<PAGE>
FORM 10-K/A-1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: September 30, 1996 Commission file number: 0-14306
INTERCELL CORPORATION
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(Exact name of registrant as specified in its charter)
Colorado 84-0928627
- ------------------------------- -----------------------
(State of other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
999 West Hastings Street, Suite 1750
Vancouver, B.C., Canada, V6C 2W2
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(Address and zip code of principal executive office)
Registrant's telephone number, including area code: (604) 684-1533
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
--------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of the close of trading on December 20, 1996, there were 17,364,750
common shares outstanding, 10,135,891 of which were held by non-affiliates. The
aggregate market value of the non-affiliated common shares, based on the average
closing bid and asked prices on December 20, 1996, was approximately
$41,177,000.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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PART II
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
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
"--Recent Acquisitions and Transactions," the Company's Consolidated Financial
Statements and Notes thereto included elsewhere herein, and "Financial
Statements and Supplementary Data--Notes to Consolidated 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 herein. The Consolidated Statements of
Operations data presented below for the fiscal year ended September 30, 1996,
the eleven months ended September 30, 1995 and the fiscal year ended October 31,
1994 and the Consolidated Balance Sheet data as of September 30, 1996 have been
derived from the Company's Consolidated Financial Statements included herein.
The Consolidated Financial Statements as of and for the fiscal year ended
September 30, 1996 and the eleven months ended September 30, 1995 were audited
by KPMG Peat Marwick LLP, independent public accountants. The Consolidated
Financial Statements, as of and for the fiscal year ended October 31, 1994 were
audited by Mark Shelley, CPA, independent public accountant. The Statements of
Operations data set forth below for the years ended October 31, 1993 and 1992
and the Balance Sheet data set forth below at October 31, 1994, 1993 and 1992
are derived from audited financial statements not included herein.
<PAGE>
<TABLE>
<CAPTION>
Year Eleven Year Year Year
Ended Months Ended Ended Ended Ended
9/30/96 9/30/95(1) 10/31/94 10/31/93 10/31/92
----------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total net sales $ 3,405,000 $ 3,768,000 $2,066,000 $ 60,000 $ 0
Costs & expenses 8,688,000 5,089,000 2,428,000 142,000 43,000
Net loss (5,283,000) (1,321,000) (362,000) (82,000) (43,000)
Net loss per common share $(0.54) $(0.18) $(0.08) $(0.04) $N/A
Weighted average
Number of common
shares outstanding 13,072,683 7,391,275 4,828,007 2,066,979 1,781,880
At period end:
Current assets $10,625,000 $ 1,796,000 $1,499,000 $ 4,000 $ 0
Current liabilities 2,060,000 1,799,000 1,621,000 82,000 149,000
Working capital (deficit) 8,565,000 (3,000) (122,000) (78,000) (149,000)
Total assets 13,826,000 3,069,000 3,141,000 51,000 0
Long-term debt 86,000 48,000 48,000 175,000 0
Stockholders' equity $11,680,000 1,222,000 $1,472,000 $ (206,000) $ (149,000)
Cash dividends per
common share 0 0 0 0 0
Deemed preferred stock 1,624,648 -- -- -- --
dividend relating to in-the-money
conversion
</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.
2
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the
"Selected Consolidated Financial Data" and the "Financial Statements and
Supplementary Data."
The statements contained in this report, 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
"Trends and Uncertainties" below. Any forward looking statement or statements
speak only as of the date on which such statement was made, and the Company
undertakes no obligation to update any forward looking statement or statements
to reflect events or circumstances after the date on which such statement is
made or to reflect the occurrence of unanticipated events. Therefore, forward-
looking statements should not be relied upon as a prediction of actual future
results.
From 1991 through the fiscal year ended December 31, 1994, the Company
was generally inactive and reported no operating revenues. In July 1995, the
Company completed the acquisition of Energy and its wholly owned subsidiary CTL.
See "Business--Overview." The Company has substantially expanded the scope of
its business and revised its business strategy subsequent to the Energy
transaction through the acquisition of certain patents, patent applications and
proprietary technology relating to the Antenna Technology and the PI Technology.
During this time, the Company has been engaged primarily in directing,
supervising and coordinating the Company's activities in the continuing
development of its new lines of business, in addition to the recruitment of
management and technical personnel and raising new capital to fund its
operations.
The primary asset acquired in the Energy transaction, its wholly owned
subsidiary CTL, continued to generate positive cash flows in the 1996 fiscal
year, although sales decreased 9.6% over the 1995 fiscal year. This decrease in
sales was primarily attributable to a change in product mix, the delayed timing
of certain orders in the fourth quarter of 1996 and production capacity
constraints at CTL's current manufacturing facilities. CTL anticipates moving to
new production facilities in February of 1997, which the Company believes will
eliminate the production capacity constraints.
On November 15, 1995, the Company entered into a research and
development agreement with ASU for the development of the Antenna Technology. To
date the Company has developed several working prototypes of the External
Antenna and anticipates commencing commercial production of both the External
Antenna and Internal Antenna in the 1997 fiscal
3
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year. There can be no assurance, however, that the Company will commence
production in 1997 or thereafter.
