended September 30,
1996 leaving a balance of 350,000 shares subject to option. These 350,000 shares
subject to option were canceled and re-issued as a new option on September 30,
1997, expiring September 30, 2007 and are included in the 1,850,000 shares shown
as issued by the Company in 1997. Mr. Smith owns an additional, presently
exercisable option to acquire 150,000 shares at $0.50 per share, issued with a
new term commencing September 30, 1997, expiring September 30, 2007, which he
received from three other individuals on October 21, 1996. This 150,000 option
has not been included in this table as the option was not granted by the
Company.
/(5)/ Received as compensation as a consultant to Energy Corporation and CTL.
/(6)/ Messrs. Sales and Neild resigned as directors and officers of the Company
effective May 28, 1997.
/(7)/ Dr. Bauer served as Chief Operations Officer from June 1, 1997 until he
resigned on October 1, 1997. The compensation shown was paid pursuant to his
Employment Agreement which was terminated effective September 30, 1997.
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 onsiders 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.
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, 1997.
65
<PAGE>
<TABLE>
<CAPTION>
OPTION GRANTS IN THE LAST FISCAL YEAR
Potential Realizable Value at Assumed
Annual Rates of Stock Price
Individual Grants Appreciation for Option Term/(1)/
- -------------------------------------------------------------------------------------------- --------------------------------------
Total/(7)/
Number of Options
Securities Granted to Fair
Underlying Employees Market
Options in Fiscal Exercise Value on Expiration
Name Granted(#) Year/(3)/ Price($/sh) Grant Date Date 0% ($)/(8)/ 5% ($)/(8)/ 10% ($)
- --------------------------- -------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paul H. Metzinger 650,000 9.80 0.50 0.2450 9/30/07 (165,750.00) (65,599.00) 88,503.00
1,700,000/(6)/ 25.64 0.3750 0.2450 9/30/07 (221,000.00) 40,935.00 442,794.00
Alan M. Smith/(4)/ 150,000 2.26 0.50 0.2450 9/30/07 (38,250.00) (15,138.00) 20,320.00
1,700,000/(6)/ 25.64 0.3750 0.2450 9/30/07 (221,000.00) 40,935.00 442,794.00
Charles E. Bauer/(5)/ 100,000 1.51 0.3750 0.2450 9/30/07 (13,000.00) 2,408.00 26,047.00
1,500,000/(6)/ 22.62 0.3750 0.2450 9/30/07 (195,000.00) 36,119.00 390,700.00
</TABLE>
_______________
/(1)/ Protential 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,
September 30, 1997.
/(4)/ Mr. Smith owns an additional, presently exercisable option to acquire
150,000 shares at $0.50 per share, issued with a new term commencing September
30, 1997, expiring September 30, 2007, which he received from three other
individuals on October 21, 1996. This 150,000 option has not been included in
this table as the option was not granted by the Company.
/(5)/ Charles Bauer resigned as an Officer of the Company on October 1, 1997.
/(6)/ Unless exercised within 90 days of resignation or termination, as an
officer, these options are forfeited by the holders unless specifically provided
otherwise in writing by the parties.
/(7)/ Based on a total of 6,831,000 options granted in the fiscal year ended
September 30, 1997.
/(8)/ Numbers in parenthesis are negative numbers.
AGGREGATED OPTION EXERCISE AND FISCAL YEAR-END OPTION TABLE
The following table provides information relating to the exercise of
stock options during the fiscal year ended September 30, 1997 by the
Company's executive officers and the 1997 fiscal year-end value of
unexercised options.
66
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options Options
at FY-End/(1)/ at FY-End($)/(1)/
---------------- -----------------
Shares
Acquired onValue Exercisable/ Exercisable/
Name Exercise(#)Realized( )$Unexercisable Unexercisable
---------------- -------------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Paul H. Metzinger -0- -0- 2,350,000/0 $ 575,750/0
Gordon J. Sales/(2)/ -0- -0- 650,000/0 159,250/0
Alan M. Smith -0- -0- 1,850,000/0/(3)/ 453,250/0/(3)/
Terry W. Neild/(2)/ -0- -0- 650,000/0 159,250/0
Charles E. Bauer/(4)/ -0- -0- 1,600,000/0 392,000/0/(4)/
</TABLE>
_______________
/(1)/ The average of the closing bid and asked price of the Common Stock on
September 30, 1997 ($.245) was used to calculate the option value.
/(2)/ Messrs. Sales and Neild resigned as Directors and officers of the Company
effective May 28, 1997.
/(3)/ Does not include 150,000 unexercised presently exercisable options held by
Alan Smith, which he received from three individuals and not the Company.
/(4)/ Charles E. Bauer resigned as officer of the Company effective October 1,
1997.
DIRECTOR COMPENSATION
Non-employee directors of the Company have in the past and will in the
future receive $1,500 for their attendance at each regular or special meeting of
the Board of Directors. In addition, the Board of Directors intends to grant
non-employee directors options to purchase shares of Common Stock on a case-by-
case basis in the future. The basis for determining the number of options to
award future non-employee directors of the Company will be based on a variety of
factors including the following: experience of the director in the industries
the Company currently competes; previous management experience; the size of the
entity the director is currently or was formerly associated with; and the
overall value the current Board of Directors believes that non-employee director
will provide to the Company.
EMPLOYMENT AGREEMENTS
On May 28, 1997, the Company entered into certain employment agreements
(the "Employment Agreements") with Paul H. Metzinger to serve as President and
Chief Executive Officer of the Company, Alan M. Smith to serve as Chief
Financial Officer of the Company, and Charles E. Bauer to serve as Chief
Operating Officer of the Company (collectively, the "Employees" and individually
an "Employee"). The Employment Agreements are for a period of one year
beginning June 1, 1997. 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
67
<PAGE>
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, Messrs. Smith and Bauer will receive an annual salary of $200,000 and
Mr. Metzinger will receive an annual salary of $210,000 (each referred to as an
"Annual Salary") for the first year. If an Employment Agreement is subsequently
extended by the Board, each Employee's Annual Salary will increase by the
amount, if any, in which the Consumer Price Index increased during the previous
year. 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, the Employee terminates his Employment
Agreement for cause, or in the event of a change in control, the Company will
pay to the Employee all compensation and other benefits that would have accrued
and/or been payable to the Employee during the full term of the Employment
Agreement.
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, acquires
fifty percent or more of the voting shares of the Company, or the Company adopts
a plan of dissolution of liquidation. 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, through its wholly owned
subsidiaries, has also entered into employment agreements with the following
individuals, among others, Dr. Herbert J. Neuhaus and Gilbert Olachea. Sigma 7
proposes to enter into a consulting agreement with Charles Peddle in lieu of an
employment agreement.
COMPENSATION PURSUANT TO PLANS
STOCK OPTION PLANS
During the fiscal year ended September 30, 1997, the Company granted
options to purchase 6,831,000 shares of common stock to directors, officers,
employees and consultants of the Company and its subsidiaries. As of September
30, 1997, 8,952,000 options are exercisable.
68
<PAGE>
The Company has one Stock Option Plan titled the Intercell Corporation 1995
Compensatory Stock Option Plan (the "1995 Plan"). The Company has reserved
14,000,000 shares of common stock for issuance under the 1995 Plan.
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 Metzinger.
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.
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 an 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
69
<PAGE>
$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 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 agreed to distribute the shares of Common Stock issued to
the shareholders of Energy over a period of three years. The Company, with the
concurrence of Energy, decided to change the timing of the distribution due to
the substantial decline in the market price of the Company's common stock.
Accordingly, the 5,412,191 shares of Common Stock owned by Energy were
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 or about May 5, 1997 and the
remainder on August 19, 1997.
521508 B.C. Ltd. (the beneficiaries of which are the adult children of Mr.
Gordon J. Sales and the father-in-law of Mr. Terry W. Neild), 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 247,632, 119,000,
20,000, 20,000 and 20,000 shares of Common Stock, respectively, in the
distribution. The Blonde Bear Trust has 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.
During the fiscal year ended September 30, 1997, the Company sold its
wholly owned subsidiaries, Intercell Wireless Corp. and Cellular Magnetics,
Inc., including all of its right title and interest in the antenna technology to
Intercell Technologies Corporation, a Colorado corporation on July 18, 1997.
Terry W. Neild, former director and officer of the Company and Louis L. Ross, a
former consultant to the Company, owns a controlling interest in Intercell
Technologies Corporation. See "BUSINESS-Recent Acquisitions, Dispositions and
Transactions."
70
<PAGE>
BENEFICIAL OWNERSHIP
The following table sets forth certain information regarding the beneficial
ownership of outstanding shares of Common Stock as of September 30, 1997, by (i)
each person known by the Company to own beneficially 5% 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.
<TABLE>
<CAPTION>
Name and Address of Percentage of
Beneficial Owner Number of Shares Class/(5)/
- ---------------- -----------------
<S> <C> <C>
Paul H. Metzinger, President,
Chief Executive Officer and Director
370 Seventeenth Street, Suite 3290
Denver, CO 80202 2,852,541/(1)/ 8.72%
Alan M. Smith, Chief Financial Officer and Director
999 West Hastings St., Suite 1750
Vancouver, B.C., V6C 2W2 2,188,000/(2)/ 6.76
Cheri L. Perry
3236 Jellison Street
Wheat Ridge, CO 80033 2,852,541/(1)/ 8.72
Charles E. Bauer, Chief Operating Officer and Director
31321 Island Drive
Evergreen, CO 80439 1,600,000/(3)(4)/ 5.00
All officers and directors as a group (3 persons) 6,640,541/(5)/ 18.28
</TABLE>
_______________
/(1)/ Includes the following shares and options currently held by corporations
whose sole shareholder, president and director is Cheri L. Perry, the wife of
Mr. Metzinger: 419,340 shares owned of record and beneficially; 650,000 shares
of common stock subject to a presently exercisable option, exercisable at $.050
per share, issued September 30, 1997, expiring September 30, 2007; and 1,700,000
shares of common stock subject to a presently exercisable option, exercisable at
$0.3750 per share, issued September 30, 1997, expiring September 30, 2007. Mr.
Metzinger owns directly, of record and beneficially, 83,201 shares of common
stock. His wife should be deemed the beneficial owner of such shares.
/(2)/ Includes 300,000 shares of common stock subject to a presently exercisable
option, exercisable at $0.50 per share, issued September 30, 1997, expiring
September 30, 2007 and 1,700,000 shares of common stock subject to a presently
exercisable option exercisable at $0.3750 per share, issued September 30, 1997,
expiring September 30, 2007.
/(3)/ Includes 1,600,000 shares of common stock subject to a presently
exercisable option, exercisable at $0.3750 per share, issued September 30, 1997,
expiring on September 30, 2007.
/(4)/ Charles E. Bauer resigned as an Officer on October 1, 1997.
/(5)/ Based on 30,371,075 shares of common stock issued and outstanding on
September 30, 1997. The total number of shares outstanding is increased to
reflect the number of shares underlying individual options in computing that
individual or group percentage ownership interest in the Company. Mr.
Metzinger's and his wife's stock ownership are not duplicated in this
computation.
71
<PAGE>
SELLING SHAREHOLDERS
This Prospectus covers 14,994,606 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 Shareholders have 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 Shareholders
prior to the offering, (iv) the amount of shares of Common Stock offered by the
Selling Shareholders hereby, and (v) the amount and (if 1% or more) the
percentage of shares of the outstanding Common Stock that will be owned by the
Selling Shareholders after the offering is complete and assuming that all shares
of Common Stock offered hereby are sold.
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<TABLE>
<CAPTION>
Amount of
Amount of Shares/Warrants
Amount of Warrants Owned Amount To Be Owned
Common Stock Amount of Prior to of Shares/(3)// After the
Name of Selling Owned Prior to Common Stock Owned Prior Offering-Series Warrants Offering/
Shareholder Offering-Series B/(1)/ to Offering-Series C/(2)/ B/Series C Offered (4)/
- --------------- ---------------------- ------------------------- ------------------- ------------------ ----------
<S> <C> <C> <C> <C> <C>
AG Super Fund -0- -0- 7,619/-0- 7,619/7,619 -0-/-0-
International Partners
L.P.
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 1,521,354 155,160 53,333/61,538 447,181/114,871 -0-/-0-
International
Darissco Diversified -0- -0- 11,429/-0- 11,429/11,429 -0-/-0-
Investments Inc.
Faisal Finance -0- -0- 49,524/-0- 49,524/49,524 -0-/-0-
(Switzerland)
GAM Arbitrage Investments, -0- -0- 7,619/-0- 7,619/7,619 -0-/-0-
Inc.
Global Bermuda, L.P. -0- 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 -0- -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 -0- 135,765 -0-/53,846 189,611/53,846 -0-/-0-
Ltd.
Leonardo, L.P. -0- -0- 53,333/-0- 53,333/53,333 -0-/-0-
Olympus Securities Ltd. -0- -0- 76,191/-0- 430,491/76,191 -0-/-0-
Queensway Financial -0- 193,950 22,857/38,462 255,269/61,319 -0-/-0-
Holdings
Rana Investment Company -0- -0- 34,286/-0- 34,286/34,286 -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, -0- -0- 26,667/-0- 26,667/26,667 -0-/-0-
Inc.
Santander Merchant Bank, -0- 387,900 -0-/153,846 541,746/153,846 -0-/-0-
Ltd.
Swartz Investments, -0- -0- 330,159/214,615 544,774/544,774 -0-/-0-
LLC/(5)/
The Gifford Fund Ltd. -0- 193,950 38,095/38,462 270,507/76,557 -0-/-0-
The Matthew Fund N.V. -0- 193,950 15,238/38,462 318,510/53,700 -0-/-0-
The Otato Limited -0- 96,975 38,095/0 135,070/38,095 -0-/-0-
Partnership
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 1,521,354 2,036,475 1,092,064/745,386 6,336,987/1,837,450 -0-/-0-
========= ========= ================= =================== ==========
</TABLE>
_______________
/(1)/ Assumes all holders of Series B Preferred Stock convert their shares to
Common Stock two years after July 10, 1996, the last closing date, in
accordance with the conversion formula at a conversion price of $.25 per
share. See "DESCRIPTION OF SECURITIES-Preferred Stock").
/(2)/ Assumes all holders of Series C Preferred Stock convert their shares to
Common Stock two years after December 16, 1996, the last closing date, in
accordance with the conversion formula at a conversion price of $.25 per
share. See "DESCRIPTION OF SECURITIES-Preferred Stock").
/(3)/ 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.
/(4)/ 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.
/(5)/ Swartz Investments, LLC was engaged as selling 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 Preferred Stock and Series C Preferred
Stock or exercised their warrants at the fixed Conversion Price. See
"DESCRIPTION OF SECURITIES."
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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, 600 shares of the Series C Preferred
Stock have been reserved for issuance and 1,080 shares of Series D Preferred
Stock authorized but not yet issued. 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 September 30, 1997, there were 30,371,075 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 September 30, 1997, there were 5 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
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Conversion Price is less than $3.9375 per share of Common Stock on the
conversion date pursuant to the following formula (the "Redemption Formula"):
1,000 x (N/365) + 10,000 x Closing Bid Price on Date of Conversion
---------------------------------------
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:
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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 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 September 30, 1997, there were 167 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) +
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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") 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.
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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:
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.
SERIES D PREFERRED STOCK
As of September 30, 1997, there was no Series D Preferred Stock
outstanding, however, there were 1,080 shares of Series D Preferred Stock (the
"Series D Preferred Stock") authorized and unissued. Each share of Series D
Preferred Shares has an exchange value, or deemed purchase price, of $2,500 per
share and will be convertible into Common Stock beginning on January 1, 1999 at
the option of each holder of the Series D Preferred Stock or automatically upon
the affirmative vote of the holders of a majority of the Series D Preferred
Stock, on the following basis. Each share of Series D Preferred Stock shall
convert into that number of shares of Common Stock that could be acquired at the
then current market price multiplied by the yearly factor indicated in the
following table:
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Year Factor
---- ------
1999 1.5
2000 1.3
2001 1.1
2002 1.0
2003 and thereafter 0.9
The beneficial conversion features of the Series D Preferred Shares
commencing in January 1, 2003 will result in a deemed dividend of approximately
$299,000. The Company will accrete this deemed dividend over the period from
the date of issuance to January 1, 2003. The deemed dividend will reduce
(increase) income (loss) applicable to common stockholders.
Market price will equal the average closing price as published for Common
Stock in daily financial periodicals, if the Common Stock is listed for trading
on any stock exchange or on the NASDAQ Stock market, and if unlisted, then the
average of the bid and asked prices, for the thirty (30) trading day-period
ending on the date immediately preceding the date on which a notice of
conversion is sent to the Company by the holder of the Series D Preferred Stock
provided that in no event may the total number of shares of Common Stock issued
upon conversion of the Series D Preferred Stock exceed ten percent (10%) of the
total number of shares of Common Stock outstanding as of the first date on which
any holder of Series D Preferred Stock sends a notice of conversion to the
Company.
In the event the total number of shares issuable upon conversion exceeds
ten percent (10%) of the then issued and outstanding shares of Common Stock, the
Company shall within ninety (90) days, of such event, redeem those shares of
Series D Preferred Stock which, if converted, would exceed the ten percent (10%)
limitation, at their face value, plus all accrued dividends. In addition,
Series D Preferred Stock (i) will be entitled to receive a cumulative six
percent (6%) dividend commencing January 1, 1998; if such dividend is not
declared and paid for any reason, the face amount of the Series D Preferred
Stock shall be increased by such accrued dividend and shall at the option of the
holder be convertible into Common Stock or otherwise redeemed; (ii) will be
redeemable by the Company at the original price per share upon six (6) months
prior written notice by the Company and payment in cash in full on the
redemption date; (iii) will have a liquidation preference equal to the original
per share price; (iv) will not have any voting rights except as mandated by
applicable corporation law; and (v) will receive registration rights permitting
the resale of not more than twenty percent (20%) of the outstanding Series D
Preferred Stock in connection with any registered, primary, firm commitment
underwriting of the Common Stock after December 31, 1998.
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
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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 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 September 30, 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.
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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.
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 required the Company to file an initial
registration statement (the "Initial Registration Statement") by October 8, 1996
(the "Series B Due Date") and January 16, 1997 and to use its best efforts to
cause the Initial Registration Statement to become effective by April 16, 1997
(the "Series C Due Date" and together with the Series B Due Date, the "Due
Date"). The Company filed the Initial Registration Statement Form S-1 (No. 333-
21239), on February 6, 1997, which became effective on May 13, 1997.
The Initial Registration Statement remained current, until the Company
advised all Selling Shareholders on July 7, 1997 to no longer rely upon the
Prospectus in connection with any sales of securities until the Company filed an
amendment or a new Registration Statement. Because the Company was required to
register additional shares for the benefit of the Series C Selling Shareholders
it was required to file a new Registration Statement registering such shares and
to file a Post Effective Amendment to Registration Statement No. 333-21239.
This Registration Statement is the new Registration Statement and, in
addition, also constitutes Post-Effective Amendment No. 1 to the Registrant's
Initial Registration Statement. Pursuant to Rule 429 under the Securities Act,
the Prospectus included in this Registration
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Statement is a combined Prospectus that also relates to the Initial Registration
Statement. In accordance with Section 8(c) of the Securities Act, Post-
Effective Amendment No. 1 to the Initial Registration Statement shall hereafter
become effective concurrent with the effectiveness of this Registration
Statement.
The Company delivered _________ penalty shares to the Series B and C
Selling Shareholders as a result of the timing of the filing of the Initial
Registration Statement. Further, due to unavailability of registered shares
deliverable to the Series C Selling Shareholders, the Company delivered
7,412,156 restricted shares upon the conversion of 231 Series C Preferred Shares
and deposited 5,545,000 restricted shares to the Custodial Agent as required by
the Cash Disbursement and Stock Custodial Agreement, which was created for the
Series C Selling Shareholders to assure them of immediately deliverable shares
of Common Stock should they convert at declining market prices, requiring more
shares.
The Selling Shareholders have certain demand and piggyback registration
rights, which in view of the Company's actions have not been demanded or
requested as of this date and the Company does not anticipate such demand or
request.
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.
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
37,953,525 shares of Common Stock (giving effect to the conversion of all B and
C Preferred Shares and the exercise of 1,837,450 Warrants, but assuming no
exercise of outstanding stock options). Of these shares, all of the 14,994,606
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.
Approximately 690,541 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
82
<PAGE>
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 (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 14,000,000 shares of
Common Stock under its 1995 Compensatory Stock Option Plan. As of September 30,
1997, 8,952,000 options were exercisable.
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.
EXPERTS
The consolidated financial statements and schedules of Intercell
Corporation and subsidiaries 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 report given upon the authority of such firm
as experts in accounting and auditing.
83
<PAGE>
The financial statement and schedules of BMI as of December 18, 1996 and
December 31, 1995 and for the periods ended December 18, 1996 and December 31,
1995 included in this Prospectus and Registration Statement have been audited by
Matranga & Correia, independent certified public accountants, 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. The consolidated financial statements and schedules of Sigma 7 as of
December 31, 1996 and for the eight-day period ended December 31, 1996 included
in this Prospectus and Registration Statement have been audited by Matranga &
Correia, independent certified public accountants, to the extent and for the
period indicated in their report, and are included in reliance upon such report
given upon 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 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
84
<PAGE>
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.
85
<PAGE>
GLOSSARY
The following are definitions of certain technical terms used in this
Prospectus.
"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.
"DIMM" means a dual inline memory module.
"DRAM" means a dynamic random access memory chip. Currently, a DRAM is the
most common memory chip used in computer memory modules.
"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.
"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.
"Flexible Circuit" is a circuit manufactured from a Flexible Laminate.
Flexible circuits can be single-sided, double-sided or multi-layer.
"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.
86
<PAGE>
"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 connect electrical components (e.g., a
computer chip) to other substrates (e.g., a printed circuit board) which are
required to operate electronic equipment.
"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
87
<PAGE>
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.
"Memory Modules" is a generic term referring to a broad class of packaged
memory chips.
"MHz" means megahertz (one million cycles per second).
"Multi-Chip Module" or "MCM" is a high performance IC package containing
more than one silicon die on a single high density substrate.
"OEMs" means original equipment manufacturers.
"Panel" as used in the electronic industry means the substrate used to
mount, package or attach electronic devices.
"PI Technology" means the particle interconnect technology described and
covered by certain patents and patent applications, know-how and trademarks
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 products that will use the
PI Technology.
"Silicon Die" see "IC" above.
"SIMM" means a single inline memory module.
"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.
"Wafer" means a thin slice of material, (e.g., silicon) used as a base for
an electronic component for an integrated circuit.
"Z-axis" means an electronic interconnect method that uses vertical butt
contacts to connect two electronic components without the use of any horizontal
wiping or sliding action.
88
<PAGE>
INDEX TO FINANCIAL STATEMENTS
INTERCELL CORPORATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Reports.........................................................F-5, F-6
Consolidated Balance Sheets - September 30, 1996 and September 30, 1995................... F-7
Consolidated Statements of Operations - Year ended September 30, 1996, Eleven-month
period ended September 30, 1995 and the Year ended October 31, 1994...................... F-8
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-9
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-10
Notes to Consolidated Financial Statements...........................................F-11-F-29
Schedule II - Valuation and Qualifying Accounts/*/....................................... F-30
Condensed Consolidated Balance Sheets - June 30, 1997 (unaudited)
and September 30, 1996.......................................................... F-31
Condensed Consolidated Statement of Operations - Nine-month period ended
June 30, 1997 and 1996 (unaudited).............................................. F-32
Condensed Consolidated Statement of Cash Flows - Nine-month period ended
June 30, 1997 and 1996 (unaudited).............................................. F-33
Notes to Condensed Consolidated Financial Statements (unaudited).................... F-34-F-36
BMI ACQUISITION GROUP, INC.
