<PAGE>
As filed with the Securities and Exchange Commission on April 30, 1997
Registration No. 333-21239
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_______________
INTERCELL CORPORATION
(Exact name of registrant as specified in its charter)
COLORADO 3672 84-0928627
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Identification No.)
Classification Number)
7201 E. CAMELBACK ROAD, SUITE 250 GORDON J. SALES
SCOTTSDALE, ARIZONA 85251 999 WEST HASTINGS STREET, SUITE 1750
(602) 970-5500 VANCOUVER, B.C. CANADA V6C 2W2
(Address, including zip code, (604) 684-1533
and telephone number, including (Name, address, including zip code,
area code, of registrant's principal and telephone number, including
executive offices) area code, of agent for service)
With copies sent to:
Robert J. Ahrenholz, Esq.
Brian D. Lewandowski, Esq.
Kutak Rock
717 17th Street, Suite 2900
Denver, Colorado 80202
Approximate date of commencement of the proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
<PAGE>
INTERCELL CORPORATION
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Item Number and Caption Heading in Prospectus
- -------------------------------------- --------------------------------------
<S> <C>
1. Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus.................... Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus.................... Outside Back Cover Page
3. Summary Information and Risk Factors... Prospectus Summary; Risk Factors
4. Use of Proceeds........................ Use of Proceeds
5. Determination of Offering Price........ Cover Page
6. Dilution............................... *
7. Selling Security Holders............... Selling Shareholders
8. Plan of Distribution................... Cover Page; Plan of Distribution
9. Description of Securities to be........ Prospectus Summary; Price Range of
Registered............................. Common Stock-Dividend Policy;
Description of Securities
10. Interests of Named Experts and Counsel.. *
11. Information with Respect to the
Registrant............................. Prospectus Summary; Risk Factors;
Management's Discussion and Analysis
of Financial Condition and Results of
Operations; Business; Management;
Selling Shareholders; Certain
Transactions; Description of
Securities; Financial Statements
12. Disclosure of Commission............... *
Position on Indemnification for
Securities Act Liabilities
</TABLE>
___________
* Omitted because response is negative or inapplicable.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED APRIL 30, 1997
INTERCELL CORPORATION
COMMON STOCK AND COMMON STOCK PURCHASE WARRANTS
___________________
This Prospectus relates to 6,336,987 shares of common stock, no par value (the
"Common Stock") and 1,092,064 Series B Warrants ("Series B Warrants") and
745,386 Series C Warrants ("Series C Warrants" and, together with the Series B
Warrants, the "Warrants") to purchase Common Stock of Intercell Corporation (the
"Company"). Of the securities offered hereby, the Warrants, 1,837,450 shares of
Common Stock issuable upon exercise of the Warrants, and 2,695,473 shares of
Common Stock issuable upon conversion of Series B Preferred Stock, no par value
(the "Series B Preferred Stock") and Series C Preferred Stock, no par value
("Series C Preferred Stock") are being offered by certain shareholders of the
Company (the "Selling Shareholders"); and 1,804,064 shares of Common Stock are
being offered by the shareholders (the "Selling Shareholders of Energy") of
Energy Corporation, an affiliate of the Company ("Energy"), which shares Energy
will distribute to its shareholders pursuant to a Plan of Liquidating
Dissolution. See "CERTAIN TRANSACTIONS." The Series B and Series C Preferred
Stock are sometime referred to in this Prospectus as the "Preferred Stock." The
Preferred Stock is not being offered hereby.
THE 6,336,987 SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, REPRESENT
APPROXIMATELY 35% OF THE COMPANY'S ISSUED AND OUTSTANDING COMMON STOCK AS OF
APRIL 1, 1997. THE SALE OF SUBSTANTIAL AMOUNTS OF COMMON STOCK IN THE PUBLIC
MARKET SUBSEQUENT TO THIS OFFERING COULD ADVERSELY AFFECT THE MARKET PRICE OF
THE COMMON STOCK. SEE "RISK FACTORS-VOLATILITY OF STOCK PRICE."
THE COMPANY WILL RECEIVE NO PROCEEDS FROM THE COMMON STOCK DISTRIBUTED TO OR
SOLD BY THE SELLING SHAREHOLDERS OF ENERGY. THE COMMON STOCK AND WARRANTS
OFFERED HEREBY, ARE BEING OFFERED OR SOLD TO THE PUBLIC BY THE SELLING
SHAREHOLDERS AND THE SELLING SHAREHOLDERS OF ENERGY AND NOT BY THE COMPANY.
THEREFORE, PROCEEDS FROM ANY SALE WILL BE RECEIVED BY THE SELLING SHAREHOLDERS
AND THE SELLING SHAREHOLDERS OF ENERGY AND NOT BY THE COMPANY. THE COMPANY MAY
RECEIVE PROCEEDS UPON THE EXERCISE, IF EVER, OF THE WARRANTS REGISTERED HEREBY.
Each Series B Warrant and Series C Warrant entitles the holder to purchase one
share of Common Stock at an exercise price of $3.9375 per share and $3.25 per
share, respectively, subject to adjustment upon the occurrence of certain
events, at any time, with respect to the Series B Warrants, commencing on
October 14, 1996 and ending at 5:00 p.m. Eastern time, on July 1, 2001 and, with
respect to the Series C Warrants, commencing on June 1, 1997 and ending at 5:00
p.m. Eastern time on November 30, 2001. See "DESCRIPTION OF SECURITIES-
Warrants."
The Common Stock is traded on the over-the-counter market and is quoted on the
OTC Bulletin Board under the symbol "INCE." On April 1, 1997 the average of the
closing bid and asked prices for the Common Stock was $2.06. There is currently
no market for the Warrants and there can be no assurance given that a market
will develop. See "PRICE RANGE OF COMMON STOCK."
The sale of the Common Stock by the Selling Shareholders of Energy and the
sale of the Common Stock and Warrants being offered by the Selling Shareholders
hereby may be effected from time to time in one or more transactions directly to
third parties or through brokers or dealers in negotiated transactions or
otherwise at market prices prevailing at the time of sale, at prices related to
such prevailing market prices or at negotiated prices. The distribution of the
Common Stock to Energy's shareholders will be directly made by Energy. The
Company has agreed to pay the costs incurred in connection with the registration
of the Common Stock and Warrants offered hereby, which are estimated to be
$163,698. The Company has also agreed to indemnify the Selling Shareholders
against certain liabilities, including liabilities under the Securities Act of
1933, as amended (the "Securities Act"). See "PLAN OF DISTRIBUTION."
=========================================
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 1 HEREOF FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY EACH PROSPECTIVE INVESTOR.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
======================
The date of this Prospectus is May ___, 1997
<PAGE>
This Page Intentionally Left Blank.
<PAGE>
PROSPECTUS SUMMARY
The following material is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this Prospectus.
Certain technical terms used herein are defined in the "GLOSSARY." This
Prospectus contains forward-looking statements which involve risks and other
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "RISK FACTORS" and elsewhere in this Prospectus.
THE COMPANY
GENERAL
Intercell Corporation (the "Company") was incorporated under the laws
of Colorado on October 4, 1983, and was originally engaged in the marketing of
business and cellular telephone equipment. This business was discontinued and
all remaining assets of the Company were liquidated or otherwise abandoned
during 1991, and all obligations of the Company were paid or otherwise
satisfied.
From 1991 until the acquisition of Modern Industries, Inc. on July 7,
1995, which subsequently changed its name to Energy Corporation ("Energy"), the
Company was generally inactive and reported no operating revenues prior to the
fiscal year ending December 31, 1994. During that time period, the Company
explored various new business and investment opportunities involving, primarily,
companies engaged in specialty lines of business in the wireless communications
and electronic technology industries.
On July 7, 1995, the Company purchased all of the assets and
liabilities of Energy. Energy's principal asset was its wholly owned
subsidiary, California Tube Laboratory, Inc. ("CTL"). This transaction was
accounted for as an acquisition of the Company by Energy and, as such, the
historical financial statements contained herein reflect the financial
statements of Energy. The results of operations of the Company have been
included only since the date of such acquisition. See "INDEX TO FINANCIAL
STATEMENTS" and "PROSPECTUS SUMMARY-Summary Historical Consolidated Financial
Data of the Company."
As a result of the acquisition of Energy and additional acquisitions
made during the 1996 fiscal year (see "BUSINESS-Recent Acquisitions and
Transactions"), the Company is currently engaged in three lines of business: (i)
the proposed design, development and production of shielded cellular phone
antennas (the "Antenna Systems") that use the Company's proprietary antenna
technology (the "Antenna Technology") as well as the manufacture of miniature
and non-miniature coils, transformers and other electronic assemblies; (ii) the
current manufacture and rebuilding of specialty electron power tubes; and (iii)
the proposed design, development and production of patented particle
interconnect products ("Particle Interconnect Products") that use the Company's
patented particle interconnect technology (the "PI Technology") and a
proprietary
i
<PAGE>
trade secret electroplating process (the "Proprietary Electroplating Process").
Currently, the only products available for manufacture and sale by the Company
are the Company's specialty electronic power tubes and miniature and non-
miniature coils, transformers and other electronic assemblies.