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 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 acquisition
have not been restated, except for loss per common share information. From the
date of the merger, PI Corp. has been engaged primarily in the construction of
production capabilities at its plant and the continuing development of the
technology. PI Corp. expects to commence commercial production in 1997.
On July 7, 1996, the Company completed an offering pursuant to
Regulation S under the Securities Act (the "Regulation S Offering") of 1,000
shares of its Series B Preferred Stock, with attached warrants, pursuant to
which it received net proceeds of $8,900,000. The Series B Preferred Stock is
convertible into 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 $1,764,704. The Company recognized $1,624,648
of the dividend in its fiscal 1996 net loss per common share calculation. The
amount recognized was calculated on a pro rata basis over the period beginning
with the issuance of the security to the first date conversion could occur. To
further improve the Company's working capital position, the Company completed an
offering pursuant to Regulation D to institutional investors on December 15,
1996, of 525 shares of its Series C Preferred Stock, with attached warrants,
pursuant to which it received net proceeds of $4,672,500. The Series C Preferred
Stock is convertible into Common Stock at the exchange rate in effect at the
date of conversion, as described in the preferred stock agreements. At the date
of issuance, the exchange rate was less then the prevailing market rate, which
will result in a deemed dividend that will be recognized by the Company in
fiscal 1997. See "--Liquidity and Capital Resources" below.
4
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RESULTS OF OPERATIONS
Fiscal Year Ended September 30, 1996 compared to Fiscal Year Ended
September 30, 1995 (Eleven Months).
Net Sales. Net sales, which are derived solely from the operations of
CTL, decreased 9.6% in 1996 to $3,405,000 from $3,768,000 in 1995. This decrease
in sales is generally due to a combination of a change in the Company's product
mix and the delayed timing of significant orders which were originally planned
for the fourth quarter of 1996, but were not placed until the end of the 1996
calendar year.
In the 1996 fiscal year, net sales of new magnetrons totaled $1,436,000,
accounting for 42% of sales, compared with $1,455,000 or 39% of net sales in
1995. Net revenues from rebuilding of magnetrons decreased from $1,849,000 or
49% of net sales in 1995 to $1,403,000 or 43% of net sales in 1996. This shift
in sales mix was due primarily to the Company's focus on new and more complex
tube types such as certain Pulse magnetrons in an attempt to broaden the
Company's product line and a slow down in orders for rebuilt magnetrons for the
food processing industry in the last two quarters of 1996. It is anticipated
that the sales mix experienced in the final six months of fiscal 1996 will
continue for the foreseeable future.
The Company obtained a significant contract for the manufacture of new
and rebuilt Pulse magnetrons in June of 1996. However, the initial order under
this contract was not placed until September, 1996. As a result, sales were not
recorded under this contract until the first quarter of fiscal 1997, resulting
in a significant increase in sales in the first quarter of 1997 over the final
quarter of 1996.
In conjunction with the changes in sales mix noted above, the Company
experienced a decrease in gross margins to 17% in the 1996 fiscal year from 23%
in 1995. This decrease was due to the increased development time and costs
associated with the new and more complex tube types now being constructed by the
Company. In particular, direct labor costs increased to 34% of net sales in
1996 compared to 30% in 1995, while direct materials costs increased to 26% in
1996 from 25% in 1995. The Company anticipates that gross margins will improve
in the 1997 fiscal year as development of these new tube types is now complete
and production should therefore become more efficient.
In addition to the above, the Company's current electron tube
manufacturing facility is operating at maximum capacity. The Company believes
that its move to the new Watsonville manufacturing facility in February, 1997
should satisfy the Company's production needs for the foreseeable future. The
Company anticipates that it may experience minor disruptions in production due
to the movement of equipment and the familiarization of employees with the new
manufacturing facility, which disruptions are not expected to have a material
impact on the Company's operations.
5
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Allowance for Doubtful Accounts. The Company's allowance for doubtful
accounts increased from $81,000 in 1995 to $255,000 in 1996. This increase is
primarily a result of the return of certain Pulse magnetrons, a new product of
the Company, for which rework was requested by the purchasers. The Company does
not believe that similar returns will occur in the future.
Selling, General and Administrative Expense. Selling, general and
administrative ("SGA") expenses increased 331.5% from $1,317,000 in 1995 to
$5,683,000 in 1996. This increase is primarily attributable to an increase in
compensation expense of $3,686,000 resulting from the vesting of stock options
to purchase an aggregate of 4,841,000 shares of Common Stock granted to the
Company's officers, directors, employees and consultants in 1996 at exercise
prices below the fair value of the Common Stock on the date of grant. The
Company recorded deferred compensation expense of $4,017,000 based on these
grants. The options were granted as an incentive to such persons at a time when
the Company did not have sufficient funds to otherwise compensate such persons.
In the future, the Company does not intend to grant stock options in the amounts
granted in 1996 or at less than the fair value of the Common Stock on the date
of grant.