Independent Auditor's Report on the Financial Statements
for the Year Ended December 31, 1995..................................................... F-37
Balance Sheet as of December 31, 1995............................................... F-38-F-39
Statement of Operations for the year ended December 31, 1995............................. F-40
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Statement of Changes in Shareholder's Equity for the year ended
December 31, 1995................................................................... F-41
Statement of Cash Flows for the year ended
December 31, 1995.............................................................. F-42-F-43
Notes to Financial Statements for the year ended
December 31, 1995.............................................................. F-44-F-55
Independent Auditor's Report on Supplementary Operating Information...................... F-56
Schedule A-Cost of Good Sold............................................................. F-57
Schedule B-General and Administrative Expenses........................................... F-58
Independent Auditor's Report on the Financial Statements as of and
for the eleven and a half month period ended December 18, 1996...................... F-59
Balance Sheet as of December 18, 1996............................................... F-60-F-61
Statement of Operations for the eleven and a half month period
ended December 18, 1996............................................................. F-62
Statement of Changes in Shareholder's Equity for the eleven and a half
month period ended December 18, 1996................................................ F-63
Statement of Cash Flows for the eleven and a half month period ended
December 18, 1996.............................................................. F-64-F-65
Notes to Financial Statements December 18, 1996..................................... F-66-F-75
Independent Auditor's Report on Supplementary Operating Information...................... F-76
Schedule A-Cost of Good Sold............................................................. F-77
Schedule B-General and Administrative Expenses........................................... F-78
SIGMA 7 CORPORATION
Independent Auditor's Report on the Consolidated Financial Statements
as of and for the period from
December 19, 1996 to December 31, 1996.............................................. F-79
Consolidated Balance Sheet as of December 31, 1996.................................. F-80-F-81
</TABLE>
F-2
<PAGE>
<TABLE>
<S> <C>
Consolidated Statement of Operations for the period from
December 11, 1996 (date of inception) to December 31, 1996.......................... F-82
Consolidated Statement of Changes in Shareholder's Equity
for the period from December 11, 1996 (date of inception) to
December 31, 1996................................................................... F-83
Consolidated Statement of Cash Flows for the period from December 11, 1996
(date of inception) to December 31, 1996....................................... F-84-F-85
Notes to Consolidated Financial Statements December 31, 1996........................ F-86-F-96
Independent Auditor's Report on Supplementary Operating Information...................... F-97
Schedule A-Cost of Good Sold............................................................. F-98
Schedule B-General and Administrative Expenses........................................... F-99
Unaudited Condensed Consolidated Balance Sheet, March 31, 1997........................... F-100
Unaudited Condensed Consolidated Statement of Operations of Sigma 7
Corporation for the Three Months Ended March 31, 1997 and
Unaudited Condensed Statement of Operations of BMI Acquisition
Group, Inc. for the Three Months Ended March 31, 1996............................... F-101
Unaudited Condensed Consolidated Statement of Cash Flows of Sigma 7
Corporation for the Three Months Ended March 31, 1997 and
Unaudited Condensed Statement of Cash Flows of BMI Acquisitions
Group, Inc. for the Three Months Ended March 31, 1996............................... F-102
Notes to Unaudited Interim Condensed Combined Financial Statements....................... F-103
PRO FORMA FINANCIAL INFORMATION
Pro Forma Condensed Combined Financial Information....................................... F-104
Unaudited Pro Forma Condensed Combined Balance Sheet June 30, 1997...................... F-105
Unaudited Pro Forma Combined Statement of Operations for the
year ended September 30, 1996....................................................... F-106
Unaudited Pro Forma Combined Statements of Operations for the
Nine Months Ended June 30, 1997..................................................... F-107
</TABLE>
F-3
<PAGE>
<TABLE>
<S> <C>
Notes to Unaudited Condensed Combined Pro Forma Financial Statements................ F-108-F-110
</TABLE>
/*/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-4
<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.
KPMG Peat Marwick LLP
San Jose, California
December 6, 1996
F-5
<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.
Mark Shelley, CPA
March 14, 1995
Updated December 31, 1996
F-6
<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-7
<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-8
<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
Prefered stock Warrants Common Stock
---------------------- to acquire --------------------
Shares Amount common stock Shares Amount
------- ------ ------------ ------- ------
<S> <C> <C> <C> <C> <C>
Balances as of October 31, 1993 - $ - - 2,352,081 $ 7,000
Conversion of debt to equity - - - 676,777 2,000
Shares issued in exchange for prepaid promotion - - - 35,637 -
Shares issued in exchangefor consulting services - - - 14,255 -
Acquisition of California Tube Laboratory, Inc. - - - 762,031 2,000
Employment contract buy out - - - 222,572 1,000
Shares issued in exchange for microwave technology - - - 178,188 500
Shares issued in exchange for services - - - 178,188 500
Purchase of treasury stock - - - - -
Net loss - - - - -
------- ---------- ------- ---------- ----------
Balances as of October 31, 1994 - - - 4,419,729 13,000
Shares issued in lieu of interest payment to related party - - - 17,819 -
Shares issued in exchange for investment in American Microcell - - - 712,751 2,000
Shares issued in private placement - - - 85,530 -
Contribution to ESOP - - - 176,362 1,000
Conversion of additional paid-in capital to common stock - - - - 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 1,000,00
Contribution to ESOP - - - 126,761 158,00
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 - - - - 4,017,00
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 56,00
Shares to be issued for acquisition of M.C. Davis Net loss - - - 277,778 1,000,00
Net loss - - - - -
------ ---------- --------- ---------- -----------
Balances as of September 30, 1996 787 $5,533,000 1,870,000 15,734,229 $12,187,000
====== ========== ========= ========== ===========
<CAPTION>
Total
Additional stockholders'
paid-in Deferred Accumulated equity
capital compensation deficit (deficit)
--------- ------------ --------- ---------
<S> <C> <C> <C> <C>
Balances as of October 31, 1993 242,000 - (454,000) (205,000)
Conversion of debt to equity 473,000 - - 475,000
Shares issued in exchange for prepaid promotion 50,000 - - 50,000
Shares issued in exchangefor consulting services 20,000 - - 20,000
Acquisition of California Tube Laboratory, Inc. 1,067,000 - - 1,069,000
Employment contract buy out 311,000 - - 312,000
Shares issued in exchange for microwave technology 250,000 - - 250,500
Shares issued in exchange for services 69,000 - - 69,500
Purchase of treasury stock (206,000) - - (206,000)
Net loss - - (362,000) (362,000)
--------- ------------ ---------- ---------
Balances as of October 31, 1994 2,276,000 - (816,000) 1,473,000
Shares issued in lieu of interest payment to related party 13,000 - - 13,000
Shares issued in exchange for investment in American Microcell 498,000 - - 500,000
Shares issued in private placement 60,000 - - 60,000
Contribution to ESOP 246,000 - - 247,000
Conversion of additional paid-in capital to common stock (3,093,000) - - -
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 Net loss - - - 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-9
<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-10
<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 Energy Corporation (formerly known as Modern Industries,
Inc.)
In July 1995, Intercell entered into an Agreement and Plan of
Reorganization with Modern Industries, Inc., a Delaware corporation. Modern
Industries Inc. subsequently changed its name to Energy Corporation
("Energy"). The Company issued 5,412,191 shares of common stock to Energy
in exchange for all of the assets and liabilities of Energy and its wholly
owned subsidiary, California Tube Laboratory, Inc. (CTL).
The 5,412,191 shares issued to Energy 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 Energy. 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.
Energy's historical share amounts have been adjusted on a retroactive basis
in a manner similar to a reverse stock split.
The following table presents unaudited pro forma results of operations as
if the acquisition of Intercell had occurred on November 1, 1993. 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 fiscal 1994 or of results which
may occur in the future.
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Net sales $3,768,000 $2,173,000
Operating loss 512,000 266,000
Net loss 1,397,000 308,000
Net loss per common share 0.23 0.09
</TABLE>
Distribution of Common Stock
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
F-11 (Continued)
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Liquidating Dissolution (the "Plan"). The Plan was approved by a majority
of the shareholders of Energy on October 21, 1996. 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, on a pro-rata
basis over a period of three years.
Acquisition of California Tube Laboratory, Inc.
In May 1994, Energy 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. Energy also bought
out an employment contract with a former owner of CTL for 222,572 shares of
Energy 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, located in Colorado Springs, Colorado, is engaged in the
development and manufacturing of particle-coated substrates for integrated
circuits using patented particle interconnect technology (the "PI
Technology") and a proprietary trade secret electroplating process (the
"Proprietary Electroplating Process"). At the time of the acquisition,
Particle owned rights to the PI Technology and the Proprietary
Electroplating Process and was developing an initial production line for
the manufacture of particle coated substrates at its manufacturing
facility. The Company exchanged 1,400,000 shares of Intercell common stock
for all of the outstanding stock 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.
The book value of Particle at the date of acquisition was as follows:
<TABLE>
<S> <C>
Assets acquired $ 273,000
Liabilities assumed (424,000)
--------
Stockholders' deficit $(151,000)
=========
</TABLE>
F-12 (Continued)
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At the date of acquisition, stockholders' deficit was comprised of $8,000
common stock and ($159,000) accumulated deficit.
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 an $800,000 note. 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:
<TABLE>
<S> <C>
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
==========
</TABLE>
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.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
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
</TABLE>
F-13 (Continued)
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Change in Fiscal Year
During the 11-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 11-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-14 (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-15 (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 nine cents 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.
F-16 (Continued)
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) BALANCE SHEET COMPONENTS
Inventories
A summary of inventories follows:
<TABLE>
<CAPTION>
September 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
Raw materials $ 422,000 296,000
Work in process 453,000 477,000
Finished goods 191,000 -
---------- -------
$1,066,000 773,000
========== =======
</TABLE>
Property, Plant, and Equipment
A summary of property, plant, and equipment follows:
<TABLE>
<CAPTION>
September 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
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
========== =======
</TABLE>
F-17 (Continued)
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Accounts Payable and Accrued Liabilities
A summary of accounts payable and accrued liabilities follows:
<TABLE>
<CAPTION>
September 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
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
========= =======
</TABLE>
(4) SUPPLEMENTAL CASH FLOW INFORMATION
For the year ended September 30, 1996, and the 11-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-18 (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 - -
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 - -
Shares issued in acquisition of Particle
common stock and net liabilities assumed,
accounted for as an immaterial pooling 151,000
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) 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
F-19 (Continued)
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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.
Note Payable
The note payable of $266,000 is unsecured, with principal and interest of
12% per annum due on June 24, 1997. The note payable and accrued interest
were paid in full in October 1996.
F-20 (Continued)
<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
======== ======
</TABLE>
Future maturities of long-term debt as of September 30, 1996, are as
follows:
<TABLE>
<CAPTION>
Year ending
September 30,
-------------
<S> <C>
1997 $120,000
1998 86,000
--------
Total $206,000
========
</TABLE>
F-21 (Continued)
<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
(Continued)
F-22
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
A summary of stock option activity under the Plan follows:
<TABLE>
<CAPTION>
Shares Options outstanding
-------------------
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.
Options granted during 1996 include 2,791,180 granted to nonemployees for
legal services, placement agent services, consulting services and product
promotion services. Nonemployee stock options were generally granted at
discounts ranging from 15% to 90% of the quoted market value of the stock
on the date of grant with prices ranging between $.50 per share and $4.75
per share, and expire 10 years from the date of the grant. Options to
acquire 2,391,180 shares that were granted to nonemployees were exercisable
immediately upon grant. The remaining options to acquire 400,000 shares
vest, as to 150,000 shares, on December 1, 1996 and 1997 and, as to 100,000
shares, on December 1, 1998.
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 compensation expense has been included
in selling, general and administrative expenses in the accompanying 1996
consolidated statement of operations. The remaining deferred compensation
will be amortized over the vesting period of the options, generally four
years.
(Continued)
F-23
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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.
(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.
(Continued)
F-24
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 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.
Grant of Stock Options to Related Party
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 a
related party in return for which the related party agreed to promote the
sale of the Company's products and services in Canada. The options vest
immediately and expire 10 years from the date of grant.
(Continued)
F-25
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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:
<TABLE>
<CAPTION>
Year ending
September 30,
-------------
<S> <C>
1997 $ 513,000
1998 475,000
1999 262,000
2000 254,000
Thereafter 2,048,000
---------
Total $3,552,000
=========
</TABLE>
Rent expense under operating leases was approximately $277,000, $145,000,
and $116,000 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:
(Continued)
F-26
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<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>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
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 $ - -
======= =====
</TABLE>
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
(Continued)
F-27
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
(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:
<TABLE>
<CAPTION>
Percentage of Percentage of
net sales accounts receivables
------------------ --------------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Customer A 14% 15% 22% 6% 9% 15%
Customer B 12% 12% 35% 11% 12% 17%
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
CTL $3,371,000 3,950,000
M.C. Davis 2,150,000 -
</TABLE>
(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.
(Continued)
F-28
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 equal to 85% of the then prevailing market
rate, resulting in a deemed dividend of $932,000 to 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.
(Continued)
F-29
<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-30 (Continued)
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
June 30, 1997 September 30,
(Unaudited) 1996
----------- ----
ASSETS
------
Current assets
<S> <C> <C>
Cash and cash equivalents $ 1,526,000 $ 4,224,000
Short term investments 789,000 3,063,000
Accounts receivable, net 904,000 746,000
Inventories 2,850,000 1,066,000
Prepaid expenses and other current assets 249,000 102,000
Investment land held for sale 1,424,000 1,424,000
----------- -----------
Total current assets 7,742,000 10,625,000
Property, plant and equipment, net 3,595,000 1,418,000
Goodwill and other intangible assets, net 1,365,000 1,583,000
Unallocated purchase price related to Sigma 7 acquisition 3,341,000 -
Other assets 72,000 200,000
----------- -----------
$16,115,000 $13,826,000
=========== ===========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
Current liabilities:
<S> <C> <C>
Note payable $ - $ 266,000
Notes payable to related parties - 932,000
Current portion of long-term debt - 120,000
Accounts payable and accrued liabilities 2,124,000 742,000
------------ ------------
Total current liabilities 2,124,000 2,060,000
Long term debt, less current portion - 86,000
------------ ------------
- -
Total liabilities 2,124,000 2,146,000
------------ ------------
Minority interest in subsidiary 2,500,000 -
------------ ------------
Stockholders' equity:
Convertible preferred stock: 10,000,000 shares authorized
Series B; 59 and 787 issued and outstanding as of June 30, 1997
and September 30, 1996 respectively 415,000 5,533,000
Series C; 403 issued and outstanding as of June 30, 1997 2,681,000 -
Warrants to acquire common stock 3,051,000 1,870,000
Common stock; no par value; 100,000,000 shares authorized
20,378,043 and 15,734,229 shares outstanding as of June 30, 1997,
and September 30, 1996 respectively 18,839,000 12,187,000
Deferred compensation ( 77,000) ( 331,000)
Accumulated deficit (13,418,000) ( 7,579,000)
Total stockholders' equity 11,491,000 11,680,000
------------ ------------
$ 16,115,000 $ 13,826,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(Continued)
F-31
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30
-------
1997 1996
---- ----
<S> <C> <C>
Net sales $ 5,426,000 $ 2,499,000
Cost of goods sold 4,080,000 1,866,000
----------- -----------
Gross profit 1,346,000 633,000,
Selling, general and administrative expenses 5,834,000 4,139,000
Research and development 1,537,000 38,000
----------- -----------
Operating loss (6,025,000) (3,544,000)
Other income (expense) 186,000 ( 121,000)
-----------
Loss before income taxes (5,839,000) (3,665,000)
Income taxes - -
----------- -----------
Net loss (5,839,000) (3,665,000)
Deemed Preferred Stock Dividend relating to
in-the-money conversion terms 1,023,000 -
Accretion on Preferred Stock 413,000 -
----------- -----------
Net loss applicable to common
stockholders $(7,275,000) $(3,665,000)
Net loss per common share $( 0.42) $( 0.28)
Weighted average number of shares of
common stock outstanding 17,169,353 13,095,417
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-32 (Continued)
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30
-------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss $(5,839,000) $ (3,665,000)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 484,000 248,000
Amortization of deferred compensation 784,000 3,086,000
Common stock issued for interest 43,000 -
Changes in operating assets and liabilities net of effects
from purchase of Sigma 7 Corporation
Accounts receivable ( 55,000 181,000
Inventory ( 972,000) ( 218,000)
Prepaid expenses ( 110,000) 18,000
Investment land held for sale - (1,424,000)
Accounts payable and accrued liabilities 116,000 10,000
----------- -----------
Net cash used in operating activities (5,549,000) (1,764,000)
Cash flows from investing activities
Proceeds from maturities of short-term investments 2,274,000 -
Acquisition of property, plant and equipment (1,150,000) ( 20,000)
Payment for purchase of Sigma 7 Corporation ( 550,000) -
Advances to Sigma 7 Corporation (1,395,000) -
Other assets 253,000 -
----------- ----------
Net cash provided by (used in) investing activities ( 568,000) ( 20,000)
Cash flows from financing activities
Proceeds from issuance of common stock 150,000 2,481,000
Proceeds from issuance of Series C preferred stock and warrants 4,673,000 -
Proceeds (repayments) of notes payable (1,198,000) 87,000
Repayment of long term debt ( 206,000) ( 48,000)
Net cash provided by financing activities 3,419,000 2,520,000
----------- -----------
Net increase (decrease) in cash and cash equivalents (2,698,000) 736,000
Cash and cash equivalents at beginning of period 4,224,000 57,000
----------- -----------
Cash and cash equivalents at end of period $ 1,526,000 $ 793,000
=========== ===========
Cash paid during the period for interest $ - $ 84,000
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-33 (Continued)
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Intercell Corporation and its wholly-owned subsidiaries (the "Company").
All intercompany transactions have been eliminated.
The condensed consolidated financial statements are unaudited (except for
the balance sheet information as of September 30, 1996, which is derived
from the Company's audited financial statements) and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the
financial position and operating results for the periods presented. The
condensed consolidated financial statements should be read in conjunction
with the September 30, 1996 audited financial statements of Intercell
Corporation and the notes thereto. The results of operations for the nine
months ended June 30, 1997 are not necessarily indicative of the results
for the entire year ended September 30, 1997, or any future period.
2. NET LOSS PER SHARE
Net loss applicable to common stockholders is computed by dividing the sum
of net loss, deemed preferred stock dividends and accretion on preferred
stock by the weighted average number of common shares and dilutive common
equivalent shares outstanding for each period presented. Common stock
equivalent shares consist of stock options and are computed using the
treasury stock method.
3. INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of: June 30, 1997 September 30, 1996
------------- ------------------
<S> <C> <C>
Raw materials $ 1,663,000 $ 422,000
Work in process 897,000 453,000
Finished goods 290,000 191,000
---------- ---------
$ 2,850,000 $1,066,000
========== =========
</TABLE>
4. SERIES C PREFERRED SHARES
In December 1996, the Company issued 525 shares of no par value Series C
preferred stock (Series C preferred) and detachable warrants in a private
placement for $4,672,500 (net of issuance costs of $577,500).
Each share of Series C preferred is convertible into common stock at the
exchange rate in effect at the time of the conversion, as described in the
preferred stock agreements, and is subject to appropriate adjustment for
common stock splits, stock dividends, and other similar transactions.
Conversion of the Series C preferred is automatic upon the expiration of
three years from the original date of issuance. At the date of issuance,
the exchange rate was less than the prevailing market rate, resulting in a
deemed dividend of $932,000, of which $883,000 has been recognized on a pro
rata basis in the first three quarters of fiscal year 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.
F-34 (Continued)
<PAGE>
Shares of Series C preferred purchased in excess of certain quantities as
described in the preferred stock agreements, or purchased in addition to
previous purchases of Series B preferred shares are accompanied by
detachable warrants to purchase a number of shares of common stock of the
Company equal to between 20% and 50% of the original aggregate purchase
price of the Series C preferred shares divided by a fixed conversion rate
of $3.25 per share, exercisable 105 days after original issuance.
5. ACQUISITION OF SIGMA 7 CORPORATION
Effective June 6, 1997, the Company acquired a controlling interest in
Sigma 7 Corporation. Sigma 7 conducts its business through its wholly
owned subsidiary BMI Acquisition Group, Inc. ("BMI"). BMI has developed
and currently utilizes a proprietary patch technology to produce fully-
functional computer memory modules from defective memory chips. The Company
acquired control of Sigma 7 through the acquisition of 4,500,000 shares of
Sigma 7's common stock in exchange for the payment of $550,000 for 90% of
its outstanding shares and by providing approximately $1,985,000 in
additional financing, consisting primarily of secured loans and standby
letters of credit. In addition, the Company may issue 2,500 shares of a
new class of preferred stock at $1,000 per share to holders of certain
preferred shares of BMI to eliminate such preferred shares.
The total cash purchase price for Sigma 7 of $550,000 has been allocated on
a preliminary basis to the net assets acquired based on the estimated fair
values as follows:
<TABLE>
<S> <C>
Current assets $ 939,000
Property, plant and equipment 1,293,000
Other assets 125,000
Unallocated purchase price 3,341,000
Current liabilities assumed ( 881,000)
Other liabilities assumed ( 84,000)
Notes payable to Intercell (1,395,000)
Note payable ( 288,000)
Minority interest (2,500,000)
-----------
Cash paid for common stock $ 550,000
===========
</TABLE>
The purchase price allocation is preliminary and the actual amount will
depend upon the valuation of the purchased technology at the acquisition
date. Consequently, the ultimate allocation of the purchase price could
differ from that presented above.
6. NONCASH INVESTING AND FINANCING ACTIVITIES
The Company purchased 90% of the common stock outstanding of Sigma 7
Corporation for $550,000. In conjunction with the purchase, the Company
acquired assets with a fair value of $4,316,000 and assumed liabilities and
minority interests of $3,766,000.
In addition, the Company engaged in the following noncash investing and
financing activities:
<TABLE>
<CAPTION>
Nine months ended June 30
-------------------------
1997 1996
---- ----
<S> <C> <C>
Series B preferred stock converted to common stock $ 5,118,000 $ -
Series C preferred stock converted to common stock $ 811,000 $ -
Transfer of stock options from principal shareholders
to Company officer $ 530,000 $ -
</TABLE>
F-35 (Continued)
<PAGE>
7. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". SFAS
No. 128 requires the presentation of basic earnings per share ("EPS") and,
for companies with complex capital structures, diluted EPS. SFAS No. 128
is effective for annual and interim periods ending after December 31, 1997.
Adoption of SFAS No. 128 is not expected to have a material impact on net
loss per common share as presented in the accompanying consolidated
statements of operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This Statement establishes standards for reporting and displaying
comprehensive income and its components in the financial statements. It
does not, however, require a specific format for the statement, but
requires the Company to display an amount representing total comprehensive
income for the period in that financial statement. The Company is in the
process of determining its preferred format. This Statement is effective
for fiscal years beginning after December 15, 1997.
Also, in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". The Statement
establishes standards for the manner in which public business enterprises
report information about operating segments in annual financial statements
and requires those enterprises to report selected information about
operating segments in interim financial reports issued to stockholders.
This Statement is effective for financial statements for periods beginning
after December 15, 1997, and the Company is currently evaluating its impact
on the reporting of segment information.
8. SUBSEQUENT EVENTS
Effective July 18, 1997, the Company entered into a stock purchase
agreement to sell, transfer, assign and deliver certain assets,
liabilities, rights and obligations of the Company related to the Antenna
Technology, including its wholly-owned subsidiaries Cellular Magnetics and
Intercell Wireless Corp., to Intercell Technologies Corporation ("ITC"), a
Colorado corporation, in exchange for shares of ITC common stock, the
Company's common stock and notes. The total consideration received was
valued at approximately $2,300,000. As a result of uncertainties with
respect to realization of the consideration received, no gain was recorded.
F-36 (Continued)
<PAGE>
To the Board of Directors
BMI Acquisition Group, Inc.
San Diego, California
INDEPENDENT AUDITOR'S REPORT
----------------------------
We have audited the accompanying balance sheet of BMI Acquisition Group, Inc. as
of December 31, 1995, and the related statements of operations, retained
earnings, and cash flows for the year ending December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted the audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to in the first paragraph
above, present fairly, in all material respects the financial position of BMI
Acquisition Group, Inc. as of December 31, 1995, and the results of their
operations and their cash flows for the year ending December 31, 1995, in
conformity with generally accepted accounting principles.
Matranga & Correia
/s/ Matranga & Correia
September 27, 1996
San Diego, CA
F-37 (Continued)
<PAGE>
BMI ACQUISITION GROUP, INC.
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 234,909
Investments 200
Accounts receivable - trade, net (Note 3) 1,533,308
Receivables, other (Note 5) 80,605
Inventories (Notes 1 and 4) 5,480,483
Prepaid state tax 98,579
Prepaid expenses (Note 6) 104,542
Advances 114,190
----------
Total current assets 7,646,816
----------
PROPERTY & EQUIPMENT (Note 1)
Property and equipment 2,488,140
Accumulated depreciation (668,170)
----------
Total property and equipment 1,819,970
----------
OTHER ASSETS
Deferred tax asset (Note 7) 0
Deposits 17,333
Covenants 50,000
Accumulated amortization (40,278)
----------
Total other assets 27,055
----------
Total assets $9,493,841
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
BMI ACQUISITION GROUP, INC.
