<PAGE>
As filed with the Securities and Exchange Commission on April 4, 1997
Registration No. 333-21239
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
PRE-EFFECTIVE AMENDMENT NO. 1
TO
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)
7201 E. CAMELBACK ROAD, SUITE 250 GORDON J. SALES
SCOTTSDALE, ARIZONA 85251 999 WEST HASTINGS STREET, SUITE 1750
(602) 970-5500 VANCOUVER, B.C. CANADA \\V6C 2W2
(Address, including zip code, and (604) 684-1533
telephone number, including area code, (Name, address, including zip code,
of registrant's principal executive and telephone number, including
offices) area code, of agent for service)
With copies sent to:
Robert J. Ahrenholz, Esq.
Brian D. Lewandowski, Esq.
Kutak Rock
717 17th Street, Suite 2900
Denver, Colorado 80202
Approximate date of commencement of the proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
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/(4)/ price/(4)/ fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value/(1)/................................. 1,804,064 $4.00 $ 7,216,256 $2,187.00
Common Stock underlying Convertible
Series B Preferred Stock/(2)/................................. 658,998 $4.00 $2,635,992 $ 799.00
Common Stock underlying Convertible
Series C Preferred Stock/(2)/................................. 2,036,475 $4.00 $ 8,145,900 $2,468.00
Series B Common Stock Purchase Warrants/(3)/.................... 1,092,064 $4.00 $ 4,368,256 $1,324.00
Common Stock Underlying Series B Warrants/(3)/.................. 1,092,064 N/A N/A N/A
Series C Common Stock Purchase Warrants/(3)/.................... 745,386 $4.00 $ 2,981,544 $ 903.00
Common Stock Underlying Series C Warrants/(3)/.................. 745,386 N/A N/A N/A
--------- ---------- ----------- ---------
Total Registration Fee/(5)/..................................... $25,347,948 $7,681.00/(5)/
====================================================================================================================================
</TABLE>
/(1)/ Common Stock to be distributed to, and sold by, shareholders of Energy
Corporation. Registration fee calculated pursuant to Rule 457(c) based on a
share price of $4.00 per share-the last sale price of the Common Stock on
January 31, 1997.
/(2)/ Registration fee calculated pursuant to Rule 457(c) based on the last sale
price of the Common Stock on January 31, 1997. Pursuant to Rule 416 promulgated
under the Securities Act of 1933 ("Rule 416"), this Registration Statement also
covers such shares of Common Stock as may be issuable pursuant to the anti-
dilution provisions of the Series B and Series C Preferred Stock.
/(3)/ Registration fee calculated pursuant to Rule 457(g) based on the last sale
price of the Common Stock on January 31, 1997. Pursuant to Rule 416, this
Registration Statement also covers such shares of Common Stock as may be
issuable pursuant to the anti-dilution provisions of the Warrants. Pursuant to
Rule 457(g), no separate registration fee is payable with respect to the Common
Stock underlying the Warrants.
/(4)/ Estimated solely for purposes of calculating the registration fee.
/(5)/ A fee of $7,698.00 was paid with the initial filing of the registration
statement on February 6, 1997.
<PAGE>
INTERCELL CORPORATION
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Item Number and Caption Heading in Prospectus
- -------------------------------------- --------------------------------------
<S> <C>
1. Forepart of the Registration Statement and Outside Front
Cover Page of Prospectus...................................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of Prospectus......... Outside Back Cover Page
3. Summary Information and Risk Factors............................ Prospectus Summary; Risk Factors
4. Use of Proceeds................................................. Use of Proceeds
5. Determination of Offering Price................................. Cover Page
6. Dilution........................................................ *
7. Selling Security Holders........................................ Selling Shareholders
8. Plan of Distribution............................................ Cover Page; Plan of Distribution
9. Description of Securities to be Registered..................... Prospectus Summary; Price Range of
Common Stock-Dividend Policy;
Description of Securities
10. Interests of Named Experts and Counsel.......................... *
11. Information with Respect to the Registrant...................... Prospectus Summary; Risk Factors;
Management's Discussion and Analysis
of Financial Condition and Results of
Operations; Business; Management;
Selling Shareholders; Certain
Transactions; Description of
Securities; Financial Statements
12. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities.................................... *
</TABLE>
_________________
* Omitted because response is negative or inapplicable.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED APRIL 4, 1997
INTERCELL CORPORATION
COMMON STOCK AND COMMON STOCK PURCHASE WARRANTS
___________________
This Prospectus relates to 6,336,987 shares of common stock, no par value
(the "Common Stock") and 1,092,064 Series B Warrants ("Series B Warrants") and
745,386 Series C Warrants ("Series C Warrants" and, together with the Series B
Warrants, the "Warrants") to purchase Common Stock of Intercell Corporation
(the "Company"). Of the securities offered hereby, the Warrants, 1,837,450
shares of Common Stock issuable upon exercise of the Warrants, and 2,695,473
shares of Common Stock issuable upon conversion of Series B Preferred Stock,
no par value (the "Series B Preferred Stock") and Series C Preferred Stock, no
par value ("Series C Preferred Stock") are being offered by certain
shareholders of the Company (the "Selling Shareholders"); and 1,804,064 shares
of Common Stock are being offered by the shareholders (the "Selling
Shareholders of Energy") of Energy Corporation, an affiliate of the Company
("Energy"), which shares Energy will distribute to its shareholders pursuant
to a Plan of Liquidating Dissolution. 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 6,336,987 SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, REPRESENT
APPROXIMATELY 35% OF THE COMPANY'S ISSUED AND OUTSTANDING COMMON STOCK AS OF
APRIL 1, 1997. 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 COMPANY WILL RECEIVE NO PROCEEDS FROM THE COMMON STOCK DISTRIBUTED TO
OR SOLD BY THE SELLING SHAREHOLDERS OF ENERGY. THE COMMON STOCK AND
WARRANTS OFFERED HEREBY, ARE BEING OFFERED OR SOLD TO THE PUBLIC BY THE
SELLING SHAREHOLDERS AND THE SELLING SHAREHOLDERS OF ENERGY AND NOT BY THE
COMPANY. THEREFORE, PROCEEDS FROM ANY SALE WILL BE RECEIVED BY THE SELLING
SHAREHOLDERS AND THE SELLING SHAREHOLDERS OF ENERGY AND NOT BY THE COMPANY.
THE COMPANY MAY RECEIVE PROCEEDS UPON THE EXERCISE, IF EVER, OF THE WARRANTS
REGISTERED HEREBY.
Each Series B Warrant and Series C Warrant entitles the holder to purchase
one share of Common Stock at an exercise price of $3.9375 per share and $3.25
per share, respectively, subject to adjustment upon the occurrence of certain
events, at any time, with respect to the Series B Warrants, commencing on
October 14, 1996 and ending at 5:00 p.m. Eastern time, on July 1, 2001 and,
with respect to the Series C Warrants, commencing on June 1, 1997 and ending
at 5:00 p.m. Eastern time on November 30, 2001. 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 April 1, 1997 the
average of the closing bid and asked prices for the Common Stock was $2.06.
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 by the Selling Shareholders of Energy and
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 otherwise at market prices prevailing at the time
of sale, at prices related to such prevailing market prices or at negotiated
prices. The distribution of the Common Stock to Energy's shareholders will be
directly made by Energy. The Company has agreed to pay the costs incurred in
connection with the registration of the Common Stock and Warrants offered
hereby, which are estimated to be $163,698. 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 April ___, 1997
<PAGE>
PROSPECTUS SUMMARY
The following material is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this
Prospectus. Certain technical terms used herein are defined in the
"GLOSSARY." This Prospectus contains forward-looking statements which
involve risks and other uncertainties. The Company's actual results could
differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under
"RISK FACTORS" and elsewhere in this Prospectus.
THE COMPANY
GENERAL
Intercell Corporation (the "Company") was incorporated under the laws of
Colorado on October 4, 1983, and was originally engaged in the marketing of
business and cellular telephone equipment. This business was discontinued
and all remaining assets of the Company were liquidated or otherwise
abandoned during 1991, and all obligations of the Company were paid or
otherwise satisfied.
From 1991 until the acquisition of Modern Industries, Inc. on July 7,
1995, which subsequently changed its name to Energy Corporation ("Energy"),
the Company was generally inactive and reported no operating revenues prior
to the fiscal year ending December 31, 1994. During that time period, the
Company explored various new business and investment opportunities
involving, primarily, companies engaged in specialty lines of business in
the wireless communications and electronic technology industries.
On July 7, 1995, the Company purchased all of the assets and liabilities
of Energy. Energy's principal asset was its wholly owned subsidiary,
California Tube Laboratory, Inc. ("CTL"). This transaction was accounted
for as an acquisition of the Company by Energy and, as such, the historical
financial statements contained herein reflect the financial statements of
Energy. The results of operations of the Company have been included only
since the date of such acquisition. See "INDEX TO FINANCIAL STATEMENTS"
and "PROSPECTUS SUMMARY-Summary Historical Consolidated Financial Data of
the Company."
As a result of the acquisition of Energy and additional acquisitions made
during the 1996 fiscal year (see "BUSINESS-Recent Acquisitions and
Transactions"), the Company is currently engaged in three lines of
business: (i) the proposed design, development and production of shielded
cellular phone antennas (the "Antenna Systems") that use the Company's
proprietary antenna technology (the "Antenna Technology") as well as the
manufacture of miniature and non-miniature coils, transformers and other
electronic assemblies; (ii) the current manufacture and rebuilding of
specialty electron power tubes; and (iii) the proposed design, development
and production of patented particle interconnect products ("Particle
Interconnect Products") that use the Company's patented particle
interconnect technology (the "PI Technology") and a proprietary
i
<PAGE>
trade secret electroplating process (the "Proprietary Electroplating
Process"). Currently, the only products available for manufacture and sale
by the Company are the Company's specialty electronic power tubes and
miniature and non-miniature coils, transformers and other electronic
assemblies.
The Company's operations are or will be conducted by and through its
wholly owned subsidiaries, CTL, Cellular Magnetics, Inc. ("Cellular
Magnetics"), Intercell Wireless Corp. ("Intercell Wireless"), which was
formed after the end of the 1996 fiscal year, and Particle Interconnect
Corporation ("PI Corp."). Because the Antenna Technology and the PI
Technology are in the development stage, the Company does not anticipate
operating revenues from such lines of business until such time, if ever, as
products developed using the Antenna Technology and PI Technology are
completed, developed, manufactured in commercial quantities, available for
commercial delivery, and accepted in the market place.
ANTENNA TECHNOLOGY
The Company has determined to pursue a new line of business involving the
development and manufacture of shielded cellular phone antennas. The
Company has the rights to certain patent applications relating to the
Antenna Technology that the Company jointly developed with the
Telecommunications Research Center at Arizona State University ("ASU").
The Antenna Technology is designed to reduce actual or perceived potential
health hazards that may be associated with exposure to electromagnetic
signals by using a "shielded" antenna. The Antenna Technology has been
tested in working prototypes in cellular phones by ASU. These tests
indicated a significant reduction in radiation emissions caused by wireless
devices, and cellular phones in particular. The tests also indicated
several other benefits including increased range and reception, and
improved battery life. In addition, the Antenna Technology results in an
antenna that is smaller in size and lighter in weight than most antennas
currently on the market.
The Company anticipates that the initial market for the Antenna
Technology will be the cellular telephone market. The market for cellular
technology has materially increased in the last decade, growing from
approximately 92,000 subscribers in the United States in 1983 to more than
33.5 million at the end of 1995. Although industry revenue from the
manufacture and sale of cellular phones is expected by industry analysts to
grow just .2% in the 1996 calendar year to approximately $6.27 billion, the
number of cellular phones sold is expected by industry analysts to increase
more than 15% to 16.6 million in the 1996 calendar year.
The Company's Antenna Technology is designed to minimize the radiation
emitted toward the user in order to reduce potential health hazards that
may be associated with exposure to electromagnetic energy. The Company has
installed external and internal prototype cellular phone antennas that
use the Antenna Technology in existing cellular phone models. Preliminary
testing of the prototype antennas indicated that they reduced the amount of
electromagnetic energy in the near field by 90% while in use. In such
testing, there was also evidence of a significant increase in transmittal
reception and range of the signal and a demonstrable extension of the life
of the cellular phone battery.
ii
<PAGE>
After an analysis of the Antenna Technology, the Company determined
that the manufacture of an aftermarket "retrofit" external antenna for
existing cellular phones (the "External Antenna") would not be marketable
in the volumes necessary to justify further development. The Company
intends to focus its efforts on the development of an internal antenna
(the "Internal Antenna"), which does not have an external antenna
component. The Company intends to design and manufacture Internal Antenna
packages for use as a retrofit to existing cellular phones and to sell
customized cellular phones under the Company logo or under the logo of
cellular phone carriers or distributors. The Company has substantially
completed all documentation and specifications for the Internal Antenna and
has several prototypes in place. The Company intends to commence production
of its Internal Antenna products in the latter part of the 1997 fiscal
year. Such production, is dependent upon, among other things, final testing
and design of the Internal Antenna, obtaining strategic partnerships with
cellular service providers or cellular phone original equipment
manufacturers ("OEMs"), and market acceptance of the Antenna Systems. There
can be no assurance that the Internal Antenna will be accepted by the
market place or that unforeseen problems will not arise in the final design
and testing of the Internal Antenna or in the development and marketing of
the Company's Antenna Systems.
The Company purchased AC Magnetics, Inc., doing business as M.C. Davis
Company ("M.C. Davis"), to manufacture and build products that use the
Antenna Technology. M.C. Davis, now known as Cellular Magnetics, is
currently working on fixtures and tooling required for the manufacture and
sale of the Company's Internal Antenna products. In addition to
manufacturing products that use the Antenna Technology, Cellular Magnetics
will continue to produce miniature and non-miniature coils, transformers,
surface mount coils and other small electronic products at its 8,000 square
foot manufacturing facility in Arizona City, Arizona and its 8,600 square
foot manufacturing plant in Sonora, Mexico.
See "BUSINESS-The Company's Antenna Technology" for a discussion of the
Antenna Technology.
ELECTRON TUBES
The Company manufactures and rebuilds a wide variety of electron power
tubes in numerous forms and models which service the frequency range of
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
iii
<PAGE>
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.
The Company has entered into a lease agreement to move its manufacturing
operation to a new facility customized for the Company's operations. In
order to minimize the effects on the Company's business, the Company plans
to move into the facility over a period of several months. The Company
began moving into the few facility in March 1997 and expects to have
completed the move by the end of June 1997. The Company believes that the
new facility will enable it to meet its current and future manufacturing
needs.
See "BUSINESS-The Company's Electron Tube Products" for a description of
the Company's electron tube business.
iv
<PAGE>
PARTICLE INTERCONNECT TECHNOLOGY
The Company proposes to pursue a new line of business involving the
development and manufacturing of high performance, low-cost interconnect
products. The Company's PI Technology utilizes patents procured and owned
by the Company for the production of electronic interconnect products. The
Company intends to use the Proprietary Electroplating Process for the
manufacture of 12" x 18" panels used to mount, package or attach electronic
devices and other products utilizing the PI Technology. This proposed new
line of business will be conducted through the Company's wholly owned
subsidiary, PI Corp.
The PI Technology utilizes patents owned by the Company for bonding and
joining metal surfaces to enhance electronic connectivity and also uses the
Proprietary Electroplating Process to electroplate panels at an anticipated
lower cost than conventional manufacturing processes. The Company's core
product is similar to "conductive sandpaper" in appearance, and is formed
by attaching conductive diamond particles to a panel. The "conductive
sandpaper" creates a socket or connector for electronic devices, and
replaces the use of soldering to create such connections.
The Company can apply these particles to many different substrates, both
flexible, rigid, metallic and non-metallic. This ability, coupled with the
very low contact force, gives the Company the capability to make reliable
connectors out of materials that could collapse if exposed to the normally
required contact forces. The Company's initial focus is on producing a
particle coated panel for use in a ball grid array ("BGA") production
socket or other Z-axis IC packages.
The Company believes that market trends in IC packaging will lead to
increased demand for emerging high density substrates. As ICs are becoming
increasingly powerful, they produce more heat and require a significantly
greater number of input/output ("I/O") electrical connections to attach the
silicon die, thus placing substantially greater demands on the IC packaging
materials. For instance, a typical IC five years ago required up to
approximately 80 I/O connections to the silicon die, whereas today typical
ICs require up to approximately 250 I/O connections. The Company believes,
based on published industry information, that the number of high density IC
packages requiring more than the typical 250 I/O connections to the silicon
die increased from an estimated 240 million in 1990 to an estimated 777
million in 1995. Market demands are currently forcing certain ICs toward
1,000 I/O connections.
The Company believes that its PI Technology could potentially provide a
cost effective solution to solving the increasing demands made on IC
Packaging materials. Based on the experiences of current licensees to the
PI Technology and the Company's research and development performed to date,
the Company believes that the PI Technology can establish reliable,
rematable connections at 10 grams of force. This means that 10 kg versus
40 to 80 kg of force is required to interconnect a 1,000 I/O IC socket with
the underlying substrate. The Company believes this reduction in force may
enable manufacturers to connect complex ICs to products through the next
several generations of electronics.
5
<PAGE>
The Company intends to initially focus on high speed electroplating of
conductive diamond particles for panels used by third-parties to
manufacture BGA production sockets or other Z-axis IC packages. The
primary objective is to provide this service to numerous connector
manufacturers, in competing and non-competing applications. The Company
intends to provide this service to companies in the form of teaming/co-
manufacturing agreements. The Company 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 999 West Hastings
Street, Suite 1750, Vancouver, B.C. Canada V6C 2W2. Its telephone number
is (604) 684-1533.
RISK FACTORS
The Common Stock and Warrants offered hereby involve a high degree of
risk. See "RISK FACTORS."
6
<PAGE>
THE OFFERING
Series B Warrants to Purchase
Common Stock offered by the
Selling Shareholders.............. 1,092,064 Warrants
Common Stock issuable upon
exercise of Series B Warrants..... 1,092,064 Common Shares
Series C Warrants to Purchase
Common Stock offered by the
Selling Shareholders.............. 745,386 Warrants
Common Stock issuable upon
exercise of Series C Warrants..... 745,386 Common Shares
Common Stock offered by the
Selling Shareholders upon
conversion of Series B Preferred
Stock............................. 658,998 Common Shares
Common Stock offered by the
Selling Shareholders upon
conversion of Series C Preferred
Stock............................ 2,036,475 Common Shares
Common Stock offered by the Selling
Shareholders of Energy........... 1,804,064 Common Shares/(1)/
Common Stock outstanding after the
Offering and assuming exercise of
Warrants and Conversion of
Preferred Stock................... 22,342,116 Common Shares/(2)/
vii
<PAGE>
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 or the Common Stock
distributed to and sold by the Energy
Selling Shareholders. See "USE OF
PROCEEDS."
Common Stock Nasdaq symbol (OTC)...... "INCE"
_____________
/(1)/ A total of 5,412,191 shares of Common Stock are available for distribution
to the shareholders of Energy pursuant to the Plan of Liquidating Dissolution in
six installments over the next three years. Each installment includes
approximately 902,032 shares, the first installment of 902,032 shares will be
made promptly after the effective date of the Company's Registration Statement
of which this Prospectus is a part, and an additional 902,032 shares ninety (90)
days thereafter. For each of the years 1998 and 1999, approximately 902,032
shares will be distributed on or about January 31 and April 30. Other than the
1,804,064 shares offered by this Prospectus, the Company does not intend to
register the additional shares scheduled for distribution to the shareholders of
Energy in calendar years 1998 and 1999. Rather, because of recent amendments to
Rule 144 adopted by the Securities and Exchange Commission on and after July 7,
1997, the remaining 3,608,120 shares of Common Stock to be distributed to the
shareholders of Energy will be distributed by Energy, as planned, but may be
resold by the Energy shareholders in reliance upon Rule 144(k) without
registration, provided such persons at the time of any sales are not affiliates
and have not been affiliates within ninety (90) days prior to resale. See "PLAN
OF DISTRIBUTION."
/(2)/ Does not include 4,396,000 shares of Common Stock currently issuable upon
the exercise of the Company's stock options outstanding as of the date hereof.
viii
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
OF THE COMPANY
On December 4, 1995, the Company changed its fiscal year end from
December 31, 1995 to September 30, 1995 due to the acquisition of the
assets and liabilities of Energy on July 7, 1995 for 5,412,191 shares of
Common Stock, which represented 52% of the Common Stock outstanding at that
time. As a result, for accounting purposes, Energy was considered the
acquiring corporation and the comparative information presented herein
represents that of Energy prior to July 7, 1995 and Energy and the Company
subsequent to such date. See "BUSINESS-Recent Acquisitions and
Transactions," and "INDEX TO FINANCIAL STATEMENTS."
The following selected consolidated financial data should be read in
conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and the Company's Consolidated
Financial Statements and Notes thereto included elsewhere in this
Prospectus. The Consolidated Statements of Operations data presented below
for the three months ended December 31, 1996 and 1995 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 December 31, 1996 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 December 31,
1996 and for the three months ended December 31, 1996 and 1995 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.
9
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended 12/31
------------------------
Year Eleven Year Year Year
Ended Months Ended Ended Ended Ended
1996 1995 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 $ 1,599,000 $ 853,000 $ 3,405,0 00 $ 3,768,000 $2,066,000 $ 60,000 $ 0
Costs & expenses 2,991,000 1,144,000 8,688,00 0 5,089,000 2,428,000 142,000 43,000
Net loss (1,392,000) (291,000) (5,283,00 0) (1,321,000) (362,000) (82,000) (43,000)
Net loss per common share $ (0.11) $ (0.03) $ (0.54) $ (0.18) $ (0.08) $ (0.04) $ N/A
Weighted average
Number of common
shares outstanding 16,527,588 10,457,547 13,072,683 7,391,275 4,828,007 2,066,979 1,781,880
At period end:
Current assets $12,622,000 N/A $10,625, 000 $ 1,796,000 $1,499,000 $ 4,000 $ 0
Current liabilities 873,000 N/A 2,060,00 0 1,799,000 1,621,000 82,000 149,000
Working capital (deficit) 11,749,000 N/A 8,565,00 0 (3,000) (122,000) (78,000) (149,000)
Total assets 15,983,000 N/A 13,826,0 00 3,069,000 3,141,000 51,000 0
Long-term debt 29,000 N/A 86,000 48,000 48,000 175,000 0
Stockholders' equity 15,081,000 N/A $11,680, 000 1,222,000 $1,472,000 $(206,000) $(149,000)
Cash dividends per
common share 0 0 0 0 0 0 0
Deemed preferred stock 221,000 0 1,624,64 8 -- -- -- --
dividend relating to
in-the-money conversion
Accretion on Preferred Stock 139,000 -- -- -- -- -- --
_______________
</TABLE>
/(1)/ On December 4, 1995, the Company changed its fiscal year end from December
31 to September 30. The comparative information presented herein represents
that of Energy which was deemed to be the acquiring company in the July 7, 1995
transaction. Energy's fiscal year was previously October 31.
x
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended. Actual events or
results could differ materially from those discussed in the forward-looking
statements as a result of various factors, including, without limitation,
the risk factors set forth below and elsewhere in this Prospectus. The
following risk factors should be considered carefully before purchasing the
Common Stock offered hereby.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES
Due to the Company's change of business purpose, the Company has a
limited operating history that is relevant to its proposed future
operations. The Company does not anticipate producing significant
operating revenues until such time, if ever, as products developed using
the Antenna Technology and PI Technology are completely developed,
manufactured in commercial quantities and available for commercial
delivery, and accepted in the marketplace. There can be no assurance that
the Antenna Technology and PI Technology, if developed and manufactured,
will be able to compete successfully in the marketplace and/or generate
significant revenue. The Company anticipates incurring significant costs
in connection with the development of its technologies and proposed
products and there is no assurance that the Company will achieve
significant revenues to offset anticipated operating costs. Included in
such 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
$291,000 in the first quarter of fiscal 1996 to $1,452,000 in the first
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 $60,000 provided by operations in the first quarter of fiscal 1996 to
($1,206,000) used in operations in the first 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 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 December 31, 1996, the Company had a
cumulative deficit of $8,971,000. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "PROSPECTUS
SUMMARY-Summary Historical Consolidated Financial Data of the
Company."
NEW LINES OF BUSINESS
The Company intends to market, manufacture and distribute new Antenna
Systems using the Antenna Technology and Particle Interconnect Products
using the PI Technology, each of which are newly formed business ventures
with no operating history. The Company's viability, profitability and
growth depend in large part upon the successful completion of the
development, manufacture and distribution of its Antenna Systems and
Particle Interconnect Products. There
1
<PAGE>
can be no assurance that any of the Company's new technologies or products
will be developed,
manufactured, marketed or distributed. In connection with the development
of commercially saleable prototypes, the Company must successfully complete
a testing program for the products before they can be marketed. Unforeseen
technical problems arising out of such testing could materially and
adversely affect the Company's ability to manufacture a commercially
acceptable version. In addition, the Company's success will depend upon
its technologies and proposed products meeting acceptable cost and
performance criteria and upon their timely introduction into the
marketplace. There can be no assurance the technologies and proposed
products will satisfactorily perform the functions for which they are
designed, that they will meet applicable price or performance objectives or
that unanticipated technical or other problems will not occur that would
result in increased costs and/or material delays in their development.
Other than the operations of CTL and Cellular Magnetics, the Company has
no experience or business history in marketing any of the products it
intends to manufacture and sell. There can be no assurance that the
Company will gain the necessary experience, either through the hiring of
experienced personnel or by acquiring such experience through trial and
error, to ever successfully and profitably conduct its businesses.
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. The Company
recently 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 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. See "BUSINESS-
Intellectual Property."
2
<PAGE>
NO ASSURANCE OF PRODUCT QUALITY,
PERFORMANCE AND RELIABILITY
The Company has no experience in producing and manufacturing new
technologies from the conceptual phase to a commercially acceptable
product. The Company expects that its customers will establish demanding
specifications for quality, performance and reliability. Specifically, the
Company's Antenna Systems and Particle Interconnect Products will generally
be manufactured for incorporation into high technology products
manufactured by original equipment manufacturers ("OEMs") and, accordingly,
will need to meet exacting specifications. The Company believes that, if
its products prove successful, a substantial portion of the OEMs will
require the Company to qualify as an approved supplier. In order to so
qualify, the Company may be required to satisfy stringent quality control
standards and undergo extensive in-plant inspections of the Company's
personnel, manufacturing processes, equipment and quality control systems.
Although the Company's efforts will be devoted to ensure that its
capabilities and quality control standards are adequate to meet specific
OEM customer requirements, there can be no assurance that the Company will
be able to comply with quality control standards established by OEMs or
that the Company will be able, for financial or other reasons, to qualify
as an approved supplier for its existing and prospective customers.
UNCERTAINTY OF MARKET ACCEPTANCE FOR
ANTENNA TECHNOLOGY
The Company's prospective customers, cellular service providers and
distributors, are currently manufacturing, using or selling equipment
without the Company's Antenna Systems. To be successful in convincing
these potential customers that its Antenna Systems should be incorporated
into new and existing cellular telephones, the Company must, among many
actions, convince its potential customers that the Antenna Systems reduce
the health concerns of users and increases the telephone range and battery
life of a cellular phone. Achieving market acceptance for new products
requires substantial marketing and sales efforts and expenditure of
significant funds to create awareness of and demand for the Company's
products. There can be no assurance that future additions to the Company's
product line will achieve market acceptance or result in significantly
increased levels of revenues. See "BUSINESS-The Company's Antenna
Technology-Company Antenna Technology Strategy."
Any delay in the adoption of the Company's Antenna Systems may result in
prospective customers utilizing alternative technologies in their next
generation of cellular telephones, which may have a material adverse effect
on the Company's business, financial condition and results of operations.
There can be no assurance that prospective customers will incorporate the
Company's Antenna Systems into cellular telephones in the future, or that
the Antenna Technology will be viewed to any significant extent as an
improvement over existing technologies and achieve commercial acceptance in
the cellular telephone market. Failure to achieve or sustain commercial
acceptance of the Company's Antenna Systems would materially adversely
affect the Company's business, financial condition and results of
operations. See "BUSINESS-The Company's Antenna Technology-Company Antenna
Technology Strategy."
3
<PAGE>
UNCERTAINTY OF MARKET ACCEPTANCE FOR
PI TECHNOLOGY
Similarly, the Company's prospective customers, connector manufacturers
and electronic equipment OEMs, are currently manufacturing and selling
equipment without the Company's Particle Interconnect Products. To be
successful in convincing these potential customers that its Particle
Interconnect Products should be used in lieu of existing technologies, the
Company must, among many actions, convince its potential customers that the
Particle Interconnect Products make rematable contacts with reduced force
and can be manufactured efficiently and cost effectively. In addition, the
Company may be required to obtain an additional manufacturing facility to
supply its Particle Interconnect Products. Achieving market acceptance for
new products requires substantial marketing and sales efforts and
expenditure of significant funds to create awareness of and demand for the
Company's products. There can be no assurance that future additions to the
Company's product line will achieve market acceptance or result in
significantly increased levels of revenues. See "BUSINESS-The Company's PI
Technology-Company PI Technology Strategy."
Any delay in the adoption of the Company's Particle Interconnect
Products may result in prospective customers utilizing alternative
technologies in their next generation of IC packages or other electronic
interconnections, which may have a material adverse effect on the Company's
business, financial condition and results of operations. Specifically, the
Company believes that it is necessary to establish a market presence in the
1997 calendar year. There can be no assurance that prospective customers
will use the Particle Interconnect Products in the future, or that the PI
Technology will be viewed to any significant extent as an improvement over
existing technologies and achieve commercial acceptance in the electronic
interconnect industry. Failure to achieve or sustain commercial acceptance
of the Particle Interconnect Products would likely materially adversely
affect the Company's business, financial condition and results of
operations. See "BUSINESS-The Company's PI Technology-Company PI
Technology Strategy."
NO ASSURANCE OF
SUCCESSFUL EXPANSION OF OPERATIONS
The Company's significant increase in the scope and the scale of its
operations, including the hiring of additional personnel, has resulted in
significantly higher operating expenses. As a result, the Company
anticipates that its operating expenses will continue to increase.
Expansion of the Company's operations may also cause a significant demand
on the Company's management, its finances and other resources. The
Company's ability to manage the anticipated future growth, should it occur,
will depend upon a significant expansion of its accounting and other
internal management systems and the implementation and subsequent
improvement of a variety of systems, procedures and controls. There can be
no assurance that significant problems in these areas will not occur. Any
failure to expand these areas and implement and improve such systems,
procedures and controls in an efficient manner at a pace consistent with
4
<PAGE>
the Company's business could have a material adverse effect on the
Company's business, financial condition and results of operations.
Any significant sales growth will be dependent in part upon the
Company's expansion of its marketing, selling, manufacturing and customer
service capabilities. This expansion will require significant expenditures
to build the necessary Company infrastructure. There can be no assurance
that the Company's attempts to expand its marketing, sales, manufacturing
and customer support efforts will be successful or will result in
additional sales or profitability in any future period. As a result of the
expansion of its operations and the anticipated increase in its operating
expenses, as well as the difficulty in forecasting revenue levels, the
Company expects to continue to experience significant fluctuations in its
results of operations. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "BUSINESS."