In addition to the above, SGA expenses increased in 1996 due to higher
legal and audit costs ($387,000 in 1996 compared to $102,000 in 1995) associated
with the Company's acquisitions, financings and compensation arrangements, and
increased compensation paid to management and administrative personnel.
In the 1997 fiscal year, it is anticipated that sales and marketing
expenses will increase considerably over 1996 levels. In 1996, sales and
marketing expenses were limited to costs associated with CTL's operations. In
1997, significant costs will be incurred in order to bring the Company's Antenna
Systems and Particle Interconnect Products to market. In addition, the Company
intends to significantly expand its marketing activities for its electron tube
products in an effort to capture a larger share of the market.
Research and Development. Research and development expenses increased
from -0-in 1995 to $88,000 in 1996. This increase was attributable entirely to
costs associated with research and development of the Company's Antenna Systems.
It is anticipated that research and development activities will materially
increase in 1997 as the Company continues to develop its Antenna Technology and
the PI Technology.
Interest Income and Expense. The Company earned interest income of
$36,000 in 1996 compared to -0- in 1995. This increase was due to the investment
in Treasury Bills of undeployed cash resources realized through the sale of its
Series B Preferred Stock. The Company anticipates that interest income will
increase in 1997 as undeployed funds, including those raised through the sale of
its Series C Preferred Stock, will continue to be invested in low risk interest
bearing securities.
6
<PAGE>
Interest expense increased to $90,000 in 1996 compared to $88,000 in
1995 due to continued bank financing and outstanding notes payable to related
parties. The Company repaid these financings and notes with the proceeds
received from the Series B Preferred Stock financing and does not currently
anticipate obtaining further debt financing.
Net Operating Loss Carryforwards for Tax Purposes. As of September 30,
1996 the Company had a net operating loss carryover for federal and California
income tax purposes of approximately $7,376,000 and $3,463,000 respectively. The
federal net operating losses expire from 2007 to 2011. The California net
operating losses expire from 2000 to 2001. The benefit of these net operating
loss carryforwards has not been recorded by the Company as it is uncertain that
the Company will generate sufficient income in future periods to utilize the
loss carryforwards.
Eleven Months Ended September 30, 1995 compared to Fiscal Year Ended
October 31, 1994.
On July 7, 1995, the Company acquired all of the assets and assumed all
of the liabilities of Energy through the issuance of 5,412,191 shares of Common
Stock. The principal asset acquired in this transaction was all of the issued
and outstanding common stock of CTL. Energy had acquired its investment in CTL
on May 1, 1994. In accordance with generally accepted accounting principles, the
results of operations disclosed in the Company's audited consolidated financial
statements include CTL's operations for the eleven-month period ended September
30, 1995 for the 1995 fiscal year and for the six-month period ended October 31,
1994 for the comparative 1994 fiscal year.
Net Sales and Gross Margins. The Company's net sales of $3,768,000,
which are attributable entirely to the operations of CTL, increased 82% in the
1995 fiscal year compared to net sales of $2,066,000 in 1994. This increase was
due primarily to the inclusion in the financial statements of eleven months of
CTL's operations in the 1995 fiscal year compared to only six months in fiscal
1994 as described above. Monthly sales in both the 1995 and 1994 fiscal years
averaged approximately $340,000 due to capacity limitations at CTL's
manufacturing facilities.
Although CTL's average monthly sales remained constant in the 1995 and
1994 fiscal years, the Company experienced a decline in gross margins on sales
of electron tubes to 23% of net sales in 1995 from 42% in 1994. This decrease
was due primarily to increased costs associated with the development and
manufacture of new types of tubes. In addition, the Company sold a greater
percentage of new tubes relative to rebuilt tubes in the 1995 fiscal year
compared to 1994. As new tubes carry a lower gross margin than rebuilt tubes, an
overall decline in gross margins was experienced.
Selling, General and Administrative Expenses. SGA expenses increased by
11% in the 1995 fiscal year due to increased consulting, legal and audit costs
associated with the Energy transaction and the Company's financing activities.
7
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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 deemed price 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.
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.
8
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LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had cash and cash equivalents on
hand of $4,224,000 as compared to $57,000 at September 30, 1995. This increase
in working capital was primarily due to net proceeds of $8,900,000 received from
the issuance of Series B Preferred Stock and warrants and the proceeds of
$1,342,000 received from sales of Common Stock. In addition, the Company
acquired $167,000 in connection with its acquisition of Particle California and
M.C. Davis and realized proceeds of $174,000 on the sale of property. These
proceeds were used to finance the Company's operating activities of $1,697,000,
to repay bank debt of $190,000 and other debt totalling $994,000, and to acquire
property, plant, equipment and other assets of $472,000.
The Company acquired assets comprised of working capital and property,
plant and equipment, and recorded related goodwill and other intangibles,
totalling $1,649,000 in 1996 as a result of the business combinations of M.C.
Davis and PI Corp. In addition, the Company acquired land in exchange for
400,000 shares of the Company's common stock valued at $1,000,000, the
assumption of mortgages of $367,000 and acquisition costs of $57,000. The
Company also disposed of equipment held for resale through the return and
cancellation of its Series A Preferred Stock for which it recognized neither a
gain or loss, except for $40,000 in storage costs.