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES
Accounts payable, trade $ 1,211,594
Accounts payable, other 116,914
Deferred revenue 1,240,000
Other accrued liabilities 491,434
Capital lease (Note 10) 3,536
Note payable - bank (Note 14) 2,000,000
-----------
Total current liabilities 5,063,478
-----------
SHAREHOLDERS' EQUITY
Capital stock, common, no par value, authorized
100,000 shares, issued 12,000 shares 600,000
Preferred stock 4,882,277
Retained earnings (deficit) (1,051,914)
-----------
Total shareholders' equity 4,430,363
-----------
Total liabilities and shareholders' equity $ 9,493,841
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
BMI ACQUISITION GROUP, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
SALES, NET $54,561,213
COST OF GOODS SOLD (Schedule A)
(48,150,515)
-----------
Gross profit 6,410,698
GENERAL AND ADMINISTRATIVE (Schedule B) (7,713,826)
-----------
Net income (loss) from operations (1,303,128)
-----------
OTHER INCOME AND (EXPENSES)
Other income 29,446
Interest income 85,969
Gain (loss) on sale of assets (6)
Theft loss 344,871
Penalties 462
Loss - supplier contract (Note 16) (1,400,000)
-----------
Total other income and (expenses) (939,258)
-----------
Net income (loss) before provision for
income taxes (2,242,386)
PROVISION FOR INCOME TAXES (Note 7)
California income tax (800)
-----------
Total provision for income taxes (800)
-----------
NET INCOME (LOSS) $(2,243,186)
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
BMI ACQUISITION GROUP, INC.
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
DECEMBER 31, 1995
<TABLE>
<CAPTION>
No. of Common No. of Preferred Retained
Shares Stock Shares Stock Deficit Total
------ ----- ------ ----- ------- -----
Balance
<S> <C> <C> <C> <C> <C> <C>
May 25, 1994 0 $ 0 0 $ 0 $ 0 $ 0
Issuance of shares:
For Cash 12,000 600,000 600,000
Shareholder distributions (16,753,442) (16,753,442)
Net Income (loss) Fiscal
Year 1994 17,944,714 17,944,714
------ ------- --------- --------- ---------- ----------
Balance Dec. 31, 1994 12,000 600,000 -- -- 1,191,272 1,191,272
Issuance of Shares:
For debt 7,346,040 7,346,040 7,346,040
Preferred Stock redemptions (2,463,763) (2,463,763) (2,463,763)
Net Income (loss) Fiscal
Year 1995 (2,243,186) (2,243,186)
------ ------- --------- --------- --------- ---------
Balance Dec. 31, 1995 12,000 600,000 4,882,277 4,882,277 (1,051,914) 4,430,363
====== ======= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
BMI ACQUISITION GROUP, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C>
Cash received from customers $ 55,441,413
Cash paid to suppliers and employers (48,227,910)
Interest paid (181,493)
Interest received 85,969
Theft loss (344,871)
Other income 29,446
------------
Net cash provided by operating activities 6,802,554
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (523,194)
Payment for purchase of USMT acquisition (325,000)
Proceeds from sale of fixed assets 27,341
------------
Net cash (used) in investing activities (820,853)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on short-term debt (6,825,038)
Redemptions of preferred stock (2,463,763)
Proceeds from short-term debt 2,000,000
Payments under capital lease obligations (42,441)
------------
Net cash (used) in financing activities (7,331,242)
------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,349,541)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,584,450
------------
CASH AND CASH EQUIVALENTS AT DECEMBER 31, 1995 $ 234,909
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
BMI ACQUISITION GROUP, INC.
STATEMENT OF CASH FLOWS (Cont.)
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
RECONCILIATION OF NET INCOME (LOSS) TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
<S> <C>
Net income (loss) $(2,243,186)
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 464,479
Change in assets and liabilities net of effects
from purchase of USMT:
Decrease in accounts receivable 880,200
Decrease in notes receivable 750,096
Decrease in inventory 8,316,659
Increase in investment (200)
Increase in advances (114,190)
Decrease in prepaid FTB 800
Increase in deferred tax asset valuation allowance (308,291)
Decrease in prepaid expenses 278,376
Increase in deposits (3,526)
Decrease in accounts payable (2,300,871)
Increase in deferred revenues 1,240,000
Decrease in other accrued liabilities (157,235)
Decrease in deferred tax liabilities (563)
Loss on sale of fixed assets 6
-----------
Total adjustments 9,045,740
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES: $ 6,802,554
===========
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activities:
The Company purchased USMT for $325,000. In connection with the acquisition,
liabilities were assumed as follows:
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired $2,156,764
Cash paid (325,000)
----------
Liabilities assumed $1,831,764
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------------------
This summary of significant accounting policies of BMI Acquisition Group, Inc.,
a California corporation (the "Company"), is presented to assist in
understanding the Company's consolidated financial statements. The consolidated
financial statements and notes are representations of the Company's management
who is responsible for their integrity and objectivity. These accounting
policies conform to generally accepted accounting principles and have been
consistently applied in the preparation of the consolidated financial
statements.
Business Activity
- -----------------
The Company was established and incorporated on May 25, 1994, in the State of
California. On June 20, 1994, it acquired the majority of the assets of U.S
Modules Technologies, Inc. On January 1, 1995, the Company acquired the stock of
U.S. Modules Technologies, Inc. (refer to Note 2 for details of the
acquisition). The Company is a value-added distributor and tester of micro-
electronic components, and a designer and assembler of computer sub-assemblies.
It purchases untested surplus and non-standard dynamic random access memory
products (DRAMs) from several of the world's foremost DRAM manufacturers. The
Company tests the DRAM and markets the product based on specifications developed
and published by the Company's engineers. It also performs assembly, testing
and repair work on various electronic sub-assemblies. The Company has the
following four operating divisions: BMI, Inc., U.S. Modules Technologies, Inc.,
Global Tech Industries and U.S. Modules, Inc.
Procurement of the dynamic random access memory products (DRAMs) is done through
the BMI division. Testing and assembly of DRAMs are handled by the U.S. Modules
Technologies division. Reclamation of micro-electronic components from
electronic scrap and the reconditioning of those reclaimed components is
performed by the Global Tech Industries division.
In addition to its procurement and recycling capabilities, the Company has
developed highly specialized testing and application design capabilities. Its
testing and assembly subsidiary, U.S. Modules, Inc., based in Milpitas,
California, tests large volumes of non-standard or surplus components, and
designs and assembles applications for these components.
See accountants' audit report.
F-44
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Cont.)
- -----------------------------------------------------------------------
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts of U.S.
Modules Technologies, Inc. - a California corporation, BMI Acquisition Group,
Inc. - a California corporation (the "Company"), and U.S. Modules, Inc. - a
California corporation. All significant intercompany balances and transactions
have been eliminated in consolidation.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include demand deposits with financial institutions
and highly liquid debt instruments with original maturities of 90 days or less.
Revenue Recognition
- -------------------
The Company uses the accrual basis of accounting. Accordingly, revenues are
recorded in the period in which they are earned and expenses are recorded in the
period in which they are incurred. The effect of events on the business is
recognized as services are rendered or consumed rather than when cash is
received or paid.
Property and Equipment
- ----------------------
Property and equipment are carried at cost. Depreciation of property and
equipment is provided using the straight-line method for financial reporting
purposes over their estimated useful lives as follows:
Vehicles 5 years
Office furniture and equipment 5 and 7 years
Leasehold improvements Life of Lease
Testing equipment 5 years
Warehouse equipment 5 years
Computer equipment and software 5 years
See accountants' audit report.
F-45
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Cont.)
- -----------------------------------------------------------------------
Property and Equipment (Cont.)
- ------------------------------
For federal income tax purposes, depreciation is computed using the modified
accelerated cost recovery system. Repairs and maintenance that do not extend
the useful life of the assets are charged to operations as incurred.
Leases
- ------
Leases are classified as either capital or operating leases. Leases that
substantially transfer all of the benefits and risks of ownership of property to
the Company are accounted for as capital leases. At the time a capital lease is
entered into, an asset is recorded together with its related long-term
obligation to reflect the acquisition and financing. Rental payments under
operating leases are expensed as incurred. As of December 31, 1995, all of the
Company's lease agreements have been properly classified.
Inventories
- -----------
Inventories are valued at moving-average cost method, not in excess of market.
Concentration of Credit Risk
- ----------------------------
The Company sells its products to original equipment manufacturers and third
party distributors in the electronics industry worldwide. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. As of December 31, 1995, the Company has established provisions for
potential credit losses and sales returns that are reasonably expected to be
incurred.
See accountants' audit report.
F-46
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Cont.)
- -----------------------------------------------------------------------
Income Taxes
- ------------
Income taxes are computed under the provisions of the Financial Accounting
Standards Board (FASB) Statement 109 - "Accounting for Income Taxes." Certain
items of income and expense are recognized for income tax purposes in different
periods from those in which such items are recognized for financial reporting
purposes. These items include depreciation expense. Deferred income taxes are
provided for the tax effect of these differences.
NOTE 2 - ACQUISITIONS
- ---------------------
On January 1, 1995, the Company acquired 100% of the issued and outstanding
shares of stock of U.S. Modules Technologies, Inc. for $325,000 in cash. The
major remaining assets of U.S. Modules Technologies, Inc. was its 80% owned
subsidiary U.S. Modules, Inc. of Milpitas, California. It tests and assembles
DRAM chips onto single in-line memory modules (SIMM cards). The Company
acquired the remaining 20% minority interest of U.S. Modules during 1995.
NOTE 3 - ACCOUNTS RECEIVABLE - TRADE
- ------------------------------------
Trade accounts receivable is shown net of allowance for bad debts, returns,
allowances and discounts as follows:
<TABLE>
<S> <C>
Accounts receivable $2,069,156
Less: Allowance for bad debts (275,110)
Reserve for returns, allowances and discounts (260,738)
----------
Net trade receivables $1,533,308
==========
</TABLE>
See accountants' audit report.
F-47
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 4 - INVENTORIES
- --------------------
Inventories at December 31, 1995, consisting of the following:
<TABLE>
<S> <C>
Raw materials/work in progress $3,604,176
Finished goods 2,098,126
Reserve for slow moving items (221,819)
---------
Total net inventory $5,480,483
=========
</TABLE>
Inventories are stated at the lower of cost or market. Cost is determined by
the moving-average cost method. Inventory values were significantly reduced
during the year to reflect the decline in market value of computer chips.
NOTE 5 - RECEIVABLES - OTHER
- ----------------------------
Receivables - other at December 31, 1995, consisted of the following:
<TABLE>
<S> <C>
Employee notes receivable (a) $35,857
Other receivables (b) 14,144
Vendor receivable (c) 30,604
-------
Total receivables - other $80,605
=======
</TABLE>
(a) Employee receivables:
<TABLE>
<S> <C> <C>
(1) Various advances $ 4,200
(2) 5% interest-bearing note receivable; payable
at $84.07 per week through July 1996 1,261
(3) 6% interest-bearing note receivable; payable at
$100 semi-monthly through November 1998 6,296
(4) 8% interest-bearing note receivable; payable at
$200 semi-monthly through June 1997 7,606
(5) 6.60% interest-bearing note receivable; lump
sum payable on January 31, 1996 16,494
-------
Total employee receivables $ 35,857
=======
</TABLE>
See accountants' audit report.
F-48
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 5 - RECEIVABLES - OTHER (Cont.)
- ------------------------------------
(b) Other receivables of $14,144 consist of various expenses paid on behalf of
unrelated parties.
(c) Vendor receivable:
<TABLE>
<S> <C> <C>
(1) Component Design $ 30,604
-------
Total vendor receivable $ 30,604
=======
</TABLE>
NOTE 6 - PREPAID EXPENSES
- -------------------------
Prepaid expenses at December 31, 1995, consisted of the following:
<TABLE>
<S> <C>
Prepaid service contracts $ 496
Prepaid expenses 20,924
Prepaid insurance 58,401
Prepaid rent 15,449
Prepaid inventory 9,272
-------
$104,542
=======
</TABLE>
NOTE 7 - INCOME TAXES PAYABLE
- -----------------------------
The components of the provision for (benefit from) income taxes on income are as
follows:
<TABLE>
<CAPTION>
Total Paid Payable
----- ---- -------
<S> <C> <C> <C>
Current tax expense:
CA franchise tax $800 $800 $ 0
U.S. federal tax 0 0 0
--- --- ---
Total income taxes payable $800 $800 $ 0
=== === ===
</TABLE>
See accountants' audit report.
F-49
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 7 - INCOME TAXES PAYABLE (Cont.)
- -------------------------------------
Deferred tax expense:
<TABLE>
<S> <C>
CA franchise tax $ 0
U.S. federal tax 0
-------
Total deferred 0
-------
Total tax provision $ 800
=======
</TABLE>
The deferred tax asset at December 31, 1995, is as follows:
<TABLE>
<S> <C>
CA franchise tax $ 61,135
U.S. federal tax 184,062
Valuation allowance (245,197)
--------
Total $ 0
========
</TABLE>
The provision (benefit) for income taxes for December 31, 1995, consists of the
following:
<TABLE>
<S> <C>
Current provision - California $ 800
- Federal 0
-------
Total current provision $ 800
=======
Deferred tax provision:
Depreciation $ (43,868)
Inventory reserves 105,627
Allowance for doubtful accounts 1,335
Valuation allowance (63,094)
--------
Total deferred provision 0
--------
Total income tax provision $ 800
========
</TABLE>
See accountants' audit report.
F-50
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 7 - INCOME TAXES PAYABLE (Cont.)
- -------------------------------------
The provision (benefit) for income taxes in the accompanying statements of
operations differs from the amount of tax based on the statutory income tax
rates as follows:
Provision for income taxes at statutory rate:
<TABLE>
<S> <C>
CA franchise tax $ 800
U.S. federal tax 0
------
Total provision for income tax $ 800
======
</TABLE>
The components of the Company's deferred income tax (benefit) asset as of
December 31, 1995, are as follows:
<TABLE>
<S> <C>
Fixed asset reserves/depreciation $ (37,412)
Allowance for doubtful accounts 199,871
Inventory reserves 82,738
Valuation allowance (245,197)
--------
Total components of the Company's
deferred income tax (benefit) asset $ 0
========
</TABLE>
An allowance for the deferred income tax (benefit) asset has been set at one
hundred percent (100%) due to a going concern issue (see Note 18) which causes
us to believe that it is more likely than not, that the deferred tax (benefit)
asset will not be realized.
NOTE 8 - COMMITMENTS
- --------------------
The Company has entered into leases for 9,824 square feet of space located at
7100 Convoy Court. The Company also entered leases for 8,400 square feet at
7170 Convoy Court and 2,885 square feet at 7366 Convoy Court. The lease at 7100
Convoy Court expires on April 30, 1996. Minimum lease payments are $4,912 per
month plus utilities. The lease at 7170 Convoy Court expires on April 30, 1996.
Minimum lease payments are $4,200 per month plus utilities. The lease at 7366
Convoy Court expires on April 30, 1996. Minimum lease payments are $721 per
month plus utilities, increasing to $750 per month plus utilities on June 1,
1995.
See accountants' audit report.
F-51
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 8 - COMMITMENTS (Cont.)
- ----------------------------
The Company also entered into a lease for 8,713 square feet of space located at
1435 McCandless Drive, Milpitas, California. This lease expires December 14,
1996. Minimum lease payments are $5,663 per month, plus common area maintenance
charges and utilities.
The scheduled payments for the next five years are as follows:
<TABLE>
<CAPTION>
7100 7170 7366
Year Milpitas Convoy Convoy Convoy Total
---- -------- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
1996 $67,956 $19,648 $16,800 $3,000 $107,404
1997 0 0 0 0 0
1998 0 0 0 0 0
1999 0 0 0 0 0
2000 0 0 0 0 0
------- ------- ------- ------ --------
$67,956 $19,648 $16,800 $3,000 $107,404
======= ======= ======= ====== ========
</TABLE>
NOTE 9 - SUBSEQUENT EVENTS
- --------------------------
On January 2, 1996 the Company entered into a five-year lease. The Company will
be relocating operations to a 33,938 square foot space located at 6610 Nancy
Ridge Drive. Monthly rent payments for 1996 will be $16,969.
The schedule payments for the next five years are as follows:
<TABLE>
<S> <C>
1996 $135,752
1997 203,628
1998 203,628
1999 203,628
2000 203,628
-------
Total $950,264
=======
</TABLE>
See accountants' audit report.
F-52
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 10 - LEASES PAYABLE
- ------------------------
Lease payable at December 31, 1995, consist of the following:
<TABLE>
<S> <C>
a) Lease payable - Manifest $ 3,536
-------
Total leases payables 3,536
Less: current portion 3,536
-------
Balance at December 31, 1995 $ 0
-======
</TABLE>
a) Lease payable, monthly lease payments are $732 including interest at 14.00%
and maturing in June 16, 1996.
The scheduled principal payments for the next five years are as follows:
<TABLE>
<S> <C>
1996 $3,536
1997 0
1998 0
1999 0
2000 0
-----
Total $3,536
=====
</TABLE>
NOTE 11 - ECONOMIC DEPENDENCY
- -----------------------------
The Company obtains a significant amount of its inventory from three major DRAM
manufacturing sources. Although BMI Acquisition Group, Inc. was able to obtain
an acceptable supply of materials during the last year, there can be no
assurance that BMI Acquisition Group, Inc. will be able to secure a continued
supply in the future. If suppliers reduce, terminate, suspend or delay their
shipments to the Company in the near future, there could be substantial negative
effect on the Company's business and results of operations.
See accountants' audit report.
F-53
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 12 - CONTINGENCIES
- -----------------------
The Company has a written warranty program on its products for one year. The
program is novel within the industry, includes potential product liability
claims and thus, the Company is unable to estimate accurately the ultimate cost
of the program. Accordingly, the Company has not accrued for any warranty
expenses or potential product liability claims in the financial statements.
NOTE 13 - CUSTOMERS
- -------------------
The Company's products are sold, primarily, to original equipment manufacturers.
For the period ending December 31, 1995, BMI Acquisition Group, Inc.'s largest
customers accounted for 32%, 30%, 11% and 11% of sales. No other customer
accounted for 10% or more of net sales.
The Company believes that loss of these customers would not have a material
adverse effect on its business because of the significant industry demand for
the Company's products.
As is customary in the industry, the Company does not have long-term sales
agreements with its customers. However, the Company believes that it enjoys
excellent relationships with its customers.
NOTE 14 - NOTE PAYABLE - BANK
- -----------------------------
Note payable - bank, dated December 29, 1995 bears interest at 1% above the
London Interbank market rate. The note is unsecured, no prepayment penalties,
and is due December 27, 1996.
Balance at December 31, 1995 $2,000,000
=========
See accountants' audit report.
F-54
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 15 - PREFERRED STOCK
- -------------------------
On January 15, 1995, the shareholders decided to recapitalize the company and
cancel their secured shareholder loans. In consideration for this cancellation,
the company issued them preferred stock.
NOTE 16 - LOSS - SUPPLIER CONTRACT
- ----------------------------------
The Company entered into a prepaid inventory purchase agreement with a major
supplier of DRAM, whereby the supplier guaranteed to supply approximately
$8,000,000 of products at fixed prices. The price of DRAM fell so dramatically
during the year that the Company exercised its right not to take delivery, thus,
forfeiting its prepaid deposit.
NOTE 17 - INVENTORY WRITE DOWN
- ------------------------------
Due to the major decline in the market value of DRAM, the statement of earnings
includes a one-time write down of the Company's inventory to market value.
NOTE 18 - GOING CONCERN
- -----------------------
There has been a rapid decline in the price of computer components, which has
caused a substantial decrease in BMI's inventory valuation. If this decrease in
the industry persists throughout the following year, the entities ability to
meet maturing obligations without selling operating assets, or restructuring
debt based on these outside pressures, will be strained.
Based on the status of the industry at this time, there is a possibility of
discontinuance of operations in 1996.
See accountants' audit report.
F-55
<PAGE>
To the Board of Directors
BMI Acquisition Group, Inc.
San Diego, California
INDEPENDENT AUDITOR'S REPORT
----------------------------
Our examination was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information for the
year ending December 31, 1995, is presented for purposes of additional analysis
and is not a required part of the basic financial statements. The supplementary
information has been subjected to the auditing procedures applied in the
examination of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
Matranga & Correia
/s/ Matranga & Correia
September 27, 1996
San Diego, CA
F-56
<PAGE>
BMI ACQUISITION GROUP, INC.
SCHEDULE A - COST OF GOODS SOLD
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COST OF GOODS SOLD
<S> <C>
Materials $40,645,276
Inventory write down (Note 17) 5,022,216
Outside processing 1,892,778
Depreciation 286,088
Freight 281,002
Commissions 23,153
-----------
TOTAL COST OF GOODS SOLD $48,150,515
===========
</TABLE>
See accountants' audit report.
F-57
<PAGE>
BMI ACQUISITION GROUP, INC.
SCHEDULE B - GENERAL AND ADMINISTRATIVE EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
GENERAL AND ADMINISTRATIVE EXPENSES
<S> <C>
Salaries - Officers $ 284,500
- Other 3,797,475
Accounting 13,816
Advertising 42,839
Amortization 16,667
Auto expense 53,698
Bank charges 1,459
Computer supplies 13,333
Contract labor 75,785
Consulting 395,088
Depreciation 161,724
Charitable contributions 9,736
Dues and subscriptions 22,342
Employee benefits 19,170
Equipment rental 59,259
Insurance - general, workers' compensation and health 402,451
Interest expense 181,493
Legal fees 101,173
Licenses and fees 6,064
Miscellaneous 140,785
Meals and entertainment 98,888
Office expense and supplies 73,537
Payroll preparation charges 17,251
Payroll taxes 366,450
Postage and freight 17,188
Property taxes 23,454
Research and development 119,485
Rent 235,576
Repairs and maintenance 80,812
Sales tax expense 63,168
Security 87,534
Telephone 147,084
Testing supplies 24,029
Training 14,838
Travel 233,435
Utilities 117,943
Warehouse expense 12,891
Warehouse supplies 181,406
----------
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES $7,713,826
==========
</TABLE>
See accountants' audit report.
F-58
<PAGE>
To the Board of Directors
BMI Acquisition Group, Inc.
San Diego, California
INDEPENDENT AUDITOR'S REPORT
----------------------------
We have audited the accompanying balance sheet of BMI Acquisition Group, Inc. as
of December 18, 1996, and the related statements of operations, retained
earnings, and cash flows as of and for the eleven and a half month period ended
December 18, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted the audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to in the first paragraph
above, present fairly, in all material respects the financial position of BMI
Acquisition Group, Inc. as of December 18, 1996, and the results of their
operations and their cash flows for the eleven and a half months ending December
18, 1996, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has experienced operating losses over the past
two years, resulting in a deficit equity position. The company's financial
position and operating results raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Matranga & Correia
/s/ Matranga & Correia
February 11, 1997
San Diego, CA
F-59
<PAGE>
BMI ACQUISITION GROUP, INC.
BALANCE SHEET
DECEMBER 18, 1996
<TABLE>
<CAPTION>
ASSETS
CURRENT ASSETS
<S> <C>
Cash $ 0
Accounts receivable - trade, net (Note 4) 21,818
Inventories (Notes 1 and 5) 550,425
Prepaid expenses (Note 6) 30,056
----------
Total current assets 604,299
----------
PROPERTY & EQUIPMENT (Note 1)
Property and equipment 2,281,323
Accumulated depreciation (818,601)
----------
Total property and equipment 1,462,722
----------
OTHER ASSETS
Deferred tax asset (Note 7) 0
Deposits 22,053
Technology - patent applied for 252,405
Total other assets 274,458
----------
Total assets $2,339,479
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE>
BMI ACQUISITION GROUP, INC.