The Company's operations are or will be conducted by and through its
wholly owned subsidiaries, CTL, Cellular Magnetics, Inc. ("Cellular Magnetics"),
Intercell Wireless Corp. ("Intercell Wireless"), which was formed after the end
of the 1996 fiscal year, and Particle Interconnect Corporation ("PI Corp.").
Because the Antenna Technology and the PI Technology are in the development
stage, the Company does not anticipate operating revenues from such lines of
business until such time, if ever, as products developed using the Antenna
Technology and PI Technology are completed, developed, manufactured in
commercial quantities, available for commercial delivery, and accepted in the
market place.
ANTENNA TECHNOLOGY
The Company has determined to pursue a new line of business involving
the development and manufacture of shielded cellular phone antennas. The
Company has the rights to certain patent applications relating to the Antenna
Technology that the Company jointly developed with the Telecommunications
Research Center at Arizona State University ("ASU"). The Antenna Technology is
designed to reduce actual or perceived potential health hazards that may be
associated with exposure to electromagnetic signals by using a "shielded"
antenna. The Antenna Technology has been tested in working prototypes in
cellular phones by ASU. These tests indicated a significant reduction in
radiation emissions caused by wireless devices, and cellular phones in
particular. The tests also indicated several other benefits including increased
range and reception, and improved battery life. In addition, the Antenna
Technology results in an antenna that is smaller in size and lighter in weight
than most antennas currently on the market.
The Company anticipates that the initial market for the Antenna
Technology will be the cellular telephone market. The market for cellular
technology has materially increased in the last decade, growing from
approximately 92,000 subscribers in the United States in 1983 to more than 33.5
million at the end of 1995. Although industry revenue from the manufacture and
sale of cellular phones is expected by industry analysts to grow just .2% in the
1996 calendar year to approximately $6.27 billion, the number of cellular phones
sold is expected by industry analysts to increase more than 15% to 16.6 million
in the 1996 calendar year.
The Company's Antenna Technology is designed to minimize the radiation
emitted toward the user in order to reduce potential health hazards that may be
associated with exposure to electromagnetic energy. The Company has installed
external and internal prototype cellular phone antennas that use the Antenna
Technology in existing cellular phone models. Preliminary testing of the
prototype antennas indicated that they reduced the amount of electromagnetic
energy in the near field by 90% while in use. In such testing, there was also
evidence of a significant increase in transmittal reception and range of the
signal and a demonstrable extension of the life of the cellular phone battery.
ii
<PAGE>
After an analysis of the Antenna Technology, the Company determined
that the manufacture of an aftermarket "retrofit" external antenna for existing
cellular phones (the "External Antenna") would not be marketable in the volumes
necessary to justify further development. The Company intends to focus its
efforts on the development of an internal antenna (the "Internal Antenna"),
which does not have an external antenna component. The Company intends to
design and manufacture Internal Antenna packages for use as a retrofit to
existing cellular phones and to sell customized cellular phones under the
Company logo or under the logo of cellular phone carriers or distributors. The
Company has completed substantially all documentation and specifications for the
Internal Antenna and has several prototypes in place. The Company has
substantially completed all internal testing of its Antenna Systems and intends
to distribute its Antenna Systems for independent testing in the near future.
The Company intends to commence production of its Internal Antenna products in
the latter part of the 1997 fiscal year. Such production, is dependent upon,
among other things, final testing and design of the Internal Antenna, obtaining
strategic partnerships with cellular service providers or cellular phone
original equipment manufacturers ("OEMs"), and market acceptance of the Antenna
Systems. There can be no assurance that the Internal Antenna will be accepted
by the market place or that unforeseen problems will not arise in the final
design and testing of the Internal Antenna or in the development and marketing
of the Company's Antenna Systems.
The Company purchased AC Magnetics, Inc., doing business as M.C. Davis
Company ("M.C. Davis"), to manufacture and build products that use the Antenna
Technology. M.C. Davis, now known as Cellular Magnetics, is currently working
on fixtures and tooling required for the manufacture and sale of the Company's
Internal Antenna products. In addition to manufacturing products that use the
Antenna Technology, Cellular Magnetics will continue to produce miniature and
non-miniature coils, transformers, surface mount coils and other small
electronic products at its 8,000 square foot manufacturing facility in Arizona
City, Arizona and its 8,600 square foot manufacturing plant in Sonora, Mexico.
See "BUSINESS-The Company's Antenna Technology" for a discussion of
the Antenna Technology.
ELECTRON TUBES
The Company manufactures and rebuilds a wide variety of electron power
tubes in numerous forms and models which service the frequency range of 200 KHz
to 18,000 MHz. Currently, the Company provides rebuilt and new electron tubes
to a wide variety of customers who use microwave technology in various types of
applications, including AM and VHF radio, television, linear accelerators,
radar, electron guns and industrial microwave and heating use. This line of
business will continue to be conducted by and through the Company's wholly owned
subsidiary, CTL.
Electron power tubes or electron tubes are enclosed tubes, in which
electrons act as the principal conductors of current between at least two
electrodes. Electron tubes fall into two categories, oscillators and
amplifiers. Oscillators are typically magnetrons and power grid tubes
iii
<PAGE>
(triodes and tetrodes), and amplifiers are klystrons and traveling wave tubes.
Electron power tubes are commonly identified by reference to the frequency band
of the electromagnetic spectrum (generally the L-band through KU-band) within
which they operate.
Electron and vacuum tubes are generally recognized as the dominant
technology for the generation of high power radio frequency ("RF") and
microwaves. Consequently, these tubes are used by many companies for widely
varying applications. The manufacturing and rebuilding of these units is a
significant industry. The Company estimates that the annual worldwide rebuilt
market is approximately $5.7 million for magnetron tubes and $20 million for
power grid tubes.
The Company believes that it is one of the more significant domestic
companies engaged in rebuilding electron power tubes in the United States. The
Company manufactures and rebuilds electron tubes in numerous iterations and
models that service the frequency range of 200 KHz to 18,000 MHz with power
levels of up to three million watts. The Company's product lines operate within
the following frequency bands: HF and UHF bands - 200 KHz to 1,000 MHz, L-band
500 MHz to 2,000 MHz; S-band 2,000 MHz to 4,000 MHz; C-band 4,000 MHz to 8,000
MHz; X-band 7,000 MHz to 12,000 MHz and Ku-band 12,000 MHz to 18,000 MHz. The
Company primarily manufactures and rebuilds electron power tubes categorized as
follows: CW (continuous waive) magnetrons, pulsed magnetrons, klystrons, power
grid tubes (triodes and tetrodes), linear accelerators guides and electron guns.
In the markets in which the Company competes, the Company believes it is the
major supplier of L-band, C.W. magnetrons in the world and one of the major
rebuilders of high power and high frequency triodes.
The Company is engaged in a very narrow segment of the microwave
technology industry, the rebuilding of electron and microwave tubes, and has
attempted to avoid direct competition with the major manufacturers of microwave
products. The manufacturing of new microwave products is dominated by several
very large companies in the United States and internationally. To date, these
companies have not chosen to dedicate their resources to the rebuilding of such
products or the manufacture of the electron tubes the Company manufactures.
The Company has entered into a lease agreement to move its
manufacturing operation to a new facility customized for the Company's
operations. In order to minimize the effects on the Company's business, the
Company plans to move into the facility over a period of several months. The
Company began moving into the few facility in March 1997 and expects to have
completed the move by the end of June 1997. The Company believes that the new
facility will enable it to meet its current and future manufacturing needs.
See "BUSINESS-The Company's Electron Tube Products" for a description
of the Company's electron tube business.
iv
<PAGE>
PARTICLE INTERCONNECT TECHNOLOGY
The Company proposes to pursue a new line of business involving the
development and manufacturing of high performance, low-cost interconnect
products. The Company's PI Technology utilizes patents procured and owned by
the Company for the production of electronic interconnect products. The Company
intends to use the Proprietary Electroplating Process for the manufacture of 12"
x 18" panels used to mount, package or attach electronic devices and other
products utilizing the PI Technology. This proposed new line of business will
be conducted through the Company's wholly owned subsidiary, PI Corp.
The PI Technology utilizes patents owned by the Company for bonding
and joining metal surfaces to enhance electronic connectivity and also uses the
Proprietary Electroplating Process to electroplate panels at an anticipated
lower cost than conventional manufacturing processes. The Company's core
product is similar to "conductive sandpaper" in appearance, and is formed by
attaching conductive diamond particles to a panel. The "conductive sandpaper"
creates a socket or connector for electronic devices, and replaces the use of
soldering to create such connections.
The Company can apply these particles to many different substrates,
both flexible, rigid, metallic and non-metallic. This ability, coupled with the
very low contact force, gives the Company the capability to make reliable
connectors out of materials that could collapse if exposed to the normally
required contact forces. The Company's initial focus is on producing a particle
coated panel for use in a ball grid array ("BGA") production socket or other Z-
axis IC packages.
The Company believes that market trends in IC packaging will lead to
increased demand for emerging high density substrates. As ICs are becoming
increasingly powerful, they produce more heat and require a significantly
greater number of input/output ("I/O") electrical connections to attach the
silicon die, thus placing substantially greater demands on the IC packaging
materials. For instance, a typical IC five years ago required up to
approximately 80 I/O connections to the silicon die, whereas today typical ICs
require up to approximately 250 I/O connections. The Company believes, based on
published industry information, that the number of high density IC packages
requiring more than the typical 250 I/O connections to the silicon die increased
from an estimated 240 million in 1990 to an estimated 777 million in 1995.