As a result of the transactions described above and the Series C
Preferred Stock financing, the Company believes that current and known future
capital resources will be adequate to fund its operations in the near term. The
Company also believes that sales of its Antenna Systems and Particle
Interconnect Products, both anticipated to commence in the 1997 fiscal year, in
combination with the sales of the electronic assemblies of Cellular Magnetics
and the operations of CTL will provide sufficient funds to meet the Company's
capital requirements for the next two years. At this time, the Company does not
intend to raise additional capital through the sale of additional capital stock
or through the issuance of debt.
In the 1997 fiscal year, the Company expects to make capital
expenditures of approximately $1,700,000. These expenditures will be made on
CTL's new manufacturing facility in Watsonville, California, establishing PI
Corp.'s initial full production line and facility in Colorado Springs, Colorado
and purchasing new equipment for the Company's manufacturing plants in Arizona
City, Arizona and Sonora, Mexico in connection with the manufacture of the
Antenna Systems.
TRENDS AND UNCERTAINTIES
As a result of its activities in 1996, the Company believes that it has
positioned itself for long term success 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 the electronic assemblies
9
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previously manufactured by M.C. Davis. However, the future operating results of
the Company are subject to certain trends and uncertainties within the
industries in which the Company is operating and within the Company itself.
OVERVIEW
In general, due to the Company's change of business purpose, the Company
has a limited operating history that is relevant to its current business. The
Company does not anticipate producing significant operating revenues until such
time, if ever, as products developed using the Antenna Technology and PI
Technology are completely developed, manufactured in commercial quantities and
available for commercial delivery, and accepted in the marketplace. There can be
no assurance that the Company's technology and products, if developed and
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.
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.
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.
The acceptance of the Antenna Technology and Antenna Systems by cellular
phone users and OEMs has not yet been tested. While the Company has received
significant expressions of interest from third parties for the Antenna
Technology, the existence and extent of market opportunities for its Antenna
Systems is unknown. In addition, the response of competitors to the marketing of
the Antenna Systems is unknown at this time.
10
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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. If such licensees desire to do so, Mr. Louis DiFrancesco, and
not the Company, would receive any increase in royalty payments due to such
success.
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.
PENDING ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets to Be Disposed Of," ("SFAS No. 121") which establishes
methods for determining when an impairment of long-lived assets has occurred and
for measuring the impairment of long-lived assets. The implementation of SFAS
No. 121 in the Company's 1997 fiscal year is not expected to have a material
effect on the Company's consolidated results of operations or financial
condition.
The FASB also issued SFAS No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") which encourages, but does not require,
employers to adopt a fair value method of accounting for employee stock-based
compensation, and which requires increased stock-based compensation disclosures
in lieu of expense recognition. The Company expects to continue to use the
intrinsic value-based method of Accounting as allowed under SFAS No. 123. The
implementation of SFAS No. 123 in the Company's 1997 fiscal year is not expected
to have a material effect on the Company's reported consolidated results of
operations or financial position.
11
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and related financial information
required to be filed are indexed on page F-2 and are incorporated herein.
12
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report.
1. FINANCIAL STATEMENTS. See Index to Financial Statements on page
F-2 of this Report.
2. FINANCIAL STATEMENT SCHEDULES. See Index to Financial Statements
on page F-2 of this Report. All other schedules are omitted
since they are not required, are inapplicable, or the required
information is included in the financial statements or notes
thereto.
3. EXHIBITS. The following is a complete list of exhibits filed as
part of this Form 10-K. Exhibit numbers correspond to the
numbers in the Exhibit Table of Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
2.1(5) Agreement and Plan of Reorganization, dated July 7, 1995, between
the Company and Modern Industries, Inc.
2.2(3) Plan and Agreement of Merger dated September 3, 1996, by and
between Particle Interconnect, Inc., Particle Interconnect
Corporation and the Company.
2.3(4) 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(5) Articles of Incorporation of the Company, and all amendments
thereto, as amended.
3.2(5) Bylaws of the Company.
4.1(5) 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(1) Specimen of Warrant attached to Series B Preferred Stock.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
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(5) Form of Warrant attached to Series C Preferred Stock.
4.6(5) Specimen of Registration Rights Agreement for Series B Preferred
Stock.
4.7(5) Specimen of Registration Rights Agreement for Series C Preferred
Stock.
4.8(5) Plan of Liquidating Dissolution of Energy Corporation dated July 8,
1996.
10.1(2) 1995 Compensatory Stock Option Plan.
10.2(5) 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(5) Assignment Agreement dated June 5, 1996, assigning the Patent
Application for the Antenna Technology to the Company, as assignee,
and El-Badawy Amien El-Sharaway, as assignor.
10.4(5) Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996, between Gordon J. Sales and the Company.
10.5(5) Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996, between Alan M. Smith and the Company.
10.6(5) Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996 between Terry W. Neild and the Company.
10.7(5) Employment and Non-Disclosure Non-Competition Agreement, dated
October 22, 1996 between Steven D. Clark and PI Corp.