DEPENDENCE ON KEY PERSONNEL AND NECESSITY
TO HIRE ADDITIONAL QUALIFIED PERSONNEL
The Company's future operating results depend in significant part upon
the continued contributions of its key technical and senior management
personnel, many of whom would be difficult to replace. See "MANAGEMENT."
The Company's future operating results also depend in significant part upon
its ability to attract and retain qualified personnel with experience in
manufacturing and marketing that can be applied to the Company's new and
existing products. The Company must hire additional qualified personnel in
order to become successful. Other than the manufacturing and rebuilding of
electron tubes and miniature electronic assemblies, no members of
management have significant experience in operating a manufacturing
company. There can be no assurance that the Company will be successful in
attracting or retaining such personnel. In addition, the success of the
Company is dependent upon its ability to hire and retain additional
qualified technical and financial personnel. There can be no assurance
that the Company will be able to hire or retain such necessary personnel.
The loss of any key employee, the failure of any key employee to perform in
his or her current position or the Company's inability to attract and
retain skilled employees as needed, could materially and adversely affect
the Company's business, financial condition and results of operations. See
"BUSINESS-Employees" and "MANAGEMENT."
DEPENDENCE ON A COMPANY OWNED MANUFACTURING
FACILITIES; RISKS OF BUSINESS INTERRUPTIONS
The Company intends to manufacture its products at company-owned or
leased manufacturing facilities. See "BUSINESS-Properties." Except for
the contemplated move to new manufacturing facilities located in
Watsonville, California, the Company has no present intention of
establishing additional manufacturing locations and, therefore, the Company
is dependent on existing facilities to manufacture its products. If these
facilities are not available, even temporarily, for operations at or near
full capacity for any extended period, the business, operating results and
financial condition of the Company could be materially and adversely
affected. Except for the Company's manufacturing facility for electron
tubes, the capacity of the Company's manufacturing facilities have been
estimated by management to be sufficient for future needs. However, if
additional capacity is required as a result of unplanned increased in
demand for the Company's products, the Company may suffer delays and
increased costs in establishing other facilities which could adversely
5
<PAGE>
affect customer relationships, cause a loss of market opportunities and
have a material adverse effect on the Company's business, operating results
and financial condition. In order to remain competitive, the Company will
continue to introduce new products and processes into its manufacturing
environment. These changes can disrupt the manufacturing process which
could adversely affect customer relationship, cause a loss of market
opportunities and have a material adverse effect on the Company's business,
operating results and financial condition. See "BUSINESS."
The Company's internal manufacturing capacity for electron tubes is
currently limited. The Company has entered into a lease arrangement to
move CTL's manufacturing operations to a new, larger manufacturing facility
in Watsonville, California. However, there can be no assurance that the
Company's internal manufacturing capacity will be sufficient to fulfill the
Company's orders. The Company also faces uncertainty over the effects of
business slowdowns relating to the move to the Watsonville facility. In
the event unanticipated difficulties arise in the move, such difficulties
could adversely impact the Company's operations. See "BUSINESS-The
Company's Electron Tube Products-Manufacturing of Electron Tubes."
REQUIREMENT FOR RESPONSE TO
RAPID TECHNOLOGICAL CHANGE AND
REQUIREMENT FOR FREQUENT
NEW PRODUCT INTRODUCTIONS
The cellular telephone market and the micro-electronic market are
subject to rapid technological change, frequent new product introductions
and enhancements, product obsolescence and changes in end-user
requirements. These markets may be eroded or replaced with other forms of
technology. The Company's ability to be competitive in these markets will
depend in significant part upon its ability to successfully manufacture,
market and sell its products on a timely and cost-effective basis that
responds to changing customer requirements. Any success of the Company in
developing new or enhanced products will depend upon a variety of factors,
including new product selection, integration of the various elements of its
complex technology, timely and efficient completion of design, timely and
efficient implementation of manufacturing and assembly processes, and
development of competitive products by competitors. The Company may
experience delays from time to time in the development and introduction of
its Antenna Systems and Particle Interconnect Products. Moreover, there
can be no assurance that the Company will be successful in selecting,
developing, manufacturing and marketing new products or that errors will
not be found in the Company's new products after commencement of commercial
shipments, if any, which could result in the loss of or delay in market
acceptance. The inability of the Company to introduce in a timely manner
products that satisfy market demands could have a material adverse effect
on the Company's business, financial condition and results of operations.
See "BUSINESS."
6
<PAGE>
COMPETITION; TECHNOLOGICAL AND PRODUCT OBSOLESCENCE
The market for the Company's prospective products is highly competitive.
The Company currently competes and will compete with numerous well-
established foreign and domestic companies, including many of which possess
substantially greater financial, marketing, personnel and other resources
than the Company and have established reputations for success in the
development, sale and service of products. The Company expects that
companies which have developed or are developing new technologies or
products, as well as other companies which have the type of expertise which
would encourage them to attempt to develop and market competitive products,
may attempt to develop new products directly competitive with the Company's
products. In addition, the markets for the Company's products are
characterized by rapid and significant technological changes and frequent
new product introductions. Current competitors or new market entrants
could introduce new or enhanced products with features that could render
the Company's products obsolete or less marketable. The ability of the
Company to compete successfully will depend in large measure on its ability
to maintain development capabilities in connection with upgrading its
products and quality control procedures and to adapt to technological
changes and advances in the electronics industry, including ensuring
continuing compatibility with evolving generations of electronic components
and OEM manufacturing equipment. There can be no assurance that the
Company will be able to keep pace with the technological demands of the
marketplace or successfully enhance its products or develop new products
which are compatible with products of specific OEMs. See "BUSINESS."
FUTURE CAPITAL REQUIREMENTS
The Company's future capital requirements will depend upon many factors,
including operating profits, cash flow, the success of the its Antenna
Systems and Particle Interconnect Products, the ability to maintain
adequate manufacturing facilities, the progress of the Company's research
and development efforts, expansion of the Company's marketing and sales
efforts, and the status of competitive products. There can be no assurance
that the Company will not require additional financing. There can be no
assurance that any additional financing will be available to the Company on
acceptable terms, or at all. If additional funds are raised by issuing
equity securities, further dilution to the existing stockholders will
result. If adequate financing is not available, the Company may be
required to delay, scale back or eliminate its research and development or
manufacturing programs or obtain financing through arrangements with
partners or others that may require the Company to relinquish rights to
certain of its technologies, patents, potential products or other assets.
Accordingly, the inability to obtain such financing could have a material
adverse effect on the Company's business, financial condition and results
of operations. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
7
<PAGE>
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."
LICENSE RIGHTS TO PI TECHNOLOGY
Prior to the Company's acquisition of Particle Interconnect, Inc. (see
"BUSINESS-Recent Acquisitions and Transactions"), Mr. Louis DiFrancesco,
the inventor of the PI Technology, or companies he controlled, granted
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
8
<PAGE>
substrates. 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 the
acquisition of companies that complement or supplement the Company's
existing business operations. Any acquisition involves inherent
uncertainties, such as the effect on the acquired business of its
integration into the Company and the availability of managerial resources
to oversee the operation of the acquired business. Integrating acquired
products and operations requires a significant amount of time and skill of
the Company's management and may place significant demands on the Company's
operations and its financial resources. Although an acquired business may
have enjoyed profitability and growth prior to its acquisition, there can
be no assurance that such profitability or growth will continue thereafter.
POTENTIAL LIABILITY AND INSURANCE REGARDING
ENVIRONMENTAL REGULATIONS; GOVERNMENT REGULATION
The Company's operations involve the use and handling of environmentally
hazardous substances. The use of hazardous substances is subject to
extensive and frequently changing federal, state and local laws and
substantial regulation under these laws by governmental agencies, including
the United States Environmental Protection Agency, various state agencies
and county and local authorities acting in conjunction with federal and
state authorities. Among other things, these regulatory bodies impose
restrictions to control air, soil and water pollution. The Company
believes that it is in substantial compliance with all material federal and
state laws and regulations governing its operations. Furthermore,
amendments to statutes and regulations and the Company's expansion into new
areas could require the Company to continually modify or alter methods of
operations at costs which could be substantial. There can be no assurance
that the Company will be able, for financial or other reasons, to comply
with applicable laws and regulations. Failure by the Company to comply
with applicable laws and regulations could subject the Company to civil
remedies, including fines and injunctions, as well as potential criminal
sanctions, which could have a material adverse effect on the Company. See
"BUSINESS-Government Regulation."
9
<PAGE>
REGULATORY COMPLIANCE
The various business operations of the Company are subject to numerous
federal, state and local laws and regulations, including those relating to
the use and disposal of hazardous substances discussed above. Any
difficulties or failure to obtain required licenses, permits or
authorizations, could adversely impact the Company's operations. The
failure to obtain or retain any licenses or permits would have a material
adverse effect on the Company's business. See "BUSINESS-Government
Regulation."
While the Company believes it is aware of all of the permits it is
required to obtain and all of the governmental regulations with which it is
required to comply, and believes that it has obtained such permits, there
can be no assurance that this will be the case, that such compliance might
not increase the expenses the Company will incur or that such regulations
will not be modified, making it increasingly difficult for the Company to
operate its businesses as anticipated. Additionally, there can be no
assurance that the Company can comply with all such applicable regulations
in the future and maintain any license which is granted.
NO MARKET FOR WARRANTS
There is no public market for the Warrants and the Company does not
intend to apply for listing of the Warrants on any national securities
exchange or of quotation of the Warrants through the NASDAQ automated
quotation system. No assurance can be given as to the liquidity of any
markets that may develop for the Warrants, the ability of holders of the
Warrants to sell their Warrants, or the price at which holders would be
able to sell their Warrants. Future trading prices of the Warrants, if
any, will depend on many factors, including among other things, the
Company's operating results and the market for similar securities.
NECESSITY OF FUTURE REGISTRATION OF WARRANTS AND
STATE BLUE SKY REGISTRATION; EXERCISE OF WARRANTS
The Warrants may trade separately upon the closing of the Offering.
Although the Warrants will not knowingly be sold to purchasers in
jurisdictions in which the Warrants are not registered or otherwise
qualified for sale or exempt, purchasers may buy the Warrants in the after-
market or may move to jurisdictions in which the Warrants and the Common
Stock underlying the Warrants are not so registered or qualified or exempt.
In this event, the Company would be unable lawfully to issue Common Stock
to those persons desiring to exercise their Warrants (and the Warrants will
not be exercisable by those persons) unless and until the Warrants and the
underlying Common Stock are registered or qualified for sale in
jurisdictions in which such purchasers then reside or an exemption from
such registration or qualification requirement exists in such
jurisdictions. There can be no assurance that the Company will be able to
effect any required registration or qualification.
The Warrants offered hereby will not be exercisable unless the Company
maintains a current registration statement on file with the Commission
either by filing post-effective
10
<PAGE>
amendments to the Registration Statement, of which this Prospectus is a
part, or by filing a new registration statement with respect to the
exercise of such Warrants. The Company has agreed to use its best efforts
to file and maintain, so long as the Warrants offered hereby are
exercisable, a current registration statement with the Securities and
Exchange Commission (the "SEC") relating to such Warrants and the shares of
Common Stock underlying such Warrants. However, there can be no assurance
that it will do so or that such Warrants or such underlying Common Stock
will be or continue to be so registered.
The value of the Warrants could be adversely affected if a then current
prospectus covering the Common Stock issuable upon exercise of the Warrants
is not available pursuant to an effective registration statement or if such
Common Stock is not registered or qualified for sale or exempt from
registration or qualification in the jurisdictions in which the holders of
Warrants reside. See "DESCRIPTION OF SECURITIES-Warrants."
VOLATILITY OF STOCK PRICE
Sales of substantial amounts of Common Stock in the public market after
this offering, or the perception that such sales could occur, could
adversely affect the market price of the Common Stock. Upon completion of
the Offering, the Company will have outstanding 22,552,431 shares of
Common Stock assuming conversion of the Preferred Stock and Warrants into
4,532,923 shares of Common Stock and excluding shares subject to
currently exercisable stock options. All of the 6,336,987 shares
registered in the Offering will be freely transferable by the Selling
Shareholders, since to the Company's knowledge, based upon representations
and filings, if any, with the Securities and Exchange Commission (the
"SEC") made by the Selling Shareholders, none of the Selling Shareholders
are affiliates of the Company and to the knowledge of the Company no
shareholder of Energy is an affiliate of the Company. Consequently, the
Company will have approximately 20,897,763 shares held by non-affiliates
which are freely transferable, which constitutes the "float" in the public
market for the Company's Common Stock. The remaining 1,654,668 shares of
Common Stock are "restricted" or "control" securities within the meaning of
Rule 144 ("Rule 144") under the Securities Act and may not be sold in the
absence of registration under the Securities Act unless an exemption from
registration is otherwise available, including the exemption contained in
Rule 144. The Company has filed a registration statement on Form S-8 to
register 3,581,180 shares of Common Stock under its 1995 Compensatory Stock
Option Plan (the "Plan"). Shares of Common Stock issued from time to time
under the Plan will be available for sale in the public market, subject to
Rule 144 volume limitations applicable to affiliates. In connection with
the issuance of the Preferred Stock the Company also granted Warrants to
purchase shares of Common Stock. As of April 1, 1997, 1,092,064 and
745,386 Warrants to purchase shares of Common Stock with an exercise price
of $3.975 and $3.25 per share, respectively, were issued and outstanding.
See "PLAN OF DISTRIBUTION," "SHARES ELIGIBLE FOR FUTURE SALE" and
"DESCRIPTION OF SECURITIES."
11
<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.
If the Company's securities become subject to the regulations applicable
to penny stocks, the market liquidity for the Company's securities could be
adversely affected. In such event, the regulations on penny stocks could
limit the ability of broker/dealers to sell the Company's securities and
thus the ability of purchasers of the Company's securities to sell their
securities in the secondary market.
12
<PAGE>
PLAN OF DISTRIBUTION
The distribution of the Common Stock to the shareholders of Energy
Corporation will be made directly by Energy Corporation ("Energy") and the
Company's transfer agent. The sale of the Common Stock by the Selling
Shareholders of Energy and the sale of the Common Stock and Warrants being
offered by the other Selling Shareholders (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 Company has registered 1,804,064 shares of Common Stock for
resale by the shareholders of Energy, formerly known as Modern
Industries, Inc., an affiliate of the Company, pursuant to a Liquidating
Plan of Dissolution adopted by Energy and its shareholders on July 8, 1996.
In order to minimize the potential adverse effect on the market for the
Common Stock, Energy will distribute the 5,412,191 shares of Common
Stock to its shareholders in six installments over a three-year period.
Each installment includes approximately 902,032 shares. Energy intends to
distribute the first 902,032 shares promptly after the effective date of
the Company's Registration Statement of which this Prospectus is a
part, and an additional 902,032 shares ninety (90) days thereafter. Other
than the 1,804,064 shares offered by this Prospectus, the Company does not
intend to register the additional shares scheduled for distribution to the
shareholders of Energy in calendar years 1998 and 1999. Rather, because of
recent amendments to Rule 144 adopted by the Securities and Exchange
Commission on and after July 7, 1997, the remaining 3,608,120 shares of
common stock to be distributed to the shareholders of Energy will be
distributed by Energy, as planned, but may be resold by the Energy
shareholders in reliance upon Rule 144(k) without registration, provided
such persons at the time of any sales are not affiliates or have not been
affiliates of the Company within ninety (90) days prior to resale. See
"CERTAIN TRANSACTIONS."
The Company will not engage any broker-dealers in any capacity in
connection with the Energy distribution. The distribution will be
implemented by the Company and Energy, through the Company's transfer
agent. There are no standby commitments or agreements from any person to
purchase all or any part of the securities offered by this Prospectus.
USE OF PROCEEDS
The Company will not receive any proceeds from the conversion of the
Preferred Stock into Common Stock, the sale of shares of Common Stock by
the Selling Shareholders or the Selling Shareholders of Energy, or, if sold
by the Selling Shareholders, any proceeds from the sale of the Warrants.
However, assuming that all Warrants offered hereby are exercised, the
proceeds to the Company from such exercise are estimated to be
approximately $6,722,506 based on an exercise price of $3.9375 per share
with respect to the Series B Warrants and $3.25 per share with respect to
the Series C Warrants. There can be no assurance given, however,
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<PAGE>
that any Preferred Stock will be converted or that Warrants will be
exercised. The Company expects to use substantially all of the net proceeds
received from exercise of the Warrants for general working capital
purposes.
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 $2.06 on April 1,
1997.
<TABLE>
<CAPTION>
1995 Fiscal Year High Low
-------------------- ------- ------
<S> <C> <C>
December 31, 1994 $ 5.13 $ .25
March 31, 1995 3.69 .50
June 30, 1995 2.00 .625
September 30, 1995 .825 .625
1996 Fiscal Year
--------------------
December 31, 1995 $ 1.625 $ .625
March 31, 1996 1.9375 1.00
June 30, 1996 5.75 2.00
September 30, 1996 5.50 2.75
1997 Fiscal Year
--------------------
December 31, 1996 4.00 3.875
</TABLE>
As of April 1, 1997, there were 287 holders of record of its Common
Stock.
Based upon information provided to the Company by persons holding
securities for the benefit of others, it is estimated that the Company has
in excess of 3,200 beneficial owners of its Common Stock as of April 1,
1997.
14
<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.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the
"PROSPECTUS SUMMARY-Summary Historical Consolidated Financial Data of the
Company" and "INDEX TO FINANCIAL STATEMENTS."
The statements contained in this Prospectus, if not historical, are
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, and involve risks and uncertainties that
could cause actual results to differ materially from the results, financial
or otherwise, or other expectations described in such forward-looking
statements. These risks and uncertainties that may affect the operations,
performance, development and results of the Company's business include
those, among others, discussed under "RISK FACTORS" and "-Trends and
Uncertainties" below. Any forward looking statement or statements speak
only as of the date on which such statement was made, and the Company
undertakes no obligation to update any forward looking statement or
statements to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events.
Therefore, forward-looking statements should not be relied upon as a
prediction of actual future results.
From 1991 through the fiscal year ended December 31, 1994, the Company
was generally inactive and reported no operating revenues. 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 reverse stock split. See
"BUSINESS-Company Overview" and "-Recent Acquisitions 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 Company has substantially expanded the scope of its business and
revised its business strategy subsequent to the Energy transaction through
the acquisition of certain patents, patent applications and proprietary
technology relating to the Antenna Technology and the PI Technology.
During this time, the Company has been engaged primarily in directing,
supervising and coordinating the Company's activities in the continuing
development of its new
16
<PAGE>
lines of business, in addition to the recruitment of management and
technical personnel and raising new capital to fund its operations.
The primary asset acquired in the Energy transaction, its wholly owned
subsidiary CTL, continued to generate positive cash flows in the 1996
fiscal year, although sales decreased 9.6% from the 1995 fiscal year. This
decrease in sales was primarily attributable to a change in product mix,
the delayed timing of certain orders in the fourth quarter of 1996 and
production capacity constraints at CTL's current manufacturing facilities.
CTL anticipates moving to new production facilities over the next several
months beginning in March 1997 and ending June 1997. 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. To date,
the Company has developed several working prototypes of the External
Antenna and anticipates commencing commercial production of an Internal
Antenna package and customized cellular phones sold under the Company's
logo or the logo of certain cellular phone providers or retailers in the
latter part of the 1997 fiscal year. The Company cannot, however,
provide any assurance that it will be able to do so.
On September 30, 1996, the Company formed a wholly owned subsidiary,
Cellular Magnetics, which acquired all the assets and liabilities of M.C.
Davis in exchange for 277,778 shares of Common Stock valued at $1,000,000
and $800,000 in cash. While the Company had initially considered
constructing its own manufacturing facility, this acquisition, accounted
for by the purchase method of accounting, provides the Company with both a
facility for the immediate production of its Antenna Technology and an
established manufacturing facility. The Company intends to continue to
produce the miniature and subminiature electronic components previously
produced by M.C. Davis and does not anticipate that the production of the
Antenna Technology will significantly impact its ability to manufacture
these electronic assemblies.
To further diversify the Company's operations and to capitalize on a new
and emerging technology, the Company formed a wholly owned subsidiary, PI
Corp., which merged with Particle Interconnect, Inc., a California
corporation ("Particle California"). The Company exchanged 1,400,000
shares of Common Stock for all of the outstanding stock of Particle
California. The transaction was accounted for as an immaterial pooling-of-
interest as the prior operations of Particle California are not material to
the Company's consolidated financial position, results of operations or
cash flows. Accordingly, the consolidated financial statements for periods
prior to the date of such acquisition have not been restated, except for
loss per common share information. From the date of such merger, PI Corp.
has been engaged primarily in the construction of production capabilities
at its plant and the continuing development of the PI Technology. PI Corp.
expects to commence commercial production of Particle Interconnect Products
in 1997.
17
<PAGE>
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 a deemed
dividend of $932,000 that will be recognized by the Company in fiscal 1997.
The Company recognized $81,000 of this amount on a pro rata basis in the
first quarter of the 1997 fiscal year. See "-Liquidity and Capital
Resources" below.
RESULTS OF OPERATIONS
Three Months Ended December 31, 1996 compared to Three Months Ended
December 31, 1995.
Revenues. Total revenues in the first quarter of 1997 were $1,599,000
and represented an 87% increase over the first quarter revenues in the
prior fiscal year. This increase in revenue was primarily attributable to
the inclusion of revenues from the Company's new electronic components
operations of $536,000 in the 1997 fiscal year and a $211,000 increase in
first quarter sales of electron tube products over the first quarter sales
of the prior fiscal year.
In September 1996, the Company, through its wholly owned subsidiary
Cellular Magnetics, merged with M.C. Davis. The first quarter of the 1997
fiscal year represents the first quarter in which the results of the
Company's new electronic components operations have been consolidated with
the Company's.
Sales of electron tube products increased by 25% in the first quarter of
1997 compared to the first quarter of 1996. This increase was primarily
due to new defense related contracts entered into in the final quarter of
the 1996 fiscal year for which production did not begin until the first
quarter of the 1997 fiscal year. The Company anticipates that sales under
these contracts will continue for the remainder of the year at the rate
experienced in the first quarter of the 1997 fiscal year. The balance of
the Company's operations have remained stable in the first quarter of 1997
compared to the first quarter sales of the 1996 fiscal year.
18
<PAGE>
Gross Profits. Gross profits were 29% in the first quarter of the 1997
fiscal year compared with 33% in the first quarter of the 1996 fiscal year.
This decrease in margins was primarily attributable to lower margins
experienced on the sale of electronic components (30%) and increased costs
associated with the manufacture of new electron tube products. In the first
quarter of fiscal 1996, the Company focused primarily on rebuilding
electron tube products that generally carry higher margins than the
manufacture and sale of new electron tube products.
Research and Development. Research and development expenses increased to
$374,000 in the first quarter of fiscal 1997 compared to $12,000 in the
first quarter of fiscal 1996. This increase was primarily attributable to
research and development activities incurred in connection with the
Company's new PI Technology ($341,000) as the Company commenced assembly of
its pre-production line and began testing of the line and the technology.
In addition, the Company continued work on the development of the Antenna
Technology in conjunction with ASU.
General, Selling and Administrative. General, selling and administrative
expenses increased by 180% to $1,513,000 in the first quarter of the 1997
fiscal year compared to $541,000 in the first quarter of fiscal 1996. This
increase was primarily attributable to the inclusion of general, selling
and administrative expenses for the Company's new electronic components and
cellular antenna operations ($169,000) and particle interconnect operations
($358,000). In addition, the Company incurred additional legal and
accounting costs in the first quarter of 1997 related to the filing the
Company's Registration Statement of which this Prospectus is a part.
Other Income/Expense. The Company earned $98,000 in interest income on
its cash and short term investments in the first quarter of the 1997 fiscal
year while incurring interest expense of $43,000. In the first quarter of
the 1996 fiscal year, the amount of interest income earned by the Company
was insignificant and interest expense was $25,000.
Income Taxes. As of December 31, 1996 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.
19
<PAGE>
In the 1996 fiscal year, net sales of new magnetrons totaled $1,436,000,
accounting for 42% of sales, compared with $1,455,000 or 39% of net sales
in 1995. Net revenues from rebuilding of magnetrons decreased from
$1,848,000 or 49% of net sales in 1995 to $1,403,000 or 41% of net sales in
1996. This shift in sales mix was due primarily to the Company's focus on
new and more complex tube types such as certain 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,
which is expected to be completed by the end of June 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
20
<PAGE>
recorded deferred compensation expense of $4,017,000 based on these grants.
The options were granted as an incentive to such persons at a time when the
Company did not have sufficient funds to otherwise compensate such persons.
In the future, the Company does not intend to grant stock options in the
amounts granted in 1996 or at less than the fair value of the Common Stock
on the date of grant.
In addition to the above, SGA expenses increased in 1996 due to higher
legal and audit costs ($387,000 in 1996 compared to $102,000 in 1995)
associated with the Company's acquisitions, financings and compensation
arrangements, and increased compensation paid to management and
administrative personnel.
In the 1997 fiscal year, it is anticipated that sales and marketing
expenses will increase considerably over 1996 levels. In 1996, sales and
marketing expenses were limited to costs associated with CTL's operations.
In 1997, significant costs will be incurred in order to bring the Company's
Antenna Systems and Particle Interconnect Products to market. In addition,
the Company intends to significantly expand its marketing activities for
its electron tube products in an effort to capture a larger share of the
market.
Research and Development. Research and development expenses increased
from -0- in 1995 to $88,000 in 1996. This increase was attributable
entirely to costs associated with research and development of the Company's
Antenna Systems. It is anticipated that research and development
activities will materially increase in 1997 as the Company continues to
develop its Antenna Technology and the PI Technology.
Interest Income and Expense. The Company earned interest income of
$36,000 in 1996 compared to -0- in 1995. This increase was due to the
investment in Treasury Bills of undeployed cash resources realized through
the sale of its Series B Preferred Stock. The Company anticipates that
interest income will increase in 1997 as undeployed funds, including those
raised through the sale of its Series C Preferred Stock, will continue to
be invested in low risk interest bearing securities.
Interest expense increased to $90,000 in 1996 compared to $88,000 in 1995
due to continued bank financing and outstanding notes payable to related
parties. The Company repaid these financings and notes 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 uncertain that the Company will generate sufficient income
in future periods to utilize the loss carryforwards.
21
<PAGE>
Eleven Months Ended September 30, 1995 compared to Fiscal Year Ended
October 31, 1994.
On July 7, 1995, the Company acquired all of the assets and assumed all
of the liabilities of Energy through the issuance of 5,412,191 shares of
Common Stock. The principal asset acquired in this transaction was all of
the issued and outstanding common stock of CTL. Energy had acquired its
investment in CTL on May 1, 1994. In accordance with generally accepted
accounting principles, the results of operations disclosed in the Company's
audited consolidated financial statements include CTL's operations for the
eleven-month period ended September 30, 1995 for the 1995 fiscal year and
for the six-month period ended October 31, 1994 for the comparative 1994
fiscal year.
Net Sales and Gross Margins. The Company's net sales of $3,768,000,
which are attributable entirely to the operations of CTL, increased 82% in
the 1995 fiscal year compared to net sales of $2,066,000 in 1994. This
increase was due primarily to the inclusion in the financial statements of
eleven months of CTL's operations in the 1995 fiscal year compared to only
six months in fiscal 1994 as described above. Monthly sales in both the
1995 and 1994 fiscal years averaged approximately $340,000 due to capacity
limitations at CTL's manufacturing facilities.
Although CTL's average monthly sales remained constant in the 1995 and
1994 fiscal years, the Company experienced a decline in gross margins on
sales of electron tubes to 23% of net sales in 1995 from 42% in 1994. This
decrease was due primarily to increased costs associated with the
development and manufacture of new types of tubes. In addition, the
Company sold a greater percentage of new tubes relative to rebuilt tubes in
the 1995 fiscal year compared to 1994. As new tubes carry a lower gross
margin than rebuilt tubes, an overall decline in gross margins was
experienced.
Selling, General and Administrative Expenses. SGA expenses increased by
11% in the 1995 fiscal year due to increased consulting, legal and audit
costs associated with the Energy transaction and the Company's financing
activities.
Interest Expense. Interest expense increased to $88,000 in 1995 from
$3,000 in 1994 primarily due to an increase in notes payable to former
owners of CTL and other third parties.
Loss on Investments. During fiscal 1995, the Company purchased
approximately 15% of the outstanding stock of American Microcell for
712,571 shares of common stock at a fair value of approximately $0.70 per
share, or $500,000. American Microcell was engaged in the research and
development of improved technologies for cellular phones. However,
American Microcell proved unsuccessful in its efforts to finance continuing
development of the 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.
22
<PAGE>
In addition, the Company sold certain microwave technology rights to a
related party for a note in the face amount of $1,250,000. Due to concerns
about collectibility, the Company reserved the remaining carrying value in
fiscal 1995. In addition, related deferred development costs totalling
$44,631 were written off in fiscal 1995. Losses on investments in fiscal
1994 were not significant.
Net Operating Loss Carryforwards for Tax Purposes. As of September 30,
1995 the Company had a net operating loss carryover for federal and
California income tax purposes of approximately $1,083,000 and $317,000
respectively. The federal net operating losses expire from 2007 to 2010.
The California net operating losses expire in 2000. The benefit of these
net operating loss carryforwards has not been recorded by the Company as it
is uncertain that the Company will generate sufficient income in future
periods to utilize the loss carryforwards.
Fiscal 1994 compared to Fiscal 1993
On May 1, 1994, Energy acquired all of the issued and outstanding common
shares of CTL for 762,031 shares of Energy's common stock (valued at
$1,069,140) and notes payable to two major stockholders of CTL for
$955,860. In addition, Energy bought out an employment contract with a
former owner of CTL for 222,572 shares of Energy common stock (valued at
$312,272). From the date of acquisition of CTL to October 31, 1994, the
Company's net sales were $2,066,462. For the 1994 fiscal year, the Company
incurred a net loss of $362,102.
Prior to the acquisition of CTL, Energy had been engaged in the
development of technologies designed to enhance the production of
hydrocarbons from oil properties. Subsequent to the acquisition of CTL,
Energy incurred no additional costs or revenues relating to the development
of these technologies. As discussed above, this technology was sold in the
1995 fiscal year in exchange for certain royalty payouts and a note in the
face amount of $1,250,000 bearing interest at 6%. Due to concerns about
collectibility, this note was fully reserved as of September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had cash and cash equivalents on
hand of $4,224,000 as compared to $57,000 at September 30, 1995. This
increase in working capital was primarily due to net proceeds of $8,900,000
received from the issuance of Series B Preferred Stock and warrants and the
proceeds of $1,342,000 received from sales of Common Stock. In addition,
the Company 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.
23
<PAGE>
The Company acquired assets comprised of working capital and property,
plant and equipment, and recorded related goodwill and other intangibles,
totalling $1,649,000 in 1996 as a result of the business combinations of
M.C. Davis and PI Corp. In addition, the Company acquired land in exchange
for 400,000 shares of the Company's common stock valued at $1,000,000, the
assumption of mortgages of $367,000 and acquisition costs of $57,000. The
Company also disposed of equipment held for resale through the return and
cancellation of its Series A Preferred Stock for which it recognized
neither a gain or loss, except for $40,000 in storage costs.
During the three months ended December 31, 1996, working capital
increased by $3,184,000. This increase was due primarily to net proceeds
of $4,673,000 from the private placement of 525 Series C Preferred Shares
and warrants in December, 1996.