Market demands are currently forcing certain ICs toward 1,000 I/O connections.
The Company believes that its PI Technology could potentially provide
a cost effective solution to solving the increasing demands made on IC Packaging
materials. Based on the experiences of current licensees to the PI Technology
and the Company's research and development performed to date, the Company
believes that the PI Technology can establish reliable, rematable connections at
10 grams of force. This means that 10 kg versus 40 to 80 kg of force is
required to interconnect a 1,000 I/O IC socket with the underlying substrate.
The Company believes this reduction in force may enable manufacturers to connect
complex ICs to products through the next several generations of electronics.
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<PAGE>
The Company intends to initially focus on high speed electroplating of
conductive diamond particles for panels used by third-parties to manufacture BGA
production sockets or other Z-axis IC packages. The primary objective is to
provide this service to numerous connector manufacturers, in competing and non-
competing applications. The Company intends to provide this service to
companies in the form of teaming/co-manufacturing agreements. The Company may
also enter into joint venture agreements or exclusive or non-exclusive license
agreements with leading connector manufacturers. The Company believes this
approach will provide it with the ability to penetrate the market utilizing
existing customer bases and reputations of established leaders in the connector
industry. In many cases the Company will attempt to establish long term
strategic alliances with these industry leaders to continue development and
manufacture of new products that will incorporate PI Technology.
See "BUSINESS-The Company's Particle Interconnect Technology" for a
description of the PI Technology.
THE COMPANY
The Company was organized under the laws of the State of Colorado on
October 4, 1983. Unless the context otherwise requires, the "Company" refers to
Intercell Corporation, its predecessors and its subsidiaries. The Company's
principal executive offices are located at 999 West Hastings Street, Suite 1750,
Vancouver, B.C. Canada V6C 2W2. Its telephone number is (604) 684-1533.
RISK FACTORS
The Common Stock and Warrants offered hereby involve a high degree of
risk. See "RISK FACTORS."
vi
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THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Series B Warrants to Purchase
Common Stock offered by the
Selling Shareholders.............. 1,092,064 Warrants
Common Stock issuable upon
exercise of Series B Warrants..... 1,092,064 Common Shares
Series C Warrants to Purchase
Common Stock offered by the
Selling Shareholders.............. 745,386 Warrants
Common Stock issuable upon
exercise of Series C Warrants..... 745,386 Common Shares
Common Stock offered by the
Selling Shareholders upon
conversion of Series B Preferred
Stock............................ 658,998 Common Shares
Common Stock offered by the
Selling Shareholders upon
conversion of Series C Preferred
Stock............................ 2,036,475 Common Shares
Common Stock offered by the Selling
Shareholders of Energy........... 1,804,064 Common Shares/(1)/
Common Stock outstanding after the
Offering and assuming exercise of
Warrants and Conversion of
Preferred Stock.................. 22,342,116 Common Shares/(2)/
</TABLE>
vii
<PAGE>
Use of proceeds..................... Net proceeds (approximately
$6,558,808), if any, which might be
received by the Company from the
exercise of all of the Warrants will
be used for general corporate
purposes. The Company will not
receive any proceeds from the sale of
the Common Stock underlying the
Preferred Stock, or the Common Stock
underlying the Warrants offered
hereby or the Common Stock
distributed to and sold by the Energy
Selling Shareholders. See "USE OF
PROCEEDS."
Common Stock Nasdaq symbol (OTC).... "INCE"
- ----------------
/(1)/ A total of 5,412,191 shares of Common Stock are available for distribution
to the shareholders of Energy pursuant to the Plan of Liquidating Dissolution in
six installments over the next three years. Each installment includes
approximately 902,032 shares, the first installment of 902,032 shares will be
made promptly after the effective date of the Company's Registration Statement
of which this Prospectus is a part, and an additional 902,032 shares ninety (90)
days thereafter. For each of the years 1998 and 1999, approximately 902,032
shares will be distributed on or about January 31 and April 30. Other than the
1,804,064 shares offered by this Prospectus, the Company does not intend to
register the additional shares scheduled for distribution to the shareholders of
Energy in calendar years 1998 and 1999. Rather, because of recent amendments to
Rule 144 adopted by the Securities and Exchange Commission on and after July 7,
1997, the remaining 3,608,120 shares of Common Stock to be distributed to the
shareholders of Energy will be distributed by Energy, as planned, but may be
resold by the Energy shareholders in reliance upon Rule 144(k) without
registration, provided such persons at the time of any sales are not affiliates
and have not been affiliates within ninety (90) days prior to resale. See "PLAN
OF DISTRIBUTION."
/(2)/ Does not include 4,396,000 shares of Common Stock currently issuable upon
the exercise of the Company's stock options outstanding as of the date hereof.
viii
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
OF THE COMPANY
On December 4, 1995, the Company changed its fiscal year end from December
31, 1995 to September 30, 1995 due to the acquisition of the assets and
liabilities of Energy on July 7, 1995 for 5,412,191 shares of Common Stock,
which represented 52% of the Common Stock outstanding at that time. As a
result, for accounting purposes, Energy was considered the acquiring corporation
and the comparative information presented herein represents that of Energy prior
to July 7, 1995 and Energy and the Company subsequent to such date. See
"BUSINESS-Recent Acquisitions and Transactions," and "INDEX TO FINANCIAL
STATEMENTS."
The following selected consolidated financial data should be read in
conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" and the Company's Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus. The Consolidated
Statements of Operations data presented below for the three months ended
December 31, 1996 and 1995 and for the fiscal year ended September 30, 1996, the
eleven months ended September 30, 1995 and the fiscal year ended October 31,
1994 and the Consolidated Balance Sheet data as of December 31, 1996 and
September 30, 1996 and 1995 have been derived from the Company's Consolidated
Financial Statements included in this Prospectus. The Consolidated Financial
Statements as of and for the fiscal year ended September 30, 1996 and the eleven
months ended September 30, 1995 were audited by KPMG Peat Marwick LLP,
independent certified public accountants. The Consolidated Financial
Statements, as of and for the fiscal year ended October 31, 1994 were audited by
Mark Shelley, CPA, independent public accountant. The Statements of Operations
data set forth below for the years ended October 31, 1993 and 1992 and the
Balance Sheet data set forth below at October 31, 1994, 1993 and 1992 are
derived from audited financial statements not included in this Prospectus.
The selected historical financial information as of December 31, 1996 and
for the three months ended December 31, 1996 and 1995 are derived from unaudited
financial statements of the Company. The Company's management believes such
unaudited financial statements have been accounted for on the same basis as the
audited financial statements and include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of such
financial statements.
ix
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<TABLE>
<CAPTION>
Three Months
Ended 12/31
--------------------------
Year Eleven Year Year Year
Ended Months Ended Ended Ended Ended
1996 1995 9/30/96 9/30/95/(1)/ 10/31/94 10/31/93 10/31/92
----------- ---------- ------------ ------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Total net sales $ 1,599,000 $ 853,000 $ 3,405,000 $ 3,768,000 $2,066,000 $ 60,000 $ 0
Costs & expenses 2,991,000 1,144,000 8,688,000 5,089,000 2,428,000 142,000 43,000
Net loss (1,922,000) (291,000) (5,283,000) (1,321,000) (362,000) (82,000) (43,000)
Net loss per common share $ (0.14) $ (0.03) $ (0.54) $ (0.18) $ (0.08) $ (0.04) $ N/A
Weighted average
Number of common
shares outstanding 16,527,588 10,457,547 13,072,683 7,391,275 4,828,007 2,066,979 1,781,880
At period end:
Current assets $12,622,000 N/A $10,625,000 $ 1,796,000 $ 1,499,000 $ 4,000 $ 0
Current liabilities 873,000 N/A 2,060,000 1,799,000 1,621,000 82,000 149,000
Working capital (deficit) 11,749,000 N/A 8,565,000 (3,000) (122,000) (78,000) (149,000)
Total assets 15,983,000 N/A 13,826,000 3,069,000 3,141,000 51,000 0
Long-term debt 29,000 N/A 86,000 48,000 48,000 175,000 0
Stockholders' equity (deficit) 15,081,000 N/A $11,680,000 1,222,000 $1,472,000 $(206,000) $(149,000)
Cash dividends per
common share 0 0 0 0 0 0 0
Deemed preferred stock 221,000 0 1,624,648 -- -- -- --
dividend relating to
in-the-money conversion
Accretion on Preferred Stock 139,000 -- -- -- -- -- --
_______________
</TABLE>
/(1)/ On December 4, 1995, the Company changed its fiscal year end from December
31 to September 30. The comparative information presented herein represents that
of Energy which was deemed to be the acquiring company in the July 7, 1995
transaction. Energy's fiscal year was previously October 31.
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RISK FACTORS
This Prospectus contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended. Actual events or
results could differ materially from those discussed in the forward-looking
statements as a result of various factors, including, without limitation, the
risk factors set forth below and elsewhere in this Prospectus. The following
risk factors should be considered carefully before purchasing the Common Stock
offered hereby.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES
Due to the Company's change of business purpose, the Company has a
limited operating history that is relevant to its proposed future operations.