10.8(5) Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996 between Lawrence DiFrancesco and PI Corp.
10.9(5) Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996 between Patricia H. Grihalva and PI Corp.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
10.10(5) Employment and Non-Disclosure Non-Competition Agreement, dated
October 8, 1996 between Jerry W. Tooley and Cellular Magnetics.
10.11(5) 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(5) Subsidiaries of the Company.
23.1* Consent of KPMG Peat Marwick LLP
23.2* Consent of Mark Shelley, CPA
27* Financial Data Schedule.
</TABLE>
_________________
* Filed herewith.
(1) Incorporated by reference to the Company's Current Report on Form 8-K dated
July 10, 1996.
(2) Incorporated by reference to the Company's Current Registration Statement on
Form S-8, Registration No. 333-604, effective January 24, 1996.
(3) Incorporated by reference to the Company's Current Report on Form 8-K dated
September 3, 1996.
(4) Incorporated by reference to the Company's Current Report on Form 8-K dated
October 14, 1996.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended September 30, 1996.
(b) Reports on Form 8-K:
1. Form 8-K dated July 10, 1996 regarding the sale of the Company's
Series B Preferred Stock pursuant to Regulation S.
2. Form 8-K dated September 3, 1996 regarding the acquisition of
Particle Interconnect, Inc.
3. Form 8-K dated October 14, 1996 regarding the acquisition of AC
Magnetics, Inc. which was effective September 30, 1996.
4. Form 8-K/A filed December 13, 1996 containing pro forma financial
information on the acquisition of AC Magnetics, Inc.
5. Form 8-K dated December 16, 1996 regarding the sale of 525 shares
of Series C Preferred Stock.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERCELL CORPORATION,
(a Colorado corporation)
Date: February 20, 1997 By /s/ Alan M. Smith
-------------------
Alan M. Smith, Chief
Financial Officer, Secretary
and Treasurer
16
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
September 30, 1996 and 1995 and October 31, 1994
(With Independent Auditors' Reports Thereon)
F-1
<PAGE>
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTERCELL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<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-24
</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-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
Item 14(a)2 of this Form 10-K. 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>
Convertible
preferred stock Warrants Common stock Additional
----------------------- to acquire ----------------------- paid-in Deferred Accumulated
Shares Amount common 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 250,500
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>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996 and 1995 and October 31, 1994
(1) DESCRIPTION OF BUSINESS
General
Intercell Corporation (the Company or Intercell), is a Colorado corporation
that invests in companies in the technology industries.
Acquisition of Modern Industries, Inc.
In July 1995, Intercell entered into an Agreement and Plan of
Reorganization with Modern Industries, Inc. (Modern) a Delaware
Corporation. The Company issued 5,412,191 shares of common stock to Modern
in exchange for all of the assets and liabilities of Modern and its wholly
owned subsidiary, California Tube Laboratory, Inc. (CTL).
The 5,412,191 shares issued to Modern represented approximately 52% of the
Company's outstanding common stock upon completion of the transaction. As
such, the transaction was treated for financial reporting purposes as a
purchase of Intercell by Modern. The assets of Intercell have been
recorded at their estimated fair value at the date of acquisition and
Intercell's results of operations have been included in the consolidated
statements of operations subsequent to the date of the acquisition.
Modern's historical share amounts have been adjusted on a retroactive basis
in a manner similar to a reverse stock split.
Acquisition of California Tube Laboratory, Inc.
In May 1994, Modern acquired all of the issued and outstanding shares of
CTL for 762,031 shares of its common stock (valued at $1,069,000) and notes
payable to two major stockholders of CTL for $956,000. Modern also bought
out an employment contract with a former owner of CTL for 222,572 shares of
Modern common stock (valued at $311,000).
CTL is an electronic parts manufacturer located in Northern California.
CTL manufactures, rebuilds, and repairs magnetrons, klystrons, high power
triodes and tetrodes, electron guns, and linear accelerators for customers
located primarily in the United States.
Acquisition of Particle Interconnect, Inc.
In September 1996, Intercell formed a wholly owned subsidiary, Particle
Interconnect Corp. (PI Corp.), a Colorado corporation, which merged with
Particle Interconnect, Inc. (Particle), a California corporation. Particle
is engaged in the development and manufacturing of particle-coated
substrates for integrated circuits and is located in Colorado Springs,
Colorado. The Company exchanged 1,400,000 shares of Intercell common stock
for all of the outstanding stock
F-9
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
of Particle. The transaction was accounted for by the pooling-of-interest
method of accounting. The results of operations of Particle are not
material to the Company's consolidated financial position, results of
operations, and cash flows. Accordingly, the consolidated financial
statements for periods prior to the date of acquisition have not been
restated, except for loss per common share information. The weighted
average number of shares of common stock outstanding and loss per common
share has been restated for all periods presented to reflect the 1,400,000
shares of common stock issued in the transaction.
Acquisition of A.C. Magnetics, Inc.