The Company anticipates that it will fund its financing and capital
requirements for the next 18 months through cash and cash equivalents on
hand, as well as proceeds, if any, from the exercise of the warrants by the
Selling Shareholders. The Company also believes that sales of its Antenna
Systems and Particle Interconnect Products, both anticipated to commence in
the 1997 fiscal year, in combination with the sales of the electronic
assemblies of Cellular Magnetics and the operations of CTL will provide
sufficient funds to meet the Company's capital requirements for the next
two years. To the extent the Company's operations are not sufficient to
fund the Company's capital requirements, the Company may enter into a
revolving loan agreement with a financial institution, or attempt to raise
additional capital through the sale of additional capital stock or through
the issuance of debt. At the present time the Company does not have a
revolving loan agreement with any financial institution nor can the Company
provide any assurances that it will be able to enter into any such
agreement in the future or be able to raise funds through the issuance of
debt or equity in the Company.
In the 1997 fiscal year, the Company expects to make capital expenditures
of approximately $1,700,000. These expenditures will be made on CTL's new
manufacturing facility in Watsonville, California, establishing PI Corp.'s
initial full production line and facility in Colorado Springs, Colorado and
purchasing new equipment for the Company's manufacturing plants in Arizona
City, Arizona and Sonora, Mexico in connection with the manufacture of the
Antenna Systems. In the first quarter of fiscal 1997, capital expenditures
totaled $290,000.
TRENDS AND UNCERTAINTIES
As a result of its activities in 1996, the Company believes that it has
positioned itself to compete in several new markets through the acquisition
of M.C. Davis and by obtaining the rights to the Antenna Technology, the PI
Technology and the Proprietary Electroplating Process. The Company's
activities in fiscal 1997 will focus on bringing these new technologies to
market and on expanding the existing markets for its electron tube products
and electronic assemblies. However, the future operating results of the
Company are subject to certain trends and uncertainties within the
industries in which the Company is operating and within the Company itself.
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OVERVIEW
In general, due to the Company's change of business purpose, the Company
has a limited operating history that is relevant to its current business.
The Company does not anticipate producing significant operating revenues
until such time, if ever, as products developed using the Antenna
Technology and PI Technology are completely developed, manufactured in
commercial quantities and available for commercial delivery, and accepted
in the marketplace. There can be no assurance that the Company's technology
and products, if developed and 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 $291,000 in the first quarter of fiscal 1996 to $1,452,000 in the
first 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 $60,000 provided by operations in the first quarter of fiscal 1996 to
($1,206,000) used in operations in the first 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 anticipates that such losses will continue until such time, if
ever, as the Company is able to generate sufficient revenues to exceed its
total costs of operation. See "RISK FACTORS-No Assurance of Successful
Expansion of Operations."
SPECIFIC TRENDS AND/OR UNCERTAINTIES
The Company is currently attempting to expand its customer base for its
electron tube business by and through the development of new products and
increased marketing activities. At this time, it is uncertain whether the
Company will be able to create new markets for its products. In addition,
the response of larger competitors in the electron tube markets to the
Company's increased marketing activities is not determinable.
The Company also faces uncertainty over the effects of business slowdowns
relating to the move to its new electron tube manufacturing facilities.
While the Company believes that the impact of this move will be minimal,
unanticipated difficulties may arise, which could result in a negative
impact on the Company's operations. See "RISK FACTORS-Dependence on
Company Owned Manufacturing Facilities; Risk of Business Interruptions."
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The acceptance of the Antenna Technology and Antenna Systems by cellular
phone users, cellular phone retailers and cellular service providers has
not yet been tested. While the Company has received significant
expressions of interest from third parties for the Antenna Technology, the
existence and extent of market opportunities for its Antenna Systems is
unknown. In addition, the response of competitors to the marketing of the
Antenna Systems is unknown at this time. See "RISK FACTORS-Uncertainty of
Market Acceptance for Antenna Technology."
The Company's PI Technology is currently in the development stage and the
marketability of the PI products has not yet been tested. The PI
Technology is currently being utilized by third parties in limited
applications under licenses granted from Louis DiFrancesco, the developer
of the PI Technology or from companies he previously controlled, such as
Particle California. The wide spread acceptance of the PI Technology and
the Particle Interconnect Products by the market has yet to be tested by
the Company. In addition, no prediction can be made as to competitive
responses in the market place should the PI Technology and the Particle
Interconnect Products prove successful. Moreover, the licensees of the PI
Technology could compete directly with the Company in the markets it
intends to enter provided such markets are within the scope of the licenses
granted. In addition, Louis D. DiFrancesco purportedly assigned 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 Company is operating in three diverse businesses with different
operating and management requirements. As the operations of the Company
expand there will be a requirement for increased management expertise. The
Company is currently seeking to expand its management complement,
particularly in the marketing field, to cope with the anticipated growth in
the Company's operations. See "RISK FACTORS-Dependance on Key Personnel
and Necessity to Hire Additional Qualified Personnel."
PENDING ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of," ("SFAS No. 121") which
establishes methods for determining when an impairment of long-lived assets
has occurred and for measuring the impairment of long-lived assets. The
implementation of SFAS No. 121 in the Company's 1997 fiscal year is not
expected to have a material effect on the Company's consolidated results of
operations or financial condition.
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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.
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BUSINESS
COMPANY OVERVIEW
Intercell Corporation (the "Company") was incorporated under the laws of
Colorado on October 4, 1983, and was originally engaged in the marketing of
business and cellular telephone equipment. This business was discontinued
and all remaining assets of the Company were liquidated or otherwise
abandoned during 1991, and all obligations of the Company were paid or
otherwise satisfied.
From 1991 until the acquisition of Modern Industries, Inc., on July 7,
1995, which subsequently changed its name to Energy Corporation ("Energy"),
the Company was generally inactive and reported no operating revenues prior
to the fiscal year ending December 31, 1994. During that time period, the
Company explored various new business and investment opportunities
involving, primarily, companies engaged in specialty lines of business in
the wireless communications and electronic technology industries.
On July 7, 1995, the Company purchased all of the assets and liabilities
of Energy. Energy's principal asset was its wholly owned subsidiary
California Tube Laboratory, Inc. ("CTL"). This transaction was accounted
for as an acquisition of the Company by Energy and, as such, the historical
financial statements contained herein reflect the financial statements of
Energy. The results of operations of the Company have been included only
since the date of such acquisition. See "INDEX TO FINANCIAL STATEMENTS."
As a result of the acquisition of Energy and additional acquisitions made
during the 1996 fiscal year (see "-Recent Acquisitions and Transactions"),
the Company is currently engaged in three lines of business: (i) the
proposed design, development and production of shielded cellular phone
antennas (the "Antenna Systems") that use the Company's proprietary antenna
technology (the "Antenna Technology") as well as the manufacture of
miniature and non-miniature coils, transformers and other electronic
assemblies; (ii) the manufacture and rebuilding of specialty electron power
tubes; and (iii) the proposed design, development and production of
patented particle interconnect products ("Particle Interconnect Products")
that use the Company's patented particle interconnect technology (the "PI
Technology") and a proprietary trade secret electroplating process (the
"Proprietary Electroplating Process"). Currently, the only products
available for manufacture and sale are the Company's specialty electronic
power tubes and miniature and non-miniature coils, transformers and other
electronic assemblies.
The Company's operations are or will be conducted by and through its
wholly owned subsidiaries, CTL, Cellular Magnetics, Inc. ("Cellular
Magnetics"), Intercell Wireless Corp. ("Intercell Wireless"), which was
formed after the end of the 1996 fiscal year, and Particle Interconnect
Corporation ("PI Corp."). Because the Antenna Technology and the PI
Technology are in the development stage, the Company does not anticipate
operating revenues from such lines of business until such time, if ever, as
products developed using the Antenna Technology
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and PI Technology are completed, developed, manufactured in commercial
quantities, available for commercial delivery, and accepted in the market
place.
The Company's officers and directors are responsible for the oversight of
the Company and its wholly owned subsidiaries (i.e., Cellular Magnetics,
Intercell Wireless, PI Corp. and CTL) or affiliated companies, such as
Energy, 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 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 Company's relationships with Energy is described in
Note 1 under "BENEFICIAL OWNERSHIP."
The statements contained in this Prospectus, if not historical, are
forward-looking statements and involve risks and uncertainties that could
cause actual results to differ materially from the results, financial or
otherwise, or other expectations described in such forward-looking
statements. Therefore, forward-looking statements should not be relied
upon as a prediction of actual future results or occurrences. In this
regard, see "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-General" and "-Trends and
Uncertainties."
RECENT ACQUISITIONS AND TRANSACTIONS
ACQUISITION OF M.C. DAVIS
Effective September 30, 1996, the Company, through its wholly owned
subsidiary Cellular Magnetics, an Arizona corporation, acquired AC
Magnetics, Inc., an Arizona corporation doing business as M.C. Davis
Company ("M.C. Davis"), for an aggregate purchase price of $1,800,000,
comprised of a cash payment equal to $800,000 and the issuance of 277,778
shares of the Company's restricted Common Stock at a fair value of
approximately $3.60 per share. M.C. Davis was acquired by the Company to
provide industrial engineering and production capabilities for the Antenna
Technology. M.C. Davis has production facilities located in Arizona City,
Arizona and Sonora, Mexico and has been engaged in the production of
miniature and subminiature electronic components since 1968.
PARTICLE INTERCONNECT TRANSACTION
On September 3, 1996, the Company completed the merger (the "PI Merger")
of Particle Interconnect Inc., a California corporation ("Particle
California"), with and into the Company's wholly owned Colorado subsidiary,
Particle Interconnect Corporation ("PI Corp."). The PI Merger resulted in
PI Corp. obtaining all of the properties, assets, liabilities and business
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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. The Company plans to incur expenditures of
not less than $1,500,000 to develop and equip PI Corp.'s new manufacturing
facility in Colorado Springs, Colorado.
RIGHT TO DUAL RESONANCE CELLULAR PHONE ANTENNA
On November 15, 1995, the Company entered into an agreement with Arizona
State University ("ASU") in connection with the development of a new form
of cellular phone antenna with certain features designed to reduce
potential health hazards that may be associated with electromagnetic
signals and to increase transmittal reception and range of cellular
telephones. The Agreement required the Company to pay to ASU a total
amount of approximately $78,000. On June 5, 1996, Dr. El-Badawy El-Sharawy
("Dr. Sharawy"), a tenured professor of ASU, assigned to the Company, on a
royalty-free basis, his entire right, title and interest in, and to
improvements on his U.S. Patent application entitled "Dual Resonance
Antenna with Portable Telephone Therewith" (the "Dual Resonance
Application"), and any and all patent applications thereon for nominal
consideration. The Dual Resonance Application and additional patent
extensions thereon constitute the basis of the Antenna Technology.
The Company subsequently entered into a license agreement with the
Arizona Board of Regents, on behalf of ASU, under which the Company, as
licensor, granted to the Arizona Board of Regents, strictly for education
and scientific purposes, a non-exclusive right and license to publish,
make, use and sell the technology covered by the Dual Resonance Application
and any patents that may issue thereon for the life of the patent upon
which no royalties need be paid. The Company believes the grant of such
license will have a minimal impact, if any, on any revenues the Company may
earn on the Antenna Technology. To the extent the Company acquires the
rights to any future antennas developed by ASU, it will be required to pay
ASU a royalty for the licensing rights on mutually agreed upon terms and
prices.
MISCELLANEOUS TRANSACTIONS
Arizcan Properties, Ltd. On March 13, 1996, Arizcan Properties, Ltd., a
wholly-owned subsidiary of the Company ("Arizcan"), entered into an
agreement with a group, including certain minority shareholders of the
Company, to acquire a 94-acre development property located in Pinal County,
Arizona for a total purchase price of $1,424,362. This transaction was
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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.
THE COMPANY'S ANTENNA TECHNOLOGY
OVERVIEW OF ANTENNA TECHNOLOGY
The Company has the rights to certain patent applications relating to the
Antenna Technology that the Company jointly developed with the
Telecommunications Research Center at ASU. The Antenna Technology is
designed to reduce actual or perceived potential health hazards that may be
associated with exposure to electromagnetic signals by using a "shielded"
antenna. The Antenna Technology has been tested in working prototypes in
cellular phones by ASU. These tests indicated a significant reduction in
radiation emissions caused by wireless devices, and cellular phones in
particular. The tests also indicated several other benefits including
increased range and reception, and improved battery life. In addition, the
Antenna Technology results in an antenna that is smaller in size and
lighter in weight than most antennas currently on the market.
ANTENNA TECHNOLOGY INDUSTRY BACKGROUND
General
The wireless communications industry is relatively young and is
characterized by continual change. Currently, the wireless communications
industry is experiencing significant worldwide growth. Contributing to
this growth are improvements in wireless communication products, such as
cellular, personal communication service networks, global satellite
telephones and wireless data systems.
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Wireless Communication Market Segments and Technology
Cellular Communication Services. The market for cellular technology, a
subset of the wireless communications market, has materially increased in
the last decade, growing from approximately 92,000 subscribers in the
United States in 1983 to more than 33.5 million at the end of December
1995. Worldwide, the Company believes there are currently approximately 60
million cellular phones in operation. The Company believes that there are
over 30 brand names and in excess of 70 models of portable cellular phones
for sale in the United States; however, there are only approximately 18
manufacturers of cellular phones in the world and eight of these
manufacturers are original equipment manufacturers ("OEMs"). No one
company dominates the market and there are only two manufacturers with more
than 10% of the market. Although industry revenue from the manufacture and
sale of cellular phones is expected by industry analysts to grow just .2%
in the 1996 calendar year to approximately $6.27 billion, the number of
cellular phones sold is expected by industry analysts to increase more than
15% to 16.6 million in the 1996 calendar year.
The cellular communications process begins by carving a service area into
small areas called cells, which can range from one mile in diameter to 20
miles in diameter. Each cell is equipped with a radio transmitter and
receiver, which are connected through the cellular phone company's
switching center to the local phone network. Currently, cellular phones
primarily transmit data through the cellular phone antenna by means of
analog transmission and, to a lesser extent, through digital transmission.
Personal Communications Services. New digital communication standards
and technologies are rapidly emerging to provide the performance
improvements necessary to address overcrowding of existing cellular systems
and provide increased performance of communication equipment including
Personal Communications Services ("PCS").
PCS is a term encompassing a wide range of wireless mobile technologies,
primarily two-way paging and cellular-like calling services that are
transmitted at lower power and higher frequencies than other cellular
services. Unlike current cellular technology, plans call for broadband PCS
to be digital from the start. Because PCS services are digital, it is
expected that PCS telephone sets will be smaller and lighter in weight than
most cellular sets.
The Federal Communications Commission ("FCC") has stated that it expects
the PCS industry to compete with existing cellular and private advanced
mobile communications services, thereby yielding lower prices for existing
users of those services. In addition, the FCC has stated that it believes
PCS service will promote the development of a wide range of services and
devices such as, among others, smaller, lighter, multi-function portable
phones; portable facsimile and other imaging equipment; and multi-channel
cordless phones. The development of PCS services is also expected to
permit the United States industry to develop services and technologies for
international markets.
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Narrowband PCS, which operate in the 900-901 MHz, 930-931 MHz and 940-941
MHz range, will largely be used for advanced paging services, such as two-
way paging, in which a recipient can respond to a sender's message with a
message of his or her own, and voice messaging. The Company believes that,
in the near term, broadband PCS will consist of cellular-like services
including new categories of wireless voice and data transmissions over both
local and wide areas using low power, lightweight pocket phones and hand-
held computers, all of which require the use of an antenna.
Current Cellular Phone Technology
Operation of Cellular Phones and Related Potential Health Risk. Cellular
phones and their antennas must comply with a particular bandwidth and
directionality constraints. Conventional cellular telephones operate over
a relatively wide bandwidth of approximately 824 MHz to 896 MHz, or
approximately 8% of the entire frequency. For a portable telephone to
communicate more than a few hundred feet, it must radiate a substantial
amount of L-band (approximately 1,000 to 2,000 MHz) or S-band
electromagnetic energy (approximately 2,000-3,500 MHz). A typical cellular
portable telephone transmits at a power level of around 600 microwatts. In
normal use, electromagnetic energy radiates from a cellular phone or
portable telephone antenna which is used in a position immediately adjacent
to the user's head. Electromagnetic energy in the L-band and S-band is
absorbed by and may otherwise influence organic matter, such as the human
brain and other tissues. Research has indicated that up to 50% of the
energy radiated from a traditional antenna can be absorbed by the body
tissue of a user's head and hand.
Since many portable telephone users spend a significant amount of time
using portable telephones, the possibility exists for cumulative adverse
health effects to the extent that the electromagnetic energy is harmful to
cellular phone users. In this regard, there is growing concern both in the
scientific community and among the general public that cellular phone use
could be hazardous to the health of humans. In response to this concern,
the Cellular Telecommunications Industry Association commenced a multi-
year, multi-million dollar program to award grants to researchers who will
investigate this issue. In addition, certain cellular phone OEMs caution
users in their advertisements against prolonged usage of their cellular
phones. To date, the Company is not aware of any definitive studies that
provide conclusive evidence on the potential adverse health effect of
electromagnetic energy on cellular phone users.
Current Antenna Technology and Products
Existing cellular phones must meet weight, size and cost constraints in
attempting to limit the amount of electromagnetic energy radiated toward
the user's head and hand. For example, a cellular phone that uses a remote
antenna so that antenna emissions do not emanate from a location in close
proximity to a user's head or hand, would seriously diminish the
convenience of the cellular phone. Other technologies and techniques that
might reduce radiation emission solutions generally lead to increases in
cellular phone cost, weight or require excessively large antennas. For
instance, many microstrip antennas have been adapted to various
applications
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having L-band and S-band frequencies. Generally, however, microstrip
antennas are too heavy, costly, and fragile for use in cellular and similar
portable telephones. Attempts to modify a monopole antenna by mounting it
on a ground plane and applying a metallic shield coated with an isotropic
magnetic material have succeeded in reducing the emission of
electromagnetic radiation in the near field but have encountered problems
similar to those encountered by microstrip antennas.
A more conventional technique of using shielding with a traditional
antenna design to decrease near-field radiation in one direction is
generally not practicable because such a technique tends to narrow
bandwidth. Moreover, this technique limits the omnidirectional antenna
patterns necessary to ensure that the quality of communication service will
not vary with the direction a user faces at any given point in time when
using a cellular phone.
THE COMPANY'S ANTENNA TECHNOLOGY
Characteristics of Company's Antenna Technology
The Company's Antenna Technology is designed to minimize the radiation
emitted toward the user in order to reduce potential health hazards that
may be associated with exposure to electromagnetic energy. The Company has
installed prototypes of both the External Antenna and Internal Antenna in
existing cellular phone models. Preliminary testing of the prototype
antennas indicated that they reduce the amount of electromagnetic energy
in the near field by 90% while in use. In such testing, the prototype
antennas also indicated evidence of a significant increase in transmittal
reception and range of the signal, and a demonstrable extension of the life
of the cellular phone battery. Due to the novel nature of the Antenna
Technology, the prototype antennas the Company has developed are also
physically smaller in size, lighter in weight. The Company believes that
the simplicity, combined with the size advantage, will enable it to
manufacture the Antenna Systems at a cost attractive to consumers,
cellular phone retailers, cellular service providers and possibly cellular
phone OEMs. The Company also believes its Antenna Systems and in
particular, the Internal Antenna packages, will prove attractive to the
market due to the continuing trend in lighter weight and smaller cellular
phones, which trend should continue as a result of the emerging PCS
market.
Operation of Technology
The Company's Antenna Technology reduces the electromagnetic energy
emanating toward the user primarily through the use of a conductive ground
plane attached to existing substrates in cellular phones. The ground plane
reflects the electromagnetic energy away from the user. The Company's
antenna resonates at two distinctly different frequencies above and below
the required or target bandwidth. The frequencies are spaced sufficiently
apart so that, after impedance (the total opposition to current flow), the
subject bandwidth resides between the two resonances. Neither lower nor
higher resonances alone achieve the desired impedance for the antenna
throughout the bandwidth, while also reducing the radio frequencies near
the user and maintaining omnidirectionality in distances farther away.
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In addition, attaching the ground plane to existing substrates adds no
appreciable cost or weight to the cellular phone. Moreover, radiating
elements of the antenna are assembled from a relatively rigid conductive
material that can support its own shape, weight and condition without the
use of additional structural substrates. As a result, the absence of
additional substrates reduces the weight of the antenna and, therefore,
reduces the weight of the cellular phones.
The Antenna Technology was designed to be used with both analog and
digital cellular phones and, therefore, if accepted in the market, should
be available for use in the emerging PCS market, as well as Europe and
Australia.
COMPANY ANTENNA TECHNOLOGY STRATEGY
The Company intends to focus its efforts on the development of its
Internal Antenna in two product categories: an after market retro-fit for
many existing cellular phones, and a customized cellular phone that
incorporates the Antenna Technology. After analysis of the Antenna
Technology, the Company determined that the manufacture of an aftermarket
retro-fit External Antenna for existing cellular phones currently would not
be marketable in the volumes necessary to justify further development.
The Company plans to focus first on the development and design of
Internal Antenna packages for cellular phones that transmit via analog
transmission. Each Internal Antenna package developed will use the same
Antenna Technology, but each package will have a different external casing
designed to fit the particular model of cellular phone. Because of the
large number of different types and models of cellular phones, the Company
has commissioned a market research effort to determine the cellular phone
models that offer the greatest potential demand and opportunity. Another
factor that will influence the Company's decision on what Internal Antenna
packages it will design and produce is the difficulty of designing an
Internal Antenna package for a particular phone model. For example, at
this time the Company has not been able to develop an Internal Antenna
package for the flip-phone marketed by Motorola, Inc.
The Company also plans to develop and market customized cellular phones
that contain the Internal Antenna, which the Company would sell under its
own logo or under the logo of the relevant cellular service provider or
cellular phone retailer. At the present time, the Company plans to market
these phones as rugged, shock-resistant cell phones that have a large
keypad as well as the Company's Antenna Technology. This strategy is
contrary to the current trend by cellular phone OEMs to manufacture
increasingly smaller and lighterweight cellular phones.
The Company intends to commence production of its Internal Antenna
products in the latter part of the 1997 fiscal year. Such production, is
dependent upon, among other things, final testing and design of the
Internal Antenna, obtaining strategic partnerships with cellular service
providers or cellular phone OEMs, and market acceptance of the Antenna
Technology. There can be no assurance that the Internal Antenna will be
accepted by the market place or that
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unforeseen problems will not arise in the final design and testing of the
Internal Antenna or in the development and marketing of the Company's
Antenna Technology.
While the safety of cellular phones is subject to question by consumers
and scientists, the Company believes there currently exists a marketing
opportunity for the development, manufacture and sale of its Antenna
Systems. The Company believes the overriding benefit of protection,
whether perceived or scientifically proven, will result in market demand
for the Antenna Technology. The Company also believes that the cellular
phone industry will find the Antenna Systems attractive due to their
increased signal strength, range, and battery life and their small and
lightweight size.
Antenna Technology Sales and Marketing
Antenna Systems. The Company does not believe there exists sufficient
dollar volume or profit margin to market its Internal Antennas to cellular
phone OEMs for incorporation into the cellular phones these OEMs currently
manufacture. For this reason the Company currently plans on offering its
Internal Antenna packages through wireless carriers and wireless
distributors that have service shop capabilities, such as BellSouth, Tandy,
Sears, BANM and Choice Cellular among others. Such service capabilities
are needed to install an Internal Antenna package, as the cellular phone
must be opened, the existing external antenna removed and the Internal
Antenna inserted to the cellular phone backplane, with a solder connection
made to the Internal Antenna post. The Company intends to design its
Internal Antenna packages to enable cellular phone retailers to quickly
modify existing cellular phones to insert the Internal Antenna
package.
The Company is preparing to work with cellular service providers who are
interested in assessing the new technology for range, signal strength, and
other significant benchmarks. The Company has had discussions with
cellular manufacturers in Europe and the Asia-Pacific Rim region and is
working on establishing sales arrangements with distributors and expanding
the production facilities of Cellular Magnetics to accommodate additional
production. The Company has received requests for working phone models
incorporating the Company's Antenna Technology from Telstar, one of the
largest carriers and providers of cellular technology in Australia, and
Optus Communications, one of the largest telecommunication carriers in
Australia operating a nation-wide cellular network. Although the terms of
the testing and evaluation have not been formalized, both Telstar and Optus
Communications expressed interest in evaluating the Company's Antenna
Systems to determine the compatibility of the Antenna Systems with their
respective technologies and for potential performance enhancements.
There can be no assurance that, after testing and evaluations, any orders
will be placed by Telstar or Optus Communications with the Company or by
any other cellular service provider.
The Company intends to market its customized cellular phones and
Internal Antenna packages worldwide. At the present time, the Company
intends to sell its customized cellular phones under the Company's logo
overseas and under the logo of cellular service providers or cellular phone
retailers domestically. The Company will focus on marketing its products
at key
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domestic trade shows and may also support certain international trade
shows. The Company plans to establish an internet-based sales operation to
sell the Company's customized cellular phones.
Other Electronic Assemblies. The Company will continue to market
miniature and non-miniature coils, transformers, surface mount coils and
electronic assemblies previously produced by M.C. Davis. The customer base
for these products consists principally of electronic companies that
manufacture their own electronic equipment. The Company intends to sell
these products primarily in the Southwest region of the United States.
PRODUCT DEVELOPMENT OF ANTENNA SYSTEMS
The Company is currently working on engineering designs to manufacture
additional prototypes of its Internal Antenna packages. Based on the
results of its market research, the Company will develop Internal Antenna
packages for those cellular phone models that have the greatest market
acceptance and for which the Company can design a cost effective Internal
Antenna package for incorporation therein. The Company also intends to
work on the design and offer of its customized cellular phones for use with
the cellular phone technology's used in other countries, such as digital
based technologies in Europe and Australia.
The Company also plans to continue the development of the Antenna
Technology and related technologies in other markets, including the
development of its "strip" antenna system for use in specialty applications
with exposure to extreme conditions, such as those encountered in the
military, and for satellite communications.
The strip antenna is a form of micro-strip antenna that is currently
being designed by ASU. The Company is currently working with ASU in the
development of this technology and is in the process of negotiating an
exclusive licensing agreement for this technology. The strip antenna
system is designed to transmit at 500MHz to 20GHz. The strip antenna
system consists of combining ("stacking") several micro-strip antennas,
which have a long range, at reduced power, but which transmit only in a
specified direction. Because antennas used for satellite transmission and
military use require omnidirectional transmission and reception, the
Company believes that stacking the micro-strip antennas in certain
configurations will allow the completed product to have omnidirectional
transmission and reception. The strip antenna is currently in the
development stage and the Company can provide no assurances that it will
operate as planned or will be accepted by the industry. In addition, the
Company can provide no assurance that it will enter into an exclusive
licensing agreement with ASU with respect to this technology.
MANUFACTURING OF ANTENNA SYSTEMS
The Company will manufacture its Antenna Systems and continue to produce
electronic assemblies at its 8,000 square foot manufacturing facility in
Arizona City, Arizona and its 8,600 square foot plant in Sonora, Mexico.
The Company is currently working on the fixtures and tooling required for
the manufacture and sale of the Internal Antenna packages. The Company
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currently does not intend to manufacture its own cellular phones; rather,
it intends to enter into contracts or joint venture relationships with
manufacturers, which may include cellular phone OEMs, that currently
manufacture the internal components for cellular phones. The Company
would then encase such components in the Company's customized design
packages along with the Internal Antenna.
These manufacturing facilities will also manufacture the electronic
assemblies previously manufactured by M.C. Davis. The Company does not
anticipate that the manufacture of its Antenna Systems will affect the
Company's ability to continue to manufacture its electronic assembly
products.
ANTENNA TECHNOLOGY COMPETITION
At present, the Company is not aware of any major OEMs, such as Motorola,
Inc., AT&T, Nokia, NEC and Panasonic, that have indicated a change in the
conventional approach to power or emissions with respect to their portable
phones; however, there can be no assurances that such a change may not be
instituted in the future or that, in fact, such changes may not currently
be contemplated. In the event any of the major OEMs decided to develop a
competitive antenna design, such an occurrence could materially adversely
affect the Company's operations.
The Company is aware of several small companies that currently address
the health hazard issue or promote increased range and reception for their
antennas, but the Company is not aware of any one company that addresses
both of these issues or of any company that has progressed significantly
beyond the development stage. While the Company is not aware of any
company that would directly compete with its Internal Antenna packages, the
Company will face normal market forces in obtaining cellular phone
retailers to carry and sell the Internal Antenna packages. These
competitive factors, include, among others, customer demand and limited
space for the display of the Internal Antenna packages at retail locations.
In addition, many of the major cellular phone OEMs currently sell
their cellular phones through existing retail outlets such as Sears, Best
Buy, and Tandy, and provide cellular phones to current cellular carriers
such as BellSouth and Choice Cellular for resale under such cellular
carriers logo. The Company's customized phones, sold under the Company's
own logo or the logo of such cellular carriers and retail outlets, would
directly compete with the cellular phones manufactured by these OEMs, all
of whom have greater financial and other resources than the Company.
These resources include brand name recognition, market acceptance, an
extensive distribution network for their products, and substantial
advertising and marketing resources.
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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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<TABLE>
<CAPTION>
Published
Annual Annual Approximate Company
New Units Units New Price/*/
Produced Rebuilt Price Rebuilt
----------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Television Broadcasting 2500 50 $40,000 $16,000
Transmission of Data 2000 10 $13,000 $ 6,000
Medical Use 200 or more 6 $40,000 $15,000
Navigation 400 or more 25 $12,000 $ 4,000
/*/Subject to change depending on prevailing market and other financial conditions.
</TABLE>
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:
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CW (continuous waive) magnetrons, pulsed magnetrons, klystrons, power
grid tubes (triodes and tetrodes), linear accelerators guides and
electron guns.
The Company offers warranties for its rebuilt electron tubes that meet
or exceed the original manufacturer's warranty. The rebuilt electron tubes
can be purchased for approximately one half the cost of a new tube and are
often technologically superior to a new tube due to the Company's analysis
of the reasons for failure of the original manufacturers technology, which
analysis often results in the usage of components incorporating the latest
technological improvements, designs and performance specifications. The
Company also manufactures new electron power tubes for use in the industry.
The Company rebuilds and manufactures new electron tubes in the following
industry segments:
Magnetrons
General. The Company believes that it is one of the major suppliers of
L-band (operating in the 915 MHz frequency range), CW magnetrons in the
world. The Company services and sells magnetrons with power levels from 5
KW through 75 KW. It has developed its own 30 KW S-band, CW magnetron,
which is used primarily for industrial heating applications. The Company
believes that this product has the highest power rating at this frequency
in the industry.
The Company is not considered a major supplier in the medical x-ray
market, since such market is essentially dominated by two major companies,
Varian 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
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
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in fiscal year 1996. Approximately 42% of these net revenues are generated
from the manufacturing and sale of new magnetrons, with the remaining 41%
derived from rebuilding magnetrons.
Klystrons and Linear Accelerators
General. The Company's rebuilding program for klystrons has, until
recently, been limited by a lack of suitable testing equipment. The Company
has recently obtained two test sets for klystron data transmission tubes
and has purchased a surplus television transmitter to test television
klystrons. The Company has entered into an agreement with a manufacturer
of x-ray machines to test the Company's rebuilt klystrons for the medical
market. This line of products accounted for less than 5% of the Company's
net revenues in fiscal year 1996.