BALANCE SHEET
DECEMBER 18, 1996
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C>
Accounts payable, trade $ 659,767
Accounts payable, other 138,000
Deferred revenue 229,193
Other accrued liabilities 97,911
Current portion capital lease (Note 9) 12,934
Total current liabilities 1,137,805
-----------
NON-CURRENT LIABILITIES
Capital lease (Note 9) 28,905
Total non-current liabilities 28,905
-----------
Total liabilities 1,166,710
-----------
SHAREHOLDERS' EQUITY
Capital stock, common, no par value, authorized
100,000 shares, issued 12,000 shares 600,000
Preferred stock, $1 par value, 4,882,277
shares authorized, issued and outstanding 4,882,277
Additional paid in capital 2,000,000
Retained earnings (deficit) (6,309,508)
-----------
Total shareholders' equity 1,172,769
-----------
Total liabilities and shareholders' equity $ 2,339,479
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE>
BMI ACQUISITION GROUP, INC.
STATEMENT OF OPERATIONS
FOR THE ELEVEN AND A HALF MONTH PERIOD ENDED DECEMBER 18, 1996
<TABLE>
<S> <C>
SALES, NET $ 18,028,464
COST OF GOODS SOLD (Schedule A) (20,398,654)
------------
Gross profit (loss) (2,370,190)
GENERAL AND ADMINISTRATIVE (Schedule B) (3,127,604)
------------
Net income (loss) from operations (5,497,794)
------------
OTHER INCOME AND (EXPENSES)
Other income 311,394
Interest income 5,350
Gain (loss) on sale of assets (74,144)
------------
Total other income and (expenses) (242,600)
------------
Net income (loss) before provision for income taxes (5,255,194)
------------
PROVISION FOR INCOME TAXES (Note 7)
California income tax (2,400)
------------
Total provision for income taxes (2,400)
------------
NET INCOME (LOSS) $ (5,257,594)
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE>
BMI ACQUISITION GROUP, INC.
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE ELEVEN AND A HALF MONTH PERIOD ENDED DECEMBER 18, 1996
<TABLE>
<CAPTION>
No. of Common No. of Preferred Paid-in Retained
Shares Stock Shares Stock Capital Deficit Total
------ -------- ----------- ------------ ---------- ------------- -------------
Balance
<S> <C> <C> <C> <C> <C> <C> <C>
May 25, 1994 0 $ 0 0 $ 0 $ 0 $ 0 $ 0
Issuance of shares:
For Cash 12,000 600,000 600,000
Shareholder distributions (16,753,442) (16,753,442)
Net Income (loss) Fiscal
Year 1994 17,944,714 17,944,714
------ -------- ----------- ------------ ----------- ------------ ------------
Balance Dec. 31, 1994 12,000 600,000 -- -- -- 1,191,272 1,191,272
Issuance of Shares:
For debt 7,346,040 7,346,040 7,346,040
Preferred Stock redemptions (2,463,763) (2,463,763) (2,463,763)
Net Income (loss) Fiscal
Year 1995 (2,243,186) (2,243,186)
------ -------- ----------- ------------ ----------- ------------ ------------
Balance Dec. 31, 1995 12,000 600,000 4,882,277 4,882,277 -- (1,051,194) 4,430,363
Shareholders assumption of
Company debt 2,000,000 2,000,000
Net income (loss) Fiscal
year 1996 (5,257,594) (5,257,594)
------ -------- ----------- ------------ ----------- ------------ ------------
Balance Dec. 18, 1996 12,000 600,000 4,882,277 4,882,277 2,000,000 (6,309,508) 1,172,769
====== ======== ========== =========== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE>
BMI ACQUISITION GROUP, INC.
STATEMENT OF CASH FLOWS
FOR THE ELEVEN AND A HALF MONTH PERIOD ENDED DECEMBER 18, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 16,516,971
Cash paid to suppliers and employers (16,694,020)
Interest paid (8,905)
Interest received 5,350
Other income 311,394
FTB tax provision (2,400)
------------
Net cash provided by operating activities 128,390
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (304,755)
Proceeds from sale of fixed assets 155,558
Patent acquisition costs (252,405)
Net cash (used) in investing activities (401,602)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital lease acquisition 47,722
Payments under capital lease obligations (9,419)
------------
Net cash provided by financing activities 38,303
------------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (234,909)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 234,909
------------
CASH AND CASH EQUIVALENTS AT DECEMBER 18, 1996 $ 0
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE>
BMI ACQUISITION GROUP, INC.
STATEMENT OF CASH FLOWS (Cont.)
FOR THE ELEVEN AND A HALF MONTHS ENDED DECEMBER 18, 1996
<TABLE>
<CAPTION>
RECONCILIATION OF NET INCOME (LOSS) TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
<S> <C>
Net income (loss) $(5,257,594)
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 442,023
Loss on sale of fixed assets 74,144
Decrease in accounts receivable 1,988,554
Decrease in receivable other 80,605
Decrease in inventory 4,930,058
Decrease in investment 200
Increase in advances 114,190
Increase in reserve for returns (260,738)
Decrease in prepaid FTB 98,579
Increase in allowance for bad debts (216,326)
Decrease in prepaid expenses 74,486
Increase in deposits (4,720)
Decrease in accounts payable (551,827)
Increase in other accounts payable 21,086
Decrease in deferred revenues (1,010,807)
Decrease in other accrued liabilities (453,523)
Increase in contingent liabilities 60,000
Total adjustments 5,385,984
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES: $ 128,390
===========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
The shareholders personally assumed debt of the Company in the amount of
$2,000,000. The following entry was made in the Company's books to record these
transactions:
<TABLE>
<CAPTION>
Debt Credit
---- ------
<S> <C> <C>
Note payable - bank $2,000,000
Additional paid in capital $2,000,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 18, 1996
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------------------
This summary of significant accounting policies of BMI Acquisition Group, Inc.,
a California corporation (the "Company"), is presented to assist in
understanding the Company's consolidated financial statements. The consolidated
financial statements and notes are representations of the Company's management
who is responsible for their integrity and objectivity. These accounting
policies conform to generally accepted accounting principles and have been
consistently applied in the preparation of the consolidated financial
statements.
Business Activity
- -----------------
The Company was established and incorporated on May 25, 1994, in the State of
California. On June 20, 1994, it acquired the majority of the assets of U.S.
Modules Technologies, Inc. On January 1, 1995, the Company acquired the stock
of U.S. Modules, Inc. Effective September 30, 1996, the Company merged its
wholly owned subsidiaries, U.S. Modules Technologies, Inc. and U.S. Modules,
Inc. into the parent BMI Acquisition Group, Inc. The Company is a value-added
distributor and tester of micro-electronic components, and a designer and
assembler of computer sub-assemblies. It purchases untested surplus and non-
standard dynamic random access memory products (DRAMs) from several of the
world's foremost DRAM manufacturers. The Company tests the DRAM and markets the
product based on specifications developed and published by the Company's
engineers. It also performs assembly, testing and repair work on various
electronic sub-assemblies.
In addition to its procurement and recycling capabilities, the Company has
developed highly specialized testing and application design capabilities. It
tests large volumes of non-standard or surplus components, and designs and
assembles applications for these components.
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts of U.S.
Modules Technologies, Inc. - a California corporation, BMI Acquisition Group,
Inc. - a California corporation (the "Company"), and U.S. Modules, Inc. - a
California corporation. All significant intercompany balances and transactions
have been eliminated in consolidation. On September 30, 1996, the Company
merged its wholly owned subsidiaries, U.S. Modules Technologies, Inc. and U.S.
Modules, Inc. into the parent BMI Acquisition Group, Inc.
See accountants' audit report.
F-66
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 18, 1996
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------------------
(Cont.)
- -------
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include demand deposits with financial institutions
and highly liquid debt instruments with original maturities of 90 days or less.
Revenue Recognition
- -------------------
The Company uses the accrual basis of accounting. Accordingly, revenues are
recorded in the period in which they are earned and expenses are recorded in the
period in which they are incurred. The effect of events on the business is
recognized as services are rendered or consumed rather than when cash is
received or paid.
Property and Equipment
- ----------------------
Property and equipment are carried at cost. Depreciation of property and
equipment is provided using the straight-line method for financial reporting
purposes over their estimated useful lives as follows:
<TABLE>
<S> <C>
Vehicles 5 years
Office furniture and equipment 5 and 7 years
Leasehold improvements Life of Lease
Testing equipment 5 years
Warehouse equipment 5 years
Computer equipment and software 5 years
</TABLE>
For federal income tax purposes, depreciation is computed using the modified
accelerated cost recovery system. Repairs and maintenance that do not extend
the useful life of the assets are charged to operations as incurred.
See accountants' audit report.
F-67
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 18, 1996
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------------------
(Cont.)
- -------
Leases
- ------
Leases are classified as either capital or operating leases. Leases that
substantially transfer all of the benefits and risks of ownership of property to
the Company are accounted for as capital leases. At the time a capital lease is
entered into, an asset is recorded together with its related long-term
obligation to reflect the acquisition and financing. Rental payments under
operating leases are expensed as incurred. As of December 18, 1996, all of the
Company's lease agreements have been properly classified.
Inventories
- -----------
Inventories are valued at moving-average cost method, not in excess of market.
Concentration of Credit Risk
- ----------------------------
The Company sells its products to original equipment manufacturers and third
party distributors in the electronics industry worldwide. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. As of December 18, 1996, the Company has established provisions for
potential credit losses and sales returns that are reasonably expected to be
incurred.
Income Taxes
- ------------
Income taxes are computed under the provisions of the Financial Accounting
Standards Board (FASB) Statement 109 - "Accounting for Income Taxes." Certain
items of income and expense are recognized for income tax purposes in different
periods from those in which such items are recognized for financial reporting
purposes. These items include depreciation expense. Deferred income taxes are
provided for the tax effect of these differences.
NOTE 2 - STATUS AS A GOING CONCERN
- ----------------------------------
There has been a rapid decline in the price of memory components, which has
caused a substantial decrease in BMI's inventory valuation. If this decrease in
the industry persists throughout the following year, the Company's ability to
meet maturing obligations without selling operating assets, or restructuring
debt based on these outside pressures, will be strained.
See accountants' audit report.
F-68
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 18, 1996
NOTE 2 - STATUS AS A GOING CONCERN (Cont.)
- ------------------------------------------
Based on the status of the industry at this time, there is a possibility of
discontinuance of operations in 1997.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. During the one year and eleven and a half months
ended December 18, 1996, the Company experienced operating losses and negative
operating cash flows which have been funded primarily from banks, privately
financed loans, and proceeds from the sale of assets. The Company has incurred
consolidated net losses of ($2,243,186) and ($5,257,594) for the one year and
eleven and a half months ended December 31, 1995 and December 18, 1996,
respectively, and a total retained deficit of ($6,309,508) at December 18, 1996,
and continues to operate at a loss. In addition, current liabilities exceed
current assets by $535,506 at December 18, 1996. These factors, as well as the
uncertain conditions that the Company faces, creates an uncertainty as to the
Company's ability to continue as a going concern. The Company is developing a
plan to reduce its liabilities through possible sales of assets or obtain
additional equity capital. The need for additional debt or equity financing
continues. The ability of the Company to continue as a going concern is
dependent upon the success of the plan.
NOTE 3 - SUBSEQUENT EVENT
- -------------------------
On December 19, 1996, Sigma 7 Corporation, a Delaware Corporation, entered into
a stock purchase agreement and purchased all of the outstanding common stock of
BMI Acquisition Group, Inc. (the Company) from its previous shareholders, for an
acquisition cost of $2,700,000 plus a covenant not to complete agreement,
consisting of $200,000 in cash and the issuance of $2,500,000 of preferred stock
in the Company. The results of operations of Sigma 7 Corporation was immaterial
and it was not practicable to develop proforma operations and earnings
information.
NOTE 4 - ACCOUNTS RECEIVABLE - TRADE
- ------------------------------------
Trade accounts receivable is shown net of allowance for bad debts, returns,
allowances and discounts as follows:
<TABLE>
<S> <C>
Accounts receivable $ 80,602
Less: Allowance for bad debts (58,784)
---------
Net trade receivables $ 21,818
=========
</TABLE>
See accountants' audit report.
F-69
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 18, 1996
NOTE 5 - INVENTORIES
- --------------------
Inventories at December 18, 1996, consisted of the following:
<TABLE>
<S> <C>
Raw materials/work in progress/finished goods $ 668,425
Reserve for slow moving items (118,000)
----------
Total net inventory $ 550,425
==========
</TABLE>
Inventories are stated at the lower of cost or market. Cost is determined by
the moving-average cost method. Inventory values were significantly reduced
during the year to reflect the decline in market value of computer chips.
NOTE 6 - PREPAID EXPENSES
- -------------------------
Prepaid expenses at December 18, 1996, consisted of the following:
<TABLE>
<S> <C>
Prepaid service contracts $ 432
Prepaid expenses 121
Prepaid insurance 29,503
-------
$30,056
=======
</TABLE>
NOTE 7 - INCOME TAXES PAYABLE
- -----------------------------
The components of the provision for (benefit from) income taxes on income are as
follows:
<TABLE>
<CAPTION>
Total Paid Payable
----- ---- -------
<S> <C> <C> <C> <C>
Current tax expense:
CA franchise tax $2,400 $2,400 $0
U.S. federal tax 0 0 0
---------- ---------- ----------
Total income taxes payable $2,400 $2,400 $0
========== ========== ==========
Deferred tax expense:
CA franchise tax $ 0
U.S. federal tax 0
---------
Total deferred 0
---------
Total tax provision $ 2,400
=========
</TABLE>
See accountants' audit report.
F-70
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 18, 1996
NOTE 7 - INCOME TAXES PAYABLE (Cont.)
- -------------------------------------
<TABLE>
<CAPTION>
The deferred tax asset at December 18, 1996, is as follows:
<S> <C>
CA franchise tax $ 15,694
U.S. federal tax 25,314
Valuation allowance ( 41,008)
---------
Total $ 0
=========
The provision (benefit) for income taxes for December 18, 1996, consists of
the following:
Current provision - California $ 2,400
- Federal 0
---------
Total current provision $ 2,400
=========
Deferred tax provision:
Fixed asset reserves/depreciation $ (35,461)
Inventory reserves 54,064
Allowance for doubtful accounts 185,586
Valuation allowance (204,189)
---------
Total deferred provision 0
---------
Total income tax provision $ 2,400
=========
The provision (benefit) for income taxes in the accompanying statements of
operations differs from the amount of tax based on the statutory income tax
rates as follows:
Provision for income taxes at statutory rate:
CA franchise tax $ 2,400
U.S. federal tax 0
---------
Total provision for income taxes $ 2,400
=========
</TABLE>
See accountants' audit report.
F-71
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 18, 1996
NOTE 7 - INCOME TAXES PAYABLE (Cont.)
- -------------------------------------
The components of the Company's deferred income tax (benefit) asset as of
December 18, 1996, are as follows:
<TABLE>
<S> <C>
Fixed asset reserves/depreciation $ (1,951)
Allowance for doubtful accounts 14,285
Inventory reserves 28,674
Valuation allowance (41,008)
--------
Total components of the Company's
deferred income tax (benefit) asset $ 0
========
</TABLE>
An allowance for the deferred income tax (benefit) asset has been set at one
hundred percent (100%) due to a going concern issue (see Note 2) which causes us
to believe that it is more likely than not, that the deferred tax (benefit)
asset will not be realized. No benefit has been recognized for the net
operating losses, due to the fact that the company will be unable to use the net
operating loss as a result of the change in ownership rules.
NOTE 8 - COMMITMENTS
- --------------------
The Company has entered into a five-year lease for 33,938 square feet space
located at 6610 Nancy Ridge Drive. Minimum lease payments are $16,969 per month
plus utilities, insurance and real estate taxes.
The schedule payments for the next five years are as follows:
<TABLE>
<S> <C>
1997 $203,628
1998 203,628
1999 203,628
2000 203,628
2001 67,876
---------
Total $882,388
=========
</TABLE>
See accountants' audit report.
F-72
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 18, 1996
NOTE 9 - LEASE PAYABLE
- ----------------------
Lease payable at December 18, 1996, consist of the following:
<TABLE>
<CAPTION>
<S> <C>
a) Lease payable - Colonial $ 41,839
--------
Total lease payable 41,839
Less: current portion (12,934)
--------
Balance at December 18, 1996 $ 28,905
========
</TABLE>
b) Lease payable, monthly lease payments are $1,770 including interest at
19.84% for thirty-six months, with a purchase option of $4,772
available at the maturity of the lease in June 1999.
The scheduled principal payments for the next five years are as follows:
<TABLE>
<S> <C>
1997 $12,934
1998 15,501
1999 13,404
2000 0
2001 0
-------
Total $41,839
=======
</TABLE>
NOTE 10 - ECONOMIC DEPENDENCY
- -----------------------------
The Company obtains a significant amount of its inventory from three major DRAM
manufacturing sources. Although BMI Acquisition Group, Inc. was able to obtain
an acceptable supply of materials during the last year, there can be no
assurance that BMI Acquisition Group, Inc. will be able to secure a continued
supply in the future. If suppliers reduce, terminate, suspend or delay their
shipments to the Company in the near future, there could be substantial negative
effect on the Company's business and results of operations.
See accountants' audit report.
F-73
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 18, 1996
NOTE 11 - CONTINGENCIES
- -----------------------
The Company has a written warranty program on its products for one year. The
program is novel within the industry, includes potential product liability
claims and thus, the Company is unable to estimate accurately the ultimate cost
of the program. Accordingly, the Company has not accrued for any warranty
expenses or potential product liability claims in the financial statements.
NOTE 12 - INVENTORY WRITE DOWN
- ------------------------------
Due to the major decline in the market value of DRAM, the cost of goods sold
includes a $3,075,723 write down of the Company's inventory to market value.
NOTE 13 - LEGAL MATTERS
- -----------------------
At December 18, 1996, the following lawsuits and claims were pending against the
Company:
(a) Spring Circle Technology, Inc. vs. BMI Acquisition Group, Inc., civil
action filed May 1, 1995, in Los Angeles Superior Court (Case No.
145864), for rescission, breach of contract, breach of express and
implied warranties, fraud, unjust enrichment and cost. Legal counsel
states that legal precedents appear to support the Company's position,
however, they believe that an adverse judgment is possible.
Therefore, $60,000 has been accrued for this potential liability.
Settlement discussions are currently being conducted, which the
Company believes will resolve this matter.
(b) BMI Acquisition Group, Inc. vs. Packard Bell NEC, Inc., civil action
filed January 1, 1996, in San Diego Superior Court (Case No.
00702822), for breach of contract, fraud and intentional
misrepresentation, suppression of facts and cost. Packard Bell has
filed a cross-complaint. This case was dismissed in early 1997.
(c) Micron Electronics, Inc. vs. BMI Acquisition Group, Inc. Legal counsel
states that legal precedents appear to support the Company's position.
The Company, however, has already recorded an account payable in the
amount of $110,000.
See accountants' audit report.
F-74
<PAGE>
BMI ACQUISITION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 18, 1996
NOTE 14 - RELATED PARTY TRANSACTIONS
- ------------------------------------
The following transactions occurred between the Company and its shareholders and
affiliated companies:
1) The Company had a contractual agreement with RAS, LLC. RAS, LLC was
controlled by certain former officers of the Company. RAS, LLC
advanced money on behalf of the Company. At December 18, 1996, RAS,
LLC is owed $209,368.58, which includes $138,000 that was advanced to
Silicon Magic on behalf of the Company. During the year, two vehicles
were transferred to RAS, LLC for payment on account.
2) The Company borrowed $2,000,000 from a bank on December 29, 1995.
During 1996, the shareholders personally assumed this loan on behalf
of the Company. There is no recourse against the Company.
3) The Company owed its shareholders $4,382,275 under a Capital
Entitlement dated January 15, 1995. This Entitlement was converted to
preferred stock on October 17, 1996.
4) The Company owns a provisional patent which was assigned to the
Company by Mr. Peddle.
5) Mr. Peddle owns a company by the name of THStyme which has been a
consultant to the Company for several years.
See accountants' audit report.
F-75
<PAGE>
To the Board of Directors
BMI Acquisition Group, Inc.
San Diego, California
INDEPENDENT AUDITOR'S REPORT
----------------------------
Our examination was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information for the
eleven and a half months ending ending December 18, 1996, is presented for
purposes of additional analysis and is not a required part of the basic
financial statements. The supplementary information has been subjected to the
auditing procedures applied in the examination of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
Matranga & Correia
/s/ Matranga & Correia
February 11, 1997
San Diego, CA
F-76
<PAGE>
BMI ACQUISITION GROUP, INC.
SCHEDULE A - COST OF GOODS SOLD
FOR THE ELEVEN AND A HALF MONTHS ENDED DECEMBER 18, 1996
<TABLE>
<CAPTION>
COST OF GOODS SOLD
<S> <C>
Commissions $ 18,769
Depreciation 300,620
Direct labor 1,258,725
Freight 179,545
Materials 14,946,387
Inventory write down (Note 12) 3,075,723
Outside processing 473,322
Payroll taxes 68,837
Production repairs 8,033
Production supplies 68,693
-----------
TOTAL COST OF GOODS SOLD $20,398,654
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-77
<PAGE>
BMI ACQUISITION GROUP, INC.
SCHEDULE B - GENERAL AND ADMINISTRATIVE EXPENSES
FOR THE ELEVEN AND A HALF MONTHS ENDED DECEMBER 18, 1996
<TABLE>
<CAPTION>
GENERAL AND ADMINISTRATIVE EXPENSES
<S> <C>
Salaries - Officers $ 10,128
- Other 1,156,971
Accounting 41,504
Advertising 2,000
Amortization 9,722
Auto expense 34,463
Bank charges 2,725
Charitable contributions 1,500
Computer supplies 7,040
Consulting 171,799
Contract labor 10,760
Depreciation 131,681
Dues and subscriptions 16,002
Equipment rental 14,349
Gifts 3,157
Insurance - general, workers' compensation and health 200,938
Interest expense 8,905
Legal fees 91,700
Licenses and fees 14,425
Meals and entertainment 33,716
Miscellaneous 4,570
Moving expense 48,974
Office expense and supplies 30,946
Payroll preparation charges 12,448
Payroll taxes 168,870
Postage and freight 5,752
Property taxes 33,886
Rent 290,661
Repairs and maintenance 60,385
Research and development 52,066
Sales tax expense 6,664
Security 26,889
Telephone 119,150
Testing supplies 15,770
Training 2,348
Travel 113,270
Utilities 88,077
Warehouse expense 13,912
Warehouse supplies 69,481
----------
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES $3,127,604
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-78
<PAGE>
To the Board of Directors
Sigma 7
San Diego, California
INDEPENDENT AUDITOR'S REPORT
----------------------------
We have audited the accompanying consolidated balance sheet of Sigma 7 and its
subsidiary as of December 31, 1996, and the related statements of operations,
retained earnings, and cash flows from the inception December 11, 1996 through
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted the audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the first
paragraph above, present fairly, in all material respects the financial position
of Sigma 7 and its subsidiary as of December 31, 1996, and the results of their
operations and their cash flows from the inception December 11, 1996 through
December 31, 1996, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to
the financial statements, the Company's subsidiary has experienced operating
losses over the past two years, resulting in a deficit equity position. The
company's financial position and operating results raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Matranga & Correia
/s/ Matranga & Correia
August 26, 1997
San Diego, California
F-79
<PAGE>
SIGMA 7
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
ASSETS
CURRENT ASSETS
<S> <C>
Cash $ 187,054
Accounts receivable - trade, net (Note 4) 21,818
Stock subscription receivable 75,000
Inventories (Notes 1 and 5) 550,425
Prepaid expenses (Note 6) 30,056
----------
Total current assets 864,353
----------
PROPERTY & EQUIPMENT (Note 1)
Property and equipment 1,462,722
Accumulated depreciation (18,795)
----------
Total property and equipment 1,443,927
----------
OTHER ASSETS
Deferred tax asset (Note 7) 0
Organizational costs, net 34,708
Goodwill 1,527,231
Deposits 22,053
Technology - patent applied for 252,405
Covenants - non compete, net (Note 12) 288,000
----------
Total other assets 2,124,397
----------
Total assets $4,432,677
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-80
<PAGE>
SIGMA 7
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C>
Accounts payable, trade $ 628,697
Accounts payable, other 138,000
Deferred revenue 229,193
Other accrued liabilities 97,941
Current portion capital lease (Note 9) 12,934
Current portion - covenant (Note 12) 144,000
----------
Total current liabilities 1,250,765
----------
NONCURRENT LIABILITIES
Capital lease (Note 9) 28,905
Note payable - covenant (Note 12) 144,000
----------
Total noncurrent liabilities 172,905
----------
Total liabilities 1,423,670
----------
PREFERRED STOCK INTEREST IN BMI
ACQUISITION GROUP, INC. (Note 13) 2,500,000
----------
SHAREHOLDERS' EQUITY
Capital stock, common, $0.0000001 par value,
25,000,000 shares authorized, 500,000 issued
and outstanding 1
Preferred stock $0.00000001 par value,
10,000,000 shares authorized, 500,000 issued
and outstanding 1
Additional paid-in capital 524,998
Retained earnings (deficit) (15,993)
----------
Total shareholders' equity 509,007
----------
Total liabilities and shareholders' equity $4,432,677
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-81
<PAGE>
SIGMA 7
CONSOLIDATED STATEMENT OF OPERATIONS
FROM THE INCEPTION DECEMBER 11, 1996 THROUGH DECEMBER 31, 1996
<TABLE>
<S> <C>
SALES, NET $ 6,892
COST OF GOODS SOLD (Schedule A) 13,070
--------
Gross profit (loss) (6,178)
GENERAL AND ADMINISTRATIVE (Schedule B) (9,785)
--------
Net income (loss) before provision for income taxes (15,963)
--------
PROVISION FOR INCOME TAXES (Note 7)
Delaware franchise tax 30
--------
Total provision for income taxes 30
--------
NET INCOME (LOSS) $(15,993)
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-82
<PAGE>
SIGMA 7
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
DECEMBER 31, 1996
<TABLE>
<CAPTION>
No. of Common No. of Preferred Paid-in Retained
Shares Stock Shares Stock Capital Deficit Total
------- ------ ------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance
December 11, 1996 0 $ 0 0 $ 0 $ 0 $ 0 $ 0
Issuance of shares:
For services 500,000 1 24,999 25,000
For cash 500,000 1 499,999 500,000
Net income (loss)
Fiscal year 1996 ------- ------ ------- --------- -------- (15,993) (15,993)
Balance
December 31, 1996 500,00 $ 1 500,000 $ 1 $524,998 $(15,993) $509,007
======= ====== ======= ========= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-83
<PAGE>
SIGMA 7
CONSOLIDATED STATEMENT OF CASH FLOWS
FROM THE INCEPTION DECEMBER 11, 1996 THROUGH DECEMBER 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 6,892
Cash paid to suppliers and employers (34,838)
---------
Net cash (used) by operating activities (27,946)
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of subsidiary (200,000)
Organization costs (10,000)
---------
Net cash (used) in investing activities (210,000)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 1
Issuance of preferred stock 1
Additional paid-in capital 424,998
---------
Net cash provided by financing activities 425,000
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 187,054
CASH AND CASH EQUIVALENTS AT DECEMBER 11, 1996 0
---------
CASH AND CASH EQUIVALENTS AT DECEMBER 31, 1996 $ 187,054
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-84
<PAGE>
SIGMA 7
CONSOLIDATED STATEMENT OF CASH FLOWS (Cont.)