The Company does not anticipate producing significant operating revenues until
such time, if ever, as products developed using the Antenna Technology and PI
Technology are completely developed, manufactured in commercial quantities and
available for commercial delivery, and accepted in the marketplace. There can
be no assurance that the Antenna Technology and PI Technology, if developed and
manufactured, will be able to compete successfully in the marketplace and/or
generate significant revenue. The Company anticipates incurring significant
costs in connection with the development of its technologies and proposed
products and there is no assurance that the Company will achieve significant
revenues to offset anticipated operating costs. Included in such operating
costs are research and development expenses, marketing costs, manufacture and
assembly, and general and administrative expenses. The Company's financial
statements reflect the increased operating expenses that the Company has
incurred. Specifically, the Company's operating losses increased from $433,000
in 1995 to $5,196,000 in 1996 and from $291,000 in the first quarter of fiscal
1996 to $1,982,000 in the first quarter of fiscal 1997. Similarly, the net cash
(used in) operating activities increased from ($201,000) in 1995 to ($1,697,000)
in 1996 and from $60,000 provided by operations in the first quarter of fiscal
1996 to ($1,206,000) used in operations in the first quarter of fiscal 1997.
Inasmuch as the Company will continue to have high levels of operating expenses
and will be required to make significant expenditures in connection with its
continued research and development activities, the Company anticipates that such
losses will continue until such time, if ever, as the Company is able to
generate sufficient revenues to exceed its total costs of operation. As of
December 31, 1996, the Company had a cumulative deficit of $9,501,000. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and "PROSPECTUS SUMMARY-Summary Historical Consolidated Financial
Data of the Company."
NEW LINES OF BUSINESS
The Company intends to market, manufacture and distribute new Antenna
Systems using the Antenna Technology and Particle Interconnect Products using
the PI Technology, each of which are newly formed business ventures with no
operating history. The Company's viability, profitability and growth depend in
large part upon the successful completion of the development, manufacture and
distribution of its Antenna Systems and Particle Interconnect Products. There
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<PAGE>
can be no assurance that any of the Company's new technologies or products will
be developed, manufactured, marketed or distributed. In connection with the
development of commercially saleable prototypes, the Company must successfully
complete a testing program for the products before they can be marketed.
Unforeseen technical problems arising out of such testing could materially and
adversely affect the Company's ability to manufacture a commercially acceptable
version. In addition, the Company's success will depend upon its technologies
and proposed products meeting acceptable cost and performance criteria and upon
their timely introduction into the marketplace. Further, the Company believes
that a significant requirement for introducing its products into the market will
be entering into a joint venture, co-manufacturing, licensing or other similar
arrangement with existing manufacturers or distributors in these fields. There
can be no assurance the technologies and proposed products will satisfactorily
perform the functions for which they are designed, that they will meet
applicable price or performance objectives or that unanticipated technical or
other problems will not occur that would result in increased costs and/or
material delays in their development.
Other than the operations of CTL and Cellular Magnetics, the Company
has no experience or business history in marketing any of the products it
intends to manufacture and sell. There can be no assurance that the Company
will gain the necessary experience, either through the hiring of experienced
personnel or by acquiring such experience through trial and error, to ever
successfully and profitably conduct its businesses.
FUTURE CAPITAL REQUIREMENTS
The Company's future capital requirements will depend on many factors,
including operating profits, cash flow, the success of the its Antenna Systems
and Particle Interconnect Products, the ability to maintain adequate
manufacturing facilities, the progress of the Company's research and development
efforts, expansion of the Company's marketing and sales efforts, and the status
of competitive products. If additional funds are raised by issuing equity
securities, further dilution to the existing stockholders will result. If
adequate financing is not available, the Company may be required to delay, scale
back or eliminate its research and development or manufacturing programs or
obtain financing through arrangements with partners or others that may require
the Company to relinquish rights to certain of its technologies, patents,
potential products or other assets. In this regard, the Company has determined
that its future capital requirements will be met in part by entering into a
joint venture, co-manufacturing, licensing or other similar arrangement with
existing connector manufacturers (with respect to the manufacture of the
Particle Interconnect Product) and with existing manufacturers of the internal
components for cellular phones or cellular service providers (with respect to
the Antenna Systems). The failure to enter into such relationships could result
in the Company requiring substantial additional capital and resources to bring
the Particle Interconnect Products and Antenna Systems to market. The Company
does not believe that, in the absence of such relationships, it will have the
necessary resources to compete in the Z-axis interconnect market or to produce a
customized cellular phone. While the Company has had discussions with potential
joint venture or co-manufacturing partners, no agreements, written or otherwise,
of any material nature have been formally or informally entered into with
respect thereto. In addition,
2
<PAGE>
there can be no assurance that any additional financing will be available to the
Company on acceptable terms, or at all. Accordingly, the inability to obtain
such financing could have a material adverse effect on the Company's business,
financial condition and results of operations. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
RIGHTS TO PI TECHNOLOGY
Pursuant to oral and written representations and warranties of
Particle Interconnect, Inc., a California corporation ("Particle California"),
made to the Company at the time of its merger with and into PI Corp. on
September 3, 1996, the Company believed that it was purchasing all right, title
and interest in and to the PI Technology, with the exception of certain licenses
granted to others to practice the inventions. The Company recently became aware
of a purported assignment on February 14, 1991 of a one-half interest, title and
right in and to the then patent application, which is now U.S. Patent No.
5,083,697 (a basic patent underlying the PI Technology), all inventions
disclosed in the patent description and all patents that might be granted on
those inventions, made by Louis DiFrancesco, the inventor of the PI Technology,
to Mr. Kenneth S. Bahl. To the extent the assignment is valid, which the
company does not concede, Mr. Bahl would have a one-half interest in certain
patents underlying and in and to the PI Technology. As the joint owner of these
patents, Mr. Bahl may sell his interest therein for his own profit, or license
others to import, make, use, sell or offer to sell without regard to the rights
of the Company. Mr. Bahl may have licensed the technology to another company at
or about the time of the assignment of the half interest to him. Mr. Bahl may
sell the interest or any part of it, or grant licenses to others without regard
to the Company's wishes. Any other sale or assignment that may have occurred
and any future assignments, sale or license of Mr. Bahl's one-half interest in
the patents to other persons or entities could materially adversely affect the
Company's business, financial condition and results of operations with respect
to the PI Technology. See "BUSINESS-Intellectual Property."
NO ASSURANCE OF PRODUCT QUALITY,
PERFORMANCE AND RELIABILITY
The Company has no experience in producing and manufacturing new
technologies from the conceptual phase to a commercially acceptable product.
The Company expects that its customers will establish demanding specifications
for quality, performance and reliability. Specifically, the Company's Antenna
Systems and Particle Interconnect Products will generally be manufactured for
incorporation into high technology products manufactured by original equipment
manufacturers ("OEMs") or products manufactured by the Company's joint venture
partners, co-manufacturing partners or licensees, if any, and, accordingly, will
need to meet exacting specifications. The Company believes that, if its
products prove successful, a substantial portion of the OEMs or the Company's
joint venture partners, co-manufacturing partners or licensees, if any, will
require the Company to qualify as an approved supplier. In order to so qualify,
the Company may be required to satisfy stringent quality control standards and
undergo extensive in-plant inspections of the Company's personnel,
manufacturing
3
<PAGE>
processes, equipment and quality control systems. Although the Company's
efforts will be devoted to ensure that its capabilities and quality control
standards are adequate to meet specific OEM customer requirements or the
requirements of the Company's joint venture partners, co-manufacturing partners
or licensees, if any, there can be no assurance that the Company will be able to
comply with quality control standards established by such parties or that the
Company will be able, for financial or other reasons, to qualify as an approved
supplier for its existing and prospective customers.
UNCERTAINTY OF MARKET
ACCEPTANCE FOR ANTENNA TECHNOLOGY
The Company's prospective customers, cellular service providers and
distributors, are currently manufacturing, using or selling equipment without
the Company's Antenna Systems. To be successful in convincing these potential
customers that its Antenna Systems should be incorporated into new and existing
cellular telephones, the Company must, among many actions, convince its
potential customers that the Antenna Systems reduce the health concerns of users
and increases the telephone range and battery life of a cellular phone.
Achieving market acceptance for new products requires substantial marketing and
sales efforts and expenditure of significant funds to create awareness of and
demand for the Company's products. There can be no assurance that future
additions to the Company's product line will achieve market acceptance or result
in significantly increased levels of revenues. See "BUSINESS-The Company's
Antenna Technology-Company Antenna Technology Strategy."