Rebuilding Process. The rebuilding process includes opening the vacuum
envelopes either by machining in the case of ceramic insulator tubes or by
cutting the glass on those tubes with glass insulators. The grids are
removed and salvaged and the cathodes are replaced. Typically,
cathodes are directly heated tungsten or thoriated tungsten filaments.
These are replaced and processed, the cleaned grids replaced and the
envelope resealed. Tubes are then pumped and baked for 48-hours, at which
time they are burned-in and tested. All klystron tubes are cleaned and
finished in bright nickel plate. Workmanship and material warranties
prorated over 3,000 hours are provided with every klystron tube. In
rebuilding linear accelerators, as with klystron tubes, the electron gun is
removed and rebuilt, then the rebuilt unit is pumped, boiled and processed.
High Power and High Frequency Triodes and Tetrodes
The Company believes that it is one of the major rebuilders of high power
and high frequency triode and tetrode tubes in the world. These units are
available with power output ranging from 10KW up to 300KW. These units
comprised approximately 7% of the net revenues of the Company in fiscal
year 1996.
Electron Guns
The Company rebuilds various sizes and powers of electron guns up to 120
KV, 20A gridded electron sources for research application. Rebuilt
electron guns are also used on rebuilt medical accelerators. The
rebuilding of electron guns typically requires the removal of the old
cathode and heater structure and the replacement with a new unit. The
electron gun is rebuilt under vacuum conditions.
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
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performance of its rebuilt electron tubes by continuing to emphasize these
business characteristics.
For magnetron tubes, the Company concentrates on markets where the unit
price is high and competition is the least. For power grid tubes (i.e.,
triode and tetrode tubes), the Company concentrates on the high power, and
more expensive units where new tubes are no longer manufactured and
rebuilding is necessary to avoid replacement of large, expensive equipment.
With the addition of two new test sets for klystron tubes, the Company also
intends to focus more heavily on this segment of the market.
Electron Tube Sales and Marketing
The Company recently hired a full-time, experienced marketing employee to
increase the Company's existing market and to create new markets for its
products and services. The efforts of such employee, to date, have
resulted in an increase in new orders from existing and new customers.
CUSTOMERS
The Company currently has approximately 100 customers in its electron
tube business and has shipped over 25,000 electron tubes to 350 customers.
The Company's client base is comprised of industrial companies, commercial
service firms and government agencies in the United States, Canada, Mexico,
Europe, Asia and Australia. The two largest customers of the Company,
Amana Refrigeration, Inc. and Ferrite Components System, accounted for
approximately 14% and 12%, respectively, of its annual revenues for fiscal
year 1996. The loss of any one such customer could have a materially
adverse effect on the business of the Company.
MANUFACTURING OF THE ELECTRON TUBES
The Company's existing 8,000 square foot manufacturing facility for its
electron tube business is currently operating at maximum capacity. In
recognition of these constraints, the Company has entered into an agreement
with the City of Watsonville, California for the lease, development and
construction of a 21,600 square foot manufacturing facility. Construction
of this facility began in March of 1996. In order to minimize the
effects on the Company's business, the Company plans to move into the
facility over a period of several months. The Company commenced moving
into the new facility in March 1997 and expects to have completed the move
by the end of June 1997. Initially, the Company will occupy approximately
12,000 square feet of the building and will sublet the balance until such
time as it requires the additional space. Upon completion of the
Watsonville manufacturing facility, the Company intends to apply for ISO
9000 certification, which will enable it to more effectively compete in
overseas markets.
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Since the Company is engaged in manufacturing and rebuilding of electron
tubes designed by major manufacturers of such tubes, the Company does not
experience and does not contemplate encountering any substantial
difficulties relating to the sources or availability of materials with
which to conduct its principal business operations. The components to
remanufacture and rebuild these tubes are commonly available from numerous
sources.
BACKLOG OF ELECTRON TUBES
As of September 30, 1996, the Company's production backlog represented by
customer orders in its electron tube business was approximately $3,170,000.
For the preceding year ended (or equivalent) September 30, 1995, the
Company had approximately $1,300,000 in firm backlog. The Company
anticipates completing all production backlog during its current fiscal
year. There is no guarantee, however, that the Company will recognize
sales from any or all of the backlog orders.
ELECTRON TUBE COMPETITION
The Company is engaged in a very narrow segment of the microwave
technology industry, the rebuilding of electron and microwave tubes, and
has attempted to avoid direct competition with the major manufacturers of
microwave products. The manufacturing of new microwave products is
dominated by several very large companies in the United States and
internationally. These companies, however, have not chosen to dedicate
their resources to the rebuilding of such products or the manufacture of
the electron tube the Company manufactures.
The principal competitors of the Company are relatively few, but have
with the Company, significant segments of the narrow market area in which
the Company competes. Principal among these competitors are Litton
Industries, Varian Associates, English Electric Valve and Burle Industries,
Inc. Although there are a few small competitors, management believes that,
based upon the Company's latest internal market information, it has the
largest market share in certain product lines, such as the CW magnetrons.
Because of its perceived reputation for quality, customer service,
warranty and the performance of its new and rebuilt units, the Company
believes that it offers a competitive advantage equal to or superior to
what is otherwise provided by its competitors.
PRODUCT DEVELOPMENT OF ELECTRON TUBES
Research and development activities to be conducted for the Company with
respect to electron tubes will be conducted through institutions or other
firms qualified to conduct such research and development activities as
independent contractors to the Company. To the extent that the Company
does engage in business activities which will require research and
development, it will seek to decrease such costs by entering into joint
ventures or other types of business relationships wherein the costs of
research and development activities will be paid for by other parties, who
in consideration of such payments will enjoy partial ownership or other
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<PAGE>
rights relating to any technologies or products which might develop from
such research and development.
THE COMPANY'S PARTICLE INTERCONNECT TECHNOLOGY
OVERVIEW OF PARTICLE INTERCONNECT TECHNOLOGY
The Company proposes to pursue a new line of business involving the
development and manufacturing of high performance, low-cost interconnect
products. The Company's PI Technology utilizes patents procured and owned
by the Company for the production of electronic interconnect products. The
Company's Proprietary Electroplating Process will be used in the
manufacture of 12" x 18" panels used to mount, package or attach electronic
devices and other products utilizing the PI Technology. This new line of
business will be conducted through the Company's wholly owned subsidiary,
PI Corp.
PI TECHNOLOGY INDUSTRY BACKGROUND
Electronics Industry Trends
Over the past decade, consumers and OEMs have demanded electronic
products that provide a significant increase in performance accompanied by
reduced size, weight and cost. These factors have forced manufacturers to
produce smaller, lighter and higher performing components while reducing
their costs in order to remain competitive. New developments in printed
circuit boards (including flexible circuitry), integrated circuits ("ICs"),
IC packaging techniques, and new forms of interconnect assemblies for
connecting the various electronic components, have contributed to the
ability of electronic system manufacturers to accomplish these objectives.
As these products have decreased in size and increased in complexity,
conventional techniques of connecting their components together have begun
to become inadequate. The conventional methods of interconnecting
electronic components in a rematable fashion have limits to the
miniaturization the electronic components can tolerate, while at the same
time remaining cost effective. The interconnect industry that serves the
personal computer ("PC"), automotive, communication and workstation markets
is aggressively pursuing technologies that will allow it to move to the
next level of performance and size.
Integrated Circuits
The Company believes that market trends in IC packaging will lead to
increased demand for emerging high density substrates. ICs have
historically been packaged by connecting the silicon die to a lead frame or
by bonding the silicon die to an interconnect substrate using fine wires.
As ICs are becoming increasingly powerful, they produce more heat and
require a significantly greater number of input/output ("I/O") electrical
connections to attach the silicon die, thus placing substantially greater
demands on the IC packaging materials. For instance,
46
<PAGE>
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. The market for the "Ball Grid Array" technology ("BGAs"),
a product line in which the Company intends to compete, is expected to be
approximately 200 million units in 1997.
The Company believes, based on interviews and contact with industry
leaders and experts, that the PI Technology has the potential and the
capability to solve this miniaturization problem and allow electronics
manufacturers to move to the next level of high-performance, low cost
interconnect systems. The potential advantage of PI Technology, in
addition to potentially providing increased performance and reliability, is
that it replaces the fragile leads which extend from the perimeter of
current IC packages, resulting in improved assembly yields and reduced
size.
PI TECHNOLOGY-TECHNOLOGY AND PRODUCTS
General
Interconnect technology has not kept pace with micro-miniaturization in
the electronics industry. Thus, component packages and the connectors used
to form an electrical and/or mechanical interface between various
components and assemblies in electronic products are now the most expensive
portion of such products. Component packages, connectors, sockets, plugs
and the like are also the bulkiest and heaviest portion of such products.
Conventional interconnect technology complicates the electronic equipment
design and manufacturing processes by introducing special considerations
into such processes with regard to component placement, heat generation,
power loss, and signal propagation delay (the time it takes a signal to
traverse a given distance). These considerations have an adverse impact on
potential gains in performance being realized by new and emerging
technologies.
Wiping Action Technology
Wiping Action Technology is still the prevailing means for
interconnecting electronic components. Wiping action interconnect
technology (for example, sockets, plugs, and needle pins) forms a temporary
electrical interconnect and thus readily allows the remating of various
components and assemblies (for example, when replacing a defective
component, such as a
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<PAGE>
random access memory chip in a personnel computer). A problem with using
such technology is that it is subject to the persistent formation of oxides
(a non-conductive material) along a contacting surface, which increases
contact resistance. In time, these oxides build up, hastening connection
failure and thus equipment failure.
Wiping action technology is only available in the form of various
connectors and sockets. These devices usually provide a contact surface
formed from a limited range of special metals, alloys, and other expensive
materials, as are suitable for maintaining a sliding connection. The
devices themselves have interfering electrical properties due to their size
and orientation on a circuit board, among others, and thus degrade signal
propagation through the interconnect (by introducing resistive, capacitive,
and inductive components into the signal path).
Wiping action technology provides high ohmic connections that produce
excessive and unwanted wear and heat, and therefore contribute to equipment
failure while wasting energy. The wiper mechanism, as in the case of a
socket, requires significant space on a circuit board. Thus, potential
circuit operating speeds are degraded due to propagation delays. In
addition, sockets, plugs, and similar interconnect devices are only
available in a limited number of configurations and materials. Thus, the
evolution of electronic technology is constrained by the limitations wiper
interconnects impose upon a designer.
Additionally, wiper interconnects are unreliable in punishing
environments such as that in which a laptop computer is used. Wiper
connections subject to shock, intense vibration, temperature extremes,
and/or high levels of contamination tend to induce disruption in the
continuity of connections made at a wiper interconnect. As wiper
interconnects are mechanical devices, they corrode and are subject to wear.
Thus, they have a limited useful life.
Identification of Problem
The Company and others in the industry are aware of the physical
constraints imposed upon the development of new products using existing
technologies. The problem is simple to identify and define, but difficult
to solve. As IC packages increase in I/O count and complexity while
remaining constant or decreasing in physical size, a problem 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.
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Requiring a plastic substrate, barely 2 cm on a side to support half the
weight of a man is unreasonable, even with today's excellent plastic
technologies. Such force, concentrated in a small space contained by
petroleum based products that are almost always re-heated is very likely to
fail because of board warp, package warp, or outright physical failure.
This difficulty, when coupled with increasing intolerance from the market
to pay premium prices, presents today's socket manufacturer with an immense
task: create a socket that can:
. Accommodate very high I/O count devices.
. Receive high speed devices without seriously degrading their
performance (have as short a circuit path as possible).
. Be very low-cost.
The Company's Solution
The Company believes that its PI Technology provides a cost effective
solution to solving this industry-wide problem. As discussed below, the
Company believes the PI Technology can establish reliable, rematable
connections at only 10 grams of force. This means that only 10 kg
versus 40 to 80 kg of force is required to interconnect a 1,000 I/O IC
socket with the underlying substrate. The Company believes this reduction
in force may enable manufacturers to connect complex ICs to products
through the next several generations of electronics.
Additionally, the connection pathway provided by a connection using the
PI Technology is exceptionally short and has very low resistance. These
features allow the connection of very high speed ICs without seriously
degrading their performance as conventional techniques sometimes do.
Moreover, the Company believes that it can apply the PI Technology using
its Proprietary Electroplating Process at a very low cost.
There is no assurance, however, that the market place will accept the PI
Technology and proposed Particle Interconnect Products. In connection with
the development of commercially saleable prototypes, the Company must
successfully complete a testing program for such products before they can
be marketed. Unforeseen technical problems arising out of such testing
could adversely affect the Company's ability to manufacture a commercially
acceptable version of its Particle Interconnect Products.
THE COMPANY'S PI TECHNOLOGY
Overview
Background. The PI Technology was conceived in 1986, with the initial
patent thereon issued in 1987. A major aerospace firm took a special
evaluation contract in August 1988
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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 Transactions." Five companies operate
under licenses from the Company to use the PI Technology. These
licensees are utilizing the PI Technology to produce products that do not
currently compete with the Company's proposed Particle Interconnect
Products; however, nothing in the license agreements would prohibit these
companies from doing so in the future 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 "-Intellectual Property."
General. The PI Technology utilizes patents owned by the Company for
bonding and joining metal surfaces to enhance electronic connectivity and
also uses the Proprietary Electroplating Process to electroplate panels at
an anticipated lower cost than conventional manufacturing processes. The
Company's core product is similar to "conductive sandpaper" in appearance,
and is formed by attaching conductive diamond particles to a panel. The
"conductive sandpaper" creates a socket or connector for electronic
devices, and replaces the use of soldering to create such connections.
Operation of the Technology
PI Technology begins with sharp, metallized, doped diamond particles
which have been closely screened as to size. The particles are tightly
classified in sizes ranging from 10 microns to 125 microns, depending upon
the end-product application. Small particle size, 8 to 12 micron range,
are for small pad sizes, less than 5 mm in diameter, and have a small
amount of penetration. Medium particle size, in the 20 to 30 micron range,
are for medium pads sizes, 5 mm to 100 mm in diameter, and have a medium
amount of penetration. Large particle size, 115 to 135 micron range, are
for large pads sizes, greater than 100 mm in diameter, and have a large
amount of penetration.
These electrically conductive diamond particles are attached onto contact
sites using standard masking and electroplating processes. The sharp,
embedded particles create a surface with many sharp points that make many
parallel electrical paths by penetrating though an oxide without requiring
the wiping action of conventional contacts. The Company believes that its
non-wiping action, oxide penetrating Particle Interconnect Products are
capable of penetrating surface contamination and oils to create a gas-tight
electrical contact.
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The sharpness of the diamond particles concentrates insertion force
transmitted by a contact into a very small area or point. This gives the
diamond particle the force per square inch required to pierce oxides and
other contaminates on most surfaces without requiring large amounts of
force on the contact. Reliable, gas-tight connections can be made with PI
Technology with as little as 10 grams of force per contact. This low-level
of force is sufficient to drive the particles into the mating surface (for
example a I/O pad on a silicon die) and provide low contact resistance.
Moreover, the diamond particles do very little damage to the mating
surface. This provides very long remate life with very little degradation
of the connection. Since there is no wiping action, contact coatings stay
intact.
The Company can apply these particles to many different substrates, both
flexible, rigid, metallic and non-metallic. This ability coupled with the
very low contact force gives the Company the capability to make reliable
connectors out of materials that could collapse if exposed to the normally
required contact forces.
Proprietary Process of PI Technology Manufacturing
The Company's ability to compete on a cost-effective basis is driven by
two factors; the high-speed Proprietary Electroplating Process and a re-
cycling, pollution reduction process.
The Company believes it will be able to offer its Particle Interconnect
Products at costs competitive with conventional techniques because of its
high speed Proprietary Electroplating Process. This Proprietary
Electroplating Process allows the Company to electroplate at rates
substantially higher than industry standards while investing larger capital
amounts in automated equipment. Additionally, the Proprietary
Electroplating Process uses fewer raw materials and eliminates ancillary
processes that cost competing technologies both time and money.
The Company expects to additionally benefit from the Proprietary
Electroplating Process because the entire manufacturing operation is
cleaner and less environmentally hazardous with its recycling design, than
existing plating processes used in the electronics industry. Since
electroplating is typically an environmentally hostile process, the Company
expects to gain advantages over competitors by minimizing the costs
associated with the control, removal and processing of these pollutants.
COMPANY PI TECHNOLOGY STRATEGY
The PI Technology has application in many different industries where
electrical connections and interconnections are made. The Company
initially has selected the electronic interconnect industry as its
primary industry to potentially penetrate. The PI Technology has been in
use in the connector industry for several years, mainly in test and burn-in
socket applications by 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
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<PAGE>
Company believes the PI Technology offers immediate advantages for these
products. As a result, the Company has developed the following short term
and long term strategies.
Initially, the Company intends to focus on high speed electroplating of
conductive diamond particles. The primary objective is to provide this
service to numerous connector manufacturers, in competing and non-competing
applications. The Company intends to provide this service to companies in
the form of teaming/co-manufacturing agreements, joint venture agreements
or exclusive or non-exclusive license agreements. The Company believes
that entering into joint venture relations with a leading connector
manufacturer or a leading electronic technology OEM would substantially
reduce the period of time to bring the Company's products to market, The
Company contemplates that such a relationship is necessary to gain
worldwide access for its Particle Interconnect Products (i.e., the Company
believes approximately 60% of its potential market for Z-axis interconnects
exists outside the United States), and to increase the Company's production
capabilities by providing a second source of plating for its Particle
Interconnect Products. Currently, the Company believes that customers of
major electronic technology OEMs will not convert to a prototype process
unless there exists two sources of supply. The Company contemplates that
the joint venture or comanufacturing partner would 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.
The Company's initial product line will be particle plated panels for use
as an interposer in a BGA production socket. Assuming there is market
demand for this product, the Company expects to produce this interposer
in moderate quantities at its existing facility and using domestic
subcontractors, until co-manufacturing partner(s) are able to produce in
larger quantities. If or when this occurs, the Company will attempt to
expand with proposed partners into numerous other BGA and LGA applications
and new products as they are designed. The Company believes that in order
to adequately penetrate all aspects of the Z-axis interconnect market it
will be required to design up to 5,000 separate panel configurations over
the next five years. The Company also believes that this investment could
approach $10 million dollars over the next five years, if conducted with a
joint venture partner, and substantially more if conducted without a joint
venture partner.
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).
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PI Technology Sales and Marketing
Phase I Corporate Image. The Company, as an emerging Company with
respect to the design, manufacture, marketing and sales of its proposed
Particle Interconnect Products must become recognized in the industry. The
Company's focus on establishing a solid corporate image is based on
management's belief that OEMs and suppliers to OEMs will not put their own
production schedules and reputations at risk with companies they feel are
unstable regardless of how revolutionary the product or service may be.
This is exceptionally true in the connector industry. The Company believes
that it has been successful at projecting an image acceptable to the
industry as evidenced by the willingness of industry leaders to enter
teaming and strategic alliance discussions with the Company prior to
production. The Company will continue to use conventional methods such as
attending industry conventions, meeting with high-level executives in the
industry's leading companies and contacting key analysts in the industry to
enhance and stabilize the Company's corporate image. In the future the
Company expects to expand its efforts to include:
. Traveling to meet individually with key executives.
. Generating interest through the trade press and presentations at trade
shows.
. Exhibiting with display booths at certain industry trade shows.
. Publishing and publicizing test results as they become available.
The Company believes this approach will provide it with an image that
will enhance the formation of relationships with key industry leaders.
Phase II - Forming Strategic Alliances. The Company believes that
establishment of a sound business image and an appropriate level of
exposure for PI Technology in the market place is only the first step in
successfully penetrating the market through a strategic partner. To be
successful with this approach, the Company must select an appropriate
partner, convince this partner of the viability and advantages of the PI
Technology at its Proprietary Electroplating Process, negotiate a mutually
beneficial agreement, and perform on the agreement. There is no guarantee
that the Company will be able to accomplish these tasks.
In each industry in which the Company decides to compete, the Company
will select market leaders that have key characteristics such as:
. Significant market share and strong distribution channels.
. Manufacturing competencies that compliment that of the Company.
. A corporate culture that allows them to quickly respond to a new
technology.
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. Sufficient capital and sales strength.
The Company is currently in preliminary discussions with two industry
leaders that satisfy all of the above criteria, however, there can be no
assurances given that any agreements will be consummated or, if
consummated, that any such agreements will be profitable to the Company.
Phase III - Penetrate Other Industries and Application Areas.
Combinations of the Company's intended strategies in Phases I and II above
will be used in Phase III to allow access to all the markets where PI
Technology is potentially viable. The steps the Company has taken and will
take in the electronics industry in Phases I and II, will be repeated in
other industries in which the Company may compete.
PI TECHNOLOGY COMPETITION
Competition in the electronic connector market is fierce. The principal
competitive factors are product quality, performance, price and service.
Multinational connector manufacturers (such as Berg Electronic, AMP, 3M,
Molex and Kamaichi), and major OEM electronic technology leaders (such as
Intel, Dupont, 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 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 supplying 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.
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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.
. High Voltage Contractors and Switches.
The Company will consider researching the potential of these markets and
develop appropriate manufacturing and penetration strategies for them, as
discussed in "-Company Strategy" above, whenever the electronic connector
market begins to show signs of maturation with declining profit margins,
increased competition and lack of opportunity.
GOVERNMENT REGULATION
The various business operations of the Company are subject to numerous
federal, state and local laws and regulations, including those relating to
the use and disposal of hazardous substances. Specifically, the operations
of CTL and PI Corp. involve the use and handling of environmentally
hazardous substances. The use of hazardous substances is subject to
extensive and frequently changing federal, state and local laws and
substantial regulation under these laws by governmental agencies, including
the United States Environmental Protection Agency, various state agencies
and county and local authorities acting in conjunction with federal and
state authorities. Among other things, these regulatory bodies impose
restrictions to control air, soil 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, 1996.
Similarly, capital expenditures to comply with such laws and regulations
are not expected to be material in the fiscal year ending September 30,
1997.
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INTELLECTUAL PROPERTY
CELLULAR PHONE ANTENNAS AND PARTICLE INTERCONNECT TECHNOLOGY
The Company will rely on a combination of patents, patent applications,
trademarks, copyrights and trade secrets to establish and protect its
proprietary rights in the Antenna Technology and PI Technology and the
Proprietary Electroplating Process. The electron tube technology utilizes
no intellectual property rights belonging to the Company. The Company
currently owns seven U.S. patents (which expire from February 14, 2006 to
October 15, 2013) on the PI Technology and seven patent applications, six
related to the PI Technology and one relating to the Antenna Technology.
Prior to the Company's acquisition of Particle California, Mr. Louis
DiFrancesco, the inventor of the PI Technology, or companies he controlled,
granted 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. Mr. DiFrancesco, and not the Company, will receive any
royalty payments or other compensation received under the terms of these
licenses. 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
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entities could materially adversely affect the Company's business,
financial condition and results of operations. See "RISK FACTORS-Rights to
PI Technology."
Consequently, PI retains the right, subject to any interest which 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.
A basic Dual Resonance Application was filed in the United States Patent
and Trademark Office. The Company has subsequently filed a continuation to
the Dual Resonance Application to cover additional features made available
through the use of the Antenna Technology. The Company can provide no
assurance that a patent will be issued on the Dual Resonance Application.
The Company has granted a non-exclusive royalty free license to ASU to
publish, make, use, and sell the Antenna Technology strictly for
educational purposes. The Company believes that the grant of such license
will have a minimal impact, if any, on any revenue the Company may earn on
the Antenna Technology.
The Company also owns certain proprietary techniques and trade secrets
relating to a Proprietary Electroplating Process. The Company recognizes
the benefits associated with developing a portfolio of corporate
intellectual property, particularly during the new product development
process, and is pursuing patentability searches and activities on several
technologies. There can be no assurance that patents will be issued from
any of the pending applications, or that any claims allowed from existing
or pending patents will be sufficiently broad enough to protect the
Company's technology. While the Company intends to vigorously protect its
intellectual property rights, there can be no assurance that any patents
held by the Company will not be challenged, invalidated or circumvented, or
that the rights granted thereunder will provide competitive advantages to
the Company. Litigation may be necessary to enforce the Company's patents,
patent applications, trade secrets, licenses and other intellectual
property rights, to determine the validity and scope of the proprietary
rights of others or to defend against claims of infringement. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business and results
of operations regardless of the final outcome of the litigation. Despite
the Company's efforts to maintain and safeguard its proprietary rights,
there can be no assurances that the Company will be successful in doing so
or that the Company's competitors will not independently develop or patent
technologies that are substantially equivalent or superior to the Company's
technologies.
The telecommunications and interconnect industries are characterized by
uncertain and conflicting intellectual property claims. The Company has in
the past and may in the future become aware of the intellectual property
rights of others that it may be infringing, although it does not believe
that it is infringing any third party proprietary rights at this time. To
the extent that it deems necessary, the Company may license the right to
use certain technology patented by others in certain products that it
manufactures. There can be no assurance that the Company
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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 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 March 31, 1997, the Company and its three active wholly owned
subsidiaries had approximately 125 employees. None of the Company's
employees is represented by a labor union or is subject to a collective
bargaining agreement. The Company believes that its relations with its
employees are satisfactory.
PROPERTIES
PRINCIPAL EXECUTIVE OFFICES
The principal executive office of the Company is located at 999 West
Hastings Street, Suite 1750, Vancouver, B.C., Canada V6C 2W2. The Company
leases this office space from a company controlled by Alan M. Smith, an
executive officer and director of the Company, pursuant to a lease that
expires on July 31, 2001. The monthly lease payments are $3,000. The
Company believes that the lease payments are on terms at least as favorable
as could be obtained from an independent lessor.
PRINCIPAL CORPORATE OFFICES
The principal corporate office of the Company is located at 7201 E.
Camelback Road, Suite 250, Scottsdale, Arizona 85251. The Company leases
this office space. The monthly lease payments are approximately $3,500
pursuant to a lease that expires July 31, 2001.
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PI CORP.
The Company conducts operations on a 10-acre site located at 3550 South
Marksheffel Road, Colorado Springs, Colorado. The building has 45,000
square feet with 22,000 square feet currently allocated for production.
The facility also includes two 1000 square feet security vaults for storage
of finished products prior to shipping. The Company leases this facility
pursuant to a lease that expires on July 31, 1998. The monthly lease
payments for the first year are approximately $23,000, and approximately
$23,500 for the remainder of the term.
CELLULAR MAGNETICS
The Company will manufacture its Antenna Systems and continue to produce
electronic assemblies at its 8,000 square foot manufacturing facility in
Arizona City, Arizona and its 8,600 square foot plant in Sonora, Mexico.
The Company owns the land on which these facilities are located.
CTL
The Company's manufacturing facilities are presently located at 1305 17th
Avenue, Santa Cruz, California 95062. The current leased premises comprise
approximately 8,000 square feet at a monthly lease cost of approximately
$10,000. The Company has entered into a lease agreement dated June 16, 1995
with the City of Watsonville, California, for a new manufacturing facility
consisting of approximately 21,600 square feet. Construction of this
facility began in March 1996, with an anticipated final occupancy date of
June 1997. The Company will initially occupy approximately 12,000 square
feet at the facility and will sublet the remainder until such time as it
requires additional space. The lease is for a period of 15 years with an
option to renew for 3 successive five-year terms. The total lease cost will
be approximately $15,000 per month, exclusive of any sublease revenues.
LEGAL PROCEEDINGS
The Company has recently been notified of a potential litigation matter
(the "Complaint") which has been filed by American Microcell Corp. ("AMC")
and MicroAntenna, Inc. (collectively, "Plaintiffs") against but not yet
served upon, among others, the Company, Terry Neild, a director and
Executive Vice President of the Company, and Lucius Ross, a consultant to
the Company (collectively, the "Defendants"), in the Superior Court of
Maricopa County, No. CV 96-97-00642. The Complaint alleges that Messrs.
Ross and Neild were, at the relevant time, former directors of Plaintiffs
and breached their fiduciary duties to Plaintiffs by usurping a corporate
opportunity, the acquisition of the Antenna Technology from Plaintiffs for
their personal benefit and the benefit of the Company. The Complaint
requests both compensatory damages, an assignment of all rights to the
Antenna Technology and a lien or constructive trust on the Antenna
Technology and all proceeds therefrom.
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The Company is currently conducting an extensive factual analysis of
the threatened litigation. Based upon such information, the Company
believes the Complaint lacks substantial merit and further believes it has
and intends to assert meritorious counterclaims against the Plaintiffs.
Other than the Complaint, no material legal proceedings (other than
routine litigation incidental to the business) to which the Company (or any
officer or director of the Company, or any affiliate or owners of record or
beneficially of more than 5% of the common stock) to management's
knowledge, is a party or to which the property of the Company is subject,
is pending and no such material proceedings are known by management of the
Company to be contemplated.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, directors and significant employees of the
Company are as follows:
<TABLE>
<CAPTION>
Name and Age Position Period of Service
- ------------ -------- -----------------
<S> <C> <C>
Gordon J. Sales (59) Director, President and Chief July 7, 1995 to Present
Executive Officer
Terry W. Neild (56) Director and Executive Vice July 7, 1995 to Present and
President Director since October 23, 1996
to Present
Alan M. Smith (45) Director, Secretary, Treasurer July 7, 1995 to Present and
and Chief Financial Officer Director since June 1996 to
Present
Theodore A. Waibel (59) Director November 22, 1996 to Present
Charles E. Bauer, Ph.D. (46) Director November 22, 1996 to Present
Steven D. Clark (38) President of PI Corp. October 22, 1996 to Present
Lawrence DiFrancesco (48) Executive Vice President and September 3, 1996 to Present
Chief Operations Officer of PI
Corp.
Jerry W. Tooley (53) President and Chief Executive October 14, 1996 to Present
Officer of Cellular Magnetics
David Putnam (50) Chief Financial Officer of October 14, 1996 to Present
Cellular Magnetics
Richard Gibson (44) President and Chief Financial February 6, 1997 to Present
Officer of Intercell Wireless
Corp.
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
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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.
In connection with its merger with Particle California, the Company
agreed to appoint Lawrence DiFrancesco to the Board of Directors and
elected Louis DiFrancesco as Chief Technical Officer of PI Corp. Mr.
Lawrence DiFrancesco subsequently resigned from the Board of Directors on
October 23, 1996. Mr. Louis DiFrancesco resigned as Chief Technical
Officer of PI Corp. and now serves as a paid consultant to PI Corp.
In connection with the Company's acquisition of Energy, Mr. Sales was
appointed as Director and Chief Executive Officer of the Company and
Messrs. Neild and Smith were appointed as officers of the Company.
BIOGRAPHICAL INFORMATION ON OFFICERS AND DIRECTORS AND SIGNIFICANT
EMPLOYEES
GORDON J. SALES. Mr. Sales has been President, Chief Executive Officer
and a Director of the Company since July 7, 1995. In addition, he has been
President and Chief Executive Officer of CTL since May 1, 1994 and of PI
Corp. from September 3, 1996 to October 22, 1996. Mr. Sales also has been
President, Chief Executive Officer and a Director of Energy since March of
1993. Prior to his association with the Company, its parent and
subsidiary, Mr. Sales was involved in the building supply, forest products
and real estate industries. During the years 1977 to 1993, Mr. Sales was
President of his privately owned holding company, which had interests in
truck parts manufacturing, wood fibre processing and commercial real estate
development. Mr. Sales devotes substantially all of his professional time
to the business affairs of the Company.