FROM THE INCEPTION DECEMBER 11, 1996 THROUGH DECEMBER 31, 1996
<TABLE>
<S> <C>
RECONCILIATION OF NET INCOME (LOSS) TO NET
CASH (USED) BY OPERATING ACTIVITIES:
Net income (loss) $ (15,993)
-------------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH (USED) BY OPERATING ACTIVITIES:
Depreciation and amortization 19,087
Decrease in accounts payable (31,040)
-------------
Total adjustments (11,953)
-------------
NET CASH (USED) BY OPERATING ACTIVITIES: $ (27,946)
=============
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
The Company purchased all of the capital stock of BMI Acquisition Group, Inc.
for $200,000. In conjunction with the acquisition, liabilities were assumed as
follows:
<TABLE>
<S> <C>
Fair value of assets acquired $4,156,640
Cash paid for the capital stock (200,000)
----------
Liabilities assumed $3,956,640
==========
</TABLE>
Common stock was issued for costs attributable to organization and start-up
costs. The following entry was made on the Company's books to record this
transaction.
<TABLE>
<CAPTION>
Debit Credit
----- ------
<S> <C> <C>
Organization costs $25,000
Common stock $ 1
Additional paid-in capital 24,999
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-85
<PAGE>
SIGMA 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------------------
This summary of significant accounting policies of Sigma 7, a Delaware
corporation (the "Company"), is presented to assist in understanding the
Company's consolidated financial statements. The consolidated financial
statements and notes are representations of the Company's management who is
responsible for their integrity and objectivity. These accounting policies
conform to generally accepted accounting principles and have been applied in the
preparation of the consolidated financial statements.
Business Activity
- -----------------
The Company was established and incorporated on December 11, 1996, in the State
of Delaware. On December 19, 1996, it acquired 100% of the common stock of BMI
Acquisition Group, Inc. BMI is a value-added distributor and tester of micro-
electronic components, and a designer and assembler of computer sub-assemblies.
It purchases untested surplus and non-standard dynamic random access memory
products (DRAMs) from several of the world's foremost DRAM manufacturers. BMI
tests the DRAM and markets the product based on specifications developed and
published by the Company's engineers. It also performs assembly, testing and
repair work on various electronic sub-assemblies.
In addition to its procurement and recycling capabilities, it has developed
highly specialized testing and application design capabilities. It tests large
volumes of non-standard or surplus components, and designs and assembles
applications for these components.
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts of the
Company from inception (December 11, 1996) and its wholly owned subsidiary (BMI
Acquisition Group, Inc.) from date of acquisition (December 19, 1996). All
material intercompany accounts and transactions have been eliminated in
consolidation.
Incorporation/Start-Up Costs
- ----------------------------
Costs incurred to incorporate and start up the Company have been permanently
capitalized. These costs are being amortized on the straight-line basis over
sixty (60) months.
See accountants' audit report
F-86
<PAGE>
SIGMA 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------------------
(Cont.)
- -------
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include demand deposits with financial institutions
and highly liquid debt instruments with original maturities of 90 days or less.
Revenue Recognition
- -------------------
The Company uses the accrual basis of accounting. Accordingly, revenues are
recorded in the period in which they are earned and expenses are recorded in the
period in which they are incurred. The effect of events on the business is
recognized as services are rendered or consumed rather than when cash is
received or paid.
Property and Equipment
- ----------------------
Property and equipment are carried at cost. Depreciation of property and
equipment is provided using the straight-line method for financial reporting
purposes over their estimated useful lives as follows:
<TABLE>
<S> <C>
Office furniture and equipment 5 and 7 years
Leasehold improvements Life of Lease
Testing equipment 5 years
Warehouse equipment 5 years
Computer equipment and software 5 years
</TABLE>
For federal income tax purposes, depreciation is computed using the modified
accelerated cost recovery system. Repairs and maintenance that do not extend
the useful life of the assets are charged to operations as incurred.
Leases
- ------
Leases are classified as either capital or operating leases. Leases that
substantially transfer all of the benefits and risks of ownership of property to
the Company are accounted for as capital leases. At the time a capital lease is
entered into, an asset is recorded together with its related long-term
obligation to reflect the acquisition and financing. Rental payments under
operating leases are expensed as incurred. As of December 31, 1996, all of the
Company's lease agreements have been properly classified.
See accountants' audit report
F-87
<PAGE>
SIGMA 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------------------
(Cont.)
- -------
Inventories
- -----------
Inventories are valued at moving-average cost method, not in excess of market.
Concentration of Credit Risk
- ----------------------------
The Company sells its products to original equipment manufacturers and third
party distributors in the electronics industry worldwide. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. As of December 31, 1996, the Company has established provisions for
potential credit losses and sales returns that are reasonably expected to be
incurred.
Income Taxes
- ------------
Income taxes are computed under the provisions of the Financial Accounting
Standards Board (FASB) Statement 109 - "Accounting for Income Taxes." Certain
items of income and expense are recognized for income tax purposes in different
periods from those in which such items are recognized for financial reporting
purposes. These items include depreciation expense. Deferred income taxes are
provided for the tax effect of these differences.
NOTE 2 - STATUS AS A GOING CONCERN
- ----------------------------------
There has been a rapid decline in the price of memory components, which has
caused a substantial decrease in BMI's inventory valuation. If this decrease in
the industry persists throughout the following year, the Company's ability to
meet maturing obligations without selling operating assets, or restructuring
debt based on these outside pressures, will be strained.
Based on the status of the industry at this time, there is a possibility of
discontinuance of operations in 1997.
See accountants' audit report
F-88
<PAGE>
SIGMA 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 2 - STATUS AS A GOING CONCERN (Cont.)
- ------------------------------------------
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. During the two years ended
December 31, 1996, the Company's subsidiary experienced operating losses and
negative operating cash flows which have been funded primarily from banks,
privately financed loans, and proceeds from the sale of assets. The Company's
subsidiary has incurred consolidated net losses of ($2,243,186) and ($5,276,389)
for the year ended December 31, 1995 and eleven and a half months ended December
18, 1996, respectively, and a total retained deficit of ($6,328,303) at December
18, 1996, and the subsidiary continues to operate at a loss. In addition,
current liabilities exceed current assets by $386,412 at December 31, 1996.
These factors, as well as the uncertain conditions that the Company faces,
creates an uncertainty as to the Company's ability to continue as a going
concern. The Company has recently obtained significant financing for operations
and has obtained substantial equity capital. See Note 17 regarding subsequent
events.
NOTE 3 - OWNERSHIP CHANGE
- -------------------------
On December 19, 1996, Sigma 7 Corporation, a Delaware Corporation, entered into
a stock purchase agreement and purchased all of the outstanding common stock of
BMI Acquisition Group, Inc. (the Company) from its previous shareholders, for an
acquisition cost of $2,700,000 plus a covenant not to complete agreement (See
Note 13), consisting of $200,000 in cash and the issuance of $2,500,000 of
preferred stock in the Company. For accounting purposes, this acquisition was
treated as an asset purchase. The statement of operations includes BMI's
results of operations for the 13 days ended December 31, 1996, since BMI was
acquired December 19, 1996.
NOTE 4 - ACCOUNTS RECEIVABLE - TRADE
- ------------------------------------
Trade accounts receivable is shown net of allowance for bad debts, returns,
allowances and discounts as follows:
<TABLE>
<S> <C>
Accounts receivable $ 80,602
Less: Allowance for bad debts (58,784)
--------
Net trade receivables $ 21,818
========
</TABLE>
See accountants' audit report
F-89
<PAGE>
SIGMA 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 5 - INVENTORIES
- --------------------
Inventories at December 31, 1996, consisted of the following:
<TABLE>
<S> <C>
Raw materials/work in progress/finished goods $ 668,425
Reserve for slow moving items (118,000)
---------
Total net inventory $ 550,425
=========
</TABLE>
Inventories are stated at the lower of cost or market. Cost is determined by
the moving-average cost method. Inventory values were significantly reduced
during the year to reflect the decline in market value of computer chips.
NOTE 6 - PREPAID EXPENSES
- -------------------------
Prepaid expenses at December 31, 1996, consisted of the following:
<TABLE>
<S> <C>
Prepaid service contracts $ 432
Prepaid expenses 121
Prepaid insurance 29,503
-------
$30,056
=======
</TABLE>
NOTE 7 - INCOME TAXES PAYABLE
- -----------------------------
The components of the provision for (benefit from) income taxes on income are as
follows:
<TABLE>
<CAPTION>
Total Paid Payable
----- ---- -------
<S> <C> <C> <C>
Current tax expense:
CA franchise tax $ 0 $0 $ 0
U.S. federal tax 0 0 0
Delaware franchise tax 30 0 30
--- -- ---
Total income taxes payable $30 $0 $30
=== == ===
Deferred tax expense:
CA franchise tax $ 0
U.S. federal tax 0
Delaware franchise tax 0
---
Total deferred 0
---
Total tax provision $30
===
</TABLE>
See accountants' audit report
F-90
<PAGE>
SIGMA 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 7 - INCOME TAXES PAYABLE (Cont.)
- -------------------------------------
The deferred tax asset at December 31, 1996, is as follows:
<TABLE>
<S> <C>
CA franchise tax $ 0
U.S. federal tax 0
Delaware franchise tax 0
Valuation allowance (0)
---------
Total $ 0
=========
</TABLE>
The provision (benefit) for income taxes for December 31, 1996, consists of the
following:
<TABLE>
<S> <C>
Current provision -California $ 0
-Federal 0
-Delaware 0
---------
Total current provision $ 30
=========
Deferred tax provision:
Fixed asset reserves/depreciation $ (35,461)
Inventory reserves 54,064
Allowance for doubtful accounts 185,586
Valuation allowance (204,189)
--------
Total deferred provision 0
--------
Total income tax provision $ 30
========
</TABLE>
The provision (benefit) for income taxes in the accompanying statements of
operations
differs from the amount of tax based on the statutory income tax rates as
follows:
<TABLE>
<S> <C>
Provision for income taxes at statutory rate:
CA franchise tax $ 0
U.S. federal tax 0
Delaware franchise tax 30
--------
Total provision for income taxes $ 30
========
</TABLE>
SEE ACCOUNTANTS' AUDIT REPORT
F-91
<PAGE>
SIGMA 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 7 - INCOME TAXES PAYABLE (Cont.)
- -------------------------------------
The components of the Company's deferred income tax (benefit) asset as of
December 31, 1996, are as follows:
<TABLE>
<S> <C>
Fixed asset reserves/depreciation $ 0
Allowance for doubtful accounts 0
Inventory reserves 0
Valuation allowance 0
----
Total components of the Company's
deferred income tax (benefit) asset $ 0
====
</TABLE>
An allowance for the deferred income tax (benefit) asset has been set at one
hundred percent (100%) due to a going concern issue (see Note 2) which causes us
to believe that it is more likely than not, that the deferred tax (benefit)
asset will not be realized. No benefit has been recognized for the net
operating losses, due to the fact that the company will be unable to use the net
operating loss as a result of the change in ownership rules.
NOTE 8 - COMMITMENTS
- --------------------
The Company has entered into a five-year lease for 33,938 square feet space
located at 6610 Nancy Ridge Drive. Minimum lease payments are $16,969 per month
plus utilities, insurance and real estate taxes.
The schedule payments for the next five years are as follows:
<TABLE>
<S> <C>
1997 $203,628
1998 203,628
1999 203,628
2000 203,628
2001 67,876
--------
Total $882,388
========
</TABLE>
See accountants' audit report
F-92
<PAGE>
SIGMA 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 9 - LEASE PAYABLE
- ----------------------
Lease payable at December 31, 1996, consist of the following:
<TABLE>
<S> <C>
a) Lease payable - Colonial $ 41,839
--------
Total lease payable 41,839
Less: current portion (12,934)
--------
Balance at December 31, 1996 $ 28,905
========
</TABLE>
b) Lease payable, monthly lease payments are $1,770 including interest
at 19.84% for thirty-six months, with a purchase option of $4,772
available at the maturity of the lease in June 1999.
The scheduled principal payments for the next five years are as follows:
<TABLE>
<S> <C>
1997 $12,934
1998 15,501
1999 13,404
2000 0
2001 0
-------
Total $41,839
=======
</TABLE>
NOTE 10 - ECONOMIC DEPENDENCY
- -----------------------------
The Company obtains a significant amount of its inventory from three major DRAM
manufacturing sources. Although BMI Acquisition Group, Inc. was able to obtain
an acceptable supply of materials during the last year, there can be no
assurance that BMI Acquisition Group, Inc. will be able to secure a continued
supply in the future. If suppliers reduce, terminate, suspend or delay their
shipments to the Company in the near future, there could be substantial negative
effect on the Company's business and results of operations.
NOTE 11 - CONTINGENCIES
- -----------------------
The Company has a written warranty program on its products for one year. The
program is novel within the industry, includes potential product liability
claims and thus, the Company is unable to estimate accurately the ultimate cost
of the program. Accordingly, the Company has not accrued for any warranty
expenses or potential product liability claims in the financial statements.
See accountants' audit report
F-93
<PAGE>
SIGMA 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 12 - COVENANT - NON-COMPETE
- --------------------------------
Note payable to the former owners for their covenant not to compete is a non-
interest bearing note. Payments in the amount of $6,000 per month each for
twenty-four (24) months are scheduled until the note is paid in full in December
1998. The Company is currently in default, as no payments have been made to
date. The scheduled principal payments are as follows:
<TABLE>
<S> <C>
1997 $144,000
1998 144,000
--------
Total $288,000
========
</TABLE>
NOTE 13 - PREFERRED STOCK INTEREST IN BMI ACQUISITION GROUP, INC.
- -----------------------------------------------------------------
Pursuant to the stock purchase agreement (See Note 3) dated December 19, 1996,
BMI Acquisition Group, Inc. issued convertible preferred stock in the amount of
$2,500,000. The preferred stock consists of 1,000 shares at $2,500 per share and
is convertible into common stock of Sigma beginning on January 1, 1999 at the
option of the holder. In addition, the preferred stock is entitled to receive a
six percent (6%) dividend commencing in 1998.
NOTE 14 - LEGAL MATTERS
- -----------------------
At December 31, 1996, the following lawsuits and claims were pending against the
Company:
(a) Spring Circle Technology, Inc. vs. BMI Acquisition Group, Inc., civil
action filed May 1, 1995, in Los Angeles Superior Court (Case No.
145864), for rescission, breach of contract, breach of express and
implied warranties, fraud, unjust enrichment and cost. Legal counsel
states that legal precedents appear to support the Company's position;
however, they believe that an adverse judgment is possible.
Therefore, $60,000 has been accrued for this potential liability.
Settlement discussions are currently being conducted, which the
Company believes will resolve this matter.
(b) BMI Acquisition Group, Inc. vs. Packard Bell NEC, Inc., civil action
filed January 1, 1996, in San Diego Superior Court (Case No.
00702822), for breach of contract, fraud and intentional
misrepresentation, suppression of facts and cost. Packard Bell has
filed a cross-complaint. This case was dismissed in early 1997.
See accountants' audit report
F-94
<PAGE>
SIGMA 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 14 - LEGAL MATTERS (Cont.)
- -------------------------------
(c) Micron Electronics, Inc. vs. BMI Acquisition Group, Inc. Legal
counsel states that legal precedents appear to support the Company's
position. The Company, however, has already recorded an account
payable in the amount of $110,000.
NOTE 15 - RELATED PARTY TRANSACTIONS
- ------------------------------------
The following transactions occurred between the Company and its shareholders and
affiliated companies:
1) BMI Acquisition Group, Inc. had a contractual agreement with RAS, LLC.
RAS, LLC was controlled by certain former officers of BMI Acquisition
Group, Inc. RAS, LLC advanced money on behalf of BMI Acquisition
Group, Inc. At December 31, 1996, RAS, LLC is owed $209,368.58, which
includes $138,000 that was advanced to Silicon Magic on behalf of BMI
Acquisition Group, Inc. During the year, two vehicles were
transferred to RAS, LLC for payment on account.
2) BMI Acquisition Group, Inc. borrowed $2,000,000 from a bank on
December 29, 1995. During 1996, the shareholders personally assumed
this loan on behalf of the Company. There is recourse against BMI
Acquisition Group, Inc.
3) BMI Acquisition Group, Inc. owed its shareholders $4,382,275 under a
Capital Entitlement dated January 15, 1995. This Entitlement was
converted to preferred stock on October 17, 1996. Pursuant to the
stock purchase agreement (see Note 3) with Sigma dated December 19,
1996, the above preferred stock was cancelled and Reclassified as
additional paid in capital. Pursuant to this stock purchase agreement,
new preferred stock (1,000 shares) was issued in the amount of
$2,500,000 to the previous common shareholders of BMI Acquisition
Group, Inc.
4) As a result of this new convertible preferred stock, issued December
19, 1996, the previous common shareholders are still major
shareholders in the Company.
5) BMI Acquisition Group, Inc. owns a provisional patent which was
assigned to BMI Acquisition Group, Inc. by Mr. Peddle, who is BMI
Acquisition Group, Inc.'s current C.E.O.
6) Mr. Peddle owns a company by the name of THStyme which has been a
consultant to BMI Acquisition Group, Inc. for several years.
See accountants' audit report
F-95
<PAGE>
SIGMA 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 16 - STOCK WARRANTS
- ------------------------
The Company has issued 100,000 warrants at $0.10 per share convertible into
common stock. The warrants must be exercised by April 3, 1998.
NOTE 17 - SUBSEQUENT EVENTS
- ---------------------------
On June 6, 1997, Intercell Corporation acquired control of Sigma 7 Corporation
("Sigma 7"). Sigma 7 conducts its business through its wholly owned subsidiary
BMI Acquisition Group, Inc. BMI has developed and currently utilizes a
proprietary patch technology to produce fully functional computer memory modules
from defective memory chips. Intercell acquired control of Sigma 7 through the
acquisition of 4,500,000 shares of Sigma 7's common stock in exchange for the
payment of $550,000 for the shares and for providing approximately $1,985,000 in
additional financing, consisting primarily of secured loans and standby letters
of credit. As a result of the transaction, Intercell owns approximately 90% of
the 5,000,000 issued and outstanding common shares of Sigma 7. In addition,
Intercell may issue 2,500 shares of a new class of preferred stock at $1,000 per
share to holders of certain preferred shares of BMI to eliminate such preferred
shares.
See accountants' audit report
F-96
<PAGE>
To the Board of Directors
Sigma 7
San Diego, California
INDEPENDENT AUDITOR'S REPORT
----------------------------
Our examination was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The supplementary
information from the inception December 11, 1996 through December 31, 1996, is
presented for purposes of additional analysis and is not a required part of the
basic consolidated financial statements. The supplementary information has been
subjected to the auditing procedures applied in the examination of the basic
consolidated financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic consolidated financial statements
taken as a whole.
Matranga & Correia
/s/ Matranga & Correia
August 26, 1997
San Diego, California
F-97
<PAGE>
SIGMA 7
SCHEDULE A - COST OF GOODS SOLD
FROM THE INCEPTION DECEMBER 11, 1996 THROUGH DECEMBER 31, 1996
<TABLE>
<S> <C>
COST OF GOODS SOLD
Depreciation $13,070
-------
TOTAL COST OF GOODS SOLD $13,070
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-98
<PAGE>
SIGMA 7
SCHEDULE B - GENERAL AND ADMINISTRATIVE EXPENSES
FROM THE INCEPTION DECEMBER 11, 1996 THROUGH DECEMBER 31, 1996
<TABLE>
<S> <C>
GENERAL AND ADMINISTRATIVE EXPENSES
Amortization $ 292
Consulting 3,768
Depreciation 5,725
------
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES $9,785
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-99
<PAGE>
SIGMA 7 CORPORATION AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
CURRENT ASSETS:
Cash $ (10,000)
Accounts Receivable 149,000
Inventory 502,000
Prepaids 37,000
----------
Total Current Assets $ 678,000
==========
Property, Plant and Equipment, Net $1,325,000
Goodwill and Other Intangible Assets 1,544,00
Deposits 22,000
Technology 252,000
Covenants (Noncompete) 252,000
----------
$4,073,000
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts Payable and Accrued Liabilities $ 924,000
Deferred Revenue 229,000
Notes Payable 468,000
----------
Total Current Liabilities $1,621,000
==========
Minority Interest in Subsidiary $2,500,000
Stockholders' Equity
Common Stock: $0.0000001 par value,
25,000,000 shares authorized,
500,000 issued and outstanding
Preferred Stock: $0.00000001 par value,
10,000,000 shares authorized,
500,000 issued and outstanding 525,000
Additional paid-in capital (573,000)
Deficit (48,000)
----------
$4,073,000
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-100
<PAGE>
SIGMA 7 CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND
BMI ACQUISITION GROUP, INC.
UNAUDITED CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
Three Months Ended March 31
-----------------------------
1997 1996
---- ----
<S> <C> <C>
Net Sales $ 229,000 $10,261,000
Cost of Goods Sold 351,000 10,795,000
--------- -----------
Gross Profit $(122,000) $ (534,000)
Selling, General and Administrative Expenses 436,000 1,178,000
--------- -----------
Operating Loss $(558,000) $(1,712,000)
Other Income -- 486,000
--------- -----------
Net Loss $(558,000) $(1,226,000)
========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-101
<PAGE>
SIGMA 7 CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND
BMI ACQUISITION GROUP, INC.