Any delay in the adoption of the Company's Antenna Systems may result
in prospective customers utilizing alternative technologies in their next
generation of cellular telephones, which may have a material adverse effect on
the Company's business, financial condition and results of operations. There
can be no assurance that prospective customers will incorporate the Company's
Antenna Systems into cellular telephones in the future, or that the Antenna
Technology will be viewed to any significant extent as an improvement over
existing technologies and achieve commercial acceptance in the cellular
telephone market. To date, the Federal Communications Commission (the "FCC")
has not mandated any specific requirements for reducing the electromagnetic
radiation produced from cellular phones nor has it recognized the potential
health hazards associated with the use of cellular phones and there can be no
assurances given that any such requirements or recognition will be mandated or
occur in the future. Moreover, the development of a customized cellular phone
that will include the Antenna Technology will depend in significant part on the
Company's ability to enter into a joint venture, co-manufacturing, licensing or
other similar arrangement with existing manufacturers of the internal components
of cellular phones and there can be no assurances given that any such
relationships will be entered into in the future. Failure to achieve or sustain
commercial acceptance of the Company's Antenna Systems would materially
adversely affect the Company's business, financial condition and results of
operations. See "BUSINESS-The Company's Antenna Technology-Company Antenna
Technology Strategy."
4
<PAGE>
UNCERTAINTY OF MARKET
ACCEPTANCE FOR PI TECHNOLOGY
Similarly, the Company's prospective customers, connector
manufacturers and electronic equipment OEMs, are currently manufacturing and
selling equipment without the Company's Particle Interconnect Products. To be
successful in convincing these potential customers that its Particle
Interconnect Products should be used in lieu of existing technologies, the
Company must, among many actions, convince its potential customers that the
Particle Interconnect Products make rematable contacts with reduced force and
can be manufactured efficiently and cost effectively. In addition, the Company
may be required to obtain an additional manufacturing facility to supply its
Particle Interconnect Products. Achieving market acceptance for new products
requires substantial marketing and sales efforts and expenditure of significant
funds to create awareness of and demand for the Company's products. There can
be no assurance that future additions to the Company's product line will achieve
market acceptance or result in significantly increased levels of revenues. See
"BUSINESS-The Company's PI Technology-Company PI Technology Strategy."
Any delay in the adoption of the Company's Particle Interconnect
Products may result in prospective customers utilizing alternative technologies
in their next generation of IC packages or other electronic interconnections,
which may have a material adverse effect on the Company's business, financial
condition and results of operations. Specifically, the Company believes that it
is necessary to establish a market presence in the 1997 calendar year. To
achieve such a presence, the Company believes it is necessary to enter into a
joint venture, co-manufacturing, licensing or other similar arrangement with one
or more connector manufacturers. There can be no assurances given that the
Company will be able to enter into such relationships in the future, that
prospective customers will use the Particle Interconnect Products, or that the
PI Technology will be viewed to any significant extent as an improvement over
existing technologies and achieve commercial acceptance in the electronic
interconnect industry. Failure to achieve or sustain commercial acceptance of
the Particle Interconnect Products would likely materially adversely affect the
Company's business, financial condition and results of operations. See
"BUSINESS-The Company's PI Technology-Company PI Technology Strategy."
NO ASSURANCE OF SUCCESSFUL
EXPANSION OF OPERATIONS
The Company's significant increase in the scope and the scale of its
operations, including the hiring of additional personnel, has resulted in
significantly higher operating expenses. As a result, the Company anticipates
that its operating expenses will continue to increase. Expansion of the
Company's operations may also cause a significant demand on the Company's
management, its finances and other resources. The Company's ability to manage
the anticipated future growth, should it occur, will depend upon a significant
expansion of its accounting and other internal management systems and the
implementation and subsequent improvement of a variety of systems, procedures
and controls. There can be no assurance that significant problems in these
areas will not occur. Any failure to expand these areas and implement and
5
<PAGE>
improve such systems, procedures and controls in an efficient manner at a pace
consistent with the Company's business could have a material adverse effect on
the Company's business, financial condition and results of operations.
Any significant sales growth will be dependent in significant part
upon the Company's ability to enter into a joint venture, co-manufacturing,
licensing or other similar arrangement with existing participants in the Z-axis
interconnect and the wireless communications markets, in addition to the
Company's expansion of its marketing, selling, manufacturing and customer
service capabilities. This expansion will require significant expenditures to
build the necessary Company infrastructure. The expenditures will significantly
increase in the event the Company is unable to enter into a joint venture, co-
manufacturing, licensing or other similar arrangement with current industry
participants in the Z-axis interconnect and wireless communications markets.
See "-Future Capital Requirements." There can be no assurance that the
Company's attempts to expand its marketing, sales, manufacturing and customer
support efforts will be successful or will result in additional sales or
profitability in any future period. As a result of the expansion of its
operations and the anticipated increase in its operating expenses, as well as
the difficulty in forecasting revenue levels, the Company expects to continue to
experience significant fluctuations in its results of operations. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and "BUSINESS."
DEPENDENCE ON KEY PERSONNEL AND NECESSITY
TO HIRE ADDITIONAL QUALIFIED PERSONNEL
The Company's future operating results depend in significant part upon
the continued contributions of its key technical and senior management
personnel, many of whom would be difficult to replace. See "MANAGEMENT." The
Company's future operating results also depend in significant part upon its
ability to attract and retain qualified personnel with experience in
manufacturing and marketing that can be applied to the Company's new and
existing products. The Company must hire additional qualified personnel in
order to become successful. Other than the manufacturing and rebuilding of
electron tubes and miniature electronic assemblies, no members of management
have significant experience in operating a manufacturing company. There can be
no assurance that the Company will be successful in attracting or retaining such
personnel. In addition, the success of the Company is dependent upon its
ability to hire and retain additional qualified technical and financial
personnel. There can be no assurance that the Company will be able to hire or
retain such necessary personnel. The loss of any key employee, the failure of
any key employee to perform in his or her current position or the Company's
inability to attract and retain skilled employees as needed, could materially
and adversely affect the Company's business, financial condition and results of
operations. See "BUSINESS-Employees" and "MANAGEMENT."
6
<PAGE>
DEPENDENCE ON A COMPANY OWNED MANUFACTURING
FACILITIES; RISKS OF BUSINESS INTERRUPTIONS
The Company intends to manufacture its products at company-owned or
leased manufacturing facilities. See "BUSINESS-Properties." Except for the
contemplated move to new manufacturing facilities located in Watsonville,
California, the Company has no present intention of establishing additional
manufacturing locations and, therefore, the Company is dependent on existing
facilities to manufacture its products. If these facilities are not available,
even temporarily, for operations at or near full capacity for any extended
period, the business, operating results and financial condition of the Company
could be materially and adversely affected. Except for the Company's
manufacturing facility for electron tubes, the capacity of the Company's
manufacturing facilities have been estimated by management to be sufficient for
future needs. However, if additional capacity is required as a result of
unplanned increased in demand for the Company's products, the Company may suffer
delays and increased costs in establishing other facilities which could
adversely affect customer relationships, cause a loss of market opportunities
and have a material adverse effect on the Company's business, operating results
and financial condition. In order to remain competitive, the Company will
continue to introduce new products and processes into its manufacturing
environment. These changes can disrupt the manufacturing process which could
adversely affect customer relationship, cause a loss of market opportunities and
have a material adverse effect on the Company's business, operating results and
financial condition. See "BUSINESS."
The Company's internal manufacturing capacity for electron tubes is
currently limited. The Company has entered into a lease arrangement to move
CTL's manufacturing operations to a new, larger manufacturing facility in
Watsonville, California. However, there can be no assurance that the Company's
internal manufacturing capacity will be sufficient to fulfill the Company's
orders. The Company also faces uncertainty over the effects of business
slowdowns relating to the move to the Watsonville facility. In the event
unanticipated difficulties arise in the move, such difficulties could adversely
impact the Company's operations. See "BUSINESS-The Company's Electron Tube
Products-Manufacturing of Electron Tubes."
REQUIREMENT FOR RESPONSE TO
RAPID TECHNOLOGICAL CHANGE AND
REQUIREMENT FOR FREQUENT
NEW PRODUCT INTRODUCTIONS
The cellular telephone market and the micro-electronic market are
subject to rapid technological change, frequent new product introductions and
enhancements, product obsolescence and changes in end-user requirements. These
markets may be eroded or replaced with other forms of technology. The Company's
ability to be competitive in these markets will depend in significant part upon
its ability to successfully manufacture, market and sell its products on a
timely and cost-effective basis that responds to changing customer requirements.
Any success of the Company in developing new or enhanced products will depend
upon a variety of factors, including new product selection, integration of the
various elements of its complex
7
<PAGE>
technology, timely and efficient completion of design, timely and efficient
implementation of manufacturing and assembly processes, and development of
competitive products by competitors. The Company may experience delays from time
to time in the development and introduction of its Antenna Systems and Particle
Interconnect Products. Moreover, there can be no assurance that the Company will
be successful in selecting, developing, manufacturing and marketing new products
or that errors will not be found in the Company's new products after
commencement of commercial shipments, if any, which could result in the loss of
or delay in market acceptance. The inability of the Company to introduce in a
timely manner products that satisfy market demands could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "BUSINESS."