On September 30, 1996, Intercell formed a wholly owned subsidiary, Cellular
Magnetics Inc., an Arizona corporation, which acquired all the assets and
liabilities of A.C. Magnetics, Inc. dba M.C. Davis, Co. Inc. (M.C. Davis)
in exchange for 277,778 shares of Intercell common stock (valued at
$1,000,000) and $800,000 in cash. M.C. Davis is a manufacturer and
distributor of electrical devices and equipment with manufacturing
facilities near Phoenix, Arizona, and in the province of Sonora, Mexico.
The transaction was accounted for by the purchase method of accounting.
The results of operations for M.C. Davis have not been included in the
Company's consolidated results of operations as the transaction occurred on
the last day of Intercell's fiscal year. The total purchase price of
$1,800,000 has been allocated to the net assets acquired based on their
relative fair values as follows:
<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-10
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Change in Fiscal Year
During the eleven-month period ended September 30, 1995, Intercell changed
its fiscal year-end to September 30. Previously, Intercell had an October
31 year-end. The accompanying consolidated financial statements include
the results of operations and cash flows of Intercell for the year ended
September 30, 1996, the eleven-month period ended September 30, 1995, and
the year ended October 31, 1994.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant
intercompany transactions and accounts have been eliminated in
consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Cash Equivalents and Short-Term Investments
Cash equivalents are highly liquid investments with a maturity of less than
three months at the date of purchase. Short-term investments consist of
certificates of deposit and short-term debt securities with maturities
greater than three months and less than one year. As of September 30, 1996,
the Company's investments consisted of U.S. government treasury bills of
$3,925,000 and certificates of deposit of $126,000. As of September 30,
1996, investment securities of $988,000 and $3,063,000 are classified as
cash equivalents and short-term investment, respectively.
Investments in debt securities are classified as "available for sale."
Such investments are recorded at fair value, as determined from quoted
market prices, and the cost of securities sold is determined based on the
specific identification method. Unrealized gains and losses, if any, are
reported as a component of stockholders' equity. Unrealized gains and
losses were not significant for any period presented.
Revenue Recognition
Revenues are recognized when earned, generally upon product shipment.
Provision is made for estimated customer returns and warranty costs at the
time of sale.
F-11
<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-12
<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-13
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) BALANCE SHEET COMPONENTS
Inventories
A summary of inventories follows:
<TABLE>
<CAPTION>
September 30,
-------------------
1996 1995
---------- -------
<S> <C> <C>
Raw materials $ 422,000 296,000
Work in process 453,000 477,000
Finished goods 191,000 -
---------- -------
$1,066,000 773,000
========== =======
</TABLE>
Property, Plant, and Equipment
A summary of property, plant, and equipment follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Furniture and fixtures $ 339,000 76,000
Equipment and machinery 845,000 690,000
Land and buildings 282,000 230,000
Leasehold improvements 71,000 -
Vehicles 23,000 -
---------- -------
1,560,000 996,000
Less accumulated depreciation 142,000 111,000
---------- -------
$1,418,000 885,000
========== =======
</TABLE>
F-14
<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-15
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A summary of noncash investing and financing activities follows:
<TABLE>
<CAPTION>
Eleven-month
Year ended period ended Year ended
September 30, September 30, October 31,
1996 1995 1994
------------- ------------- -----------
<S> <C> <C> <C>
Shares issued in acquisition of Intercell - $250,000 -
Shares issued in exchange for investment in
American Microcell - 500,000 -
Shares issued in exchange for microwave technology - 250,000 -
Contribution to ESOP 158,000 247,000 -
Shares issued in lieu of interest payment to
related party - 13,000 -
Shares issued in acquisition of CTL - - 2,025,000
Conversion of debt to equity - - 475,000
Shares issued in exchange for prepaid promotion - - 140,000
Employment contract buy out - - 311,000
Shares issued in exchange for microwave technology - - 250,000
Shares issued in exchange for services 56,000 - -
Net assets acquired in business combinations 1,649,000 - -
Shares issued in exchange for land 1,000,000 - -
Debt assumed in land acquisition 367,000 - -
Shares to be issued for acquisition of M.C. Davis 1,000,000 - -
Debt incurred in acquisition of M.C. Davis 800,000 - -
Deferred compensation related to stock option grants 4,017,000 - -
Repurchase of shares of Series A preferred stock 250,000 - -
Conversion of Series B preferred stock to
common stock 1,497,000 - -
</TABLE>
(5) EQUIPMENT HELD FOR SALE
On December 29, 1994, Intercell executed an Asset Purchase Agreement with
Asia Skylink Corp. to acquire microwave transmission and associated support
equipment in exchange for 210,000 shares of Series A redeemable convertible
preferred stock. In August 1996, the shares were returned to the Company,
and the equipment was returned to Asia Skylink, Corp. No gain or loss was
recognized by the Company in connection with the reversal of this
transaction.
(6) BANK BORROWINGS
Loan Payable to Bank
In June 1995, the Company obtained a revolving loan for up to $500,000
based on a percentage of eligible assets. This loan expires on December
31, 1996, bears interest at the bank's base rate (8.25% as of September 30,
1996) plus 1/2% for administration fees and an additional 6%, and is
secured by all assets of the Company.