UNAUDITED CONDENSED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
Three Months Ended March 31
-----------------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATION ACTIVITIES:
Net Loss $(558,000) $(1,226,000)
Adjustments to Reconcile Net Loss to
Cash Used in Operating Activities:
Depreciation and Amortization 135,000 123,000
Changes in Operating Assets and Liabilities:
Accounts Receivable (127,000) (525,000)
Inventory 48,000 1,124,000
Prepaid Expenses (7,000) 78,000
Accounts Payable and Accrued Liabilities 18,000 382,000
--------- -----------
Net Cash Used in Operating Activities $(491,000) $ (44,000)
========= ===========
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets -- $ (47,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Sale of Assets $ 39,000 $ 192,000
Proceeds from Loan 180,000 --
Stock Subscriptions Received 75,000 --
--------- -----------
Net Cash Provided by Financing Activities $ 294,000 $ 193,000
========= ===========
Net Increase (Decrease) in Cash $(197,000) $ 101,000
Cash at Beginning of Period 187,000 235,000
--------- -----------
Cash at End of Period $ (10,000) $ 336,000
========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-102
<PAGE>
SIGMA 7 CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Sigma 7 Corporation and its majority-owned subsidiary (the "Company"). All
intercompany transactions have been eliminated.
The condensed consolidated financial statements are unaudited and reflect
all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of the
financial position and operating results for the periods presented. The
condensed consolidated financial statements should be read in conjunction
with the December 31, 1996 audited financial statements of Sigma 7
Corporation and the December 18, 1996 audited financial statements of BMI
Acquisition Group, Inc., and the notes thereto. The results of operations
for the three months ended March 31, 1997 are not necessarily indicative of
the results for the entire year ended December 31, 1997, or any future
period.
SEE ACCOUNTANTS' AUDIT REPORT.
F-103
<PAGE>
UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
The accompanying unaudited pro forma condensed combined financial
statements present pro forma financial information for the Company giving effect
to (1) the Company's acquisition of 90% of the outstanding Common Stock of Sigma
7 and its subsidiary BMI on June 6, 1997 (the "Acquisition") and (2) the July
18, 1997 disposition of certain assets, liabilities, rights and obligations of
the Company and its wholly owned subsidiaries (Wireless and CMI) to Intercell
Technologies Corporation ("Disposition").
The unaudited condensed balance sheet of the Company presented in the
unaudited pro forma condensed balance sheet includes the effects of the
Acquisition. Further, the unaudited pro forma condensed combined balance sheet
is presented as if the Disposition had occurred as of June 30, 1997.
The unaudited pro forma condensed combined statement of operations for the
nine months ended June 30, 1997 is presented as if the Acquisition and
Disposition had occurred on October 1, 1996. The unaudited pro forma condensed
combined statement of operations for the year ended September 30, 1996 is
presented as if the Acquisition had occurred on October 1, 1995. The
Disposition has not been included in the pro forma condensed combined statement
of operations for the year ended September 30, 1996 as the Company's results of
operations for that period did not include the operations of Wireless or CMI.
(See "BUSINESS-Recent Acquisitions, Dispositions and Transactions.") The pro
forma statement of operations for the year ended September 30, 1996 combines the
historical consolidated statement of operations of Intercell for the year ended
September 30, 1996 with results of operations of BMI for the period from January
1, 1996 to December 18, 1996 and Sigma 7 for the period from December 19, 1996
to December 31, 1996. The unaudited pro forma condensed combined statements of
operations for the nine months ended June 30, 1997 combines the historical
consolidated statement of operations of Intercell for the nine months ended June
30, 1997 with the results from operations of BMI for the period from October 1,
1996 to December 18, 1996 and Sigma 7 for the period from December 19, 1996 to
May 31, 1997. Sigma 7 acquired BMI on December 19, 1996. The revenue and net
loss of Sigma 7 and BMI for the period October 1, 1996 through December 31, 1996
is as follows:
<TABLE>
<CAPTION>
BMI Sigma 7
(unaudited) (unaudited)
October 1, 1996 to December 19, 1996 to
December 18, 1996 December 31, 1996
------------------- ---------------------
<S> <C> <C>
Revenue $599,000 $ 7,000
Net loss 398,000 16,000
</TABLE>
The accompanying unaudited pro forma condensed combined financial information
and notes thereto do not purport to represent what the Company's results of
operations or financial position would have been if the Acquisition and
Disposition had in fact occurred on such dates and should not be viewed as
predictive of the Company's financial results or condition in the future. The
unaudited pro forma condensed combined financial information should be read in
conjunction with the consolidated financial statements of the Company and
subsidiaries included herein.
F-104
<PAGE>
INTERCELL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 1997
<TABLE>
<CAPTION>
Businesses
June 30, to be Pro Forma
1997 disposed of Adjustments Pro Forma
(Note 1) (Note 2) (Note 3) Combined
------------ ------------- ---------------- ------------
ASSETS
- ------
<S> <C> <C> <C> <C>
Current Assets:
Cash and Investments 2,315,000 217,000 (345,000)/2(a)/ 1,753,000
Accounts Receivable, Net 904,000 137,000 -- 767,000
Inventories 2,850,000 239,000 -- 2,611,000
Prepaid Expenses and other current assets 249,000 7,000 -- 242,000
Investment land held for sale 1,424,000 -- 1,424,000
Property, plant and equipment 3,595,000 364,000 (75,000)/2(b)/ 3,156,000
Unallocated purchase price related to
Sigma 7 Acquisition 3,341,000 -- -- 3,341,000
Goodwill and other intangibles 1,365,000 1,026,000 -- 339,000
Investment in affiliated company -- -- 1,926,000/2(c)/ 1,926,000
Other assets 72,000 -- -- 72,000
----------- --------- --------------- -----------
Total Assets 16,115,000 1,990,000 1,506,000 15,631,000
=========== ========= =============== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities 2,124,000 99,000 -- 2,025,000
Noncurrent Liabilities:
Capital leases -- -- -- --
Minority interest 2,500,000 -- -- 2,500,000
Stockholder's Equity:
Convertible preferred stock 3,096,000 -- -- 3,096,000
Warrants 3,051,000 -- -- 3,051,000
Common stock 18,839,000 -- (385,000)/2(d)/ 18,454,000
APIC -- -- -- --
Deferred Compensation (77,000) -- -- (77,000)
Accumulated Deficit (13,418,000) -- -- (13,418,000)
----------- --------- --------------- -----------
11,491,000 (385,000) 11,106,000
Total Liabilities and Stockholder's Equity 16,115,000 99,000 (385,000) 15,631,000
=========== ========= =============== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-105
<PAGE>
INTERCELL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
BMI Sigma 7
Intercell January 1 to December 19 to
Year Ended December 18, December 31, Pro Forma
September 30, 1996 1996 Adjustments Pro Forma
1996 (Note 1) (Note 1) (Note 3) Combined
-------------- ------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue $ 3,405,000 $18,021,000 $ 7,000 -- $ 21,433,000
Cost of Sales 2,830,000 20,399,000 13,000 -- 23,242,000
----------- ----------- -------- -------------- ------------
Gross Profit 575,000 (2,378,000) (6,000) -- (1,809,000)
Selling, General and Administrative Expenses 5,683,000 3,124,000 10,000 (668,000)/(1a)/ 9,485,000
Research and Development 88,000 -- -- -- 88,000
----------- ----------- -------- -------------- ------------
Operating Loss (5,196,000) (5,502,000) (16,000) (668,000) (11,382,000)
Other Income (Expense), Net (87,000) 243,000 -- -- 156,000
----------- ----------- -------- -------------- ------------
Loss Before Provision for Income Taxes (5,283,000) (5,259,000) (16,000) (668,000) (11,226,000)
Provision for Income Taxes -- (2,000) -- -- (2,000)
----------- ----------- -------- -------------- ------------
Net Loss (5,283,000) (5,261,000) (16,000) (668,000) (11,228,000)
Deemed Preferred Stock Dividend Relating to
In-the-money Conversion Terms 1,625,000 -- -- -- 1,625,000
----------- ----------- -------- -------------- ------------
Net Loss Applicable to
Common Shareholders $(6,908,000) $(5,261,000) $(16,000) $(668,000) $ (12,853,000)
=========== =========== ======== =============== ============
Net Loss Per Share (.54) -- -- -- (.98)
=========== =========== ======== =============== ============
Weighted Average Shares 13,072,683 -- -- -- 13,072,683
=========== =========== ======== =============== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-106
<PAGE>
INTERCELL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
BMI Sigma 7
Intercell October 1, December 19, Businesses
Nine Months 1996 to 1996 to to be
Ended December 18, May 31, Disposed Pro Forma
June 30, 1996 1997 of Adjustments Pro Forma
1997 (Note 1) (Note 1) (Note 2) (Note 3) Combined
------------- ------------- ------------- ----------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 5,426,000 $ 473,000 $ 344,000 1,480,000 -- $ 4,763,000
Cost of Sales 4,080,000 1,359,000 638,000 1,039,000 -- 5,038,000
----------- ----------- ----------- -------------- -----------
Gross Profit 1,346,000 (886,000) (294,000) 441,000 -- (275,000)
Selling, General and Administrative 5,834,000 565,000 773,000 771,000 501,000/(1a)/
Expenses
5,000/(2e)/
(47,000)/(2f)/ 6,860,000
Research and Development 1,537,000 -- 0 121,000 -- 1,416,000
----------- ----------- ----------- -------------- -----------
Operating Loss (6,025,000) (1,451,000) (1,067,000) (451,000) (459,000) (8,551,000)
Interest (expense) income, net 186,000 (323,000) 4,000 -- -- (133,000)
Loss Before Provision for
Income Taxes (5,839,000) (1,774,000) (1,063,000) (451,000) (459,000) (8,684,000)
Provision for Income Taxes -- 2,000 1,000 -- -- 3,000
----------- ----------- ----------- -------------- -----------
Net Loss (5,839,000) (1,776,000) (1,064,000) (451,000) (459,000) (8,681,000)
Deemed Preferred Stock Dividend
Relating to
In-the-money Conversion Terms 1,023,000 -- -- -- 717,000
Accretion on Preferred Stock 413,000 -- -- -- 295,000
----------- ----------- ----------- -------------- -----------
Net Loss Applicable to
Common Shareholders $(7,275,000) $ -- $ -- $ -- $(9,693,000)
=========== ============== ===========
Net Loss Per Share (0.42) -- -- -- (0.60)
=========== =========== =========== ============== ===========
Weighted Average Shares 17,169,353 -- -- -- 16,069,353
=========== =========== =========== ============== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-106
<PAGE>
INTERCELL CORPORATION
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1: ACQUISITION
On June 6, 1997, Intercell acquired 90% of the outstanding common stock of Sigma
7 for a cash purchase price of $550,000. Sigma 7 was formed in December 1996.
Through Intercell's acquisition of Sigma 7, Intercell also acquired BMI
Acquisition Group, Inc. ("BMI"), the predecessor of Sigma 7. The acquisition of
Sigma 7 has been accounted for by the purchase method of accounting.
Sigma 7 was formed on December 19, 1996 at which time it acquired all of the
outstanding Common Stock of BMI. Sigma 7's acquisition did not include the
acquisition of the outstanding convertible preferred stock of BMI.
On September 2, 1997, the Company offered 1,000 shares of a new class of its
preferred stock at a par value of $2,500 per share (the "Preferred Series"), to
the existing holders of the preferred shares of BMI, which offer the holder of
the BMI preferred shares accepted on September 11, 1997. When issued, the
Preferred Series will contain terms and conditions similar to the preferred
shares of BMI which they replace, except that as a result of such offer, the BMI
preferred shareholders no longer have the right to convert their shares into
shares of common stock of BMI, but may convert the preferred shares into shares
of the Company's common stock.
The total cash purchase price of $550,000 has been allocated on a preliminary
basis to the net assets acquired based on the estimated fair values below and is
included in the June 30, 1997 Intercell balance sheet. The actual allocation of
the purchase price will depend upon the valuation of the purchased technology as
of the acquisition date. Consequently, the ultimate allocation of the purchase
price could differ from that presented below:
<TABLE>
<S> <C>
Accounts Receivable 103,000
Inventory 812,000
Prepaid Expenses 37,000
Property, Plant and Equipment 1,293,000
Unallocated purchase price 3,341,000
Other assets 125,000
Current liabilities assumed (961,000)
Note payable to related party (288,000)
Capital leases (17,000)
Minority interest (2,500,000)
-----------
Total cash paid/advanced to Sigma 7 $ 1,945,000
Less advances to Sigma 7 1,395,000
-----------
Total purchase price $ 550,000
===========
</TABLE>
See accountants' audit report.
F-108
<PAGE>
In addition to the above advances, Intercell provided letters of credit to Sigma
7 for future inventory purchases.
NOTE 2: DISPOSITION
Effective July 18, 1997, the Company entered into a stock purchase agreement to
sell, transfer, assign and deliver certain assets, liabilities, rights and
obligations of the Company related to the Antenna Technology, including its
wholly owned subsidiaries Cellular Magnetics and Intercell Wireless Corp., to
Intercell Technologies Corporation ("ITC"), a Colorado corporation, in exchange
for shares of ITC common stock, the Company's common stock and notes. The total
consideration received was valued at approximately $2,300,000. As a result of
uncertainties with respect to realization of the consideration received, no gain
was recorded. With respect to the notes, in the event of default by ITC, the
ownership of the Cellular Magnetics and Intercell Wireless Corp. will revert
back to the Company.
The following is a list of assets sold, including cash loaned, and liabilities
transferred to ITC:
<TABLE>
<S> <C>
Cash 217,000
Accounts receivable 137,000
Inventories 239,000
Prepaid expenses and other current assets 7,000
Property, plant and equipment 364,000
Goodwill and other intangibles 1,026,000
Accounts payable (99,000)
---------
Net assets sold 1,891,000
Cash provided to ITC 345,000
Sale of corporate office furniture 75,000
---------
Total assets sold, including cash loaned, and liabilities transferred 2,311,000
</TABLE>
See accountants' audit report.
F-109
<PAGE>
INTERCELL CORPORATION
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 3: PRO FORMA ADJUSTMENTS
ACQUISITION
1(a) The pro forma adjustments applied to the historical statement of
operations to arrive at the pro forma combined statement of operations as of
September 30, 1996 and June 30, 1997 reflects amortization expenses of $668,000
and $501,000, respectively, related to long-lived assets resulting from the
acquisition of Sigma over an assumed estimated useful life of five years. The
unallocated purchase price consists primarily of purchase technology, patent
applications and goodwill.
DISPOSITION
2(a) Represents a cash loan of $300,000 to ITC and the payment of $45,000 for
certain liabilities assumed by the Buyer.
2(b) Represents the sale of certain of the Company's corporate office furniture
and equipment at net book value.
2(c) Investment in Affiliated Company consists of the Notes, 6,269,226 common
shares and warrants of ITC, primarily valued at the Company's historical book
value of the net assets transferred as the Disposition does not involve the
culmination of the earnings process.
2(d) Represents the transfer to the company of 1,100,000 shares of the
Company's no par value common stock, a substantial majority of which were
previously held by Terry W. Neild and Lou Ross, former affiliates of the
Company.
2(e) Represents the elimination of depreciation expense recorded for the
Company's corporate office furniture and equipment sold to the ITC in the
Disposition.
2(f) Represents the accrual of certain expenses and legal fees assumed by the
Company on behalf of the ITC.
See accountants' audit report.
F-110
<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......................................................... i
RISK FACTORS............................................................... 1
PLAN OF DISTRIBUTION....................................................... 14
USE OF PROCEEDS............................................................ 14
PRICE RANGE OF COMMON STOCK................................................ 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................. 16
BUSINESS................................................................... 29
MANAGEMENT................................................................. 59
EXECUTIVE COMPENSATION..................................................... 64
CERTAIN TRANSACTIONS....................................................... 69
BENEFICIAL OWNERSHIP....................................................... 71
SELLING SHAREHOLDERS....................................................... 72
DESCRIPTION OF SECURITIES.................................................. 74
SHARES ELIGIBLE FOR FUTURE SALE............................................ 82
LEGAL MATTERS.............................................................. 83
EXPERTS.................................................................... 83
AVAILABLE INFORMATION...................................................... 84
ADDITIONAL INFORMATION..................................................... 84
GLOSSARY................................................................... 86
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
</TABLE>
INTERCELL CORPORATION
Common Stock
Common Stock Purchase Warrants
__________________
PROSPECTUS
__________________
__________ __, 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.......... $ 1099.40
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 such provisions do not conflict with the CBCA and to purchase
indemnity insurance on behalf of its directors and officers.
II-1
<PAGE>
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
September 30, 1994 through September 30, 1997.
<TABLE>
<CAPTION> TITLE OF
DATE OF SALE SECURITIES AMOUNT CONSIDERATION PURCHASER
- ------------ ---------- ------ ------------- ---------
<S> <C> <C> <C> <C>
(1) 7/7/95 Common 5,412,191 Assets & Liabilities of Modern Industries, Inc.
Modern Industries
Recorded at $3,093,000
(2) 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.
(3) 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.
(4) 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
(5) 12/22/95 Options to Purchase 716,180 Agreement to Provide 1. Communique Media Services,
Common Stock, at Consulting Services to the Ltd.
an exercise price of Company 2. Financial Power Network, Inc.
$.50 per share 3. James O. Gray
4. Admiral House
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
TITLE OF
DATE OF SALE SECURITIES AMOUNT CONSIDERATION PURCHASER
- ------------ ---------- ------ ------------- ---------
<S> <C> <C> <C> <C>
(6) 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
(7) 3/3/96 Common Stock 96,606 Legal Services - valued at Corporate Consultancy Services,
$39,751 Ltd.
(8) 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
(9) 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
(10) 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
(11) 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
(12) 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
(13) 5/17/96 Common Stock 14,780 Legal Services - valued at Charmirathor, Inc.
$16,554
(14) 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
(15) 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
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
TITLE OF
DATE OF SALE SECURITIES AMOUNT CONSIDERATION PURCHASER
- ------------ ---------- ------ ------------- ---------
<S> <C> <C> <C> <C>
(16) 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.
(17) 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
(18) 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
(19) 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.
(20) 12/16/96 Series C Preferred 525 $ 5,250,000 Accredited Investors (11)
Stock and attached 530,771
Warrants to acquire
Common Stock
(21) 12/16/96 Warrants to acquire 214,615 Services as Placement Swartz Investments, LLC and
Common Stock Agent Assignees
(22) 7/3/97- Common Stock 7,412,156 Conversion of 231 Shares Accredited Investors (9)
7/14/97 of Series C Preferred
Stock
</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 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.
II-4
<PAGE>
EXEMPTION FROM REGISTRATION CLAIMED
All of the sales by the Company of its unregistered securities (except for
those described in Item 14, which were made pursuant to Regulation S and those
described in Item 20, 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 11
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.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS. The following is a complete list of exhibits filed as
part of the Registration Statement. Exhibit numbers correspond to the
numbers in the Exhibit Table of Item 601 of Regulation S-K.
II-5
<PAGE>
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.
2.4/(6)/ Stock Purchase Agreement dated July 18, 1997 between Intercell
Corporation and Intercell Technologies Corporation and Addendum to
Stock Purchase Agreement.
2.5/(7)/ Stock Sale and Purchase Agreement dated June 6, 1997 between
Intercell Corporation and Sigma 7 Corporation.
2.6/*/ Offer for Development Agreement of Microlink Technologies
Corporation.
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>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
5.1/*/ 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.
10.11/(6)/ Patent Assignment Agreement dated as of July 18, 1997 between
Intercell Corporation and Intercell Technologies Corporation.
10.12/(6)/ Warrant Agreement dated as of July 18, 1997 between Intercell
Corporation and Intercell Technologies Corporation.
10.13/(6)/ Royalty Agreement dated as of July 18, 1997 between Intercell
Corporation and Intercell Technologies Corporation.
II-7
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.14/(6)/ $2,200,000 Promissory Note dated as of July 18, 1997, between
Intercell Technologies Corporation and Intercell Corporation.
10.15/(6)/ Stock Pledge and Security Agreement dated July 18, 1997 between
Intercell Corporation and Intercell Technologies Corporation.
10.16/*/ Microlink Technologies Corporation Standard Industrial Lease.
10.17/**/ Sigma 7 Lease.
10.18/**/ CTL Lease.
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 Matranga & Correia.
27/*/ Financial Data Schedule.
_________________
/*/Filed herewith.
/**/To be filed by amendment.
/(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)/ Incorporated by reference to the Company Current Report on Form 8-K dated
July 18, 1997.
/(7)/ Incorporated by reference to the Company Current Report on Form 8-K dated
May 28, 1997.
(b) FINANCIAL STATEMENT SCHEDULES. See "Index to Financial
Statements" on page F-1.
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes the following:
II-8
<PAGE>
(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 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 November 13, 1997.
INTERCELL CORPORATION
Dated: November 13, 1997 By /s/ Paul H. Metzinger
-------------------------------------
Paul H. Metzinger, President, Chief
Executive 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 Paul H. Metzinger 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, the registrant
has duly caused this Registration Statement to be signed by the following
persons in the capacities, thereunto duly authorized, in the City of Denver,
State of Colorado, on November 13, 1997.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Paul H. Metzinger President, Chief Executive Officer November 13, 1997
- ---------------------
Paul H. Metzinger and Director (Principal Executive
Officer)
/s/ Alan M. Smith Secretary, Treasurer, Chief
- -----------------
Alan M. Smith Financial Officer and Director
(Principal Financial and
Accounting Officer) November 13, 1997
/s/ Charles E. Bauer Director November 12, 1997
- --------------------
Charles E. Bauer
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.
2.4/(6)/ Stock Purchase Agreement dated July 18, 1997 between Intercell
Corporation and Intercell Technologies Corporation and Addendum
to Stock Purchase Agreement.
2.5/(7)/ Stock Sale and Purchase Agreement dated June 6, 1997 between
Intercell Corporation and Sigma 7 Corporation.
2.6/*/ Offer for Development Agreement of Microlink Technologies
Corporation.
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.
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.8/(1)/ Plan of Liquidating Dissolution of Energy Corporation dated July
8, 1996.
5.1/*/ 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.
10.11/(6)/ Patent Assignment Agreement dated as of July 18, 1997 between
Intercell Corporation and Intercell Technologies Corporation.
10.12/(6)/ Warrant Agreement dated as of July 18, 1997 between Intercell
Corporation and Intercell Technologies Corporation.
10.13/(6)/ Royalty Agreement dated as of July 18, 1997 between Intercell
Corporation and Intercell Technologies Corporation.
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.14/(6)/ $2,200,000 Promissory Note dated as of July 18, 1997, between
Intercell Technologies Corporation and Intercell Corporation.
10.15/(6)/ Stock Pledge and Security Agreement dated July 18, 1997 between
Intercell Corporation and Intercell Technologies Corporation.
10.16/*/ Microlink Technologies Corporation Standard Industrial Lease.
10.17/**/ Sigma 7 Lease.
10.18/**/ CTL Lease.
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 Matranga & Correia.
27/*/ Financial Data Schedule.
_________________
/*/Filed herewith.
/**/To be filed by amendment.
/(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)/ Incorporated by reference to the Company Current Report on Form 8-K dated
July 18, 1997.
/(7)/ Incorporated by reference to the Company Current Report on Form 8-K dated
May 28, 1997.
<PAGE>
As Amended October 14, 1997
EXHIBIT 2.6
OFFER FOR DEVELOPMENT AGREEMENT
OF
MICROLINK TECHNOLOGIES CORPORATION
1. Form New Corporation
Microlink Technologies Corp. 15.0% Herb Neuhaus
Ownership 12.5 Ron Morley
72.5 Intercell Corporation
-----
100.0%
=====
2. Particle Interconnect Corporation transfers all of its Intellectual
Property to MTC after November 2, 1997 for Intercell Corporation's
ownership in MTC, which shall at that time be not less than 72.5%.
3. Herb Neuhaus President, Chief Executive Officer, Treasurer,
Director
Ronald Morley Vice-President of Sales & Marketing, Secretary,
Director
Paul H. Metzinger Director
4. Finance MTC.
Herb Neuhaus has indicated a "minimum operational level" budget of $325,000
(which includes $50,000 of current obligations excluding leases) for the period
September 30, 1997 to March 31, 1998.
Ronald Morley has committed, with the assistance of Herb Neuhaus and Paul
H. Metzinger, to pursue the financing, with the stated objective of receiving
substantive written offers, proposals or agreements-in-principle, on or before
December 31, 1997. At this point, the status of the entire program will be
reviewed.