TERRY W. NEILD. Mr. Neild became an Executive Vice President of the
Company on July 7, 1995 and was appointed to the Board of Directors on
October 23, 1996. From August 1, 1993 to September 26, 1995, he served as
President and Chief Operating Officer of Energy. Prior to that time Mr.
Neild was self-employed as a business and financial consultant. Mr. Neild
is a Certified Management Accountant. Mr. Neild served as Chairman and
Chief Executive Officer of Clearly Canadian Beverage Corp. ("Clearly
Canadian") from February 1986 to March 1989, and as Chairman and Chief
Executive Officer of Clearly Canadian's majority shareholder, Camfrey
Resources, Ltd., from March 1989 to February 1990. Mr. Neild has been a
Director of Baywest Capital Corp., MacNeill International Corp., North
American Contractors, Ltd., Barwell Development Corp., and Crest Realty and
Development Ltd. Mr. Neild devotes substantially all of his professional
time to the business affairs of the Company.
ALAN M. SMITH. Mr. Smith has been Secretary, Treasurer and Chief
Financial Officer of the Company since July 7, 1995 and a director since
June 12, 1996. Mr. Smith is a Chartered Accountant practicing in
Vancouver, British Columbia, Canada. Mr. Smith
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<PAGE>
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.
THEODORE A. WAIBEL. Mr. Waibel has served as a director of the Company
since November 22, 1996. Mr. Waibel has been the President and Chief
Executive Officer of T.A.W. Vehicle Concepts, Inc. (an importer of
magnesium wheels for race cars) since March 1996. From March 1991 to March
1996, Mr. Waibel was the President and Chief Executive Officer of TVX, Inc.
(a high technology company that has developed the placement of a camera on
a computer chip for security applications).
From July 1980 through February 1991, Mr. Waibel was President and Chief
Executive Officer of Ultrak, Inc. (NASDAQ: ULTK), a company he co-founded
in 1980. From July 1975 until June 1980, he was Executive Vice President
of Marketing for Alarm Device Manufacturing Co., ADEMCO Division of Pittway
Corporation, Tyosset, New York which had purchased Sontrix, Inc., a public
company co-founded by Mr. Waibel. From October 1969 through July 1975, Mr.
Waibel served as President of Sontrix, Inc., Boulder, Colorado, which
developed a successful multi-head ultrasonic system for the security
market.
Mr. Waibel is past National Director of the American Electronics
Association, a past member of the Dean's Advisory Council to Dean Firman of
the University of Denver and founded the Alarm Industry Telecommunications
Committee in Washington, D.C.
Mr. Waibel received his BS/BA from the University of Denver with a major
in marketing in 1967.
CHARLES E. BAUER, PH.D. Dr. Bauer has served as a director of the
Company since November 22, 1996. Dr. Bauer has been the Managing Director
of TechLead Corporation, an international consulting firm, since 1990.
During his career, Dr. Bauer has served as Director, Research and
Technology of MicroLithics Corporation, Golden, Colorado. At MicroLithics
Corporation, Dr. Bauer was responsible for a variety of technology programs
with the Coors Advanced Electronics Group, including, MicroLithics Coors
Electronic Packaging Company, two internal research groups of the Coors
Ceramic Company and a joint venture with W. R. Grace & Company. From 1978
through 1989 he was employed by Tektronix, Incorporated, Beaverton, Oregon,
in various capacities as a Material Scientist/Engineer, Materials
Science/Engineering Manager, Engineering Scientific Manager, Bipolar
Products Packaging Unit Manager and Integrated Circuit Packaging Operations
Manager.
Dr. Bauer received his BS in Materials Science and Engineering from
Stanford University in 1972, his MS in Metallurgical Engineering from Ohio
State University in 1975, his PhD in Materials Science and Engineering from
Oregon Graduate Center, Beaverton, Oregon in 1980 and his MBA from the
University of Portland in 1988.
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<PAGE>
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.
SIGNIFICANT EMPLOYEES. The Company considers the following officers of
its subsidiaries as significant employees of the Company
STEVEN D. CLARK. Mr. Clark has served as President of PI Corp. since
October 22, 1996. Prior thereto, Mr. Clark worked on the B2 Bomber program
as a project manager in charge of new business acquisitions with Northrop
Grumman Corporation from 1981 to 1996. In addition, Mr. Clark has served
as a consultant in the development of the PI Technology for the past ten
years.
LAWRENCE DIFRANCESCO. Mr. DiFrancesco has served as Director, Executive
Vice President and Chief Operating Officer of PI Corp. since September 3,
1996 and he served as a Director of the Company from September 3, 1996 to
October 23, 1996. From March 1995 through May 1996, Mr. DiFrancesco was
employed as an engineer with Sheldahl Inc., Northfield, Minnesota, a large
manufacturer of flex circuits. From March 1994 through March 1995, Mr.
DiFrancesco was employed by Particle California, working jointly with his
brother, Louis DiFrancesco, in the further development of the PI Technology
and the Proprietary Electroplating Process. From December 1992 through
March 1994, he was employed at Exatron-Acsist Associates where he served as
Program Coordinator and Process Engineer for the development of a new, high
density, fine pitch, surface mount interconnect technology. From July 1992
through December 1992, he was employed as an Engineer with Logical
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<PAGE>
Services, Inc. From 1982 to 1991, he served as a Project Leader for Hughes
Aircraft Company where his responsibilities related to high volume
manufacturing operations.
Mr. DiFrancesco is the co-developer of the PI Technology and the
Proprietary Electroplating Process. He served as the Senior Scientist for
Particle California in an advisory capacity or as an employee from 1991
until September 3, 1996 when it assigned the PI Technology and the
Proprietary Electroplating Process to the Company.
Mr. DiFrancesco received an AAE Electronic Technology degree from Chabot
College, Hayward, California and a Bachelor of Science degree in Electrical
Engineering from Cal Poly, San Luis Obispo, California.
JERRY W. TOOLEY. Mr. Tooley has served as President and Chief Executive
Officer of Cellular Magnetics since October 14, 1996. Prior thereto, Mr.
Tooley served as the President of M.C. Davis.
DAVID PUTNAM. Mr. Putnam has served as the Chief Financial Officer of
Cellular Magnetics since October 14, 1996. Prior thereto, Mr. Putnam
served as Vice President and Treasurer of M.C. Davis.
RICHARD GIBSON. Mr. Gibson has served as the President and Chief
Financial Officer of Intercell Wireless since February 6, 1997. From
February 1992 until February 1997, Mr. Gibson was employed by Motorola,
Inc. most recently as the head of Sales and Marketing for the Secured
Product Division of Motorola, Inc., where he worked on the development of
an encryption unit for the Motorola Elite flip-phone, including the
development of the market requirements for features and functionality.
JAMES D. MARTIN, VICE PRESIDENT, CTL. Mr. Martin has been employed by
CTL since February, 1977 and has served as Vice President of CTL since
1993. He has worked in every department of CTL from production and sales
to customer service. Mr. Martin provides technical support to customers in
this highly technical business and organizes and runs production lines for
rebuilding triodes, cyclotrons and medical linear accelerators.
ANTHONY P. WYNN, VICE PRESIDENT, CTL. Mr. Wynn has served as Vice
President of CTL since January, 1979. Mr. Wynn is a design engineer
responsible for developing a 50KW L-band magnetron and rebuilds high power
magnetrons, cyclotrons, triodes, medical linear accelerators, electron guns
and ion pumps. He has worked with English Electric Valve Co. (U.K.) and
Litton Industries (U.S.) as a professional microwave engineer in the
magnetron tube divisions.
DAVID E. BLANK, VICE-PRESIDENT, CTL. Mr. Blank has been Vice-
President of Engineering at CTL since July, 1989. A graduate of Brunel
College, London University, England and a member of the Institute of
Mechanical Engineers, he has worked in senior
65
<PAGE>
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.
66
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning
compensation paid by the Company to the Chief Executive Officer ("CEO") and
any other executive officer whose total annual salary and bonus exceeded
$100,000 for the fiscal year ended September 30, 1996 (the "Named Executive
Officers"):
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------------ -------------
Securities
Fiscal Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Options (#) Compensation($)
- --------------------------------------------- ------ --------- ------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Gordon J. Sales, President 1996 $105,917 -0- 700,000/(2)/ -0-
and Chief Executive Officer 1995 -0- -0- 500,000/(2)/ $82,265/(1)/
Alan M. Smith, Director, Secretary, 1996 93,371 -0- 550,000/(3)/ -0-
Treasurer and Chief Financial Officer 1995 15,000 -0- -0- 40,000/(4)/
Terry W. Neild, Director and Executive Vice 1996 40,000 -0- 700,000/(2)/ -0-
President 1995 -0- -0- 500,000/(2)/ -0-
________________
/(1)/ Received as compensation as an officer of CTL.
/(2)/ An option to purchase 500,000 shares of Common Stock was originally
granted to Messrs. Sales and Neild on July 7, 1995 at an exercise price of $.625
per share. On November 9, 1995 these options were repriced at an exercise price
of $.50 per share. Concurrently, an option to purchase an additional 200,000
shares of Common Stock was granted by the Company to Messrs. Sales and Neild at
the same exercise price. Messrs. Sales and Neild each subsequently transferred
options to purchase 50,000, of the 200,000 shares originally granted, on
November 11, 1996 to Alan M. Smith as a gift.
/(3)/ Mr. Smith received additional options to purchase 150,000 shares of Common
Stock from Messrs. Sales, Neild and the Company's general counsel. These options
have not been included in the above table as the options were not granted by the
Company.
/(4)/ Received as compensation as a consultant to Energy Corporation and CTL.
</TABLE>
The foregoing compensation table does not include certain fringe
benefits made available on a nondiscriminatory basis to all Company
employees such as group health insurance, dental insurance, long-term
disability insurance, vacation and sick leave. In addition, the Company
makes available certain non-monetary benefits to its executive officers
with a view to acquiring and retaining qualified personnel and
facilitating job performance. The Company considers such benefits to be
ordinary and incidental business costs and expenses. The aggregate value
of such benefits in the case of each executive officer listed in the
above table, which cannot be precisely ascertained but which is less than
10% of the cash compensation paid to each such executive officer, is not
included in such table.
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<PAGE>
OPTION GRANTS TABLE
The following table provides information relating to the grant of
stock options to the Company's executive officers during the fiscal year
ended September 30, 1996.
OPTION GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT ASSUMED
ANNUAL RATES OF STOCK PRICE
INDIVIDUAL GRANTS APPRECIATION FOR OPTION TERM/(1)/
- ------------------------------------------------------------------------------------------ ---------------------------------
PERCENT
OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES FAIR MARKET
OPTIONS IN FISCAL EXERCISE VALUE ON EXPIRATION
NAME GRANTED(#) YEAR/(3)/ PRICE($/sh) GRANT DATE/(2)/ DATE 0% ($) 5% ($) 10% ($)
- -------------------- ------------ ---------- ---------- --------------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gordon J. Sales 200,000/(4)/ 4.1% .50 .625 11/9/2005 $ 25,000 $ 103,760 $ 223,760
500,000/(4)/ 10.3% .50 .625 7/7/2005 62,500 259,400 559,400
Alan M. Smith 50,000 4.1% .50 .625 11/9/2005 6,250 25,940 55,940
300,000 6.2% .50 4.860 6/12/2006 654,000 1,113,270 1,813,110
200,000 4.1% 4.00 4.750 9/3/2006 150,000 748,500 1,660,500
Terry W. Neild 200,000/(4)/ 4.1% .50 .625 11/9/2005 25,000 103,760 223,760
500,000/(4)/ 10.3% .50 .625 7/7/2005 62,500 259,400 559,400
</TABLE>
_________________
/(1)/ Potential realizable value is based on an assumption that the stock price
of the Common Stock appreciates at the annual rate shown (compounded annually)
from the date of grant until the end of the ten-year option term. These numbers
are calculated based on the requirements promulgated by the Securities and
Exchange Commission and do not reflect the Company's estimate of future stock
price growth which may or may not occur.
/(2)/ Computed based on the average closing bid and asked prices on the date the
options were granted.
/(3)/ All options granted were immediately exercisable on the date of grant.
/(4)/ An option to purchase 500,000 shares of Common Stock was originally
granted to Messrs. Sales and Neild on July 7, 1995 at an exercise price of $.625
per share. On November 9, 1995 these options were repriced at an exercise price
of $.50 per share. Concurrently, an option to purchase an additional 200,000
shares of Common Stock was granted by the Company to Messrs. Sales and Neild at
the same exercise price.
/(5)/ The Company granted options to other officers, directors, consultants and
employees, including employees of the Company's subsidiaries, to purchase an
aggregate of 4,841,180 shares of Common Stock during fiscal 1996.
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<PAGE>
AGGREGATED OPTION EXERCISE AND FISCAL YEAR-END OPTION TABLE
The following table provides information relating to the exercise of
stock options during the fiscal year ended September 30, 1996 by the
Company's executive officers and the 1996 fiscal year-end value of
unexercised options.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR,
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
AT FY-END/(1)/ AT FY-END($)/(1)/
-------------- -----------------
SHARES
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- ----------------- ------------------ ------------- --------------- -------------
<S> <C> <C> <C> <C>
Gordon J. Sales -0- -0- 650,000/0/(2)/ $2,315,625/0
Alan M. Smith 200,000 $687,500/(3)/ 150,000/0 534,375/0
200,000/0 12,500/0
Terry W. Neild -0- -0- 650,000/0/(2)/ 2,315,625/0
</TABLE>
______________
/(1)/ The average of the closing bid and asked price of the Common Stock on
December 20, 1996 ($4.0625) was used to calculate the option value.
/(2)/ The holders transferred 50,000 out of an original 200,000 stock options
issued to them on November 9, 1995 to Alan M. Smith at no cost.
/(3)/ The market value of the Common Stock on the date of exercise, June 27,
1996, minus the exercise price of $.50 per share. The average of the closing bid
and asked price of the Common Stock on June 27, 1996 was $3.9375.
DIRECTOR COMPENSATION
An option to purchase 100,000 shares of Common Stock was originally
granted to Mark S. Pierce on July 7, 1995 at an exercise price of $.625 per
share. On November 7, 1995 these options were repriced at an exercise
price of $.50 per share. Concurrently, an option to purchase an additional
100,000 shares of Common Stock was granted by the Company to Mr. Pierce at
the same exercise price. Mr. Pierce resigned as an officer of the Company
effective July 7, 1995 and as a director of the Company on June 12, 1996.
In the future, the Company's Board of Directors intends to pay its
non-employee directors $1,500 for their attendance at each regular or
special meeting of the Board of Directors and award each non-employee
director options to purchase 100,000 shares of Common Stock, which options
shall vest 25,000 shares per year for each full year served as a director
of the Company.
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<PAGE>
EMPLOYMENT AGREEMENTS
On September 1, 1996, the Company entered into certain employment
agreements (the "Employment Agreements"), with Gordon J. Sales to serve as
President and Chief Executive Officer of the Company, Alan M. Smith to
serve as Chief Financial Officer of the Company, and Terry W. Neild to
serve as Executive Vice President of the Company (collectively, the
"Employees" and individually an "Employee"). The Employment Agreements are
for a period of sixty months beginning September 1, 1996 and ending August
31, 2001. Any extension or renewal of the Employment Agreements must occur
at least three months prior to the end of the initial term or any renewal
term and absent mutual agreement of the parties, the failure to conclude
such extension or renewal by such date shall be deemed notice to the
Company and the Employee, that the relevant Employment Agreement shall not
be extended. Under each Employment Agreement, each Employee will be paid
an annual salary of $120,000 ("Annual Salary") for the first year, which
amount will be increased to $180,000, $240,000, $270,000 and $300,000 on
September 1, 1997, 1998, 1999 and 2000, respectively. Each Employee also
is entitled to participate in the Company's bonus and stock option plans
and participate in the customary employee benefits programs maintained by
the Company, including health, life and disability insurance to the extent
provided to other senior executives of the Company.
The Company or an Employee may terminate the applicable Employment
Agreement at any time with or without cause. In the event the Company
terminates an Employment Agreement for cause or an Employee terminates his
Employee Agreement without cause, all of such Employee's rights to
compensation would cease upon the date of his termination. If the Company
terminates an Employment Agreement without cause or the Employee terminates
his Employment Agreement for cause (which is limited to the Company's
failure to pay the Employee his monthly compensation) the Company will pay
to the Employee, within 15 days of the effective date of such termination,
all compensation and other benefits that would have accrued and/or been
payable to the Employee during the full term of the Employment Agreement.
In the event of a change in control of the Company, each Employee is
be entitled to receive a lump sum payment equal to $400,000, if the change
of control occurs prior to August 31, 1999, and $430,000 if the change of
control occurs thereafter. A change of control is considered to have
occurred when, as a result of any type of corporate reorganization,
execution of proxies, voting trusts or similar arrangements, a person or
group of persons (other than incumbent officers, directors and principal
shareholders of the Company) acquires sufficient control to elect more than
a majority of the Company's Board of Directors. The Employment Agreements
also include a non-compete and non-disclosure provisions in which each
Employee agrees not to compete with or disclose confidential information
regarding the Company and its business during the term of the Employment
Agreement and for a period of one year thereafter.
Additional Employment Agreements. The Company has entered into an
employment agreement with the Company's general counsel under terms
substantially similar to those discussed above. The Company, through its
wholly owned subsidiaries, has also entered into
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<PAGE>
employment agreements with the following individuals, among others, Steven
Clark, Lawrence DiFrancesco, Jerry W. Tooley and David Putnam.
COMPENSATION PURSUANT TO PLANS
STOCK OPTION PLANS
The Company has one stock option plan entitled the Intercell
Corporation 1995 Compensatory Stock Option Plan (the "1995 Plan"). The
Company has reserved 7,000,000 shares of Common Stock for issuance. In the
1996 fiscal year, the Company granted options to purchase 4,841,180 shares
of Common Stock to directors, officers, employees and consultants of the
Company and its subsidiaries.
EMPLOYEE STOCK OWNERSHIP PLAN
In 1988, CTL established an Employee Stock Ownership Plan (the "ESOP")
and a related trust for substantially all of its employees. To participate
in the ESOP, employees of CTL must have worked at least 1,000 hours during
the year and must be employed at the end of the ESOP year. Participants do
not vest until their third year of employment and then vest 20% per year
through year seven. Employer contributions are voluntary and are generally
based on a percentage of eligible payroll, limited to 15%. The
contributions for 1995 and 1994 were approximately $158,000 and $247,000,
respectively, and were recognized as compensation expense. The Company
discontinued the ESOP in 1996.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not have a compensation committee, all decisions on
the compensation of executive officers and directors of the Company are
made by the full Board of Directors. In the preceding fiscal year, the
following members of the Board of Directors participated in discussions
involving the compensation of executive officers of the Company: Messrs.
Sales, Neild, Smith and Pierce.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, and
the rules thereunder require the Company's officers and directors, and
persons who own more than ten percent of a registered class of the
Company's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission and to furnish the
Company with copies.
Based solely on its review of the copies of the Section 16(a) forms
received by it, or written representations from certain reporting persons,
the Company believes that, during the last fiscal year, all Section 16(a)
filing requirements applicable to its officers, directors and greater than
ten-percent beneficial owners were complied with except that Alan M. Smith
failed
71
<PAGE>
to timely file a report on Form 4 reporting the grant of an option to
purchase 50,000 shares of Common Stock on November 9, 1995 until June 1996.
CERTAIN TRANSACTIONS
As of September 30, 1996, the Company had an outstanding promissory
note due to Jerry W. Tooley, the Chief Financial Officer of Cellular
Magnetics in the amount of $80,000 with an interest rate of 8%, due
annually. The promissory note was issued as part of the consideration paid
for the purchase of M.C. Davis consummated on September 30, 1996. This
note was repaid in October 1996.
The Company had noninterest bearing notes payable totaling $800,000
due to the former owners of M.C. Davis in consideration for the purchase of
M.C. Davis consummated on September 30, 1996. These notes were repaid in
October 1996. See also Note 11 to the Company's Consolidated Financial
Statements and Notes thereto included elsewhere herein.
The Company leases its principal executive office from Alan M. Smith,
Ltd., a company controlled by Alan M. Smith, an executive officer and
director of the Company. The Company leases this office space pursuant to
a lease that expires on July 31, 2001. The monthly lease payments are
$3,000. The Company believes that the lease payments are on terms at least
as favorable as could be obtained from an independent lessor.
On September 3, 1996, the Company granted options to purchase 400,000
shares of Common Stock, with an exercise price of $4.00 per share, to
521508 B.C. Ltd. ("B.C. Ltd.") in return for which B.C. Ltd. agreed to
promote the sale of the Company's products and services in Canada. These
options vest immediately and expire 10 years from the date of grant. The
Company recognized a charge to income of $300,000 resulting from the grant
of these options. B.C. Ltd, which has its own management, is beneficially
owned by the adult children of Mr. Gordon J. Sales and by the father-in-law
of Mr. Terry W. Neild. Both Mr. Sales and Mr. Neild disclaim any direct or
indirect beneficial ownership of, or interest in, B.C. Ltd.
On July 8, 1996, Energy, which does not currently conduct any
operations and whose only assets consist of the Company's Common Stock and
the Company entered into a certain Plan of Liquidating Dissolution (the
"Plan"). The Plan was approved by a majority of the shareholders of Energy
on October 21, 1996 in accordance with the provisions of the Delaware
General Corporation Law. Under the Plan, the Company has agreed to
register the shares of Common Stock issued to Energy over a period of three
years. The 5,412,191 shares of Common Stock owned by Energy will be
distributed to the beneficial owners of the shares of common stock of
Energy as of July 8, 1996, pro-rata as follows: 902,032 on the effective
date of the Company's Registration Statement of which this Prospectus is a
part, 902,032 ninety days thereafter, and approximately 902,032 shares on
or about January 30 and April 30, 1998 and January 31 and April 30, 1999.
72
<PAGE>
B.C. Ltd., 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.
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<PAGE>
BENEFICIAL OWNERSHIP
The following table sets forth certain information regarding the
beneficial ownership of outstanding shares of Common Stock as of April 1,
1997, by (i) each person known by the Company to own beneficially five
percent or more of the outstanding shares of Common Stock, (ii) the
Company's directors, Chief Executive Officer and executive officers whose
total compensation exceeded $100,000 for the last fiscal year, and (iii)
all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Name and Address of Percentage of
Beneficial Owner Number of Shares Class/(6)/
- ---------------- ---------------- ----------
<S> <C> <C>
Energy Corporation
999 West Hastings St., Suite 1750
Vancouver, B.C., V6C 2W2 5,412,191/(1)/ 30.04%
Gordon J. Sales, Chief Executive Officer
999 West Hastings St., Suite 1750
Vancouver, B.C., V6C 2W2 1,383,334/(1)(2)/ 7.68
Terry W. Neild, Executive Vice President
7201 E. Camelback Rd., Suite 250
Scottsdale, AZ 85251 1,383,334/(2)/ 7.68
Alan M. Smith, Chief Financial Officer
999 West Hastings St., Suite 1750
Vancouver, B.C., V6C 2W2 688,000/(3)/ 3.82
Cheri L. Perry
3236 Jellison Street
Wheat Ridge, CO 80033 1,269,340/(4)/ 7.04
Theodore A. Waibel, Director
890 S. Coors Drive
Lakewood, CO 80228 -0-/(5)/ -0-
Charles E. Bauer, Director
31321 Island Drive
Evergreen, CO 80439 -0-/(5)/ -0-
All officers and directors as a group (5 persons) 3,454,668 19.17
</TABLE>
_______________
/(1)/ Mr. Sales is President and a Director of Energy but does not
beneficially own any shares of common stock of Energy. As the sole
director of Energy, Mr. Sales has voting control of the Common Stock held
by Energy. However, Mr. Sales does not own any shares of Energy's common
stock and disclaims any beneficial ownership of the Common Stock held by
Energy. Consequently, its ownership is not attributed to or included in
his ownership. No current shareholder of Energy that will receive shares
of Common Stock pursuant to the Plan of Liquidating Dissolution owns in
excess of 10% of the common stock of Energy and no such current shareholder
is an affiliate of the Company, except as described under "Certain
Transactions." Energy filed a Certificate of Dissolution with the Delaware
Secretary of State on November 13, 1996, and currently acts as a holding
company, whose only assets consist of the Common Stock being held for
distribution to Energy's shareholders.
/(2)/ Includes 650,000 shares of Common Stock subject to presently
exercisable stock options held by Messrs. Sales and Neild. The options are
exercisable at $0.50 per share and expire July 7, 2005 with respect to
500,000 shares and November 9, 2005 with respect to 150,000 shares. The
holders transferred 50,000 out of an original 200,000 stock options issued
to them on November 9, 1995 to Alan M. Smith at no cost.
/(3)/ Includes 500,000 shares of Common Stock subject to presently
exercisable stock options held by Mr. Smith. The options are exercisable
at $0.50 per share and expire on June 12, 2006 with respect to 150,000
shares; $0.50 per share and expire on
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November 9, 2005 with respect to 150,000 shares (transferred to him, at no
cost by certain other shareholders) and at $4.00 per share and expire on
October 21, 2006 with respect to 200,000 shares.
/(4)/ Includes 850,000 shares of Common Stock subject to presently
exercisable stock options held by such individual. The options are
exercisable at $0.50 per share and expire on July 7, 2005 with respect to
500,000 shares and on November 9, 2005 with respect to 150,000 shares; and
at $4.00 per share and expire on October 21, 2006 with respect to 200,000
shares.
/(5)/ The ownership indicated does not include options granted effective
November 22, 1996 to acquire up to one hundred thousand (100,000) shares of
the Common Stock at $4.00 per share. The options vest at the rate of
twenty-five thousand (25,000) shares per year for each year served as a
director. As the options are not presently exercisable, the option holder
is not considered to be the beneficial owner of the shares of Common Stock
underlying the Options. The Options have a term expiring on November 22,
2006.
/(6)/ Based upon 18,019,508 shares issued and outstanding on April 1,
1997.
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SELLING SHAREHOLDERS
This Prospectus covers 6,336,987 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 and the
Selling Shareholders of Energy, (ii) the nature of any position or other
material relationship, if any, which the Selling Shareholders and the
Selling Shareholders of Energy 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 and the Selling
Shareholders of Energy prior to the offering, (iv) the amount of shares of
Common Stock offered by the Selling Shareholders and the Selling
Shareholders of Energy hereby, and (v) the amount and (if one percent or
more) the percentage of shares of the outstanding Common Stock that will be
owned by the Selling Shareholders and the Selling Shareholders of Energy
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 Amount of Amount of
Common Stock Common Stock Warrants Owned Amount Shares/Warrants
Owned Prior to Owned Prior to Prior to of Shares/(4)// To Be Owned
Name of Selling Offering-Series Offering-Series Offering-Series Warrants After the
Shareholder B/(2)/ C/(3)/ B/Series C Offered Offering/(5)/
- ------------------ ------------------- ------------------- ------------------- ------------------- ----------------
<S> <C> <C> <C> <C> <C>
Selling Shareholders of 1,804,064/-0- -0-/3,608,127
Energy/(1)/
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 177,150 155,160 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. 24,801 174,555 15,238/69,231 283,825/84,469 -0-/-0-
Gracechurch & Co. -0- -0- 38,095/-0- 38,095/38,095 -0-/-0-
KA Investments LDC 31,887 -0- 11,429/-0- 43,316/11,429 -0-/-0-
Lake Management LDC -0- 193,950 38,095/38,462 270,507/76,557 -0-/-0-
Lakeshore International -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. 354,300 -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/(6)/
The Gifford Fund Ltd. -0- 193,950 38,095/38,462 270,507/76,557 -0-/-0-
The Matthew Fund N.V. 70,860 193,950 15,238/38,462 318,510/53,700 -0-/-0-
The Otato Limited -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 658,998 2,036,475 1,092,064/745,386 6,336,987/1,837,450 -0-/3,608,127
_______________
</TABLE>
/(1)/ Energy Corporation is a holding company whose only assets are the shares
of the Company's Common Stock being held for distribution to its shareholders.
See "PLAN OF DISTRIBUTION" and "BUSINESS-Recent Acquisitions and Transactions."
Appendix A to this Prospectus contains a listing of the Selling Shareholders of
Energy and the number of shares of Common Stock each shareholder will receive
pursuant to the Plan of Liquidating Dissolution and the amount of such shares
offered by this Prospectus.
/(2)/ Assumes all holders of Series B Preferred Stock convert their shares to
Common Stock one year and one day after July 10, 1996, the last closing date, in
accordance with the conversion formula at a conversion price of $3.9375 per
share. See "DESCRIPTION OF SECURITIES-Preferred Stock").
/(3)/ Assumes all holders of Series C Preferred Stock convert their shares to
Common Stock one year and one day after December 16, 1996, the last closing
date, in accordance with the conversion formula at a conversion price of $3.25
per share. See "DESCRIPTION OF SECURITIES-Preferred Stock").
/(4)/ Includes the number of shares of Common Stock issuable upon conversion of
the Series B Preferred Stock and the Series C Preferred Stock and underlying the
Warrants offered hereby.
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/(5)/ Assumes that all of the shares of Common Stock and Warrants being offered
hereby are sold by such Selling Shareholders unless otherwise indicated. There
is no assurance that the Selling Shareholders will sell any or all of the Common
Stock or Warrants offered pursuant to this Prospectus.
/(6)/ 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 and 600
shares of the Series C Preferred Stock have been reserved for issuance. No
shares of the Series A Preferred Stock are currently outstanding. In
addition, the Company has Warrants outstanding to purchase 1,837,450 shares
of Common Stock.
COMMON STOCK
As of April 1, 1997, there were 18,019,508 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 April 1, 1997, there were 186 shares of Series B Preferred
Stock (the "Series B Preferred Stock") outstanding. Each share of Series B
Preferred Stock is currently convertible at the option of the holder into
Common Stock.
In general, each share of Series B Preferred Stock is convertible into
shares of Common Stock pursuant to the following formula: (1,000) x (N/365)
+ 10,000/Conversion Price (with N being the number of days that have
expired between the date of conversion and July 10, 1996, and the
"Conversion Price" being the lessor of: $3.9375 or 85% of average closing
bid price (the "Closing Bid Price") of the Common Stock for the 5 trading
days immediately preceding the date of conversion). Each holder is also
entitled to convert shares of the Series B Preferred Stock pursuant to the
above formula with the Conversion Price equal to the closing bid price on
the over-the-counter market on the date of conversion. Under the latter
method, the Company may elect to redeem the shares of Series B Preferred
Stock offered for conversion where the Conversion Price is less than
$3.9375 per share of Common Stock on the conversion date pursuant to the
following formula (the "Redemption Formula"):
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Closing Bid Price on Date of Conversion
1,000 x (N/365) + 10,000 x ----------------------------------------
Conversion Price
The Company also has the right to redeem the Series B Preferred Stock on or
after July 11, 1997, provided that the Company purchases Series B Preferred
Stock with an aggregate value $1,500,000 (using the Original Issuance
Price, as defined below), for a price equal to 130% of the Stated Value
(Original Issuance Price plus any accrued and unpaid Premium as defined
below) of the shares of the Series B Preferred Stock being redeemed for the
first 18 months, which percentage is decreased by 5% for every 6 month
period that expires thereafter.