F-16
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Long-Term Debt
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
September 30,
----------------
1996 1995
-------- ------
<S> <C> <C>
Note payable to bank; interest at prime plus 2%; due
April 4, 1997; collateralized by various assets; repaid
in October 1996 $100,000 -
Note payable; noninterest bearing; due June 1998;
collateralized by building 47,000 -
Note payable to bank; interest at 9.75%;
due in 36 monthly payments of $481;
collateralized by a vehicle; repaid in October 1996 15,000 -
Note payable to bank; interest at 9.75%; due May 2008;
secured by real property; repaid in April 1996 - 50,000
Other 44,000 -
-------- ------
206,000 50,000
Less current portion 120,000 2,000
-------- ------
Long-term debt, net $ 86,000 48,000
======== ======
</TABLE>
Future maturities of long-term debt as of September 30, 1996, are as follows:
<TABLE>
<CAPTION>
Year ending
September 30,
----------------
<S> <C>
1997 $120,000
1998 86,000
--------
Total $206,000
========
</TABLE>
F-17
<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-18
<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 must have worked at least 1,000
hours during the year and must be employed at the end of the plan year.
Participants do not vest until their third year of employment and then vest
20% per year through year seven. Employer contributions are voluntary and
generally are based on a percentage of eligible payroll, limited to 15%.
In 1995, the Company elected to contribute 126,761 shares of the Company's
common stock valued at $158,000 to the Employee Plan. The Employee Plan
was terminated in 1996, and, as such, the Company has not made any
additional contributions.
F-19
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) PURCHASE OF AMERICAN MICROCELL
During fiscal 1995, the Company acquired approximately 15% of the
outstanding stock of American Microcell in exchange for 712,751 shares of
common stock at a deemed value of approximately $0.70 per share. American
Microcell was engaged in the research and development of improved
technologies for cellular phones. However, American Microcell proved
unsuccessful in its efforts to finance continuing development of
technologies acquired, and the rights to these technologies reverted to the
original developers. Accordingly, the Company's investment in American
Microcell has been written off as a charge to income in the accompanying
1995 consolidated statement of operations.
(10) ADVANCES TO INTERPRETEL, INC.
In anticipation of a merger, the Company advanced $100,000 to Interpretel,
Inc. in January 1995. The proposed merger was not completed and
Interpretel, Inc. repaid $45,000 of the advance and will issue 100,000
shares of Wavetech, Inc. common stock to the Company in fiscal 1997.
(11) RELATED PARTY TRANSACTIONS
Notes Payable
As of September 30, 1995, the Company had an outstanding promissory note
due to a former owner of CTL in the amount of $495,000, bearing interest at
8%. The note was repaid during fiscal 1996.
As of September 30, 1996, the Company had an outstanding promissory note
due to a former owner and current president of M.C. Davis in the amount of
$80,000, bearing interest at 8%, due December 15, 1996. The note was
repaid in October 1996.
As of September 30, 1996, the Company had an outstanding promissory note
due to a former owner of Particle in the amount of $52,000, bearing
interest at 8%, due on demand.
The Company has noninterest bearing notes payable totaling $800,000 due to
the former owners of M.C. Davis in consideration for the purchase of M.C.
Davis consummated on September 30, 1996 (see Note 1). The notes were paid
in full in October 1996.
Purchase of Land
During April 1996, the Company entered into an agreement with a related
party whereby in exchange for 400,000 shares of the Company's common stock
(valued at $1,000,000) and assumption of mortgages of $367,000, the Company
acquired development land located in Arizona. In connection with the
exchange, the Company incurred acquisition costs of $57,000.
F-20
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
(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>
F-21
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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:
<TABLE>
<CAPTION>
Eleven-month
Year ended period ended Year ended
September 30, September 30, October 31,
1996 1995 1994
--------------- -------------- ------------
<S> <C> <C> <C>
Computed "expected" tax benefit $(1,616,000) (448,000) (117,000)
State income taxes (442,000) 2,000 19,000
Change in valuation allowance 1,912,000 249,000 117,000
Net operating loss carryforwards for
state purposes not available
for future utilization 146,000 142,000 -
Other - 57,000 -
----------- ---------- -----------
$ - 2,000 19,000
=========== ========== ===========
</TABLE>
F-22
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Deferred tax assets:
Stock options $ 688,000 -
Net operating loss carryovers 1,610,000 398,000
Allowance for returns and doubtful accounts 47,000 35,000
---------- -----------
2,345,000 433,000
Less valuation allowance 2,345,000 433,000
---------- -----------
Net deferred tax assets $ - -
========== ===========
</TABLE>
The change in the valuation allowance was an increase of $1,912,000 and
$164,000 in fiscal 1996 and 1995, respectively. The valuation allowance
applies primarily to those temporary differences that are expected to be
deductible at a point in the future when taxable income is uncertain.
Since the Company is entitled to a deduction for federal and state tax
purposes resulting from the exercise of nonqualified stock options and
employees' early dispositions of stock acquired through incentive stock
options, a portion of the deferred tax asset, when recognized by a
reduction of the valuation allowance, will be credited to additional paid-
in capital. As of September 30, 1996, approximately $1,262,000 of the
deferred asset will be credited to additional paid-in capital when
recognized.