(a) Intercell will advance $180,000 (less payments made since
September 20, 1997) to MTC to cover operations on or about October 17,
1997. Intercell Corporation commits to timely provide an additional
$140,000 for operations for months 4, 5 and 6, if required. Herb Neuhaus
will control the expenditure of such funds.
(b) MTC will obtain financing:
(i) Through direct sale of 20% of its equity for not less
than $350,000
<PAGE>
(ii) Through R&D funds of not less than $500,000 advanced by
sponsoring firms in an amount agreed between MTC and the sponsoring
firms, with such firms having (A) exclusive rights to purchase the IP
if successfully developed; (B) an option to acquire equity in MTC
(controlling or otherwise) for negotiated amounts, terms and
conditions; (C) exclusive licensing for a cash payment and royalty
payment; or (D) a combination of all of the above.
(c) Herb Neuhaus is of the opinion that the amount of financing is
sufficient to bring the technology to a marketable status.
5. Assuming financing is completed, as staged, ownership would be:
<TABLE>
<CAPTION>
Percent Shares Consideration
------- ------ -------------
<S> <C> <C> <C>
Herb Neuhaus 15.0% 15,000 $ 100.00
Ron Morley 12.5 12,500 100.00
Investors 20.0 20,000 350,000.00
Intercell Corporation 52.5/*/ 50,000 Transfer
----- ------- Technology and
100.0% 100,000 Physical Assets
===== =======
</TABLE>
___________
/*/Intercell Corporation agrees to provide up to 2.5% equity interest to outside
consultants, if considered by all parties necessary to promote ITC's success.
6. Any sale of the IP of MTC, or the sale or change of control of MTC, if
it occurs at any time within one year of the formation of MTC, shall require
that MTC or Intercell Corporation pay Herb Neuhaus $120,000 in one lump sum to
mitigate the financial impact on him caused by his relocation and termination of
employment with Amoco. Intercell Corporation shall, as soon as possible, at its
cost, obtain a term life insurance policy on Herb Neuhaus, payable to his
beneficiaries in an amount of not less than $250,000.00. It is specifically
understood and agreed that when MTC is funded as herein provided, that MTC shall
pay all cost associated with such policy.
7. Herb Neuhaus' 100,000-share option in Intercell Corporation would vest
immediately. In addition Herb Neuhaus would agree to serve as President & Chief
Executive Officer, on the agreed terms and conditions as set forth in the Tech
Lead Letter, dated September 18, 1997. Ron Morley would continue as a salaried
employee of Intercell Corporation until otherwise changed by agreement of the
parties. He will devote substantially all of his time to the business activities
of MTC provided it shall bear full responsibility for all his costs incurred in
pursuing such business activities.
8. The equity ownership of Herb Neuhaus and Ron Morley in MTC would
increase pro rata for each percentage of equity of MTC they did not sell but
still raised not less than $350,000 (e.g., if they raised $350,000 by selling
only 10% of MTC then each would share equally in the 10% not sold). It is
specifically understood and agreed that if at any time within
2.6-2
<PAGE>
the six-month term of this Agreement Paul H. Metzinger, on behalf of Intercell
Corporation shall raise financing of not less than $350,000.00 by utilizing part
or all of the 20% equity reserved for investors, then the equity ownership of
Herb Neuhaus and Ron Morley shall remain as set forth herein, but they shall
lose all rights to any percentage of the equity reserved for investors.
Further, should Paul H. Metzinger, on behalf of Intercell Corporation, manage to
raise financing of $850,000.00 in such a manner as to not require usage of the
20% allocated to the investors, then such percentage shall remain vested in
Intercell Corporation, the percentage equity of Herb Neuhaus and Ron Morley
shall remain as set forth herein, but Herb Neuhaus and Ron Morley shall lose any
rights to participation in any of the 20% reverted to Intercell Corporation.
It is further specifically understood and agreed that if, during the term
of this Agreement, Herb Neuhaus and Ron Morley obtain financing of not less than
$850,000.00 for MTC without utilizing the 20% equity reserved for investors,
then they shall share equally such equity ownership.
9. Paul H. Metzinger will devote immediate attention to acquire funds to
settle out Ken Bahl and clear title to all IP.
10. Paul H. Metzinger will, with Herb Neuhaus and Ron Morley, consider the
desirability and advisability of creating or acquiring a public company to
facilitate these objectives.
11. If $350,000 is raised from investors, $150,000 would be returned to
Intercell Corporation.
2.6-3
<PAGE>
12. Unless otherwise agreed to, in writing, by all parties, if Herb
Neuhaus and Ron Morley fail to raise the private financing or obtain the R&D
funds, by March 31, 1998, they shall surrender their ownership of MTC back to
Intercell Corporation; provided they have been reimbursed for all accountable
expenses or paid other sums owed to them.
Dated: October 8, 1997 INTERCELL CORPORATION
By /s/ Paul H. Metzinger
-------------------------------------------
Paul H. Metzinger, President and Chief
Executive Officer
Accepted and Agreed to this 8th day of October 1997.
By /s/ Herbert J. Neuhaus
------------------------------
Herbert J. Neuhaus, Ph.D.
By /s/ Ronald Morley
------------------------------
Ronald Morley
2.6-4
<PAGE>
EXHIBIT 5.1
KUTAK ROCK ATLANTA
A PARTNERSHIP KANSAS CITY
INCLUDING PROFESSIONAL CORPORATIONS LITTLE ROCK
SUITE 2900 NEWPORT BEACH
717 SEVENTEENTH STREET NEW YORK
DENVER, COLORADO 80202-3329 OKLAHOMA CITY
(303) 297-2400 OMAHA
FACSIMILE (303) 292-7799 PHOENIX
PITTSBURGH
http://www.kutakrock.com WASHINGTON
November 13,1997
Board of Directors
Intercell Corporation
999 West Hastings Street, Suite 1750
Vancouver, B.C. Canada V6C 2W2
Re: Registration Statement on Form S-1
Gentlemen:
We have acted as counsel to Intercell Corporation (the "Company") in
connection with the filing of a registration statement on Form S-1, including a
related prospectus, under the Securities Act of 1933, as amended (the "Act").
The registration statement covers a proposed offering by certain shareholders of
the company of 14,994,606 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 covered by the registration statement, the Warrants, 1,837,450
shares of Common Stock issuable upon exercise of the Warrants, and 13,157,156
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. Such registration statement and prospectus on file with the
Securities and Exchange Commission (the "Commission") at the time such
registration statement becomes effective (including financial statements and
schedules, exhibits and all other documents filed as a part thereof or
incorporated therein) are herein called, respectively, the "Registration
Statement" and the "Prospectus."
5.1-1
<PAGE>
Intercell Corporation
November 13, 1997
Page 2
In connection with this opinion, we have made such investigations and
examined such records, including the Company's Articles of Incorporation, as
amended, Bylaws and corporate minutes as we deemed necessary to the performance
of our services and to give this opinion. We have also examined and are familiar
with the originals or copies, certified or otherwise identified to our
satisfaction, of such other documents, corporate records and other instruments
as we have deemed necessary for the preparation of this opinion. In express this
opinion, we have relied, as to any questions of fact upon which our opinion is
predicated, upon representations and certificates of the officers of the
Company.
In giving this opinion we assumed:
(a) the genuineness of all signatures and the authenticity and
completeness of all documents submitted to us as originals;
(b) the conformity to originals and the authenticity of all documents
supplied to us as certified, photocopied, conformed or facsimile copies and
the authenticity and completeness of the originals of any such documents;
and
(c) the proper, genuine and due execution and delivery of all
documents by all parties to them and that there has been no breach of the
terms thereof.
Based upon the foregoing and subject to the qualifications set forth above,
and assuming (i) that the Registration Statement has become effective under the
Act, (ii) that the full amount of consideration is received for the Common Stock
and Warrants, and (iii) that the shares of the Series B Preferred Stock and
Series C Preferred Stock are converted in accordance with the Company's Articles
of Incorporation, as amended, we are of the opinion that :
(w) upon issuance of the shares of the Common Stock underlying the
Warrants, such Common Stock will be legally issued, fully paid and
nonassessable;,
(x) upon issuance of the shares of Common Stock upon conversion of the
Series B Preferred Stock and Series C Preferred Stock, such Common Stock
will be legally issued, fully paid and nonassessable; and
(y) the Warrants have been legally issued, and are fully paid and
nonassessable.
5.1-2
<PAGE>
Intercell Corporation
November 13, 1997
Page 3
We consent to the filing of this opinion as an exhibit to the Registration
Statement and the use of our name in the Registration Statement. In giving such
consent, we do not thereby admit that we come within the category of persons
whose consent is required under Section 7 of the Act or the Rules and
Regulations of the Commission promulgated pursuant thereto.
Very truly yours,
/s/ Kutak Rock
5.1-3
<PAGE>
EXHIBIT 10.16
STANDARD INDUSTRIAL LEASE
ARTICLE I
PARTIES
This Lease, dated October 14, 1997, is made by and between Springs
Industrial Group, LLC, owner of the premises (the "Lessor") and Microlink
Technologies Corp. (the "Lessee").
ARTICLE II
PREMISES
In consideration of the rents, covenants and agreements hereinafter
reserved and contained on the part of the Lessee to be observed and performed,
Lessor hereby leases to Lessee and Lessee hereby rents from Lessor, those
certain Premises (the "Premises") known as 2291-C & D Waynoka Road, Colorado
Springs, Colorado 80915, consisting of a space having measurements of
approximately 50 feet in width and 80 feet in depth, totaling approximately
4,000 square feet, for the term and upon the conditions and agreements
hereinafter set forth, and Lessor and Lessee hereby agree as follows:
ARTICLE III
TERM
The term of this Lease shall be for three years, commencing on November 1,
1997 and ending on October 31, 2000 unless sooner terminated pursuant to any
provision hereof.
DELAY IN COMMENCEMENT. Notwithstanding said commencement date, if for any
reason Lessor cannot deliver possession of the Premises to Lessee on said date,
Lessor shall not be subject to any liability thereof, nor shall failure affect
the validity of the Lease or the obligations of Lessee hereunder or extend the
term hereof, but in such case Lessee shall not be obligated to pay rent until
possession of the Premises is tendered to Lessee; provided, however, that Lessor
shall not have delivered possession of the Premises within 10 days from said
commencement date. Lessee may, at Lessee's option, by notice in writing to
Lessor within 10 days thereafter, cancel this Lease, in which event the parties
shall be discharged from all obligations hereunder. If Lessee occupies the
Premises prior to said commencement date, such occupancy shall be subject to all
provisions hereof; such occupancy shall not advance the termination date, and
Lessee shall pay rent for such period at the initial monthly rates set forth
below. If Lessor, by reason outside the reasonable control of Lessor, cannot
deliver said Premises within 10 days from said commencement date, Lessor may, at
Lessor's option, by notice in writing within 10 days thereafter, cancel this
Lease.
10.16-1
<PAGE>
ARTICLE IV
RENT
Lessee shall pay Lessor, without any prior demand thereof and without any
right of deduction or set-off whatsoever, a monthly rental of $1,833.33, in
advance, upon the first day of each calendar month during the first 12 months of
the term. The rental amount for years two and three of the lease shall increase
5% over the previous year's rental. The Lessee further agrees to pay, in
addition to the rent as provided herein, all privilege, sales, excise and other
taxes (except income taxes) imposed by state, federal or municipal authorities
upon the rentals herein provided to be paid by the Lessee to the Lessor. Said
payment shall be in addition to and accompanying each rental payment made by
Lessee to Lessor.
ARTICLE V
SECURITY DEPOSIT
Lessee shall deposit with Lessor, upon execution hereof, $1,833.33 as
security for Lessee's faithful performance of Lessee's obligations hereunder.
If Lessee fails to pay rent or other charges due hereunder or otherwise defaults
with respect to any provision of this Lease, Lessor may use, apply or retain all
or any portion of said deposit for the payment of any rent or other charge in
default or the payment of any other sum to which Lessor may become obligated by
reason of Lessee's default, or to compensate Lessor for any loss or damage which
Lessor may suffer thereby. If Lessor so uses or applies all of or any portion
of said deposit, Lessee shall, within 10 days after written demand thereof,
deposit cash with Lessor in an amount sufficient to restore said deposit to the
full amount herein above stated, and Lessee's failure to do so shall be a
material breach of this Lease. Lessor shall not be required to keep said
deposit separate from its general accounts. If Lessee performs all of Lessee's
obligations hereunder, said deposit, or so much thereof as has not theretofore
been applied by Lessor, shall be returned without payment of interest or other
increment for its use, to Lessee (or, at Lessor's option, the last assignee, if
any, of Lessee's interest hereunder) at the expiration of the term hereof, as it
may be altered or amended and after Lessee has vacated the Premises.
ARTICLE VI
USE
Section 6.01. USE. The Premises shall be used and occupied only for
Office, Warehouse and Light Manufacturing Facility and Lessee shall not use of
occupy the Premises or permit the same to be used for any other purpose.
Section 6.02. COMPLIANCE WITH LAW. Lessee shall, at Lessee's expense,
comply promptly with all applicable statutes, ordinances, rules, regulations,
orders and requirements in effect during the term or any part of the term hereof
regulating the use by Lessee of the Premises. Lessee shall not use or permit
the use of the Premises in any manner that will tend
10.16-2
<PAGE>
to create waste or a nuisance or, if there shall be more than one tenant of the
building containing the Premises, which shall tend to disturb such other
tenants.
Section 6.03. CONDITION OF PREMISES. Lessee hereby accepts the Premises
in their condition existing as of the date of the execution hereof, subject to
all applicable zoning, municipal, county and state laws, ordinances and
regulations governing and regulating the use of the Premises, and accepts this
lease subject thereto and to all matters disclosed thereby and by any exhibits
attached hereto. Lessee acknowledges that neither Lessor not Lessor's Agent has
made any representation or warranty as to the suitability of the Premises for
the conduct of Lessee's business.
Section 6.04. LANDLORD'S IMPROVEMENTS TO THE SPACE. The space shall be
leased to the Tenant in as-is condition.
ARTICLE VII
MAINTENANCE, REPAIRS AND ALTERATIONS
Section 7.01. LESSOR'S OBLIGATIONS. Subject to the provisions of Article
IX and except for damage caused by any negligent or intentional act or omission
of Lessee, Lessee's Agents, employees or invitees, Lessor, at Lessor's expense,
shall keep in good order, condition and repair the foundations, exterior walls
and the exterior roof of the Premises. The Lessee shall give the Lessor prompt
notice of any defects or breakage in the structure, equipment, fixture or any
unsafe conditions upon or within the Premises. Lessee expressly waives the
benefits of any statute now or hereafter in effect which would otherwise afford
Lessee the right to make repairs at Lessor's expense or to terminate this Lease
because of Lessor's failure to keep the Premises in good order, condition and
repair.
Section 7.02. LESSEE'S OBLIGATIONS.
(a) Lessee shall, at its expense throughout the term of this Lease,
maintain, service, replace and keep in good repair the interior structures
and mechanical equipment, including such items as floors, ceilings, walls,
doors, glass, partitions and surrender same upon the expiration of the term
herein or renewal thereof in the same condition as received, ordinary wear
and tear excepted.
(b) On the last day of the term hereof, or on any sooner termination,
Lessee shall surrender the Premises to Lessor in the same condition as
received, broom clean, ordinary wear and tear excepted. Lessee shall
repair any damage to the Premises occasioned by the removal of its trade
fixtures, furnishings and equipment pursuant to Section 7.03, which repair
shall include the patching and filling of holes and repair of structural
damage.
10.16-3
<PAGE>
Section 7.03. ALTERATIONS AND ADDITIONS.
(a) Alterations may not be made to the Premises without the prior
written consent of the Lessor, and any alterations of the Premises,
excepting movable furniture and machinery and trade fixtures, shall become
part of the realty and belong to the Lessor upon termination of this Lease.
However, this shall not prevent the Lessee from installing trade fixtures,
machinery or other trade equipment in conformance with the local ordinances
provided the Premises are not damaged by the removal thereof. The Lessee
shall keep the Premises, the building and the property in which the
Premises are situated free from any liens arising out of any work performed
for, material furnished to or obligations incurred by the Lessee. It is
further understood and agreed that under no circumstance is the Lessee to
be deemed the Agent of the Lessor for any alteration, repair or operation
of the building upon the Premises, the same being done at the sole expense
of the Lessee, and all contractors, materialmen, mechanics and laborers are
hereby charged with notice that they must look to the Lessee only for the
payment of any charge for work done and materials furnished upon the
Premises during the term of this Lease.
(b) Lessor shall have the right to require removal of alterations and
additions but absent such demand, all improvements, additions and utility
installations, except trade fixtures and machines, shall remain the
property of Lessor. The above notwithstanding, Lessee shall have the right
to remove all improvements placed in the Premises other than plumbing,
electrical, walls, carpets and other like permanent improvements. Lessee
shall also have the right to install, at Lessee's expense, a vent through
the roof provided it is done in a workman like manner.
ARTICLE VIII
INDEMNITY
Section 8.01. LIABILITY INSURANCE. Lessee shall, at Lessee's expense,
obtain and keep in force during the term of this Lease, a policy of
comprehensive public liability insurance insuring Lessor and Lessee against any
liability arising out of the Ownership, use, occupancy or maintenance of the
Premises and all areas appurtenant thereto. Such Insurance shall be in an
amount not less than $100,000 for injury to or death of one person in any one
accident or occurrence and in any amount of not less than $300,000 for injury to
or death of more than one person in any one accident or occurrence. Such
insurance shall further insure Lessor and Lessee against liability for property
damage of at least $50,000. The limits of said Insurance shall not, however,
limit the liability of Lessee hereunder. In the event that the Premises
constitute a part of a larger property, said Insurance shall have a Lessor's
Protective Liability endorsement attached thereto. If Lessee shall fail to
procure and maintain said Insurance, Lessor may, but shall not be required to,
procure and maintain the same, but at the expense of Lessee.
Section 8.02. INSURANCE POLICIES. Insurance required hereunder shall be
in companies rated "AAA" or better in "Best's Insurance Guide." Lessee shall
deliver to Lessor copies of policies of liability insurance required under
Section 8.01 or certificates evidencing the existence
10.16-4
<PAGE>
and amounts of such Insurance with loss payable clauses satisfactory to Lessor.
No such policy shall be cancellable or subject to reduction of coverage or other
modification, except after the expiration of such policies at which time Lessee
must furnish Lessor with renewals or "binder" thereof, or Lessor may order such
Insurance and charge the cost thereof to Lessee, which amount shall be payable
by Lessee upon demand. Lessee shall not do or permit to be done anything which
shall invalidate the Insurance policies referred to in Section 8.03.
Section 8.03. PROPERTY INSURANCE. Lessor shall obtain and keep in force
during the term of this Lease policy or policies of Insurance covering loss or
damage to the Premises in the amount of the full replacement value thereof,
providing protection against all perils included within the classification of
fire, extended coverage, vandalism, malicious mischief and special extended
perils (all risk).
Section 8.04. WAIVER OF SUBROGATION. Lessee and Lessor each hereby waives
any and all lights of recovery against the other or against the officers,
employees, Agents and representatives of the other for loss of or damage to such
waiving party or its property of others under its control, where such loss or
damage is insured under any Insurance policy in force at the time of such loss
or damage. Lessee and Lessor shall, upon obtaining the policies of Insurance
required hereunder, give notice to the Insurance carrier or carriers that the
foregoing mutual waiver of subrogation is contained in this Lease.
Section 8.05. INDEMNITY. Lessee shall indemnify and hold harmless Lessor
from and against any and all claims arising from Lessee's use of the Premises or
from the conduct of Lessee's business or from any activity, work or things done,
permitted or suffered by Lessee in or about the Premises or elsewhere, and shall
further indemnify and hold harmless Lessor from and against any and all claims
arising from any breach or default in the performance of any obligation on
Lessee's part to be performed under the terms of the Lease or arising from any
negligence of the Lessee or any of the Lessee's Agents, contractors or
employees, and from and against all costs, attorneys' fees, expenses and
liabilities incurred in the defense of any such claim or any action or
proceeding brought thereon and in case any action or proceeding be brought
against Lessor by reason of any such claim. Lessee, upon written notice from
Lessor, shall defend the same at Lessee's expense with counsel satisfactory to
Lessor. Lessee, as a material part of the consideration to Lessor, hereby
assumes all risk of damage to property or injury to persons in, upon or about
the Premises arising from any cause and Lessee hereby waives all claims in
respect thereof against Lessor.
Section 8.06. EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees
that Lessor shall not be liable for injury to Lessee's business or for any loss
of income therefrom or for damage to the goods, wares, merchandise or other
property of Lessee, Lessee's employees, invitees, customers or any other person
in or about the Premises, nor shall Lessor be liable for injury to the person of
Lessee, Lessee's employees, Agents or contractors, whether such damage or injury
is caused by or results from fire, steam, electricity, gas, water or rain, or
from the breakage, leakage, obstruction or other defects of pipes, sprinklers,
wires, appliances, plumbing, air conditioning or light fixtures or from any
other cause whether the said damage or injury results from conditions arising
upon the Premises or upon other portions of the building of which the Premises
are a part or from other sources or places, and regardless of whether the cause
of
10.16-5
<PAGE>
such damage or injury or the means of repairing the same is inaccessible to
Lessee. Lessor shall not be liable for any damages arising from any act or
neglect of any other tenant, occupant, if any, of the building in which the
Premises are located. It shall be the sole obligation of Lessee to insure its
property, trade fixtures and equipment located on the Premises from any and all
loss or damage.
ARTICLE IX
DAMAGE OR DESTRUCTION
Section 9.01. DAMAGE OR DESTRUCTION. If, during the term of this Lease or
extension thereof, all or part of the building or structures now or hereafter
located upon the Premises should be destroyed partially or totally by fire or
other casualty, this Lease shall continue thereafter in full force and effect
except as hereinafter provided, and the Lessor may cause the reconstruction of
said building within 60 days following such destruction days, pending the
availability of labor and construction services, to substantially the same
condition in which it did exist at the time immediately preceding such
destruction. The Lessee's obligation to pay rental to the Lessor hereunder
shall abate from the date of such destruction until completing of such
reconstruction, and the terms hereof shall be automatically extended for a
period of time equivalent to that during which rent is abated as aforesaid. In
the event the Lessor does not commence reconstruction, repair or Replacement of
the improvements within 15 days after loss or damage, this Lease shall be deemed
terminated and of no further force or effect.
Section 9.02. ABATEMENT OF RENT; LESSEE'S REMEDIES. Except for abatement
of rent, if any, Lessee shall have no claim against Lessor for any damage
suffered by reason of any such damage, destruction, repair or restoration.
ARTICLE X
REAL PROPERTY TAXES
Section 10.01. PAYMENT OF TAX. Lessor shall pay all real property taxes
applicable to the Premises; provided, however, Lessee shall pay, as Additional
Rent, its proportionate share of any increase in such taxes and assessments
levied upon the real property for which the Premises are a part during the Lease
Term thereof over the fiscal tax year 1996. Such payment shall be made by
Lessee within 30 days after receipt of Lessor's written statement setting forth
the payment due and the reasonable computation thereof. If the Lease Term shall
not expire concurrently with the expiration of the tax fiscal year, Lessee's
liability for taxes for the last partial Lease Year shall be prorated on an
annual basis. For purposes of this Section 10.01 and otherwise in this Lease,
"Taxes" means real estate taxes, assessments (whether general or special), sewer
rents, rates and charges, transit taxes, taxes based on the receipt of rent, and
any other federal, state or local government charge, general special, ordinary
or extraordinary, that may now or hereafter be levied or assessed against the
Building(s) of which the Premises are a part, or the land on which the
Building(s) stands.
10.16-6
<PAGE>
Section 10.02. LESSEE'S "PROPORTIONAL SHARE" OF REAL PROPERTY TAX.
Lessee's "Pro Rata Share" shall mean a fraction, the numerator of which shall be
the total number of square feet in the Premises and the denominator of which
shall be the total number of square feet of real property in the entire complex
of which the Premises are a part.
Section 10.03. PERSONAL PROPERTY TAXES.
(a) Lessee shall pay prior to delinquency all taxes assessed against
and levied upon trade fixtures, furnishings, equipment and all other
personal property of Lessee contained in the Premises or elsewhere. When
possible, Lessee shall cause said trade fixtures, furnishings, equipment
and all other personal property to be assessed and billed separately from
the real property of Lessor.