The holders of the Series B Preferred Stock are not entitled to receive
dividends thereon and shall have no voting power whatsoever, except as
otherwise provided by the Colorado Business Corporation Act (which
generally provides voting rights for any action that directly adversely
affects the rights of the holders of the Series B Preferred Stock). In
the event of any liquidation, dissolution or winding up of the Company with
respect to distributions of assets upon liquidation, dissolution or winding
up of the Company's affairs (collectively "Distributions"), the holders of
Series B Preferred Stock shall be entitled to receive, after any
Distribution to senior securities, if any, and prior to any Distribution to
any junior securities (including holders of Common Stock) the sum of
$10,000 per share (the "Original Issuance Price") and an amount equal to
ten percent (10%) of the Original Issuance Price (the "Premium") per annum
for the period that has passed since July 10, 1996. In addition, at the
option of each holder of Series B Preferred Stock, a sale, conveyance or
disposition of substantially all of the assets of the Company or the
effectuation by the Company of a transaction, or series of transactions, in
which more than 50% of the voting power of the Company is disposed of,
shall be deemed to be a liquidation, dissolution or winding up as set forth
above.
So long as shares of Series B Preferred Stock are outstanding, the
Company may not, without the written approval of the holders of at least
75% of the then outstanding shares of Series B Preferred Stock (i) alter or
change the rights, preferences or privileges of the Series B Preferred
Stock or any senior securities, if any, that would adversely effect the
holders of the Series B Preferred Stock, and (ii) create any class or
series of capital stock having a preference over or on parity with the
Series B Preferred Stock with respect to Distributions.
Regulation S Subscription Agreement
The Regulation S Subscription Agreement (the "Subscription Agreement")
under which shares of the Series B Preferred Stock were sold, granted the
holders of the Series B Preferred Stock certain additional rights, which
include, among others, the following:
Subscriber's Rights in the Event Shares Issued with a Restrictive Legend.
Generally, in the event the Company issues shares of Common Stock with a
restrictive legend upon conversion by the holder of Series B Preferred
Stock, then the holder of Common Stock, at its option, may
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<PAGE>
require the Company immediately to either (i) redeem the Series B Preferred
Stock submitted for conversion at the redemption price determined under the
Redemption Formula or (ii) demand (without any other holder's
participation) that the Company file a registration statement under the
Securities Act covering the registration of the Common Stock which has been
issued with such restrictive legend and the Common Stock issuable upon
conversion of such holders's remaining Preferred Stock then outstanding
pursuant to the terms of the Registration Agreement (as defined below).
Payments for Failure to Register. The Company shall pay to a holder who
has demanded registration, as set forth above, an amount equal to five
percent (5%) per month of the Original Issue Price of such holders's shares
of Series B Preferred Stock that were outstanding immediately prior to the
delivery of the notice of conversion, compounded monthly and accruing
daily, payable in cash by the fifth (5th) day of the month following such
demand and the fifth (5th) day of each month thereafter (i) if a demand
registration is not effective, or (ii) if the Company has not re-issued and
delivered to the holder of Series B Preferred Stock shares of Common Stock
without a restrictive legend, whichever is earlier.
Capital Raising Limitations. The Company also agreed to provide the
Series B shareholders with a right of first refusal in proportion to the
percentage of Series B Preferred Stock purchased in the Series B Offering
for any offering conducted within 240 days of July 10, 1996, (the
limitations referred to in this paragraph are collectively referred to as
the "Capital Raising Limitation"). In general, the Capital Raising
Limitation does not apply to any transaction involving the Company's
commercial banking arrangements or issuances of securities in connection
with a merger, consolidation or purchase or sale of assets, or exercise of
options by employees, consultants or directors or any transaction with a
strategic corporate partner.
SERIES C PREFERRED STOCK.
General
As of April 1, 1997, there were 525 shares of Series C Preferred Stock
(the "Series C Preferred Stock") outstanding. Each share of Series C
Preferred Stock is convertible at the option of the holder into Common
Stock as described below during the following periods: (i) up to 20% of the
Series C Preferred Stock initially issued to the holder at any time on and
after April 16, 1997; and (ii) an additional 20% per month on the 16th day
of each month thereafter; provided, however, that the holder of the Series
C Preferred Stock may not convert more than 25% of the aggregate Series C
Preferred Stock initially issued to such holder in any given one month
period beginning on April 16, 1997 and ending on August 16, 1997.
In general, each share of Series C Preferred Stock is convertible into
shares of Common Stock pursuant to the following formula (the "Conversion
Formula"): (800) x (N/365) + 10,000/Conversion Price (with N being the
number of days that have expired between the date of conversion and
December 16, 1996, and the "Conversion Price" being the lessor of: $3.25
(the "Fixed Conversion Price") or 85% of average closing bid price (the
"Closing Bid Price")
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of the Common Stock for the 5 trading days immediately preceding the date
of conversion (the "Variable Conversion Price")). If at the time of
conversion the Variable Conversion Price is less than the Fixed Conversion
Price, the Company may elect, in its sole discretion, to redeem each share
of Series C Preferred Stock offered for conversion in an amount equal to
the Stated Value ($10,000 plus any Accrued Premium, as defined below) x
117.60%.
The Company also has the right to redeem the Series C Preferred Stock on
or after December 16, 1997, provided the Company purchases at least
$1,500,000 of Series C Preferred Stock (based on the Original Issuance
Price defined below) for a price equal to 130% of the Original Issuance
Price for the first 18 months. For each six months thereafter, the
redemption percentage decreases by 5% until the expiration of three years.
Each share of Series C Preferred Stock outstanding on December 16, 1999,
automatically shall either be converted in accordance with the Conversion
Formula or, if the Company provides the holders of the Series C Preferred
Stock with a notice of redemption by December 11, 1999, at the Original
Issuance Price plus an accrued premium of 8% per year (the "Accrued
Premium").
The holders of the Series C Preferred Stock are not entitled to receive
dividends and shall have no voting power, except as otherwise provided by
the Colorado Business Corporation Act. In the event of any liquidation,
dissolution or winding up of the Company (a "Liquidation Event"), the
holders of Series C Preferred Stock shall be entitled to receive, after any
distribution to the holders of the Series B Preferred Stock and other
senior securities, if any, and prior to any Distribution to any junior
securities (including holders of Common Stock) the sum of $10,000 per share
(the "Original Issuance Price") and the Accrued Premium. At the option of
each holder of Series C Preferred Stock, a sale, conveyance or disposition
of substantially all of the assets of the Company or the effectuation by
the Company of a transaction, or series of transactions, in which more than
50% of the voting power of the Company is disposed of, will generally be
deemed to Liquidation Event.
So long as shares of Series C Preferred Stock are outstanding, the
Company may not, without the written approval of the holders of at least
75% of the then outstanding shares of Series C Preferred Stock (i) alter or
change the rights, preferences or privileges of the Series C Preferred
Stock or any senior securities, if any, that would adversely effect the
holders of the Series C Preferred Stock, and (ii) create any class or
series of capital stock having a preference over or on parity with the
Series C Preferred Stock with respect to Distributions; (iii) cause the
holders of the Series C Preferred Stock to be taxed under Section 305 of
the Internal Revenue Code; or (iv) issue any additional shares of Series C
Preferred Stock.
Regulation D Subscription Agreement
The Regulation D Subscription Agreement (the "Subscription Agreement")
under which shares of the Series C Preferred Stock were sold, granted the
holders of the Series C Preferred Stock certain additional rights, which
include, among others, the following:
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Payments for Failure to Register. The Company shall pay to a holder who
has demanded registration an amount in Common Stock equal to two percent
(2%) per month of the amount of Series C Preferred Stock sold to the holder
in the offering, compounded monthly and accruing daily until the
registration statement is declare effective. In addition, if the Company
is unable to issue Common Stock upon conversion of the Series C Preferred
Stock or upon exercise of the Series C Warrants, and is unable to cure the
default within 75 days, the Company shall pay a Conversion Default Payment
equal to: (N/365) x (.24) x the sum of the Original Issuance Price of all
shares of Series C Preferred Stock held by each holder (where N equals the
number of days from the date of default to the date that the Company cures
the default).
Capital Raising Limitations. The Company shall not issue any debt or
equity securities for cash in capital raising transactions ("Future
Offerings") for a period beginning on December 16, 1996 and ending one
hundred twenty (120) days thereafter without obtaining the prior written
approval of the holders holding a majority of the purchase price of Series
C Preferred Stock then outstanding. The Company also agreed to provide the
Series C shareholders with a right of first refusal in proportion to the
percentage of Series C Preferred Stock purchased in the Series C Offering
for any offering conducted within 240 days of December 16, 1996, (the
limitations referred to in this paragraph are collectively referred to as
the "Capital Raising Limitation"). In general, the Capital Raising
Limitation does not apply to any transaction involving the Company's
commercial banking arrangements or issuances of securities in connection
with a merger, consolidation or purchase or sale of assets, or exercise of
options by employees, consultants or directors or any transaction with a
strategic corporate partner.
Miscellaneous Provisions
Assuming all shares of Preferred Stock currently issued and outstanding
are converted during the term of this Offering, the Company will be
authorized to issued up to an additional 10,000,000 shares of Preferred
Stock. The Board of Directors has authority to issue the Preferred Stock
in one or more series and to fix the number of shares constituting any such
series, and the voting powers, designations, preferences, and relative
participating, optional or other special rights and qualifications,
limitations or restrictions thereof, including the dividend rights,
dividend rate, terms of redemptions, redemption prices, conversions and
voting rights, and liquidation preferences, without any further vote or
action by the holders of the Common Stock.
Although the Board of Directors currently has no intention of doing so,
its authority to issue preferred stock, without further vote or action by
the holders of the Common Stock, could be used to discourage attempts by
others to obtain control of the Company through a merger, tender offer,
proxy or consent solicitation, or otherwise, by making such attempts more
difficult to achieve and more costly. The Board of Directors may also
issue preferred stock with voting rights that could adversely affect the
voting power of the then existing holders of Common Stock. There are
currently no agreements or understandings for the issuance of additional
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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 April 1, 1997, 24 persons held Warrants to purchase an
aggregate of 1,092,064 shares of Common Stock at an exercise price of
$3.9375 per share (the "Class B Warrants"), and 10 persons held Warrants to
purchase an aggregate of 745,386 shares of Common Stock at an exercise
price of $3.25 per share (the "Class C Warrants" and together with the
Class B Warrants, the "Warrants"), subject to adjustments in certain
events. The Warrants may be exercised at any time commencing on October
14, 1996 and ending at 5:00 p.m. Eastern time, on July 1, 2001 for the
Class B Warrants and June 1, 1997 and ending at 5:00 p.m. Eastern time on
November 30, 2001 for the Class C Warrants. If all Warrants are exercised,
the Company will receive proceeds of approximately $6,722,506 million.
The Warrants may also be exercised pursuant to a cashless exercise
procedure. The cashless exercise procedure is not available if shares of
Common Stock to be issued upon such exercise would be (i) immediately
transferable, free of restrictive legend under Rule 144 of the Securities
Act; (ii) then registered pursuant to an effective registration statement
under Registration Rights Agreement (hereinafter defined); or (iii)
otherwise registered under Securities Act. The Company has registered all
shares of Common Stock issuable upon exercise of the Warrants for sale
under the Registration Statement of which this Prospectus is a part.
Therefore, the cashless exercise procedure will be unavailable after the
time the Registration Statement is declared effective.
The exercise price and number of shares of Common Stock or other
securities issuable on exercise of the Warrants are subject to adjustment
in certain circumstances, including in the event of a stock dividend,
recapitalization, reorganization, merger or consolidation or the Company's
distribution to the holders of Common Stock cash, evidences of indebtedness
or other securities or assets (other than cash dividends or distributions
payable out of earned surplus or net profits for the current or preceding
year) of the Company.
The Company will not issue fractional shares or scrip representing
fractional shares of Common Stock upon exercise of the Warrant. If, on
exercise of the Warrant, the holder would be entitled to a fractional share
of Common Stock or a right to acquire a fractional share of Common Stock,
such fractional share shall be disregarded and the number of shares of
Common Stock issuable upon conversion shall be the next higher number of
shares.
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Reference is made to the Warrant Agreements (which are filed as exhibits
to the Registration Statement) for a complete description of the terms and
conditions of the Warrants and the description of the Warrants contained
herein is qualified in its entirety by reference thereto.
REGISTRATION RIGHTS AGREEMENT
The Registration Rights Agreements for the Series B Preferred Stock and
the Series C Preferred Stock (the "Registration Agreement") grants certain
registration, demand and piggyback registration rights to the holders of
the Preferred Stock and applies to shares of the Common Stock issuable upon
conversion of the Preferred Stock and upon exercise of the Warrants. The
Common Stock subject to the Registration Agreement is referred to herein as
"Registered Securities."
The Registration Agreement requires the Company to file a registration
statement (the "Initial Registration Statement") by October 8, 1996 (the
"Series B Due Date") and January 16, 1997 which must become effective by
April 16, 1997 (the "Series C Due Date" and together with the Series B Due
Date, the "Due Date"). Any holder of Registerable Securities may elect not
to have their shares included in the registration statement. Such holder
(together with holders owing at least 25% of the Registerable Securities)
may, after expiration of the Due Date, require the Company to effect a
Demand Registration (as defined below) or at any time following the Due
Date to have their shares included in a registration statement subsequently
filed by the Company (a "Piggyback Registration").
If the registration statement is not filed by the Due Date, at least 25%
of the Shareholders owning Registerable Securities may demand that the
Company file a registration statement under the Securities Act (a "Demand
Registration"). To date, neither the holders of the Series B Preferred
Stock or Series C Preferred Stock have requested a Demand Registration.
In the event any Registrable Securities are included in a registration
statement of the Company, to the extent permitted by law, the Company and
the holders of the Preferred Stock and Warrants have agreed to indemnify
and hold harmless each other against any losses, claims, damages, expenses,
or liabilities (joint or several) (hereinafter referred to singularly as
"Loss" and collectively as "Losses") to which they may become subject under
the Securities Act, the Securities Exchange Act of 1934, as amended, or
other federal or state law, insofar as such Losses (or actions in respect
thereof) arise out of or are based upon any of the following statements,
omissions or violations.
If the Initial Registration Statement required is not filed on or prior
to the Due Date or, with respect to holders of the Series B Preferred
Stock, if a Demand Registration is not effective within ninety (90) days of
demand or if the Company fails to respond to any request for information
from the Securities and Exchange Commission related to such registration
statement within fifteen (15) days of such request, then the Company shall
pay to all holders of outstanding Preferred Stock an aggregate amount equal
to two percent (2%) per month of the aggregate
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amount of Preferred Stock sold in the Regulation S Offering or Resolution D
Offering, compounded monthly, and accruing daily, payable in Common Stock.
With respect to Holders of the Series B Preferred Stock, if the Company
is not eligible to effect a registration statement under Form S-1 or SB-2
or S-3 or other appropriate registration statement at the time of a Demand
Registration under the terms of the Registration Agreement, solely through
the act or failure to act by the Company, the Company shall pay the holders
of outstanding Preferred Stock an amount equal to the "Conversion Default
Payment" for each day beyond sixty (60) days on the receipt of the request
for a Demand Registration until such registration statement is effective.
In addition, if, on the date that the Preferred Stock becomes eligible for
conversion into Common Stock or the Warrants are exercisable, the Common
Stock is not listed on the OTC Bulletin Board or other national stock
exchange or automated quotation system, then the Company shall pay to all
holders of outstanding Preferred Stock an aggregate penalty equal to the
amount of the Conversion Default Payment.
The Conversion Default Payment is equal to the amount of (N/365) x (.24)
x the sum of the Original Issuance Price of all shares of Series B
Preferred Stock held by each holder (where N equals the number of days from
the date of default to the date that the Company cures the default).
TRANSFER AGENT AND REGISTRANT
The transfer agent and registrar for the Common Stock is Corporate Stock
Transfer, Inc., 870 Seventeenth Street, Suite 2350, Denver, Colorado
80202.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
22,552,431 shares of Common Stock (giving effect to the exercise of
1,837,450 Warrants, but assuming no exercise of outstanding stock options).
Of these shares, all of the 6,336,987 shares sold in the Offering will
be freely transferable by persons other than "affiliates" of the Company,
without restriction or further restriction under the Securities Act.
An aggregate of 1,654,668 shares of Common Stock are "restricted" or
"control" securities within the meaning of Rule 144 under the Securities
Act and may not be sold in the absence of registration under the Securities
Act unless an exemption from registration is available, including the
exemption contained in Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned his or her shares
for at least two years, including an "affiliate" of the Company (as that
term is defined under the Securities Act), is entitled to sell, within any
three-month period, the number of shares that does not exceed the greater
of (i) 1% of the then outstanding shares of Common Stock or (ii) the
average weekly trading volume of the then outstanding shares during the
four calendar weeks preceding each such sale. A person
86
<PAGE>
(or persons whose shares are aggregated) who is not deemed an "affiliate"
of the Company and who has beneficially owned shares for at least three
years is entitled to sell such shares under Rule 144 without regard to the
volume limitations described above. Affiliates, including members of the
Board of Directors and senior management, continue to be subject to such
limitations.
The Company has filed a registration statement on Form S-8 to
register 3,581,180 shares of Common Stock. The Company has reserved
7,000,000 shares of Common Stock under its 1995 Compensatory Stock Option
Plan. As of January 31, 1997, options to purchase 4,396,000 shares of
Common Stock were outstanding.
Sales of substantial amounts of Common Stock in the public
market, or the perception that such sales could occur, could have an
adverse impact on the market price of the Common Stock.
LEGAL MATTERS
Certain legal matters with respect to the Common Stock will be
passed upon for the Company by Kutak Rock, Denver, Colorado.
The statements in the Prospectus under the captions "RISK
FACTORS-Uncertainty Regarding Protection of Proprietary Rights," "-Rights
to PI Technology," "-License Rights to PI Technology" and "BUSINESS-
Intellectual Property" have been reviewed by Michael A. Glenn, Esq., with
respect to the PI Technology, and Meschkow & Gresham, P.L.C., with respect
to the Antenna Technology, each of whom serves as patent counsel for the
Company, and are included herein in reliance upon that review.
EXPERTS
The financial statements and schedules of Intercell Corporation
as of September 30, 1996 and 1995 and for the year ended September 30, 1996
and the eleven-month period ended September 30, 1995 and the financial
statements for A.C. Magnetics, Inc. doing business as M.C. Davis Co. Inc.,
as of December 31, 1995 and September 30, 1996 and for the years ended
December 31, 1994 and 1995 and the nine-month period ended September 30,
1996, have been included herein and in the registration statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of
said firm as experts in accounting and auditing.
The consolidated financial statements of the Company as of
October 31, 1994 included in this Prospectus and Registration Statement
have been audited by Mark Shelley, CPA, to the extent and for the periods
indicated in their report, and are included in reliance upon such reports
given upon the authority of such firm as experts in accounting and
auditing.
87
<PAGE>
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 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.
88
<PAGE>
GLOSSARY
The following are definitions of certain technical terms used in
this Prospectus.
"AM" amplitude modulation, which means the encoding of an
electromagnetic wave by variation of its amplitude in accordance with its
input signal.
"Antenna Systems" means the Company's products developed using
the Antenna Technology.
"Antenna Technology" means the technology included within the
scope of patent applications assigned to the Company from Arizona State
University.
"Analog Transmission" means the transmission of information in
continuous form which is transmitted by electrical signals. This is the
traditional method of modulating radio signals so that they can carry
information. AM (amplitude modulation) and FM (frequency modulation) are
the two most common methods of analog modulation.
"Anode" means a positively charged electrode.
"Ball Grid Array" or "BGA" means an advanced IC package in which
the silicon die is attached to a high density substrate which is in turn
placed on an array of small solder balls forming the base of the package.
The Ball Grid Array is soldered directly to an electronic circuit, without
using pins or wire leads coming out of the perimeter of the package.
"Band Width" means a relative range of frequencies that can carry
a signal without distortion on a transmission medium.
"Cathode" means a negatively charged electrode.
"Die" see "IC" and "IC Package."
"Dielectric" means a nonconductive material, such as a plastic
film or coating used to provide an insulating layer on a printed circuit or
other substrate.
"Digital Transmission" means the conversion of voice
communications to computer binary language of zeros and ones. Digital
transmission offers a cleaner signal and solves many of the problems that
plague analog such as fading and static.
"Electrode" means a conductor through which an electric current
passes.
"Electron Gun" is an electron-emitting cathode and its
surrounding assembly for directing, controlling and forcing a stream of
electrons to a target. It is sold separately for use as an electron source
in medical linear accelerators for generation of high energy x-rays.
89
<PAGE>
"Electron Power Tubes" or "Electron Tubes" are enclosed tubes, in
which electrons act as the principal conductors of current between at least
two electrodes. Electron tubes fall into two categories, oscillators and
amplifiers. Oscillators are typically magnetrons and power grid tubes
(triodes and tetrodes) and amplifiers are klystrons and traveling wave
tubes.
"External Antenna" means the Company's Antenna System that will
be used as an aftermarket "retrofit" on existing cellular phones.
"Flexible Circuit" is a circuit manufactured from a Flexible
Laminate. Flexible circuits can be single-sided, double-sided or multi-
layer.
"FM" means frequency modulation, which operates through the
encoding of a electromagnetic wave by variation of its frequency in
accordance with its input signal.
"Frequency" means a measure of the energy, as one or more waves
per second, in an electrical or lightwave information signal. A signal's
frequency is stated in either cycles-per-second or Hertz.
"GHz" means gigahertz (one billion cycles per second).
"Hertz" or "Hz" means a measurement of electromagnetic energy,
equivalent to one "wave" or one cycle per second.
"High Density Substrate" are electronic circuits manufactured
from thin film flexible laminates with very thin circuit traces down to 1
millimeter (.001").
"High Power and High Frequency Triode Tubes and Tetrode Tubes" is
an electron tube with three electrodes: an anode, a cathode and a
controlling grid. Tetrode Tubes are similar to triode tubes except that it
has four electrodes: an anode, cathode, a control grid and an additional
grid. Tetrodes and triodes are used in RF induction heaters in the steel
industry, AM-FM radio communications, plastic sealing units, wood gluing
units, silicone crystal growing, induction heat treating of gears and other
metals requiring hardening, environmental vibration tables and numerous
other applications.
"IC" and "IC Package" means an integrated circuit, which is a
type of semiconductor in which a number of transistors and other elements
are combined to form a more complicated circuit. These elements are
fabricated in a small chip of silicon, known as a "silicon die," which is
attached to a substrate and then encased in plastic, ceramic or other
advanced forms of packaging to prevent damage and facilitate handling. This
package is known as an IC package.
"Interconnect" and "Interconnect Products" means a circuit used
to provide electrical connection between components and electronic systems
and also as a substrate to support electronic devices. Interconnect
products are those products or methods of connection used to
90
<PAGE>
connect electrical components (e.g., a computer chip) to other substrates
(e.g., a printed circuit board) which are required to operate electronic
equipment.
"Internal Antenna" means the Company's Antenna System that is
internally incorporated into cellular phones and has no external antenna.
"KHz" means kilohertz (one thousand cycles per second).
"Klystron Tube" is an electron tube in which bunching of
electrons is produced by electric fields, which are then used for the
amplification of microwave energy. Klystron tubes (both external cavity
and internal cavity) are commonly used in UHF television transmission,
medical and nonmedical accelerators, and navigational equipment.
"Linear Accelerator" is a device in which charged particles are
accelerated in a straight line by successive impulses from a series of
electric fields. One of the principal uses of linear accelerators is in
the medical field for the generation of high energy x-rays for therapeutic
treatment of tumors.
"Magnetron Tube" is a vacuum tube in which the flow of electrons
is controlled by an exterior applied magnetic field to generate power at
microwave frequencies (400 MHz to 18 GHz). The principal use of magnetrons
is in industrial microwave cooking and heating units. Some of the
applications are: drying foods such as pasta; pre-cooking bacon, potato
chips and snacks; thawing of meats and butter; processing chicken: dewater
oil and heat, and reprocess asphalt. Pulsed X-Band Magnetrons are used in
radar and accelerator applications.
"MHz" means megahertz (one million cycles per second).
"Micro-Strip Antenna" means an antenna that does not use wires
like a conventional antenna, but rather transmits data through a
transmission line configuration which consists of a substrate.
"Multi-Chip Module" or "MCM" is a high performance IC package
containing more than one silicon die on a single high density substrate.
"Near Field Radiation" means radiation within a few feet of the
Antenna.
"OEMs" means original equipment manufacturers.
"Panel" as used in the electronic industry means the substrate
used to mount, package or attach electronic devices.
"Particle Interconnect Products" means products produced using
the PI Technology.
91
<PAGE>
"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
Particle Interconnect Products.
"RF" means radio frequency.
"Silicon Die" see "IC" above.
"Substrate" means a material that provides a supporting surface.
"Vacuum Tube" means an electron tube having an internal vacuum
sufficiently high to permit electrons to move with low interaction with any
remaining gas molecules.
"UHF" means ultra high frequency.
"VHF" means very high frequency.
"Wireless" means a radio-based system allowing transmission of
telephone and/or data signals through the air without a physical
connection, such as a metal wire or fiber optic cable.
"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.