As of September 30, 1996, the Company had a net operating loss carryover
for federal and California income tax purpose of approximately $7,376,000
and 3,463,000, respectively. The federal net operating losses expire from
2007 to 2011. The California net operating losses expire from 2000 to
2001. The difference between the federal and California loss carryforwards
results primarily from a 50% limitation on California net operating losses.
The Tax Reform Act of 1986 and the California Conformity Act of 1987 impose
substantial restrictions on the utilization of net operating loss
carryforwards in the event of an ownership change, as defined by Internal
Revenue Code, Section 382. Federal loss carryforwards of approximately
$439,000 are subject to an annual limitation of approximately $176,000.
Any unused annual limitation can be carried forward and added to the
succeeding years annual limitation, subject to the expiration dates
discussed above.
F-23
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) SIGNIFICANT CUSTOMER AND INDUSTRY SEGMENT INFORMATION
Two customers individually accounted for 10% or more of the Company's net
sales in 1996, 1995, and 1994. Sales and the related receivable
percentages to these customers as of September 30, 1996 and 1995, and
October 31, 1994 are summarized as follows:
<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.
Conversion of the Series C preferred is automatic upon the expiration of
three years from the original date of issuance. The Series C preferred is
convertible into common stock at the exchange rate in effect at the date of
conversion, as described in the preferred stock agreements. At the date of
issuance, the exchange rate was less then the prevailing market rate, which
will result in a deemed dividend that will be recognized by the Company in
fiscal 1997. The Series C preferred are junior to the Company's Series B
preferred shares and contain a liquidation preference equal to the original
issue price plus 8% of the original issue price per annum to the date of
liquidation. Series C preferred shares are not entitled to voting
rights.
F-24
<PAGE>
Shares of Series C preferred purchased in excess of certain quantities as
described in the preferred stock agreements, or purchased in addition to
previous purchases of Series B preferred shares are accompanied by
detachable warrants to purchase a number of shares of common stock of the
Company equal to between 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-25
<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 $15 $ 81 $(15) $ 81
September 30, 1995 ============= ==== ========== ====
Year ended September 30, $81 $174 $ -- $255
1996 ============= ==== ========== ====
</TABLE>
F-26
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
2.1(5) Agreement and Plan of Reorganization, dated July 7, 1995, between
the Company and Modern Industries, Inc.
2.2(3) Plan and Agreement of Merger dated September 3, 1996, by and
between Particle Interconnect, Inc., Particle Interconnect
Corporation and the Company.
2.3(4) 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(5) Articles of Incorporation of the Company, and all amendments
thereto, as amended.
3.2(5) Bylaws of the Company.
4.1(5) 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(1) 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(5) Form of Warrant attached to Series C Preferred Stock.
4.6(5) Specimen of Registration Rights Agreement for Series B Preferred
Stock.
4.7(5) Specimen of Registration Rights Agreement for Series C Preferred
Stock.
4.8(5) Plan of Liquidating Dissolution of Energy Corporation dated July
8, 1996.
10.1(2) 1995 Compensatory Stock Option Plan.
10.2(5) 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.
</TABLE>
<PAGE>
Exhibit 11
----------
INTERCELL CORPORATION
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year ended September 30,
-----------------------------------------------------------------------
Statement of operations data: 1996 1995 1994
--------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Net (loss) (5,283,000) (1,321,000) (362,000)
Deemed preferred stock dividend
relating to in-the-money conversion 1,624,648 -- --
terms/(2)/ ---------- ---------- ---------
(6,907,648) (1,321,000) (362,000)
========== ========== =========
Weighted average shares outstanding 13,072,683 7,391,275 4,828,007
Common equivalent shares from stock options
Average common and equivalent shares -- -- --
outstanding/(1)/ ---------- ---------- ---------
13,072,683 7,391,275 4,828,007
========== ========== =========
Net (loss) per common share/(2)/ (.54) (.18) (.08)
========== ========== =========
________________
</TABLE>
/(1)/ The difference between primary and fully diluted earnings per share is not
material.
/(2)/ Net (loss) per common share has been increased by $.09 per share from
amounts previously reported to reflect a deemed dividend on Series B preferred
stock in accordance with recently published views of the Staff of the Securities
and Exchange Commission. See Note 7 to the Consolidated Financial
Statements.
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
The Board of Directors
Intercell Corporation:
We consent to incorporation by reference in the registration statement (No.
333-604) on Form S-8 of Intercell Corporation of our report dated December 6,
1996, relating to the consolidated balance sheets of Intercell Corporation 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, and the related schedule, which report appears in the September 30, 1996,
annual report on Form 10-K/A-1 of Intercell Corporation.
/s/ KPMG Peat Marwick LLP
San Jose, California
February 20, 1997
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As an independent public accountant, I hereby consent to the incorporation
of my report included in this Form 10-K/A-1 into Intercell Corporation's
previously filed Registration Statement on Form S-8, No. 333-604.
/s/ Mark Shelley, CPA
February 20, 1997
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0
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