(b) If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay Lessor the taxes attributable to
Lessee within 10 days after receipt of a written statement setting forth
the taxes applicable to Lessee's property.
ARTICLE XI
BUILDING OPERATING EXPENSES
In addition to the rental herein provided to be paid by Lessee to Lessor,
Lessee shall pay to the Lessor, on or before the first day of each month, as
Additional Rent, the amount, if any, by which Lessee's proportionate share (as
hereinafter defined) of Building Operating Expenses has increased over the Base
Year 1996. Lessee's proportionate share of Building Operating Expenses is based
upon a fraction, the numerator of which shall be the total number of square feet
of real property in the entire complex of which the Premises are a part.
This figure shall be adjusted annually based upon Lessor's best estimate of
costs of the then-current year. Within 90 days after the end of each calendar
year, Lessee shall receive an accounting statement showing the adjustment, the
actual Annual Operating Costs for the prior year and the amount actually paid by
Lessee. If the amount paid by Lessee exceeds Lessee's share of actual costs,
the excess shall be credited against Lessee's next payment(s) of Operating
Costs. If the amount paid by Lessee is less than Lessee's proportionate share
of actual costs, Lessee shall pay the deficit within 10 days of Lessee's receipt
of this statement.
For purposes of this Article XI, Building Operating Expenses, which is
inclusive of common areas, shall mean the sum of all expenses incurred by Lessor
in connection with the operation, management, repair and maintenance of the
building(s) and common areas including, but not limited to, rubbish and snow
removal, window cleaning, utilities, janitorial service, maintenance of all
parking lots, driveways, landscaping, streets and perimeter bears, including any
governmental surcharge, fee or assessment imposed with respect to the parking
facilities to the extent paid by Lessor and not passed on to users of said
parking facilities and all fire and extended supplies, salaries, wages and other
expenses incurred with respect to maintenance, gardening, landscaping, repaving,
repainting, cleaning, security and fire protection and an amount equal to 10% of
all such expenses to cover Lessor's administrative and overhead
10.16-7
<PAGE>
expenses. Lessor may, in addition to any other remedy, impose a reasonable
charge for excess usage of Building(s) facilities and services, which express
usage is occasioned by greater than normal usage or by use of the Premises.
Executive salaries, general overhead and depreciation of improvements shall not
be included in the foregoing expenses.
ARTICLE XII
UTILITIES
Lessee shall pay telephone services and all other utilities metered to the
demised Premises supplied to the Premises, together with any taxes thereon.
ARTICLE XIII
ASSIGNMENT AND SUBLETTING
Section 13.01. LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily,
or by operation of law, assign, transfer, mortgage, sublet or otherwise transfer
or encumber all or any part of Lessee's interest in this Lease or in the
Premises without Lessor's prior written consent, which Lessor shall not
unreasonably withhold. Any attempted assignment, transfer, mortgage,
encumbrance or subletting without such consent shall be void and shall
constitute a breach of this Lease. Lessor may condition its consent to any
subletting upon entering into a lease directly with the proposed subtenant, in
which case the portion of the Premises so leased shall be released from this
Lease and Lessee shall have no other obligations with respect to the released
space.
Section 13.02. NO RELEASE OF LESSEE. Except where Lessor requires a new
Lease directly with the proposed subtenant, as set forth above, no subletting or
assignment shall release Lessee of Lessee's obligation or alter the primary
liability of Lessee to pay the rent and to perform all other obligations to be
performed by Lessee hereunder. The acceptance of rent by Lessor from any other
person shall not be deemed to be a waiver by Lessor of any provision hereof.
Consent to one assignment or subletting shall not be deemed consent to any
subsequent assignment or subletting.
ARTICLE XIV
DEFAULTS; REMEDIES
Section 14.01. DEFAULTS. The occurrence of any one or more of the
following events shall constitute a default and breach of this Lease by Lessee:
(a) the vacating or abandonment of the Premises by Lessee;
(b) the failure by Lessee to make any payment of rent or other
payment required to be made by Lessee hereunder, as and when due;
10.16-8
<PAGE>
(c) the failure by Lessee to observe or perform any of the covenants,
conditions or provisions of this Lease to be observed or performed by
Lessee, other than described in paragraph (b) above, where such failure
shall continue for a period of 30 days after written notice hereof from
Lessor to Lessee; provided, however, that if the nature of Lessee's default
is such that more than 30 days are reasonably required for its cure, then
Lessee shall not be deemed to be in default if Lessee commenced such cure
to completion; and
(d) (i) the making by Lessee of any general assignment or general
arrangement for the benefit of creditors; (ii) the filing by or against
Lessee of a petition to have Lessee adjudged a bankrupt or a petition for
reorganization or arrangement under any law relating to bankruptcy unless,
in the case of a petition filed against Lessee, the same is dismissed
within 60 days; (iii) the appointment of a trustee or receiver to take
possession of substantially all of Lessee's assets located at the Premises
or of Lessee's interest in this Lease where possession is not restored to
Lessee within 30 days; or (iv) the attachment, execution or other judicial
seizures of substantially all of Lessee's assets located at the Premises or
of Lessee's interest in this Lease where such seizure is not discharged
within 30 days.
Section 14.02. REMEDIES. In the event of any such default or breach by
Lessee, Lessor may, at any time thereafter, with or without notice or demand and
without limiting Lessor in the exercise of any right or remedy which Lessor may
have by reason of such default or breach:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession of the Premises to Lessor. In such event,
Lessor shall be entitled to recover from Lessee all damages incurred by
Lessor by reason of Lessee's default including, but not limited to, the
cost of recovering possession of the Premises, expenses of reletting,
including necessary renovation and alteration of the Premises, reasonable
attorneys' fees, and any real estate commission actually paid: the worth at
the time or award by the court having jurisdiction thereof of the amount by
which the unpaid rent for the balance of the term after the time of such
award exceeds the amount of such rental loss for the same period that
Lessee provides could be reasonably avoided and that portion of the leasing
commission paid by Lessor applicable to the unexpired term of this Lease.
In the event Lessee shall have abandoned the Premises, Lessor shall have
the option of (i) retaking possession of the Premises and recovering from
Lessee the amount specified in this Section 14.02(a) or (ii) proceeding
under Section 15.02(b).
(b) Maintain Lessee's right to possession, in which case this Lease
shall continue in effect whether or not Lessee shall have abandoned the
Premises. In such event, Lessor shall be entitled to enforce all of
Lessor's rights and remedies under this Lease, including the right to
recover the rent as it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the State in which the property is
located.
10.16-9
<PAGE>
Section 14.03. DEFAULT BY LESSOR. Lessor shall not be in default unless
Lessor fails to perform obligations required of Lessor within a reasonable time,
but in no event later than thirty (30) days after written notice by Lessee to
Lessor; provided, however, that if the nature of Lessor's obligation is such
that more than thirty (30) days are required for performance, then Lessor shall
not be in default if Lessor commences performance within such 30-day period and
thereafter diligently prosecutes the same to completion.
Section 14.04. LATE CHARGES. Notwithstanding anything contained in this
Lease to the contrary, Lessee hereby acknowledges that late payment by Lessee to
Lessor of rent and other sums due hereunder will cause Lessor to incur costs not
contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges and late charges, which may be imposed on Lessor by the
terms of any mortgage or trust deed covering the Premises. Accordingly, if any
installment of rent or any other sum due from Lessee shall not be received by
Lessor or Lessor's designee within ten (10) days after such amount shall be due,
Lessee shall pay to Lessor a late charge equal to ten percent (10%) of such
overdue amount. The parties hereby agree that such late charge represents a
fair and reasonable estimate of the costs Lessor will incur by reason of late
payment by Lessee. Acceptance of such late charge by Lessor shall in no event
constitute a waiver of Lessee's default, with respect to such overdue amount nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder.
ARTICLE XV
CONDEMNATION
If the Premises, or any portion thereof, are taken under the power of
eminent domain or sold under the threat of the exercise of said power (all of
which are herein called "condemnation"), this Lease shall terminate as to the
part so taken as of the date the condemning authority takes title or possession,
whichever first occurs. If more than 10% of the floor area of the Premises is
taken by condemnation, Lessee may, at Lessee's option to be exercised in writing
only within ten (10) days after Lessor shall have given Lessee written notice of
such taking (or in the absence of such notice, within ten (10) days after the
condemning authority shall have taken possession), terminate this Lease as of
the date the condemning authority takes such possession. If Lessee does not
terminate this Lease in accordance with the foregoing, this Lease shall remain
in full force and effect as to the portion of the Premises remaining, except
that the rent shall be reduced in the proportion that the floor area taken bears
to the total floor area of the Premises. Any award for the taking of all or any
part of the Premises under the power of eminent domain or any payment made under
threat of the exercise of such power shall be the property of Lessor, whether
such award shall be made as compensation for diminution in value of the
leasehold or for the taking of the fee or as severance damages; provided,
however, that Lessee shall be entitled to any award for loss of damage to
Lessee's trade fixtures and removable personal property. In the event that this
Lease is not terminated by reason of such condemnation, Lessor shall, to the
extent of severance damages received by Lessor in connection with such
condemnation, repair any damage to the Premises caused by such condemnation,
except to the extent that Lessee has been reimbursed thereof by the condemning
10.16-10
<PAGE>
authority. Lessee shall pay any amount in excess of such severance damages
required to complete such repair.
ARTICLE XVI
GENERAL PROVISIONS
Section 16.01. ESTOPPEL CERTIFICATE.
(a) Lessee shall, at any time upon not less than ten (10) days prior
written notice from Lessor, execute, acknowledge and deliver to Lessor a
statement in writing: (i) certifying that this Lease is unmodified and in
full force and effect or, if modified, stating the nature o such
modification and certifying that this Lease, as so modified, is in full
force and effect and the date to which the rent and other charges are paid
in advance, if any; and (ii) acknowledging that there are not, to Lessee's
knowledge, any uncured defaults on the part of Lessor hereunder, or
specifying such defaults if any are claimed. Any such statement may be
conclusively relied upon by any prospective purchaser or encumbrances of
the Premises.
(b) Lessee's failure to deliver such statement within such time shall
be conclusive upon Lessee (i) that this Lease is in full force and effect,
without modification except as may be represented by Lessor, (ii) that
there are no uncured defaults in Lessor's performance, and (iii) that not
more than one month's rent has been paid in advance.
(c) If Lessor desires to finance or refinance the Premises, or any
part thereof, Lessee hereby agrees to deliver to any lender designated by
Lessor such financial statement of Lessee as may be reasonably required by
such lender. Such statements shall include the past three years' financial
statements of Lessee. All such financial statements shall be received by
Lessor in confidence and shall be used only for the purposes herein set
forth.
Section 16.02. LESSOR'S LIABILITY. The term "Lessor" as used herein shall
mean only the Owner or Owners at the time in question of the fee title or a
Lessee's interest in a ground lease of the Premises. In the event of any
transfer of such title or interest, Lessor herein named (and in case of any
subsequent transfers the then-Grantor) shall be relieved from after the date of
such transfer of all liability for Lessor's obligations thereafter to be
performed, provided that any funds in the hands of Lessor or the then-Grantor at
the time of such transfer in which Lessee has an interest shall be delivered to
the Grantee. The obligations contained in this Lease to be performed by Lessor
shall, subject as aforesaid, be binding on Lessor's successors and assigns only
during their respective periods of Ownership.
Section 16.03. SEVERABILITY. The invalidity of any provision of this
Lease, as determined by a court of competent jurisdiction, shall in no way
effect the validity of any other provision hereof.
10.16-11
<PAGE>
Section 16.04. TIME OF ESSENCE. Time is of the essence.
Section 16.05. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease
contains all agreements of the parties with respect to any matter mentioned
herein. No prior agreement or understanding pertaining to any such matter shall
be effective. This Lease may be modified in writing only, signed by the parties
in interest at the time of the modification.
Section 16.06. NOTICES. Any notice required or permitted to be given
hereunder shall be in writing and may be served personally or by regular mail,
addressed to Lessor and Lessee, respectively, at the addresses set forth after
their signatures at the end of this Lease.
Section 16.07. WAIVERS. No waiver by Lessor of any provision hereof shall
be deemed a waiver of any other provision hereof or of any subsequent breach by
Lessee of the same or any other provision. Lessor's consent to or approval of
any act shall not be deemed to render unnecessary the obtaining of Lessor's
consent to or approval of any subsequent act by Lessee. The acceptance of rent
hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of
any provision hereof other than the failure of Lessee to pay the particular rent
so accepted regardless of Lessor's knowledge of such preceding breach at the
time of acceptance of such rent.
Section 16.08. RECORDING. Lessee shall not record this Lease without
Lessor's prior written consent and such recordation shall, at the option of
Lessor, constitute a noncurable default of Lessee hereunder. Either party
shall, upon request of the other, execute, acknowledge and deliver to the other
a "short form" memorandum of this Lease for recording purposes.
Section 16.09. HOLDING OVER. If Lessee remains in possession of the
Premises or any part thereof after the expiration of the term hereof without the
express written consent of Lessor, such occupancy shall be a tenancy from month
to month at a rental in the amount of double the last monthly rental plus all
other charges payable hereunder and upon all the terms hereof applicable to a
month-to-month tenancy.
Section 16.10. CUMULATIVE REMEDIES. No remedy or election hereunder shall
be deemed exclusive but shall, wherever possible, be cumulative with all other
remedies at law or in equity.
Section 16.11. COVENANTS AND CONDITIONS. Each provision of this Lease to
be performed by Lessee shall be deemed both a covenant and a condition.
Section 16.12. BINDING EFFECT. Subject to any provision hereof
restricting assignment or subletting by Lessee and subject to the provisions of
Section 17.02, this Lease shall bind the parties, their personal
representatives, successors and assigns.
Section 16.13. SUBORDINATION.
(a) This Lease, at Lessor's option, shall be subordinate to any
ground lease, mortgage, deed of trust or any other hypothecation for
security now or hereafter placed upon the property of which the Premises
are a part and to any and all advances made on
10.16-12
<PAGE>
the security thereof and to all renewals, modifications, consolidations,
replacements and extensions thereof. Notwithstanding such subordination,
Lessee's right to quiet possession of the Premises shall not be disturbed
if Lessee is not in default and so long as Lessee shall pay the rent and
observe and perform all of the provisions of this Lease, unless this Lease
is otherwise terminated pursuant to its terms. If any mortgagee, trustee
or ground Lessor shall elect to have this Lease prior to the lien of its
mortgage, deed of trust or ground lease and shall give written notice
thereof to Lessee, this Lease shall be deemed prior to such mortgage, deed
of trust or ground lease whether this Lease is dated prior or subsequent to
the date of said mortgage, deed of trust or ground lease as of the date of
recording thereof.
(b) Lessee agrees to execute any documents required to effectuate
such subordination or to make this Lease prior to the lien of any mortgage,
deed of trust or ground lease, as the case may be, and failing to do so
within ten (10) days after written demand does hereby make, constitute and
irrevocably appoint Lessor as Lessee's attorney in fact and in Lessee's
name, place and stead, to do so.
Section 16.14. ATTORNEY'S FEES. If either party brings an action to
enforce the terms hereof or declare rights hereunder, the prevailing party, in
any such action, on trial or appeal, shall be entitled to reasonable attorneys'
fees to be paid by the losing party as fixed by the court.
Section 16.15. LESSOR'S ACCESS. Lessor and Lessor's Agents shall have the
right to enter the Premises at reasonable times between 8 a.m. and 5 p.m.
weekdays for the purpose of inspecting the same, showing the same to prospective
purchasers or lenders and making such alterations, repairs, improvements or
additions to the Premises or to the building of which they are a part as Lessor
may deem necessary or desirable. Lessor may at any time place on or about the
Premises any "For Sale" and "For Lease" signs.
Section 16.16. SIGNS AND AUCTIONS. Lessee shall not place any sign upon
the Premises or conduct any auction thereon without Lessor's prior written
consent; provided, however, Lessee shall place letter and maintain the standard
project sign can with the name of Lessee business.
Section 16.17. MERGER. The voluntary or other surrender of this Lease by
Lessee, or a mutual cancellation thereof, shall not work a merger and shall, at
the option of Lessor, terminate all or any existing subtenancies.
Section 16.18. CORPORATION AUTHORITY. If Lessee is a corporation, each
individual executing this Lease on behalf of said corporation represents and
warrants that he or she is duly authorized to execute and deliver this Lease on
behalf of said corporation in accordance with a duly adopted resolution of the
Board of Directors of said corporation or in accordance with the Bylaws of said
corporation, and that this Lease is binding upon said corporation in accordance
with its terms. If Lessee is a corporation, Lessee shall, within thirty (30)
days after execution of this Lease, deliver to Lessor a certified copy of a
resolution of the Board of Directors of said corporation authorizing or
ratifying the execution of this Lease.
10.16-13
<PAGE>
Section 16.19. RIGHT TO MOVE. Lessor shall have the right, at any time
during the term of this Lease upon giving Lessee sixty (60) days' notice in
writing, to provide and furnish Lessee with space elsewhere in the industrial
park of the approximate same size and areas as the herein Premises and to remove
and place Lessee in such new space at Lessor's sole cost and expense, including
the installation in the new space by Lessor at Lessor's sole cost and expense of
all electrical, plumbing, construction, venting and other similar improvements
made by Lessee in the original space, with all terms, covenants and provisions
contained herein remaining in full force and effect. If Lessee declines to
accept such substituted Premises, this Lease Agreement shall terminate all the
expiration of such sixty (60) day notice period or at such earlier date as
agreed upon by Lessor and Lessee.
Section 16.20. PARKING AND COMMON AREAS. The Lessee, its Agents,
employees and invitees shall be entitled to part in common with either tenant of
Lessor providing that it agrees not to overburden the parking facilities and
agrees to cooperate with the Lessor and other occupants of the property in the
use of the parking facilities. The Lessor specifically reserves the right in
this absolute discretion to determine whether parking facilities are becoming
overburdened and in such event to allocate the parking spaces among the Lessee
and other occupants, their Agent, employees and business invitees using the
parking facilities; provided, however, that Lessee shall be entitled to not less
than ten (10) parking spaces. All loading operating for receipt of shipment of
goods, wares and merchandise by the Lessee shall be done in the rear of the
Premises or in such area therein which is specifically designated in writing by
the Lessor.
Section 16.21. SAFETY. Lessee will maintain on the Premises at all times
during the term hereof adequate number, size and type of fire extinguishers as
is appropriate to Lessee's business. Lessee will at all times adhere to good
safety practices or as may be required by safety inspectors.
ARTICLE XVII
ENVIRONMENTAL REGULATIONS
The Lessee agrees to abide by all local, state and federal environmental
legislation that may now exist or become law during the term of this lease.
Lessee further agrees to indemnify the Lessor from any environmental issues that
may arise during the term of the lease that are caused by Lessee is use of the
property. This condition shall survive the lease expiration.
ARTICLE XVIII
BUILDING OPERATION EXPENSE CAP
The Lessee and Landlord agree to a maximum 10% annual cap on the building
operating expenses and property taxes during the lease term. The expenses for
1996 base year are attached as Exhibit A.
10.16-14
<PAGE>
ARTICLE XIX
BROKER COMPENSATION
The Lessor shall compensate The Home Brokers, who is acting as Lessee's
agent, in the amount of 3.5% of the gross lease value.
The parties hereto have executed this Lease on the date set forth herein
above.
LANDLORD: TENANT:
SPRINGS INDUSTRIAL GROUP, LLC MICROLINK TECHNOLOGIES CORP.
By /s/ Charles Flint, Manager By /s/ Herbert J. Neuhaus, President
----------------------------- ------------------------------------
Date: October 15, 1997 Date: October 15, 1997
--------------------------- ----------------------------------
10.16-15
<PAGE>
Lease Guarantor:
INTERCELL CORPORATION
The Undersigned Officer on behalf of Intercell Corporation hereby
guarantees the obligations created under this lease by Microlink Technologies
Corporation including payment of all rental sums due under the lease. Intercell
Corporation shall submit with execution of the lease a current audited balance
sheet and a profit and loss statement for the year ending 1996 or the last
fiscal year of operations.
INTERCELL CORPORATION
By /s/ Paul H. Metzinger
--------------------------------------------
Paul H. Metzinger, President & Chief
Executive Officer
Date: October 15, 1997
10.16-16
<PAGE>
EXHIBIT A
October 13, 1997
Mr. Charley Conrad
Olive Real Estate Group, Inc.
102 North Cascade Avenue, Suite 250
Pueblo, Colorado 81003
Dear Mr. Conrad:
Pursuant to your request, we have completed a summary of 1996 expenses for
the building located at 2291 Waynoka Road, Colorado Springs, Colorado. These
expenses are summarized below:
1996 EXPENSE SUMMARY CHART
<TABLE>
<CAPTION>
Expense Cost
------- ----
<S> <C>
Real Estate Taxes $ 9,747.46
Insurance 1,853.00
Repairs/Maintenance 4,284.25
Utilities, Grounds, Miscellaneous 4,075.33
----------
Total $19,960.04
</TABLE>
Based on the total building area of approximately 20,212 square feet, the
above expenses equal approximately $0.99 per square foot.
If we can be of further assistance in this matter, please do not hesitate
to contact us, as it is a privilege to be of service to your firm.
Sincerely,
SPRINGS INDUSTRIAL GROUP, LLC
By /s/ Thomas E. Buczek
------------------------------
Thomas E. Buczek
A-1
<PAGE>
EXHIBIT 11
INTERCELL CORPORATION
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Nine Months Year Ended Year Ended
Ended June 30, September 30, October 31, 1994
-------------------------- -------------------------- -----------------
1997 1996 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Net (loss) $(5,839,000) $(3,665,000) $(5,283,000) $(1,321,000) $ (362,000)
Deemed preferred stock dividend relating
to in-the-money conversion terms (1,023,000) -- 1,625,000 -- --
----------- ----------- ----------
Accretion on Preferred Stock 413,000 -- -- -- --
(7,275,000) (3,665,000) (6,908,000) (1,321,000) (362,000)
=========== =========== =========== =========== ==========
Weighted average shares outstanding 17,169,353 13,095,417 13,072,683 7,391,275 4,828,007
Common equivalent shares from stock
options
Average common and equivalent shares
outstanding/(1)/ -- -- -- -- --
----------- ----------- ----------- ----------- ----------
17,169,353 13,095,417 13,072,683 7,391,275 4,828,007
=========== =========== =========== =========== ==========
Net (loss) per common shares/(2)/ (.42) (.28) (.54) (.18) (.08)
===== ===== ===== ===== =====
</TABLE>
_________________
/(1)/ The difference between primary and fully diluted earnings per share is not
material.
11-1
<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 headings "Summary Historical Consolidated Financial Data of the
Company" and "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
San Jose, California
November 12, 1997
23.1-1
<PAGE>
EXHIBIT 23.2
CONSENT OF MARK SHELLEY, CPA
I hereby consent to use of my reports included herein and the reference to
my name under the headings of "Summary Historical Consolidated Financial Data of
the Company" and "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: November 1, 1997 By:/s/ Mark Shelley
-----------------------------
Mark Shelley, CPA
23.2-1
<PAGE>
EXHIBIT 23.3
CONSENT OF MATRANGA & CORREIA
We hereby consent to use of our reports included herein and to the
reference to our firm under the heading "Experts" included in the Prospectus.
Date: November 1, 1997 By:/s/ Matranga & Correia
----------------------
Matranga & Correia
23.3-1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INTERCELL
CORPORATION'S FINANCIAL STATEMENTS AS OF JUNE 30, 1997 AND FOR THE NINE-MONTH
PERIOD ENDING JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 1,526,000
<SECURITIES> 789,000
<RECEIVABLES> 904,000
<ALLOWANCES> 207,000
<INVENTORY> 2,850,000
<CURRENT-ASSETS> 7,742,000
<PP&E> 3,595,000
<DEPRECIATION> 408,000
<TOTAL-ASSETS> 16,115,000
<CURRENT-LIABILITIES> 2,124,000
<BONDS> 0
0
3,096,000
<COMMON> 18,839,000
<OTHER-SE> (7,944,000)
<TOTAL-LIABILITY-AND-EQUITY> 16,115,000
<SALES> 5,426,000
<TOTAL-REVENUES> 5,612,000
<CGS> 4,080,000
<TOTAL-COSTS> 4,080,000
<OTHER-EXPENSES> 7,371,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,839,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,839,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,839,000)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> 0
</TABLE>