COMPETITION; TECHNOLOGICAL AND PRODUCT OBSOLESCENCE
The market for the Company's prospective products is highly
competitive. The Company currently competes and will compete with numerous
well-established foreign and domestic companies, including many of which possess
substantially greater financial, marketing, personnel and other resources than
the Company and have established reputations for success in the development,
sale and service of products. The Company expects that companies which have
developed or are developing new technologies or products, as well as other
companies which have the type of expertise which would encourage them to attempt
to develop and market competitive products, may attempt to develop new products
directly competitive with the Company's products. In addition, the markets for
the Company's products are characterized by rapid and significant technological
changes and frequent new product introductions. Current competitors or new
market entrants could introduce new or enhanced products with features that
could render the Company's products obsolete or less marketable. The ability of
the Company to compete successfully will depend in large measure on its ability
to maintain development capabilities in connection with upgrading its products
and quality control procedures and to adapt to technological changes and
advances in the electronics industry, including ensuring continuing
compatibility with evolving generations of electronic components and OEM
manufacturing equipment. There can be no assurance that the Company will be
able to keep pace with the technological demands of the marketplace or
successfully enhance its products or develop new products which are compatible
with products of specific OEMs. See "BUSINESS."
UNCERTAINTY REGARDING PROTECTION
OF PROPRIETARY RIGHTS
The Company attempts to protect its intellectual property rights
through patents, trademarks, trade secrets and a variety of other measures.
However, there can be no assurance that such measures will provide adequate
protection for the Company's trade secrets or other proprietary information,
that disputes with respect to the ownership of its intellectual property rights
will not arise (such as the current matter with Mr. Kenneth S. Bahl discussed
above under "-Rights to PI Technology), that the Company's trade secrets or
proprietary technology will not otherwise become known or be independently
developed by competitors or that the Company can otherwise meaningfully protect
its intellectual property rights. There can be no assurance
8
<PAGE>
that any patent owned by the Company will not be invalidated, circumvented or
challenged, that the rights granted thereunder will provide competitive
advantages to the Company or that any of the Company's pending or future patent
applications will be approved or what the scope of the patent coverage will be
as sought by the Company. Furthermore, there can be no assurance that others
will not develop similar products, duplicate the Company's products or design
around the patents owned by the Company or that third parties will not assert
intellectual property infringement claims against the Company. In addition,
there can be no assurance that foreign intellectual property laws will
adequately protect the Company's intellectual property rights abroad. The
failure of the Company to protect its proprietary rights could have a materially
adverse effect on its business, financial condition and results of operations.
Litigation may be necessary to protect the Company's intellectual
property rights and trade secrets, to determine the validity of and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
infringement, invalidity, right to use or ownership claims by third parties or
claims for indemnification resulting from infringement claims will not be
asserted in the future. If any claims or actions are asserted against the
Company, the Company may seek to obtain a license under a third party's
intellectual property rights. There can be no assurance, however, that a
license will be available under reasonable terms or at all. In addition, should
the Company decide to litigate such claims, such litigation could be extremely
expensive and time-consuming and could materially adversely effect the Company's
business, financial condition and results of operations, regardless of the
outcome of the litigation. See "BUSINESS-Intellectual Property."
LICENSE RIGHTS TO PI TECHNOLOGY
Prior to the Company's acquisition of Particle Interconnect, Inc. (see
"BUSINESS-Recent Acquisitions and Transactions"), Mr. Louis DiFrancesco, the
inventor of the PI Technology, or companies he controlled, granted exclusive and
non-exclusive licenses to use the patents and patent applications on the PI
Technology to five companies. The exclusive licenses pertain to the use of the
PI Technology in the field of sockets for use in the automated handling and
testing of integrated circuits and in the field of MCM-D thin film substrates.
While such exclusive licenses are in force, the Company cannot compete in the
fields in which the exclusive license has been granted. The non-exclusive
licenses include a non-exclusive license to use the PI Technology in the field
of electrically conductive components. While the licenses are generally limited
to certain fields of use, the terms of the licenses do not prohibit the
licensees from directly competing with the Company or any of the Company's
future licensees. Should the present licensees do so, such competition could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, Mr. DiFrancesco and not the Company
will receive any royalty payments or other compensation received under the terms
of these licenses. See "BUSINESS-Intellectual Property."
9
<PAGE>
ACQUISITION RISKS
An important part of the Company's recent growth strategy has been,
and is expected to continue to be, the acquisition of companies that complement
or supplement the Company's existing business operations. Any acquisition
involves inherent uncertainties, such as the effect on the acquired business of
its integration into the Company and the availability of managerial resources to
oversee the operation of the acquired business. Integrating acquired products
and operations requires a significant amount of time and skill of the Company's
management and may place significant demands on the Company's operations and its
financial resources. Although an acquired business may have enjoyed
profitability and growth prior to its acquisition, there can be no assurance
that such profitability or growth will continue thereafter.
POTENTIAL LIABILITY AND INSURANCE REGARDING
ENVIRONMENTAL REGULATIONS; GOVERNMENT REGULATION
The Company's operations involve the use and handling of
environmentally hazardous substances. The use of hazardous substances is
subject to extensive and frequently changing federal, state and local laws and
substantial regulation under these laws by governmental agencies, including the
United States Environmental Protection Agency, various state agencies and county
and local authorities acting in conjunction with federal and state authorities.
Among other things, these regulatory bodies impose restrictions to control air,
soil and water pollution. The Company believes that it is in substantial
compliance with all material federal and state laws and regulations governing
its operations. Furthermore, amendments to statutes and regulations and the
Company's expansion into new areas could require the Company to continually
modify or alter methods of operations at costs which could be substantial.
There can be no assurance that the Company will be able, for financial or other
reasons, to comply with applicable laws and regulations. Failure by the Company
to comply with applicable laws and regulations could subject the Company to
civil remedies, including fines and injunctions, as well as potential criminal
sanctions, which could have a material adverse effect on the Company. See
"BUSINESS-Government Regulation."
REGULATORY COMPLIANCE
The various business operations of the Company are subject to numerous
federal, state and local laws and regulations, including those relating to the
use and disposal of hazardous substances discussed above. Any difficulties or
failure to obtain required licenses, permits or authorizations, could adversely
impact the Company's operations. The failure to obtain or retain any licenses
or permits would have a material adverse effect on the Company's business. See
"BUSINESS-Government Regulation."
While the Company believes it is aware of all of the permits it is
required to obtain and all of the governmental regulations with which it is
required to comply, and believes that it has obtained such permits, there can be
no assurance that this will be the case, that such compliance might not increase
the expenses the Company will incur or that such regulations will not be
10
<PAGE>
modified, making it increasingly difficult for the Company to operate its
businesses as anticipated. Additionally, there can be no assurance that the
Company can comply with all such applicable regulations in the future and
maintain any license which is granted.
NO MARKET FOR WARRANTS
There is no public market for the Warrants and the Company does not
intend to apply for listing of the Warrants on any national securities exchange
or of quotation of the Warrants through the NASDAQ automated quotation system.
No assurance can be given as to the liquidity of any markets that may develop
for the Warrants, the ability of holders of the Warrants to sell their Warrants,
or the price at which holders would be able to sell their Warrants. Future
trading prices of the Warrants, if any, will depend on many factors, including
among other things, the Company's operating results and the market for similar
securities.
NECESSITY OF FUTURE REGISTRATION OF WARRANTS AND
STATE BLUE SKY REGISTRATION; EXERCISE OF WARRANTS
The Warrants may trade separately upon the closing of the Offering.
Although the Warrants will not knowingly be sold to purchasers in jurisdictions
in which the Warrants are not registered or otherwise qualified for sale or
exempt, purchasers may buy the Warrants in the after-market or may move to
jurisdictions in which the Warrants and the Common Stock underlying the Warrants
are not so registered or qualified or exempt. In this event, the Company would
be unable lawfully to issue Common Stock to those persons desiring to exercise
their Warrants (and the Warrants will not be exercisable by those persons)
unless and until the Warrants and the underlying Common Stock are registered or
qualified for sale in jurisdictions in which such purchasers then reside or an
exemption from such registration or qualification requirement exists in such
jurisdictions. There can be no assurance that the Company will be able to
effect any required registration or qualification.
The Warrants offered hereby will not be exercisable unless the Company
maintains a current registration statement on file with the Commission either by
filing post-effective amendments to the Registration Statement, of which this
Prospectus is a part, or by filing a new registration statement with respect to
the exercise of such Warrants. The Company has agreed to use its best efforts
to file and maintain, so long as the Warrants offered hereby are exercisable, a
current registration statement with the Securities and Exchange Commission (the
"SEC") relating to such Warrants and the shares of Common Stock underlying such
Warrants. However, there can be no assurance that it will do so or that such
Warrants or such underlying Common Stock will be or continue to be so
registered.
The value of the Warrants could be adversely affected if a then
current prospectus covering the Common Stock issuable upon exercise of the
Warrants is not available pursuant to an effective registration statement or if
such Common Stock is not registered or qualified for sale or exempt from
registration or qualification in the jurisdictions in which the holders of
Warrants reside. See "DESCRIPTION OF SECURITIES-Warrants."