92
<PAGE>
APPENDIX A
<TABLE>
<CAPTION>
Number of Shares Shares to be
Name of owned Prior to Amount of Shares Owned After this
Selling Shareholder Offering/(1)/ to be Offered/(2)/ Offering/(3)/
------------------- ---------------- ------------------ ----------------
<S> <C> <C> <C>
504804 B C Ltd/(4)/ 270,634 82,544 188,090
The Big D's Antiques 167 56 111
Joyce Babel 334 111 223
Jean M Baier 334 111 223
Roger Barnett 4,833 1,611 3,222
John F Bauer & Shirley M Bauer JTWROS 167 56 111
Darren Begley 86,798 26,666 60,132
c/o Modern Industries Inc
Leonardo S Bilancia & Phillys R Bilancia JTWROS 834 278 556
David Blank/*/ 94,999 6,666 88,333
c/o Modern Industries
Gerard D Blank 167 56 111
Diane A Blanks & Tim Blanks JTWROS 167 56 111
Orlando A Bove & Dorothy Bove JTWROS 667 222 445
Olivia J. Bradley 417 139 278
Albert H Bradshaw & Carolyn Bradshaw JTWROS 34 11 23
Robert Branch 42 14 28
David Brandman 542 181 361
Robert L Brath 680 227 453
John Bridgeman 3,334 1,111 2,223
C/O Modern Industries
Linda Bridges 292 97 195
Harry Z Bristman 33,333 11,111 22,222
William F Broderick & Violet A Broderick JTWROS 834 278 556
Shirley K Brown Admin Est Richard Dick Reilly 6,250 2,083 4,167
C/O Joe Hoff
Richard Bullock Ttee The Blonde Bear Trust/(4)/ 119,047 39,682 79,365
Douglas Burnett 6,667 2,222 4,445
Guy W Bush & Genevieve Mae Bush JTWROS 9 3 6
Guy W Bush c/f Gregory Walter Bush Utma Il 9 3 6
</TABLE>
A-1
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Shares to be
Name of owned Prior to Amount of Shares Owned After this
Selling Shareholder Offering /(1)/ to be Offered /(2)/ Offering /(3)/
------------------- -------------- ------------------- ----------------
<S> <C> <C> <C>
Guy W Bush c/f Kevin Troy Bush Utma Il 9 3 6
Guy W Bush c/f Suzanne Mae Bush Utma Il 9 3 6
Joseph Butz 42 14 28
California Tube Laboratory Inc Stock Bonus Employee 593,843 156,703 437,140
Stock Ownership Plan & Trust
c/o James Martin/Tony Wynn TTEES
California Tube Laboratory Inc Money Purchase Pension 375,328 125,097 250,231
Employee Stock Ownership Plan & Trust
C/O James Martin/Tony Wynn TTEES
California Tube Laboratory, Inc. ESOP Trust 75,000 25,000 50,000
Adriana M. Cantelli 30 10 20
Raymond A. Cantelli 30 10 20
Ronald Q. Cantelli 30 10 20
Steve M. Carpenter 30 10 20
Cede & Co/(5)/ 7,466,019 432,810 7,033,209
Charmirathor Inc 31,446 5,555 25,891
c/o Mira M Theisen
Ben Chee 1,667 556 1,111
James S. Clifton 188 63 125
Lee C Cook & Dorrit B Book JTWROS 668 223 445
Corporate Advisors Inc 100,003 1 100,002
Charles T. Cummings 59 20 39
Keith P Cyr & Terri A Cyr JTWROS 400 133 267
Julian Daggett & D Sharon Grant JTWROS 1,334 445 889
Benjamin G Dettling 15,001 5,000 10,001
John Dickman 99,998 33,329 66,669
D & M Reilly 3,334 1,111 2,223
c/o Modern Industries
Barbara J Drew Ttee Barbara J Drew Rev Liv Tr Ua Dtd 300,870 61,457 239,323
Jan 30 1987
John W. Dye & Florence A. Dye Jt Ten 30 10 20
David Edmiston 334 111 223
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION> Number of Shares Shares to be
Name of owned Prior to Amount of Shares Owned After
Selling Shareholder Offering/(1)/ to be Offered/(2)/ Offering/(3)/
------------------- ---------------- ------------------ -------------
<S> <C> <C> <C>
Tom Ehrichs 125 42 83
The Royal Bank Of Scotland (NASSAU) Limited Ttee Emmen Trust 71,093 23,695 47,398
c/o Modern Industries
Richard J Euler 667 222 445
Shirley Ann Farrell & Michael Farrell JTWROS 167 56 111
First United Trust 16,666 5,555 11,111
Constance Fischer 16,666 5,555 11,111
William Jeffrey Fitzhugh 134 45 89
Paul A Fiumara & Mary L Fiumara 334 111 223
Frank Flournoy 4,757 1,586 3,171
Jack C Fong 334 111 223
Charles D Foster & M Dennis Stratton JTWROS 300 100 200
Leon F French 7,834 2,611 5,223
Emma Frizzell 167 56 111
Muriel Fulton 58,000 13,332 44,668
The Gap Trust 191,661 63,881 127,780
Kenneth J. Garber 42 14 28
Paul Gill 42 14 28
Charlotte Given 13,334 4,444 8,890
c/o Terry Neild
Judith A Gomolski & Adrian Gomolski JTWROS 67 22 45
David Graff 89,998 29,996 60,002
Nathan Greene 454 151 303
Marion Greenler 59 20 39
Randy Hall 334 111 223
Lori J R Harris & Alice Jean Barnette JTWROS 334 111 223
Philip Hermsen & Joann Hermsen JTWROS 167 56 111
Hilad Holdings Limited 33,334 11,110 22,224
Harold Hofmann 334 111 223
</TABLE>
A-3
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Shares to be
Name of owned Prior to Amount of Shares Owned After this
Selling Shareholder Offering /(1)/ to be Offered /(2)/ Offering /(3)/
------------------- ---------------- ------------------- ----------------
<S> <C> <C> <C>
Richard Paul Hourdequin & Angela M Hourdequin 67 22 45
JTWROS
Cynthia W Jansen 334 111 223
David A Jansen 334 111 223
Janina A Johns 668 223 445
Leon W Jones & Michelle S Jones JTWROS 1,167 389 778
Mary Ann Keeley & Robert M Keeley JTWROS 334 111 223
Ethel A Kelley & James J Kelley JTWROS 667 222 445
Ethel Ann Kelley 667 222 445
Mahjabin Q Kidwai 63 21 42
Barbara C Klaver 1,334 445 889
Nicolaas M Klaver 1,334 445 889
Earl Komarin & Chester Komarin JTWROS 334 111 223
Anthony Kovanic Sr & Anna C Kovanic Ttees Anthony P 2,500 833 1,667
Kovanic Sr Tr Ua Dtd Oct 14 1993
Kray & Co 25 8 17
Shellie Kremer 200 67 133
Edgar L Lancaster & Minnie L Lancaster JTWROS 167 56 111
Richard A Lane 3,334 1,111 2,223
Richard J. Linnevers 84 28 56
James 1d Litwinovich & Sally A Litwinovich 2,334 778 1,556
George Lycas 84 28 56
Robert E. MacNab 59 20 39
Madison Foundation 8,334 2,778 5,556
James Martin/*/ 94,999 6,666 88,333
c/o Modern Industries
Nelson M Martin & Dustin T Martin JTWROS 501 167 334
Albert Maurer 334 111 223
Patricia D Maynord 80 27 53
James F McCabe Jr 1,667 556 1,111
Dave McConkey 42 14 28
</TABLE>
A-4
<PAGE>
<TABLE>
Shares to be
<CAPTION> Number of Shares Owned After
Name owned Prior to Amount of this
Selling Shareholder Offering/(1)/ Shares/(2)/ Offering/(3)/
------------------- ------------ ----------- -------------
<S> <C> <C> <C>
Elizabeth McCrea 334 111 223
Robert Peter Meeske 17 6 11
c/o Jack Meier
Thomas F Metzger & Eileen J Metzger JTWROS 1,667 556 1,111
Paul Metzinger/**/ 83,199 27,730 55,469
Mary Ann Miller & Thomas S Miller JTWROS 300 100 200
Randall J Milligan 25 8 17
J Patrick Moss 16,667 5,555 11,112
Steve Mulder 84 28 56
Les Nance 167 56 111
Charles P Neild 213,329 71,103 142,226
Gordon J Nevers 13,334 4,444 8,890
c/o Modern Industries
Charles Newell 19,027 6,342 12,685
Nancy Nottingham 16,666 5,555 11,111
Betty Fae Nusinow & Bernard Nusinow JTWROS 167 56 111
Carol K Owens & Thomas F Owens JTWROS 167 56 111
William H Payne 167 56 111
Michael Pedone 67 22 45
Marshall Pekarsky 334 111 223
PhilaDep & Co/(6)/ 2,704,554 10,949 2,693,605
Pittco 557 14 543
c/o Rafco Financial Corp./(7)/
Albert Pogorelec 5,000 1,667 3,333
Randall Pullen 273,517 91,172 182,345
The Royal Bank Of Scotland (NASSAU) Limited Ttee Radium Trust 66,665 22,219 44,446
c/o Modern Industries
Gordon L Raphael & Mindy L Raphael JTWROS 334 111 223
Bruce Reed 188 63 125
D Reilly & M Reilly JTWROS 16,666 5,555 11,111
</TABLE>
A-5
<PAGE>
<TABLE>
<CAPTION> Number of Shares Shares to be
Name of owned Prior to Amount of Shares Owned After This
Selling Shareholder Offering/(1)/ to be Offered/(2)/ Offering/(3)/
------------------- ------------- ------------------ ----------------
<S> <C> <C> <C>
Joseph Reilly & Celine C Reilly Ttees Revocable Family Tr Ua Dtd May 15, 6,250 2,083 4,167
1990
Reilly Minerals Ltd 31,249 10,415 20,834
c/o Joe Hoff
Rexco 334 111 223
Marj Rielly & Dean Rielly JTWROS 334 111 223
Radley Robinson 67 22 45
Rocha Holdings Ltd 79,999 26,664 53,335
Bert Roosen 4,252 1,417 2,835
Lou L. Ross/*/ 273,517 91,172 182,345
Royal Bank Of Scotland (NASSAU) Ttee Windemere Trust 10,886 3,628 7,258
c/o Modern Industries
Groves & Sanders 2,501 834 1,667
Arlene Schott 6,868 2,289 4,579
Glenda Schroeder 42 14 28
Royal Bank Of Scotland (NASSAU) Ttee Radium Trust 13,334 4,444 8,890
c/o Modern Industries
Royal Bank Of Scotland (NASSAU) Ttee Emmen Trust 14,219 4,739 9,480
c/o Modern Industries
The Royal Bank Of Scotland (NASSAU) Limited Ttee Windermere Trust 54,426 18,140 36,286
c/o Modern Industries
Paul D Scott & Weldonna Drew-Scott JTWROS 2,334 778 1,556
Christine A Sedlak & Kenneth T Hassel JTWROS 166 55 111
Pushpa Sharan 1,000 333 667
Gregory M. Sprigg & Nancee K. Sprigg Jt Ten 42 14 28
St James Group Ltd 29,999 9,999 20,000
Glen Standefer 42 14 28
Alex L Stein 3,334 1,111 2,223
Donald William Stumpf 667 222 445
Tracey L Sturm & Dan Dale Sturm JTWROS 2,267 756 1,511
Charles George Suchy 1,666 555 1,111
</TABLE>
A-6
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Shares to be
Name of owned Prior to Amount of Shares Owned After this
Selling Shareholder Offering /(1)/ to be Offered /(2)/ Offering /(3)/
------------------- -------------- ------------------- ----------------
<S> <C> <C> <C>
Joseph Sudol & Ann Sudol JTWROS 334 111 223
Sunlight Systems Ltd 283,330 94,434 188,896
M K Theodoratus & Robert J Theodoratus JTWROS 334 111 223
Marshall Thompson 602 201 401
Edward Threet 3,334 1,111 2,223
Joe Tinianow 167 56 111
Joe Tinianow & Betty Tinianow Jt Ten 67 22 45
Albert Toboll 334 111 223
Thinh Trinh 2,801 934 1,867
Richard D Tuttle & Carol Lynn Tuttle Community Property 334 111 223
James M Tyler 6,667 2,222 4,445
James Tyler 60,000 19,998 40,002
Nuchanath Vandenbosch & Alfred Vandenbosch JTWROS 500 167 333
Kaylene F Veron 42 14 28
Charles F Vogdes 1,667 556 1,111
Kurt Waber 109,998 19,997 90,001
James P Walterhoefer 334 111 223
Carol Weber 667 222 445
Jerome Wenger 33,333 11,110 22,223
Donald Westphal 67 22 45
Robert Alan Wheeler 249 83 166
James P Wherley & Vivian F Wherley JTWROS 334 111 223
G & B Wilde 4,001 1,334 2,667
Bruce W Willett c/f Andrew N Willett Ugma Ar 167 56 111
Chris Wilson & Tiffany Wilson JTWROS 334 111 223
Christopher D Wilson & Tiffany J Wilson JTWROS 668 223 445
Frances Wilson 167 56 111
John E Wright Retirement Plan 3,334 1,111 2,223
Mary Wulff 6,250 2,083 4,167
c/o Joe Hoff
</TABLE>
A-7
<PAGE>
<TABLE>
<CAPTION> Number of Shares Shares to be
Name owned Prior to Amount of Shares Owned After this
Selling Shareholder Offering/(1)/ to be Offered/(2)/ Offering/(3)/
------------------- ---------------- ------------------ ---------------
<S> <C> <C> <C>
Anthony Wynn/*/ 94,999 6,666 88,333
c/o Modern Industries
Yorkton Securities Inc 3,359 1,120 2,239
Leona C Zinky Ttee Leona C Zinky Living Trust Ua Dtd May 4, 1988 1,167 389 778
Blane L Zirilli 10,009 3,336 6,673
Totals 14,929,688 1,803,943/(8)/ 13,125,745
</TABLE>
/*/Currently serves as an employee or consultant to the Company or its
subsidiaries.
/**/Currently serves as the Company's general counsel.
/(1)/ The shares reflected in this Column also include shares of the Company
that are presently owned by the Selling Shareholders of Energy (prior to
distribution), as required by the rules and regulations of the Securities and
Exchange Commission. The total number of shares to be distributed to the Selling
Shareholders of Energy and which may be resold by them remains 5,412,191. As
previously disclosed, these shares will be distributed to the Selling
Shareholders of Energy in six equal installments over a three year period.
/(2)/ Indicates shares registered in this Offering for resale by the Selling
Shareholders of Energy, which will be distributed to such Selling Shareholder of
Energy in two equal installments.
/(3)/ Indicates shares which will be distributed to the Selling Shareholder of
Energy in four equal installments on January 31 and April 30 for each of the
years 1998 and 1999, which are not registered in this Offering but which may be
sold by the Selling Shareholder of Energy after distribution pursuant to Rule
144 of the Securities Act of 1933.
/(4)/ The beneficial owners of these entities are affiliated with certain of the
Company's executive officers. See "CERTAIN TRANSACTIONS."
/(5)/ Cede & Co. is a registered Depository Company holding shares for broker-
dealers and others, which in turn hold them for their customers. The amount
shown here includes shares of the Company held by Cede & Co. The actual number
of shares of Energy Corporation held by Cede & Co., upon which the Company's
shares will be distributed for resale by the beneficial owners is 1,298,600
shares.
/(6)/ PhilaDep & Co. is a registered Depository Company holding shares for
broker-dealers and others, which in turn hold them for their customers. The
amount shown includes shares of the Company held by PhilaDep & Co. The actual
number of shares of Energy Corporation held by PhilaDep & Co., upon which the
Company's shares will be distributed for resale by the beneficial owners, is
32,852 shares.
/(7)/ Pittco is a registered Depository Company holding shares for broker-
dealers and others, which in turn hold them for their customers. The amount
shown includes shares of the Company held by Pittco. The actual number of shares
of Energy Corporation held by Pittco, upon which the Company's shares will be
distributed for resale by the beneficial owners, is 42 shares.
/(8)/ Difference between 1,804,064 and 1,803,943 is due to rounding.
A-8
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 1996,
THE ELEVEN MONTH PERIOD ENDED SEPTEMBER 30, 1995,
AND THE YEAR ENDED OCTOBER 31, 1994
INTERCELL CORPORATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Reports............... F-3 F-4
Consolidated Balance Sheets - September 30,
1996 and September 30, 1995................ F-5
Consolidated Statements of Operations -
Year ended September 30, 1996, Eleven-month
period ended September 30, 1995 and the
Year ended October 31, 1994................ F-6
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-7
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-8
Notes to Consolidated Financial Statements.. F-9
Schedule II - Valuation and Qualifying
Accounts*.................................. F-28
Condensed Consolidated Balance Sheets -
December 31 and September 30, 1996
(unaudited)................................ F-29
Condensed Consolidated Statement of
Operations - Three-month period ended
December 31, 1996 and 1995 (unaudited)..... F-30
Condensed Consolidated Statement of Cash
Flows - Three-month period ended
December 31, 1996 and 1995 (unaudited)..... F-31
Notes to Condensed Consolidated Financial
Statements (unaudited)..................... F-32
</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-1
<PAGE>
AC MAGNETICS, INC. DBA
M.C. DAVIS CO., INC.
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report.................... F-33
Consolidated Balance Sheets - December 31,
1995 and September 30, 1996.................... F-34
Consolidated Statements of Operations - For
the years ended December 31, 1994 and
December 31, 1995 and the Nine months ended
September 30, 1996............................. F-35
Consolidated Statements of Stockholders' Equity -
For the years ended December 31, 1994 and
December 31, 1995 and the Nine months ended
September 30, 1996............................. F-36
Consolidated Statements of Cash Flows - For
the years ended December 31, 1994 and
December 31, 1995 and the Nine months ended
September 30, 1996............................. F-37
Notes to Consolidated Financial Statements...... F-38
</TABLE>
PRO FORMA STATEMENT OF OPERATIONS
INTERCELL CORPORATION AND AC MAGNETICS INC.
<TABLE>
<CAPTION>
<S> <C>
Unaudited Pro Forma Combined Statement of
Operations for Intercell Corporation and
AC Magnetics, Inc. for the Year ended
September 30, 1996............................. F-44
Note to Unaudited Pro Forma Combined Statement
of Operations.................................. F-45
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Intercell Corporation:
We have audited the accompanying consolidated balance sheets of Intercell
Corporation and subsidiaries (the Company), formerly Modern Industries, Inc. and
subsidiaries, as of September 30, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year ended
September 30, 1996, and for the eleven-month period ended September 30, 1995. In
connection with our audits of the aforementioned consolidated financial
statements, we also have audited the financial statement schedule as listed in
the accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Intercell
Corporation and subsidiaries as of September 30, 1996 and 1995, and the results
of their operations and their cash flows for the year ended September 30, 1996,
and for the eleven-month period ended September 30, 1995, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
San Jose, California
December 6, 1996
F-3
<PAGE>
MARK SHELLEY, CPA
110 S. Mesa Drive #31
Mesa, Arizona 85210
(602) 833-4054
INDEPENDENT AUDITOR'S REPORT
The Shareholders and Board of Directors
Intercell Corporation:
I have audited the accompanying consolidated statements of
operations, stockholders' equity, and cash flows for the year ended October 31,
1994 of Intercell Corporation and subsidiary, formerly Modern Industries, Inc.
and subsidiaries, (the Company). These consolidated financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these consolidated financial statements based on my audit.
I have conducted my audit in accordance with generally accepted
auditing standards. Those standards require that I plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. I believe that my audit provides a reasonable basis for my
opinion.
In my opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the results of operations and
cash flows for the year ended October 31, 1994 of Intercell Corporation and
subsidiary in conformity with generally accepted accounting principles.
This updated report above and corresponding financial statements
do not include the balance sheet of the Company as of October 31, 1994. This
balance sheet is not required to be included in the current 1996 filings. This
balance sheet was included in previous filings of the Company. At those times an
unqualified opinion was given for the October 31, 1994 balance sheet.
/s/ Mark Shelley, CPA
March 14, 1995
Updated December 31, 1996
F-4
<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-5
<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-6
<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>
Warrants
Convertible to
preferred stock acquire Common stock Additional
----------------------- common ----------------------- paid-in Deferred Accumulated
Shares Amount stock Shares Amount capital compensation deficit
-------- ------------ --------- ---------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of October 31,
1993 - $ - - 2,352,081 $ 7,000 242,000 - (454,000)
Conversion of debt to
equity - - - 676,777 2,000 473,000 - -
Shares issued in exchange
for prepaid promotion - - - 35,637 - 50,000 - -
Shares issued in exchange
for consulting services - - - 14,255 - 20,000 - -
Acquisition of California
Tube Laboratory, Inc. - - - 762,031 2,000 1,067,000 - -
Employment contract buy out - - - 222,572 1,000 311,000 - -
Shares issued in exchange
for microwave technology - - - 178,188 500 250,000 - -
Shares issued in exchange
for services - - - 178,188 500 69,000 - -
Purchase of treasury stock - - - - - (206,000) - -
Net loss - - - - - - - (362,000)
-------- ----------- --------- ---------- ----------- ---------- ------------ -----------
Balances as of October 31,
1994 - - - 4,419,729 13,000 2,276,000 - (816,000)
Shares issued in lieu of
interest payment to
related party - - - 17,819 - 13,000 - -
Shares issued in exchange
for investment in
American Microcell - - - 712,751 2,000 498,000 - -
Shares issued in private
placement - - - 85,530 - 60,000 - -
Contribution to ESOP - - - 176,362 1,000 246,000 - -
Conversion of additional
paid-in capital to common
stock - - - - 3,093,000 (3,093,000) - -
Acquisition of Intercell 210,000 250,000 - 4,997,053 - - - -
Net loss - - - - - - - (1,321,000)
-------- ----------- --------- ---------- ----------- ---------- ------------ -----------
Balances as of September
30, 1995 210,000 250,000 - 10,409,244 3,109,000 - - (2,137,000)
Repurchase of shares of
Series A preferred stock (210,000) (250,000) - - - - - -
Shares of Series B
preferred stock and
warrants issued in private
placement, net of issuance
costs of $1,100,000 1,000 7,030,000 1,870,000 - - - - -
Shares issued in exchange
for land - - - 400,000 1,000,000 - - -
Contribution to ESOP - - - 126,761 158,000 - - -
Shares issued to effect
business combination with
Particle Interconnect,
Inc. treated as an
immaterial pooling - - - 1,400,000 8,000 - - (159,000)
Deferred compensation
related to stock option
grants - - - - 4,017,000 - (4,017,000) -
Amortization of deferred
compensation - - - - - - 3,686,000 -
Exercise of stock options - - - 2,295,180 1,342,000 - - -
Conversion of Series B
preferred stock to common
stock (213) (1,497,000) - 588,880 1,497,000 - - -
Shares issued in exchange
for services - - - 236,386 56,000 - - -
Shares to be issued for
acquisition of M.C. Davis - - - 277,778 1,000,000 - - -
Net loss - - - - - - - (5,283,000)
-------- ----------- --------- ---------- ----------- ---------- ------------ -----------
Balances as of September
30, 1996 787 $ 5,533,000 1,870,000 15,734,229 $12,187,000 - (331,000) (7,579,000)
======== =========== ========= ========== =========== ========== ============ ===========
Total
stockholders'
equity
(deficit)
-------------
<S> <C>
Balances as of October 31,
1993 (205,000)
Conversion of debt to
equity 475,000
Shares issued in exchange
for prepaid promotion 50,000
Shares issued in exchange
for consulting services 20,000
Acquisition of California
Tube Laboratory, Inc. 1,069,000
Employment contract buy out 312,000
Shares issued in exchange
for microwave technology 250,000
Shares issued in exchange
for services 69,500
Purchase of treasury stock (206,000)
Net loss (362,000)
---------
Balances as of October 31,
1994 1,473,000
Shares issued in lieu of
interest payment to
related party 13,000
Shares issued in exchange
for investment in
American Microcell 500,000
Shares issued in private
placement 60,000
Contribution to ESOP 247,000
Conversion of additional
paid-in capital to common
stock -
Acquisition of Intercell 250,000
Net loss (1,321,000)
----------
Balances as of September
30, 1995 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 (151,000)
Deferred compensation
related to stock option
grants -
Amortization of deferred
compensation 3,686,000
Exercise of stock options 1,342,000
Conversion of Series B
preferred stock to common
stock -
Shares issued in exchange
for services 56,000
Shares to be issued for
acquisition of M.C. Davis 1,000,000
Net loss (5,283,000)
----------
Balances as of September
30, 1996 11,680,000
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<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-8
<PAGE>
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, which
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>
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 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.
F-9
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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>
<CAPTION>
<S> <C>
Assets acquired $ 273,000
Liabilities assumed (424,000)
Stockholders' deficit $(151,000)
</TABLE>
F-10
<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>
<CAPTION>
<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-11
<PAGE>
INTERCELL CORPORATION AND SUBSIDIAIRES
Notes to Consolidated Financial Statements
Change in Fiscal Year
During the eleven-month period ended September 30, 1995, Intercell changed
its fiscal year-end to September 30. Previously, Intercell had an October
31 year-end. The accompanying consolidated financial statements include
the results of operations and cash flows of Intercell for the year ended
September 30, 1996, the eleven-month period ended September 30, 1995, and
the year ended October 31, 1994.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant
intercompany transactions and accounts have been eliminated in
consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Cash Equivalents and Short-Term Investments
Cash equivalents are highly liquid investments with a maturity of less than
three months at the date of purchase. Short-term investments consist of
certificates of deposit and short-term debt securities with maturities
greater than three months and less than one year. As of September 30, 1996,
the Company's investments consisted of U.S. government treasury bills of
$3,925,000 and certificates of deposit of $126,000. As of September 30,
1996, investment securities of $988,000 and $3,063,000 are classified as
cash equivalents and short-term investment, respectively.
Investments in debt securities are classified as "available for sale."
Such investments are recorded at fair value, as determined from quoted
market prices, and the cost of securities sold is determined based on the
specific identification method. Unrealized gains and losses, if any, are
reported as a component of stockholders' equity. Unrealized gains and
losses were not significant for any period presented.
Revenue Recognition
Revenues are recognized when earned, generally upon product shipment.
Provision is made for estimated customer returns and warranty costs at the
time of sale.
F-12
<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-13
<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-14
<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
========== =======
Property, Plant, and Equipment
A summary of property, plant, and equipment follows:
September 30,
-------------------------
1996 1995
---------- -------
Furniture and fixtures $ 339,000 76,000
Equipment and machinery 845,000 690,000
Land and buildings 282,000 230,000
Leasehold improvements 71,000 -
Vehicles 23,000 -
---------- -------
1,560,000 996,000
Less accumulated depreciation 142,000 111,000
---------- -------
$1,418,000 885,000
========== =======
</TABLE>
F-15
<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 eleven-month period ended
September 30, 1995, cash paid by the Company for interest was $87,000 and
$15,000, respectively. Cash paid by the Company for interest in 1994 was
not significant.
F-16
<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-17
<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-18
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Long-Term Debt
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
September 30,
----------------
1996 1995
-------- ------
<S> <C> <C>
Note payable to bank; interest at prime plus 2%; due
April 4, 1997; collateralized by various assets; repaid
in October 1996 $100,000 -
Note payable; noninterest bearing; due June 1998;
collateralized by building 47,000 -
Note payable to bank; interest at 9.75%;
due in 36 monthly payments of $481;
collateralized by a vehicle; repaid in October 1996 15,000 -
Note payable to bank; interest at 9.75%; due May 2008;
secured by real property; repaid in April 1996 - 50,000
Other 44,000 -
-------- ------
206,000 50,000
Less current portion 120,000 2,000
-------- ------
Long-term debt, net $ 86,000 48,000
======== ======
Future maturities of long-term debt as of September 30, 1996, are as follows:
Year ending
September 30,
-------------
1997 $120,000
1998 86,000
--------
Total $206,000
========
</TABLE>
F-19
<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
F-20
<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>
Options outstanding
Shares -------------------------
available Price
for grant Shares per share
----------- ----------- ------------
<S> <C> <C> <C>
Balances as of July 1995 5,000,000 - $ -
Options granted (1,600,000) 1,600,000 0.50
---------- ---------- ------------
Balances as of September 30, 1995 3,400,000 1,600,000 0.50
Additional shares authorized 2,000,000 - -
Options granted (4,841,000) 4,841,000 0.50 - 4.00
Options canceled 150,000 (150,000) 0.50
Options exercised - (2,295,000) 0.50 - 2.00
---------- ---------- ------------
Balances as of September 30, 1996 709,000 3,996,000 0.50 - 4.00
========== ==========
</TABLE>
As of September 30, 1996, options to purchase approximately 3,366,000
shares of common stock were exercisable.
The Company recorded deferred compensation of $4,017,000 for the difference
between the exercise price and the fair value of the common stock related
to stock options granted in 1996. Certain of the options vested immediately
and, therefore, the related compensation expense of $3,686,000 was recorded
at the grant date. The remaining deferred compensation will be amortized
over the vesting period of the options, generally four years.
(8) EMPLOYEE STOCK OWNERSHIP PLAN
CTL has established an Employee Stock Ownership Plan (the Employee Plan)
and a related trust for substantially all of its eligible employees. To
participate in the Employee Plan, employees
F-21
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
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.
F-22
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
F-23
<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:
F-24
<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
---------- --------
Less valuation allowance 2,345,000 433,000
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
F-25
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Note 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.
F-26
<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.
F-27
<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-28
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
December 31, 1996 September 30, 1996
------------------ -------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 8,116,000 $ 4,224,000
Short term investments 975,000 3,063,000
Accounts receivable, net 810,000 746,000
Inventories 1,156,000 1,066,000
Prepaid expenses and other current assets 141,000 102,000
Investment land held for sale 1,424,000 1,424,000
Total current assets 12,622,000 10,625,000
Property, plant and equipment, net 1,638,000 1,418,000
Goodwill and other intangible assets, net 1,510,000 1,583,000
Other assets 213,000 200,000
------------ ------------
Total assets $ 15,983,000 $ 13,826,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable $ - $ 266,000
Notes payable to related parties - 932,000
Current portion of long-term debt 15,000 120,000
Accounts payable and accrued liabilities 858,000 742,000
------------ ------------
Total current liabilities 873,000 2,060,000
Long term debt, less current portion 29,000 86,000
------------ ------------
Total liabilities 902,000 2,146,000
Commitments
Stockholders' equity:
Convertible preferred stock: 10,000,000 shares authorized
Series B; 228 and 787 issued and outstanding as of
December 31, 1996 and September 30, 1996 respectively 1,603,000 5,533,000
Series C; 525 and 0 issued and outstanding as of
December 31, 1996 and September 30, 1996 respectively 3,492,000 -
Warrants to acquire common stock 3,051,000 1,870,000
Common stock; no par value; 100,000,000 shares authorized
17,663,459 and 15,734,229 shares outstanding as of
December 31, 1996 and September 30, 1996 respectively 16,160,000 12,187,000
Deferred compensation (254,000) (331,000)
Accumulated deficit (8,971,000) (7,579,000)
------------ ------------
Total stockholders' equity 15,081,000 11,680,000
------------ ------------
$ 15,983,000 $ 13,826,000
============ ============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
F-29
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31
1996 1995
------------ -----------
<S> <C> <C>
Net sales $ 1,599,000 $ 853,000
Cost of goods sold 1,143,000 571,000
------------ -----------
Gross profits 456,000 282,000
Selling, general and administrative expenses 1,534,000 541,000
Research and development 374,000 12,000
------------ -----------
Operating loss (1,452,000) (271,000)
Other income (expense) 60,000 (20,000)
Loss before income taxes (1,392,000) (291,000)
Income taxes - -
------------ -----------
Net loss $ (1,392,000) $ (291,000)
Deemed Preferred Stock Dividend relating to
in-the-money conversion terms 221,000 -
------------ -----------
Accretion on Preferred Stock 139,000 -
Net loss applicable to common stockholders $ (1,752,000) $ (291,000)
============ ===========
Net loss per common share $ (.11) $ (0.03)
============ ===========
Weighted average number of shares of
common stock outstanding 16,527,588 10,457,547
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-30
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31
1996 1995
------------- -----------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (1,392,000) $ (291,000)
Adjustments to reconcile net loss to cash (used in)
provided by operating activities:
Depreciation and amortization 143,000 11,000
Amortization of deferred compensation 77,000 210,000
Common stock issued for interest 43,000 -
Changes in operating assets and liabilities
Accounts receivable (64,000) 127,000
Inventory (90,000) (6,000)
Prepaid expenses (39,000) 3,000
Current liabilities 116,000 6,000
------------- -----------
Net cash provided by (used in) operating activities (1,206,000) 60,000
Cash flows from investing activities
Proceeds from sales and maturities of short-term investments 2,088,000 -
Acquisition of property, plant and equipment (290,000) (15,000)
Acquisition of other assets (13,000) -
------------- -----------
Net cash provided by (used in) investing activities 1,785,000 (15,000)
------------- -----------
Cash flows from financing activities
Proceeds from issuance of common stock - 39,000
Proceeds from issuance of Series C preferred stock
and warrants 4,673,000 -
Repayments of notes payable (1,198,000) (86,000)
Repayments of long term debt (162,000) (1,000)
------------- -----------
Net cash provided by (used in) financing activities 3,313,000 (48,000)
------------- -----------
Net increase (decrease) in cash and cash equivalents 3,892,000 (3,000)
Cash and cash equivalents at beginning of period 4,224,000 57,000
------------- -----------
Cash and cash equivalents at end of period $ 8,116,000 $ 54,000
Cash paid during the period for interest $ - $ 25,000
============= ===========
Non-cash investing and financing activities
Series B preferred stock converted to common $ 3,930,000 $ -
============= ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-31
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Intercell Corporation and its wholly owned subsidiaries (the "Company").
All intercompany transactions have been eliminated.
The condensed consolidated financial statements are unaudited (except for
the balance sheet information as of September 30, 1996, which is derived
from the Company's audited financial statements) and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the
financial position and operating results for the periods presented. The
condensed consolidated financial statements should be read in conjunction
with the September 30, 1996 audited financial statements of Intercell
Corporation and the notes thereto. The results of operations for the three
months ended December 31, 1996 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 during each period presented. Common stock
equivalent shares consist of stock options that are computed using the
treasury stock method.
3. INVENTORIES
Inventories consist of: December 31, 1996 September 30, 1996
Raw materials $ 483,000 $ 422,000
Work in process 482,000 453,000
Finished goods 191,000 191,000
$1,156,000 $1,066,000
4. SERIES C PREFERRED SHARES
In December 1996, the Company issued 525 shares of no par value Series C
preferred stock (Series C preferred) and detachable warrants in a private
placement for $4,672,500 (net of issuance costs of $577,500).
Each share of Series C preferred is convertible into common stock at the
exchange rate in effect at the time of the conversion, as described in the
preferred stock agreements, and is subject to appropriate adjustment for
common stock splits, stock dividends, and other similar transactions.
Conversion of the Series C preferred is automatic upon the expiration of
three years from the original date of issuance. At the date of issuance,
the exchange rate was less than the prevailing market rate, resulting in a
deemed dividend of $932,000, of which $81,000 has been recognized on a pro
rata basis in the first quarter of the 1997 fiscal year. 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 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.
F-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
AC Magnetics, Inc.:
We have audited the accompanying consolidated balance sheets of
AC Magnetics, Inc. and subsidiary as of December 31, 1995 and September 30,
1996 and the related consolidated statements of operations, stockholders'
equity and cash flows for the years ended December 31, 1994 and 1995 and
the nine-month period ended September 30, 1996. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audits 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
AC Magnetics, Inc. and subsidiary as of December 31, 1995 and September 30,
1996 and the results of their operations and their cash flows for the years
ended December 31, 1994 and 1995 and the nine-month period ended September
30, 1996 in conformity with generally accepted accounting principles.
/S/ KPMG PEAT MARWICK LLP
Phoenix, Arizona
November 21, 1996
F-33
<PAGE>
AC MAGNETICS, INC.
dba M.C. DAVIS CO., INC.
Consolidated Balance Sheets
December 31, 1995 and September 30, 1996
<TABLE>
<CAPTION>
Assets December 31, 1995 September 30, 1996
------ ----------------- ------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 66,309 $111,821
Accounts receivable, net of allowance of $0 at
December 31, 1995 and $2,938 at September 30, 1996 125,799 155,922
Inventories 224,062 265,390
Prepaid expenses 7,127 10,591
----------- -----------
Total current assets 423,297 543,724
Property, plant and equipment, net 311,792 297,821
$735,089 $841,545
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current portion of long-term debt $ 67,133 $105,000
Note payable to related party 80,000 80,000
Accounts payable 34,195 98,268
Accrued wages 20,336 9,432
Other accrued liabilities 7,032 335
----------- -----------
Total current liabilities 208,696 293,035
Long-term debt, less current portion 47,000 56,964
Total liabilities 255,696 349,999
Subsequent event (note 9)
Stockholders' equity:
Common stock, no par value per share. Authorized
1,000,000 shares; one vote per share; 1,000 shares
issued and outstanding 200,000 200,000
Retained earnings 279,393 291,546
----------- -----------
Total stockholders' equity 479,393 491,546
----------- -----------
$735,089 $841,545
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-34
<PAGE>
AC MAGNETICS, INC.
dba M.C. DAVIS CO., INC.