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VOLATILITY OF STOCK PRICE
Sales of substantial amounts of Common Stock in the public market
after this offering, or the perception that such sales could occur, could
adversely affect the market price of the Common Stock. Upon completion of the
Offering, the Company will have outstanding 22,552,431 shares of Common Stock
assuming conversion of the Preferred Stock and Warrants into 4,532,923 shares of
Common Stock and excluding shares subject to currently exercisable stock
options. All of the 6,336,987 shares registered in the Offering will be freely
transferable by the Selling Shareholders, since to the Company's knowledge,
based upon representations and filings, if any, with the Securities and Exchange
Commission (the "SEC") made by the Selling Shareholders, none of the Selling
Shareholders are affiliates of the Company and to the knowledge of the Company
no shareholder of Energy is an affiliate of the Company. Consequently, the
Company will have approximately 20,897,763 shares held by non-affiliates which
are freely transferable, which constitutes the "float" in the public market for
the Company's Common Stock. The remaining 1,654,668 shares of Common Stock are
"restricted" or "control" securities within the meaning of Rule 144 ("Rule 144")
under the Securities Act and may not be sold in the absence of registration
under the Securities Act unless an exemption from registration is otherwise
available, including the exemption contained in Rule 144. The Company has filed
a registration statement on Form S-8 to register 3,581,180 shares of Common
Stock under its 1995 Compensatory Stock Option Plan (the "Plan"). Shares of
Common Stock issued from time to time under the Plan will be available for sale
in the public market, subject to Rule 144 volume limitations applicable to
affiliates. In connection with the issuance of the Preferred Stock the Company
also granted Warrants to purchase shares of Common Stock. As of April 1, 1997,
1,092,064 and 745,386 Warrants to purchase shares of Common Stock with an
exercise price of $3.975 and $3.25 per share, respectively, were issued and
outstanding. See "PLAN OF DISTRIBUTION," "SHARES ELIGIBLE FOR FUTURE SALE" and
"DESCRIPTION OF SECURITIES."
RISK OF LOW-PRICED SECURITIES
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure relating to the market for penny stocks in connection with
trades in any stock defined as a penny stock. Regulations enacted by the SEC
generally define a penny stock to be an equity security that has a market price
of less than $5.00 per share, subject to certain exceptions. Unless an
exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith.
In addition, if the Company's securities are not quoted on NASDAQ or
if the Company does not meet the other exceptions to the penny stock regulations
cited above, trading in the Company's securities would be covered by Rule 15g-9
promulgated under the Securities Exchange Act of 1934, as amended, for non-
NASDAQ and non-national securities exchange listed securities. Under such rule,
broker/dealers who recommend such securities to persons other than established
customers and accredited investors must make a special written suitability
12
<PAGE>
determination for the purchaser and receive the purchaser's written agreement to
a transaction prior to sale. Securities also are exempt from this rule if the
market price is at least $5.00 per share.
If the Company's securities become subject to the regulations
applicable to penny stocks, the market liquidity for the Company's securities
could be adversely affected. In such event, the regulations on penny stocks
could limit the ability of broker/dealers to sell the Company's securities and
thus the ability of purchasers of the Company's securities to sell their
securities in the secondary market.
13
<PAGE>
PLAN OF DISTRIBUTION
The distribution of the Common Stock to the shareholders of Energy
Corporation will be made directly by Energy Corporation ("Energy") and the
Company's transfer agent. The sale of the Common Stock by the Selling
Shareholders of Energy and the sale of the Common Stock and Warrants being
offered by the other Selling Shareholders (the "Offering") may be effected from
time to time in one or more transactions by such shareholders directly to third
parties or through brokers or dealers in negotiated transactions or otherwise at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. The Company has neither
retained in any capacity nor will it pay compensation to any brokers or dealers
in connection with the securities being distributed or offered hereby.
The Company has registered 1,804,064 shares of Common Stock for resale
by the shareholders of Energy, formerly known as Modern Industries, Inc., an
affiliate of the Company, pursuant to a Liquidating Plan of Dissolution adopted
by Energy and its shareholders on July 8, 1996. In order to minimize the
potential adverse effect on the market for the Common Stock, Energy will
distribute the 5,412,191 shares of Common Stock to its shareholders in six
installments over a three-year period. Each installment includes approximately
902,032 shares. Energy intends to distribute the first 902,032 shares promptly
after the effective date of the Company's Registration Statement of which this
Prospectus is a part, and an additional 902,032 shares ninety (90) days
thereafter. Other than the 1,804,064 shares offered by this Prospectus, the
Company does not intend to register the additional shares scheduled for
distribution to the shareholders of Energy in calendar years 1998 and 1999.
Rather, because of recent amendments to Rule 144 adopted by the Securities and
Exchange Commission on and after July 7, 1997, the remaining 3,608,120 shares of
common stock to be distributed to the shareholders of Energy will be distributed
by Energy, as planned, but may be resold by the Energy shareholders in reliance
upon Rule 144(k) without registration, provided such persons at the time of any
sales are not affiliates or have not been affiliates of the Company within
ninety (90) days prior to resale. See "CERTAIN TRANSACTIONS."
The Company will not engage any broker-dealers in any capacity in
connection with the Energy distribution. The distribution will be implemented
by the Company and Energy, through the Company's transfer agent. There are no
standby commitments or agreements from any person to purchase all or any part of
the securities offered by this Prospectus.
USE OF PROCEEDS
The Company will not receive any proceeds from the conversion of the
Preferred Stock into Common Stock, the sale of shares of Common Stock by the
Selling Shareholders or the Selling Shareholders of Energy, or, if sold by the
Selling Shareholders, any proceeds from the sale of the Warrants. However,
assuming that all Warrants offered hereby are exercised, the proceeds to the
Company from such exercise are estimated to be approximately $6,722,506 based on
an exercise price of $3.9375 per share with respect to the Series B Warrants and
$3.25 per share with respect to the Series C Warrants. There can be no
assurance given, however,
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<PAGE>
that any Preferred Stock will be converted or that Warrants will be exercised.
The Company expects to use substantially all of the net proceeds received from
exercise of the Warrants for general working capital purposes.
PRICE RANGE OF COMMON STOCK
The Common Stock is presently traded on the over-the-counter market on
the OTC Bulletin Board maintained by the National Association of Securities
Dealers, Inc. (the "NASD") The NASDAQ symbol for the Common Stock is "INCE."
The following table sets forth the range of high and low bid quotations for the
Common Stock of each full quarterly period during the fiscal year or equivalent
period for the fiscal periods indicated below. The quotations were obtained
from information published by the NASD and reflect interdealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions. The average for the closing bid and asked prices for the Common
Stock was $2.06 on April 1, 1997.
<TABLE>
<CAPTION>
1995 Fiscal Year High Low
---------------- ---- ---
<S> <C> <C>
December 31, 1994 $ 5.13 $ .25
March 31, 1995 3.69 .50
June 30, 1995 2.00 .625
September 30, 1995 .825 .625
1996 Fiscal Year
----------------
December 31, 1995 $ 1.625 $ .625
March 31, 1996 1.9375 1.00
June 30, 1996 5.75 2.00
September 30, 1996 5.50 2.75
1997 Fiscal Year
----------------
December 31, 1996 4.00 3.875
</TABLE>
As of April 1, 1997, there were 287 holders of record of its Common
Stock.
Based upon information provided to the Company by persons holding
securities for the benefit of others, it is estimated that the Company has in
excess of 3,200 beneficial owners of its Common Stock as of April 1, 1997.
Currently there exists no public market for the Warrants and there can
be no assurances given that a public market will develop in the future. See
"RISK FACTORS-No Market for Warrants."
15
<PAGE>
DIVIDEND POLICY
While there currently are no restrictions prohibiting the Company from
paying dividends to its shareholders, the Company has not paid any cash
dividends on its Common Stock in the past and does not anticipate paying any
dividends in the foreseeable future. Earnings, if any, are expected to be
retained to fund future operations of the Company. There can be no assurance
that the Company will pay dividends at any time in the future.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the
"PROSPECTUS SUMMARY-Summary Historical Consolidated Financial Data of the
Company" and "INDEX TO FINANCIAL STATEMENTS."
The statements contained in this Prospectus, if not historical, are
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, and involve risks and uncertainties that could
cause actual results to differ materially from the results, financial or
otherwise, or other expectations described in such forward-looking statements.
These risks and uncertainties that may affect the operations, performance,
development and results of the Company's business include those, among others,
discussed under "RISK FACTORS" and "-Trends and Uncertainties" below. Any
forward looking statement or statements speak only as of the date on which such
statement was made, and the Company undertakes no obligation to update any
forward looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events. Therefore, forward-looking statements should not be
relied upon as a prediction of actual future results.
From 1991 through the fiscal year ended December 31, 1994, the Company
was generally inactive and reported no operating revenues. On July 7, 1995 the
Company purchased all of the assets and liabilities of Energy and its wholly
owned subsidiary CTL in exchange for 5,412,191 shares of Common Stock. The
5,412,191 shares issued to Energy represented approximately 52% of the Company's
outstanding Common Stock upon completion of the transaction. As such, the
transaction was treated for financial reporting purposes as a purchase of the
Company by Energy. The assets of the Company were recorded at their estimated
fair value at the date of acquisition and the Company's results of operations
have been included in the consolidated statements of operations subsequent to
the date of the acquisition. Energy's historical share amounts have been
adjusted on a retroactive basis in a manner similar to a reverse stock split.
See "BUSINESS-Company Overview" and "-Recent Acquisitions and Transactions."
During the eleven-month period ended September 30, 1995, the Company
changed its fiscal year-end to September 30. Previously, the Company had an
October 31 year-end.