Consolidated Statements of Operations
Years ended December 31, 1994 and 1995 and
nine-month period ended September 30, 1996
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1994 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
Revenue $1,513,844 $1,702,951 $1,338,401
Cost of goods sold 1,293,014 1,248,653 924,969
------------ ------------ -------------
Gross margin 220,830 454,298 413,432
Operating expenses:
Selling, general and administrative 226,146 244,848 286,659
------------ ------------ -------------
Total operating expenses 226,146 244,848 286,659
Operating income (loss) (5,316) 209,450 126,773
Other income (expense):
Interest income -- 609 1,176
Interest expense (28,717) (23,767) (9,880)
Other, net (11,233) (8,896) (363)
------------ ------------ -------------
Total other expense (39,950) (32,054) (9,067)
Net income (loss) $ (45,266) $ 177,396 $ 117,706
============ ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-35
<PAGE>
AC MAGNETICS, INC.
dba M.C. DAVIS CO., INC.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1994 and 1995 and
nine-month period ended September 30, 1996
<TABLE>
<CAPTION>
Common Stock
------------ Total
Retained Stockholders'
Shares Amount Earnings Equity
------ ------ -------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1994 1,000 $200,000 $ 147,263 $ 347,263
Net Loss -- -- (45,266) (45,266)
Balance at December 31, 1994 1,000 200,000 101,997 301,997
Net Income -- -- 177,396 177,396
Balance at December 31, 1995 1,000 200,000 279,393 479,393
Net Income -- -- 117,706 117,706
Dividends paid ($106 per share) -- -- (105,553) (105,553)
Balance at September 30, 1996 1,000 $200,000 $ 291,546 $ 491,546
</TABLE>
See accompanying notes to consolidated financial statements.
F-36
<PAGE>
AC MAGNETICS, INC.
dba M.C. DAVIS CO., INC.
Consolidated Statements of Cash Flows
Years ended December 31, 1994 and 1995 and
nine-month period ended September 30, 1996
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1994 1994 1994
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(45,266) 177,396 117,706
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 48,647 51,221 41,588
(Gain) loss on sale of property, plant and
equipment 7,454 (1,945) (11,660)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 58,045 13,202 (30,123)
Decrease (increase) in inventories (304) 23,461 (41,328)
Decrease (increase) in prepaid expenses
and other assets (39,029) 66,624 (3,464)
Increase (decrease) in accounts payable (25,849) (68,610) 64,073
Increase (decrease) in accrued liabilities (3,378) 2,938 (17,601)
--------- --------- ---------
Net cash provided by operating activities 320 264,287 119,191
--------- --------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment (78,182) (30,860) (36,529 )
Proceeds from sale of property, plant and
equipment 7,000 4,000 20,572
--------- --------- ---------
Net cash used in investing activities (71,182) (26,860) (15,957)
--------- --------- ---------
Cash flows from financing activities:
Repayment of long-term debt (1,417) (161,167) (67,133)
Repayment of related party notes payable -- (10,000) --
Borrowing from financial institutions 67,000 -- 114,964
Payment of dividends -- -- (105,553)
--------- --------- ---------
Net cash provided by (used in) financing
activities 65,583 (171,167) (57,722)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents (5,279) 66,260 45,512
Cash and cash equivalents, beginning of period 5,328 49 66,309
--------- --------- ---------
Cash and cash equivalents, end of period $ 49 $ 66,309 $ 111,821
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for: Interest $ 21,172 $ 27,958 $ 13,234
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE>
AC MAGNETICS, INC.
dba M.C. DAVIS CO., INC.
Notes to Consolidated Financial Statements
1. ORGANIZATION
AC Magnetics, Inc. dba M.C. Davis Company (the Company) manufactures and
markets miniature and sub-miniature custom passive electronics for use by
original equipment manufacturers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of AC Magnetics,
Inc., dba M.C. Davis Company and its wholly owned subsidiary, M.C. Davis
International S.P. de C.B. All significant intercompany balances and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
All highly liquid securities with original maturities of three months or
less at the date of purchase are considered to be cash equivalents.
Concentrations of Credit Risk
The Company sells products to customers, primarily electronic equipment
manufacturers, and extends credit based on an evaluation of the customer's
financial condition, generally without requiring collateral. Exposure to
losses on receivables is principally dependent on each customer's financial
condition. The Company monitors its exposure for credit losses and
maintains allowances for anticipated losses.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreciated using
an accelerated method over the estimated useful lives of the assets.
Buildings are depreciated over thirty-one years; equipment, fixtures and
vehicles are depreciated over five to seven years.
F-38
<PAGE>
AC MAGNETICS, INC.
dba M.C. DAVIS CO., INC.
Notes to Consolidated Financial Statements
Revenue Recognition
The Company recognizes revenue from sales when a product is shipped.
Income Taxes
The stockholders have elected that the Company be taxed as a Subchapter "S"
Corporation (S Corporation) for federal and State of Arizona income tax
purposes. All tax attributes of the Company are passed through to the
stockholders and related income taxes are to be paid by the stockholders.
Therefore, no provision or liability for federal or State of Arizona
corporate income taxes is reflected in the accompanying financial
statements.
Foreign Currency Translation
The functional currency for the Company's foreign operations is their local
currency. Assets and liabilities of foreign operations are denominated in
U.S. dollars, and revenue and expenses are translated into U.S. dollars
using average exchange rates for the year. Transaction gains and losses
are included in operations and were not significant for the years ended
December 31, 1994 and 1995 and for the nine-month period ended September
30, 1996.
Use of Estimates
The preparation of 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
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-39
<PAGE>
AC MAGNETICS, INC.
dba M.C. DAVIS CO., INC.
Notes to Consolidated Financial Statements
3. INVENTORIES
Inventories are summarized as follows:
December 31, September 30,
1995 1996
------------ -------------
Raw materials $ 169,363 $ 186,273
Work in process 36,257 38,000
Finished goods 43,442 71,117
Less: reserve for obsolescence (25,000) (30,000)
-------- --------
$ 224,062 $ 265,390
======== ========
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows:
December 31 September 30
1995 1996
----------- -----------
Land $ 5,000 $ 5,000
Buildings 222,000 222,000
Machinery and equipment 374,899 370,984
Office furniture and fixtures 14,512 19,132
Vehicles 17,550 22,718
--------- ----------
Total 633,961 639,834
Less accumulated depreciation (322,169) (342,013)
--------- ---------
$ 311,792 $ 297,821
========= =========
F-40
<PAGE>
AC MAGNETICS, INC.
dba M.C. DAVIS CO., INC.
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
5. LONG-TERM DEBT
Long-term debt is summarized as follows:
December 31, September 30,
1995 1996
------------ -------------
<S> <C> <C>
Note payable, bank, interest at prime
plus 2%; due April 4, 1997;
collateralized by various assets;
repaid October 1996 $ -- $100,000
Note payable, bank, interest at 9.75%;
due in 36 monthly payments of $481;
collateralized by a vehicle; repaid
October 1996 -- 14,964
Note payable, bank, interest at prime
plus 2%; due August 14, 1996;
24 monthly payments of $9,615;
collateralized by real property deed
of trust 40,769 --
Note payable, no interest; due
June 1998; collateralized by building 67,000 47,000
Other 6,364
-------- --------
114,133 161,964
======== ========
Less current portion 67,133 105,000
Long-term debt, net of current portion $ 47,000 $ 56,964
======== ========
The future maturities of long-term debt after September 30, 1996 are
as follows:
Years Ending September 30:
1997 $105,000
1998 56,964
--------
Total $161,964
</TABLE>
F-41
<PAGE>
6. RELATED PARTY TRANSACTIONS
On November 1, 1993, the Chairman of the Board of Directors of the Company
loaned $90,000 to the Company. The loan bears interest at 10% with
interest and principal payable upon demand. The loan is unsecured. At
December 31, 1994 and 1995 and September 30, 1996, the loan principal
balances were $90,000, $80,000 and $80,000, respectively. Interest is paid
upon demand and unpaid accrued interest is included in other accrued
liabilities. The loan and interest was paid in October 1996.
7. MAJOR CUSTOMERS
One customer accounted for 33%, 25% and 23% of revenue for the fiscal
periods ended December 31, 1994, December 31, 1995 and September 30, 1996,
respectively. Another customer accounted for 18%, 11% and 18% of revenue
for the fiscal periods ended December 31, 1994, December 31, 1995 and
September 30, 1996, respectively. A third and fourth customer accounted
for 14% and 13%, respectively, of revenue for the fiscal year ended
December 31, 1995.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments," requires that the Company disclose
estimated fair values for its financial instruments. The following summary
presents a description of the methodologies and assumptions used to
determine such amounts.
Limitations
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument;
they are subjective in nature and involve uncertainties, matters of
judgment and, therefore, cannot be determined with precision. These
estimates do not reflect any premium or discount that could result from
offering for sale, at one time, the Company's entire holdings of a
particular instrument. Changes in assumptions could significantly affect
these estimates.
Since the fair value is estimated as of September 30, 1996, the amounts
that will actually be realized or paid at settlement or maturity of the
instruments could be significantly different.
Accounts Receivable, Accounts Payable and Accrued Liabilities
The carrying amount is assumed to be the fair value because of the short-
term maturity of these instruments.
F-42
<PAGE>
Long-Term Debt
The carrying value of the Company's long-term debt approximates the terms
in the marketplace at which they could be replaced. Therefore, the fair
value approximates the carrying value of these financial instruments.
9. SUBSEQUENT EVENT
Effective September 30, 1996, the Company was purchased by Intercell
Corporation in a stock for stock transaction. Each share of common stock
of the Company was exchanged for 277.78 shares of Intercell common stock.
In addition, the stockholders of the Company received $800,000 in cash from
Intercell. e
F-43
<PAGE>
INTERCELL CORPORATION AND AC MAGNETICS, INC.
Unaudited Pro Forma Combined Statement of Operations
The following unaudited pro forma combined statement of operations
gives effect to the acquisition by Intercell Corporation ("Intercell" or
the "Company") of AC Magnetics, Inc. dba M.C. Davis Co., Inc. ("M.C.
Davis") in a transaction accounted for by the purchase method. The
unaudited pro forma combined statement of operations includes the
consolidated statement of operations of Intercell for the year ended
September 30, 1996, and M.C. Davis for the twelve months ended September
30, 1996. The twelve months ended September 30, 1996 for M.C. Davis
includes the period from January 1, 1996 through September 30, 1996,
appearing elsewhere in this Form 8-K, and the three-month period from
October 1, 1995 through December 31, 1995. Pro forma adjustments have
been made to give effect to the September 30, 1996 acquisition of M.C.
Davis as if the acquisition had occurred on October 1, 1995.
The following unaudited pro forma combined statement of operations is
not necessarily indicative of the future results of operations of the
Company or the results of operations which would have resulted had the
Company and M.C. Davis been combined during the period presented. In
addition, the pro forma results are not intended to be a projection of
future results. The unaudited pro forma combined statement of operations
should be read in conjunction with the consolidated financial statements
of the Company and subsidiaries and the consolidated financial statements
of M.C. Davis and subsidiary appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Intercell M.C. Davis
Year ended Period ended Period ended Pro forma Pro forma
September 30, 1996 September 30, 1996 December 31, 1995 adjustments/(1)/ combined
------------------ ------------------ ----------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Net Revenue $ 3,405,000 $1,338,000 $421,000 -- $ 5,164,000
Cost of sales 2,830,000 925,000 286,000 -- 4,041,000
----------- ---------- -------- --------- ------------
Gross profit 575,000 413,000 135,000 -- 1,123,000
Selling, general and
administrative expenses 5,241,000 287,000 81,000 307,000 5,916,000
----------- ---------- -------- --------- -------------
Operating profit (loss) (4,666,000) 126,000 54,000 (307,000) (4,793,000)
Interest expense, net 87,000 9,000 8,000 -- 104,000
=========== ========== ======== ========= =============
Net income (loss) $(4,753,000) $ 117,000 $ 46,000 $(307,000) $ (4,897,000)
Net loss per share (0.41)
=============
Shares used computing
per share information 12,057,565
=============
</TABLE>
See Note to Unaudited Pro Forma Combined Statement of Operations.
F-44
<PAGE>
INTERCELL CORPORATION AND AC MAGNETICS, INC.
Note to Unaudited Pro Forma Combined Statement of Operations
(1) Pro Forma Adjustments:
The total purchase price of $1,800,000 has been allocated on a
preliminary basis to the net assets acquired based on their relative
estimated fair values as follows:
Current assets $ 544,000
Property, plant and equipment 383,000
Goodwill and other intangibles 1,223,000
Current liabilities assumed (293,000)
Other liabilities assumed (57,000)
----------
Total purchase price $1,800,000
==========
Purchase price to be paid in cash $ 800,000
Fair market value of stock to be issued 1,000,000
----------
$1,800,000
==========
The pro forma adjustments applied to the historical statement of
operations to arrive at the pro forma combined statement of operations
reflects amortization expense of $262,000 related to goodwill and other
intangibles resulting from the acquisition of M.C. Davis over its estimated
useful life. The pro forma adjustments also reflect depreciation expenses
of $45,000 related to fixed assets acquired in the M.C. Davis acquisition
over their estimated useful lives.
F-45
<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............. 13
USE OF PROCEEDS.................. 13
PRICE RANGE OF COMMON STOCK...... 14
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS..................... 16
BUSINESS......................... 28
MANAGEMENT....................... 61
EXECUTIVE COMPENSATION........... 67
CERTAIN TRANSACTIONS............. 72
BENEFICIAL OWNERSHIP............. 74
SELLING SHAREHOLDERS............. 76
DESCRIPTION OF SECURITIES........ 79
SHARES ELIGIBLE FOR FUTURE SALE.. 86
LEGAL MATTERS.................... 87
EXPERTS 87
AVAILABLE INFORMATION............ 88
ADDITIONAL INFORMATION........... 88
GLOSSARY......................... 89
INDEX TO FINANCIAL STATEMENTS... F-1
</TABLE>
INTERCELL CORPORATION
Common Stock
Common Stock Purchase Warrants
----------------
PROSPECTUS
----------------
April __, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses to be borne by the
registrant, other than underwriting discounts and commissions, in
connection with the issuance and distribution of the Common Stock
hereunder.
<TABLE>
<CAPTION>
Payable by the
Registrant
--------------
<S> <C>
SEC registration fee.......... $ 7,698.00
Accounting fees and expenses.. 55,000.00
Legal fees and expenses....... 64,000.00
Printing costs................ 25,000.00
Blue Sky fees and expenses.... 10,000.00
Miscellaneous................. 2,000.00
-----------
Total.................... $163,698.00
</TABLE>
The foregoing items, except for the SEC registration fee are
estimated.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Company made the following unregistered sales of its securities
from January 31, 1994 through January 31, 1997./(1)/
<TABLE>
<CAPTION>
TITLE OF
DATE OF SALE SECURITIES AMOUNT CONSIDERATION PURCHASER
- --------------- --------------------- --------- ---------------------------- -------------------------------------------------
<S> <C> <C> <C> <C>
1) 12/30/94 Preferred Series A 210,000 Equipment valued at Asia Skylink Corp.
and Warrants 210,000 $2,100,000.00
2) 7/7/95 Common 5,412,191 Assets & Liabilities of Energy Corporation
Energy Corporation
Recorded at $3,093,000
3) 7/7/95 Options to Purchase 1,600,000 Agreement to serve as Terry W. Neild
Common Shares directors, officers and Gordon J. Sales
counsel to Registrant Mark S. Pierce
Corporate Advisors, Inc.
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
4) 11/9/95 Options to Purchase 700,000 Agreement to serve as Gordon J. Sales
Common Stock, at Officers, Directors & Mark S. Pierce
an exercise price of Counsel to the Company Terry W. Neild
$.50 per share Corporate Advisors, Inc.
5) 11/9/95 Options to Purchase 265,000 Agreement to Continue 10 Employees of California Tube
Common Stock, at Employment at CTL and to Laboratories, Inc.;
an exercise price of provide consulting services S. Wilde and Alan M. Smith
$.50 per share to the Company
6) 12/22/95 Options to Purchase 716,180 Agreement to Provide 1. Communique Media Services, Ltd.
Common Stock, at Consulting Services to the 2. Financial Power Network, Inc.
an exercise price of Company 3. James O. Gray
$.50 per share 4. Admiral House
7) 2/1/96 Options to Purchase 800,000 Agreement to provide James O. Gray
Common Stock, at consulting services to the L.L. Ross
an exercise price of Company and for past Wendy S. Gobbett
$.75 per share for services of consultants
650,000 shares and
$1.25 per share for
150,000 shares
8) 3/3/96 Common Stock 96,606 Legal Services - valued at Corporate Consultancy Services, Ltd.
$39,751
9) 3/28/96 Common Stock 126,761 Contribution to ESOP California Tube Laboratory, Inc.
valued at $1.25 per share Stock Bonus Employee Stock
for $158,451.15 Ownership Plan & Trust
10) 3/29/96 Options to Purchase 550,000 Agreement to provide Quidquia Management
Common Stock, at consulting services to the Rocha Holdings, Ltd.
an exercise price of Company
$.50 per share for
300,000 shares and
$.75 per share for
250,000 shares
11) 5/9/96 Common Stock 400,000 Conveyance of Land, Sonora Station, Ltd.
Recorded at $1,000,000 Muriel J. Fulton
Barbara J. Drew
Darren Begley
12) 6/3/96 Options to Purchase 380,000 As consideration for past David Blank
Common Stock, at services as employees of James Martin
an exercise price of CTL Lance Mullins
$.50 per share Tony Wynn
13) 6/12/96 Options to Purchase 400,000 As consideration for Jeffrey Halbirt
Common Stock, at consulting services and as Alan M. Smith
an exercise price of an incentive to remain an
$.50 per share officer of the Company
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C> <C> <C>
14) 5/17/96 Common Stock 14,780 Legal Services - valued at Charmirathor, Inc.
$16,554
15) 7/10/96 Series B Preferred 1,000 $ 10,000,000 Accredited Investors who are Non-U.S. Persons (23)
Stock and attached
Warrants to acquire 761,905
shares of Common
Stock
16) 7/10/96 Warrants to acquire 330,159 Services as Placement Swartz Investments, LLC.
Common Stock, at a Agent
price of $3.9375 per
share
17) 9/3/96 Common Stock 1,400,000 Exchange of shares of Five (5) shareholders of Particle
Particle Interconnect, Inc. Interconnect, Inc.
in a Triangular Merger,
which was accounted for
as an immaterial pooling
of interests.
18) 9/3/96 Options to Purchase 800,000 Agreement to serve as Alan M. Smith
Common Stock, at Officers, Counsel or Corporate Advisors, Inc.
an exercise price of Consultant to Company 521508 B.C. Ltd.
$4.00 per share
19) 9/3/96 Options to Purchase 230,000 Agreement to serve as Certain employees of PI Corp.
Common Stock, at officers or employees of
an exercise price of the Company.
$4.00 per share
20) 10/8/96 Common Stock 277,778 Exchange of shares of Three (3) shareholders of
A.C. Magnetics, Inc. in A.C. Magnetics, Inc.
Triangular Merger, with a
total share value of
$1,000,000.
21) 12/16/96 Series C Preferred 525 $ 5,250,000 Accredited Investors (11)
Stock and attached 530,771
Warrants to acquire
Common Stock
22) 12/16/96 Warrants to acquire 214,615 Services as Placement Swartz Investments, LLC and
Common Stock Agent Assignees
- -----------------
</TABLE>
/(1)/ During the period commencing September, 1996 through January 31, 1997,
certain holders of the Series B Preferred Stock, pursuant to the Certificate of
Designation, converted a total of 810 shares of Series B Preferred Stock into
2,636,530 shares of Common Stock which were issued without registration pursuant
to the exemption provided by Regulation S.
II-3
<PAGE>
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.
EXEMPTION FROM REGISTRATION CLAIMED
All of the sales by the Company of its unregistered securities (except
for those described in Item 15, which were made pursuant to Regulation S
and those described in Item 21, which were made pursuant to Rule 506 of
Regulation D adopted under the Securities Act of 1933, as amended) were
made by Registrant in reliance upon Section 4(2) of the Securities Act of
1933, as amended. All of the individuals who purchased the unregistered
securities were all known to the Company and its management, through pre-
existing business relationships, as long standing business associates,
friends, employees, relatives or members of the immediate family of
management. All purchasers were provided access to all material
information which they requested and all information necessary to verify
such information and were afforded access to management of the Company in
connection with their purchases. All purchasers of the unregistered
securities acquired such securities for investment and not with a view
toward distribution, acknowledging such intent to the Company. All
certificates or agreements representing such securities that were issued
contained restrictive legends, prohibiting further transfer of the
certificates or agreements representing such securities, without such
securities either being first registered or otherwise exempt from
registration in any further resale or disposition.
The sale of One Thousand (1,000) convertible Class B Preferred Stock was
made pursuant to and in compliance with Regulation S. The offering was
restricted to and entirely purchased by Twenty-Three (23) institutional
accredited investors. Extensive documentation was prepared and utilized to
insure compliance with the terms, conditions and provisions of Regulation
S. All purchasers and the Registrant were represented by their own
independent counsel, tax advisors, accounting firms and other advisors. The
Company undertook and implemented control procedures to assure compliance
with the terms and conditions of Regulation S.
The sale of Five Hundred and Twenty-Five (525) Convertible Class C
Preferred Stock was made pursuant to and in compliance with Rule 506 of
Regulation D. The offering was restricted to and entirely purchased by
eleven institutional accredited investors. Extensive documentation was
prepared and utilized to insure compliance with the terms, conditions and
II-4
<PAGE>
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.
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1/(1)/ Agreement and Plan of Reorganization, dated July 7, 1995,
between the Company and Modern Industries, Inc.
2.2/(4)/ Plan and Agreement of Merger dated September 3, 1996, by and
between Particle Interconnect, Inc., Particle Interconnect
Corporation and the Company.
2.3/(5)/ Agreement and Plan of Merger dated October 14, 1996, by and
between AC Magnetics, Inc., doing business as M.C. Davis
Company, Cellular Magnetics, Inc. and the Company.
3.1/(1)/ Articles of Incorporation of the Company, and all amendments
thereto, as amended.
3.2/(1)/ Bylaws of the Company.
4.1/(1)/ Form of Common Stock Certificate.
4.2 Certificate of Designation for Series B Preferred Stock is
included in the Company's Articles of Incorporation filed as
Exhibit 3.1 and incorporated herein by reference.
4.3/(2)/ Specimen of Warrant attached to Series B Preferred Stock.
4.4 Certificate of Designation for Series C Preferred Stock is
included in the Company's Articles of Incorporation filed as
Exhibit 3.1 and is incorporated herein by reference.
4.5/(1)/ Form of Warrant attached to Series C Preferred Stock.
4.6/(1)/ Specimen of Registration Rights Agreement for Series B
Preferred Stock.
II-5
<PAGE>
4.7/(1)/ Specimen of Registration Rights Agreement for Series C
Preferred Stock.
4.8/(1)/ Plan of Liquidating Dissolution of Energy Corporation dated
July 8, 1996.
5.1/(6)/ Opinion of Kutak Rock as to the legality of the Common Stock
being registered.
10.1/(3)/ 1995 Compensatory Stock Option Plan.
10.2/(1)/ Assignment Agreement dated September 3, 1996, assigning certain
Patents and Patent Applications and trade secrets relating to
the PI Technology to the Company, as assignee, and Particle
Interconnect, Inc. as assignor.
10.3/(1)/ Assignment Agreement dated June 5, 1996, assigning the Patent
Application for the Antenna Technology to the Company, as
assignee, and El-Badawy Amien El-Sharawy, as assignor.
10.4/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996, between Gordon J. Sales and the Company.
10.5/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996, between Alan M. Smith and the Company.
10.6/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996 between Terry W. Neild and the Company.
10.7/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 22, 1996 between Steven D. Clark and PI Corp.
10.8/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996 between Lawrence DiFrancesco and PI Corp.
10.9/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 8, 1996 between Jerry W. Tooley and Cellular Magnetics.
10.10/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 8, 1996 between David Putnam and Cellular Magnetics.
11/**/ Statement regarding Computation of Per Share Earnings.
21/(1)/ Subsidiaries of the Company.
23.1/*/ Consent of KPMG Peat Marwick LLP.
II-6
<PAGE>
23.2/*/ Consent of Mark Shelley, CPA.
23.3/*/ Consent of Michael A. Glenn, Esq.
23.4/*/ Consent of Meschkow & Gresham, P.L.C.
23.5 Consent of Kutak Rock is included in Exhibit 5.1 and
incorporated herein be reference.
27/**/ Financial Data Schedule.
_________________
/*/ Filed herewith.
/**/ Previously filed.
/(1)/ Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended September 30, 1996.
/(2)/ Incorporated by reference to the Company's Current Report on Form 8-K
dated July 10, 1996.
/(3)/ Incorporated by reference to the Company's Current Registration
Statement on Form S-8, Registration No. 333-604, effective January
24, 1996.
/(4)/ Incorporated by reference to the Company Current Report on Form 8-K
dated September 3, 1996.
/(5)/ Incorporated by reference to the Company Current Report on Form 8-K
dated October 14, 1996.
/(6)/ To be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULES. See "Index to Financial
Statements" on page F-1.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Pre-Effective Amendment No. 1 to the Form
S-1 Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Phoenix, State of Arizona, on
April 2, 1997.
INTERCELL CORPORATION
Dated: April 2, 1997 By /s/ Alan M. Smith
-------------------------------------
Alan M. Smith, Secretary,
Treasurer, Chief Financial Officer
and Director
II-8
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to the Form S-1 Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
By:/s/ ** President, Chief Executive Officer
---------------------- and Director April 2, 1997
Gordon J. Sales (Principal Executive Officer)
By:/s/ Alan M. Smith Secretary, Treasurer, Chief
---------------------- Financial Officer and Director April 2, 1997
Alan M. Smith (Principal Financial and
Accounting Officer)
By:/s/ ** Executive Vice President and April 2, 1997
---------------------- Director
Terry W. Neild
By:/s/ ** Director April 2, 1997
----------------------
Charles E. Bauer
By:/s/ ** Director April 2, 1997
----------------------
Theodore A. Waibel
</TABLE>
** By:/s/ Alan M. Smith
Alan M. Smith, as attorney-in-fact
pursuant to a power-of-attorney
previously filed with this
Registration Statement
II-9
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1/(1)/ Agreement and Plan of Reorganization, dated July 7, 1995,
between the Company and Modern Industries, Inc.
2.2/(4)/ Plan and Agreement of Merger dated September 3, 1996, by and
between Particle Interconnect, Inc., Particle Interconnect
Corporation and the Company.
2.3/(5)/ Agreement and Plan of Merger dated October 14, 1996, by and
between AC Magnetics, Inc., doing business as M.C. Davis
Company, Cellular Magnetics, Inc. and the Company.
3.1/(1)/ Articles of Incorporation of the Company, and all amendments
thereto, as amended.
3.2/(1)/ Bylaws of the Company.
4.1/(1)/ Form of Common Stock Certificate.
4.2 Certificate of Designation for Series B Preferred Stock is
included in the Company's Articles of Incorporation filed as
Exhibit 3.1 and incorporated herein by reference.
4.3/(2)/ Specimen of Warrant attached to Series B Preferred Stock.
4.4 Certificate of Designation for Series C Preferred Stock is
included in the Company's Articles of Incorporation filed as
Exhibit 3.1 and is incorporated herein by reference.
4.5/(1)/ Form of Warrant attached to Series C Preferred Stock.
4.6/(1)/ Specimen of Registration Rights Agreement for Series B
Preferred Stock.
4.7/(1)/ Specimen of Registration Rights Agreement for Series C
Preferred Stock.
4.8/(1)/ Plan of Liquidating Dissolution of Energy Corporation dated
July 8, 1996.
5.1/(6)/ Opinion of Kutak Rock as to the legality of the Common
Stock being registered.
10.1/(3)/ 1995 Compensatory Stock Option Plan.
<PAGE>
EXHIBIT NO. DESCRIPTION
----------- -----------
10.2/(1)/ Assignment Agreement dated September 3, 1996, assigning
certain Patents and Patent Applications and trade secrets
relating to the PI Technology to the Company, as assignee, and
Particle Interconnect, Inc. as assignor.
10.3/(1)/ Assignment Agreement dated June 5, 1996, assigning the Patent
Application for the Antenna Technology to the Company, as
assignee, and El-Badawy Amien El-Sharawy, as assignor.
10.4/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996, between Gordon J. Sales and the Company.
10.5/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996, between Alan M. Smith and the Company.
10.6/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996 between Terry W. Neild and the Company.
10.7/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 22, 1996 between Steven D. Clark and PI Corp.
10.8/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996 between Lawrence DiFrancesco and PI Corp.
10.9/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 8, 1996 between Jerry W. Tooley and Cellular
Magnetics.
10.10/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 8, 1996 between David Putnam and Cellular Magnetics.
11/**/ Statement regarding Computation of Per Share Earnings.
21/(1)/ Subsidiaries of the Company.
23.1/*/ Consent of KPMG Peat Marwick LLP.
23.2/*/ Consent of Mark Shelley, CPA.
23.3/*/ Consent of Michael A. Glenn, Esq.
23.4/*/ Consent of Meschkow & Gresham, P.L.C.
23.5 Consent of Kutak Rock is included in Exhibit 5.1 and
incorporated herein be reference.
<PAGE>
EXHIBIT NO. DESCRIPTION
----------- -----------
27/**/ Financial Data Schedule.
_________________
/*/Filed herewith
/**/Previously filed
/(1)/ Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended September 30, 1996.
/(2)/ Incorporated by reference to the Company's Current Report on Form 8-K
dated July 10, 1996.
/(3)/ Incorporated by reference to the Company's Current Registration
Statement on Form S-8, Registration No. 333-604, effective January 24,
1996.
/(4)/ Incorporated by reference to the Company Current Report on Form 8-K
dated September 3, 1996.
/(5)/ Incorporated by reference to the Company Current Report on Form 8-K
dated October 14, 1996.
/(6)/ To be filed by amendment.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Intercell Corporation:
We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
San Jose, California
April 2, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF MARK SHELLEY, CPA
I hereby consent to the reference to my name under the heading of
"Experts" included in the Registration Statement of Intercell Corporation
of which this Exhibit is a part, and in any amendments to the Registration
Statement.
Date: March 29, 1997 By:/s/ Mark Shelley
-----------------
Mark Shelley, CPA
<PAGE>
EXHIBIT 23.3
CONSENT OF MICHAEL A. GLENN, ESQ.
We hereby consent to the reference to our name under the heading of
"Legal Matters" included in the Registration Statement of Intercell
Corporation of which this Exhibit is a part, and in any amendments to the
Registration Statement.
Date: April 3, 1997 /s/ Michael A. Glenn
----------------------
Michael A. Glenn, Esq.
<PAGE>
EXHIBIT 23.4
CONSENT OF MESCHKOW & GRESHAM, P.L.C.
We hereby consent to the reference to our name under the heading of
"Legal Matters" included in the Registration Statement of Intercell
Corporation of which this Exhibit is a part, and in any amendments to the
Registration Statement.
MESCHKOW & GRESHAM, P.L.C.
Date: April 1, 1997 By: /s/ Lowell W. Gresham
-------------------------
Lowell W. Gresham