The Company has substantially expanded the scope of its business and
revised its business strategy subsequent to the Energy transaction through the
acquisition of certain patents, patent applications and proprietary technology
relating to the Antenna Technology and the PI Technology. During this time, the
Company has been engaged primarily in directing, supervising and coordinating
the Company's activities in the continuing development of its new
17
<PAGE>
lines of business, in addition to the recruitment of management and technical
personnel and raising new capital to fund its operations.
The primary asset acquired in the Energy transaction, its wholly owned
subsidiary CTL, continued to generate positive cash flows in the 1996 fiscal
year, although sales decreased 9.6% from the 1995 fiscal year. This decrease in
sales was primarily attributable to a change in product mix, the delayed timing
of certain orders in the fourth quarter of 1996 and production capacity
constraints at CTL's current manufacturing facilities. CTL anticipates moving
to new production facilities over the next several months beginning in March
1997 and ending June 1997. The Company believes that the new facility will
eliminate the current production capacity constraints.
On November 15, 1995, the Company entered into a research and
development agreement with ASU for the development of the Antenna Technology.
To date, the Company has developed several working prototypes of the External
Antenna and anticipates commencing commercial production of an Internal Antenna
package and customized cellular phones sold under the Company's logo or the logo
of certain cellular phone providers or retailers in the latter part of the 1997
fiscal year. The Company cannot, however, provide any assurance that it will be
able to do so.
On September 30, 1996, the Company formed a wholly owned subsidiary,
Cellular Magnetics, which acquired all the assets and liabilities of M.C. Davis
in exchange for 277,778 shares of Common Stock valued at $1,000,000 and $800,000
in cash. While the Company had initially considered constructing its own
manufacturing facility, this acquisition, accounted for by the purchase method
of accounting, provides the Company with both a facility for the immediate
production of its Antenna Technology and an established manufacturing facility.
The Company intends to continue to produce the miniature and subminiature
electronic components previously produced by M.C. Davis and does not anticipate
that the production of the Antenna Technology will significantly impact its
ability to manufacture these electronic assemblies.
To further diversify the Company's operations and to capitalize on a
new and emerging technology, the Company formed a wholly owned subsidiary, PI
Corp., which merged with Particle Interconnect, Inc., a California corporation
("Particle California"). The Company exchanged 1,400,000 shares of Common Stock
for all of the outstanding stock of Particle California. The transaction was
accounted for as an immaterial pooling-of-interest as the prior operations of
Particle California are not material to the Company's consolidated financial
position, results of operations or cash flows. Accordingly, the consolidated
financial statements for periods prior to the date of such acquisition have not
been restated, except for loss per common share information. From the date of
such merger, PI Corp. has been engaged primarily in the construction of
production capabilities at its plant and the continuing development of the PI
Technology. PI Corp. expects to commence commercial production of Particle
Interconnect Products in 1997.
18
<PAGE>
On July 7, 1996, the Company completed an offering pursuant to
Regulation S under the Securities Act (the "Regulation S Offering") of 1,000
shares of its Series B Preferred Stock, with attached warrants, pursuant to
which it received net proceeds of $8,900,000. The Series B Preferred Stock is
convertible into Common Stock at the exchange rate in effect at the date of
conversion, as described in the preferred stock agreements. At the date of
issuance, the exchange rate was equal to 85% of the then prevailing market rate,
resulting in a deemed dividend of $1,765,000. The Company recognized on a pro
rata basis $1,625,000 of the dividend in its 1996 fiscal year net loss per
common share calculation and the balance of $140,000 in the first quarter of the
1997 Fiscal year.
To further improve the Company's working capital position, the Company
completed an offering pursuant to Regulation D to institutional investors on
December 15, 1996, of 525 shares of its Series C Preferred Stock, with attached
warrants, pursuant to which it received net proceeds of $4,672,500. The Series
C Preferred Stock is convertible into Common Stock at the exchange rate in
effect at the date of conversion, as described in the preferred stock
agreements. At the date of issuance, the exchange rate was less than the
prevailing market rate, resulting in a deemed dividend of $932,000 that will be
recognized by the Company in fiscal 1997. The Company recognized $81,000 of
this amount on a pro rata basis in the first quarter of the 1997 fiscal year.
See "-Liquidity and Capital Resources" below.
RESULTS OF OPERATIONS
Three Months Ended December 31, 1996 compared to Three Months Ended
December 31, 1995.
Revenues. Total revenues in the first quarter of 1997 were $1,599,000
and represented an 87% increase over the first quarter revenues in the prior
fiscal year. This increase in revenue was primarily attributable to the
inclusion of revenues from the Company's new electronic components operations of
$536,000 in the 1997 fiscal year and a $211,000 increase in first quarter sales
of electron tube products over the first quarter sales of the prior fiscal year.
In September 1996, the Company, through its wholly owned subsidiary
Cellular Magnetics, merged with M.C. Davis. The first quarter of the 1997
fiscal year represents the first quarter in which the results of the Company's
new electronic components operations have been consolidated with the Company's.
Sales of electron tube products increased by 25% in the first quarter
of 1997 compared to the first quarter of 1996. This increase was primarily due
to new defense related contracts entered into in the final quarter of the 1996
fiscal year for which production did not begin until the first quarter of the
1997 fiscal year. The Company anticipates that sales under these contracts will
continue for the remainder of the year at the rate experienced in the first
quarter of the 1997 fiscal year. The balance of the Company's operations have
remained stable in the first quarter of 1997 compared to the first quarter sales
of the 1996 fiscal year.
19
<PAGE>
Gross Profits. Gross profits were 29% in the first quarter of the
1997 fiscal year compared with 33% in the first quarter of the 1996 fiscal year.
This decrease in margins was primarily attributable to lower margins experienced
on the sale of electronic components (30%) and increased costs associated with
the manufacture of new electron tube products. In the first quarter of fiscal
1996, the Company focused primarily on rebuilding electron tube products that
generally carry higher margins than the manufacture and sale of new electron
tube products.
Research and Development. Research and development expenses increased
to $374,000 in the first quarter of fiscal 1997 compared to $12,000 in the first
quarter of fiscal 1996. This increase was primarily attributable to research
and development activities incurred in connection with the Company's new PI
Technology ($341,000) as the Company commenced assembly of its pre-production
line and began testing of the line and the technology. In addition, the Company
continued work on the development of the Antenna Technology in conjunction with
ASU.
General, Selling and Administrative. General, selling and
administrative expenses increased by 280% to $2,064,000 in the first quarter of
the 1997 fiscal year compared to $541,000 in the first quarter of fiscal 1996.
This increase was primarily attributable to the inclusion of general, selling
and administrative expenses for the Company's new electronic components and
cellular antenna operations ($169,000), particle interconnect operations
($358,000), and compensation expense recognized on the transfer of stock options
from principal stockholders to an officer and director of the Company
($530,000). In addition, the Company incurred additional legal and accounting
costs in the first quarter of 1997 related to the filing the Company's
Registration Statement of which this Prospectus is a part.
Other Income/Expense. The Company earned $98,000 in interest income
on its cash and short term investments in the first quarter of the 1997 fiscal
year while incurring interest expense of $43,000. In the first quarter of the
1996 fiscal year, the amount of interest income earned by the Company was
insignificant and interest expense was $25,000.
Income Taxes. As of December 31, 1996 the Company had a net operating
loss carryover for federal and California income tax purposes. The benefit of
these net operating loss carryforwards has not been recorded by the Company as
it is uncertain that the Company will generate sufficient income in future
periods to utilize the loss carryforwards.
Fiscal Year Ended September 30, 1996 compared to Fiscal Year Ended
September 30, 1995 (Eleven Months).
Net Sales. Net sales, which are derived solely from the operations of
CTL, decreased 9.6% in 1996 to $3,405,000 from $3,768,000 in 1995. This
decrease in sales was generally due to a combination of a change in the
Company's product mix and the delayed timing of significant orders which were
originally planned for the fourth quarter of 1996, but were not placed until the
end of the 1996 calendar year.
20
<PAGE>
In the 1996 fiscal year, net sales of new magnetrons totaled
$1,436,000, accounting for 42% of sales, compared with $1,455,000 or 39% of net
sales in 1995. Net revenues from rebuilding of magnetrons decreased from
$1,848,000 or 49% of net sales in 1995 to $1,403,000 or 41% of net sales in
1996. This shift in sales mix was due primarily to the Company's focus on new
and more complex tube types such as certain Pulsed magnetrons in an attempt to
broaden the Company's product line and a slow down in orders for rebuilt
magnetrons for the food processing industry in the last two quarters of 1996.
It is anticipated that the sales mix experienced in the final six months of
fiscal 1996 will continue for the foreseeable future.
The Company obtained a significant contract for the manufacture of new
and rebuilt Pulsed magnetrons in June of 1996. However, the initial order under
this contract was not placed until September, 1996. As a result, sales were not
recorded under this contract until the first quarter of fiscal 1997, resulting
in a significant increase in sales in the first quarter of 1997 over the final
quarter of 1996.
In conjunction with the changes in sales mix noted above, the Company
experienced a decrease in gross margins to 17% in the 1996 fiscal year from 23%
in 1995. This decrease was due to the increased development time and costs
associated with the new and more complex tube types now being constructed by the
Company. In particular, direct labor costs increased to 34% of net sales in
1996 compared to 30% in 1995, while direct materials costs increased to 26% in
1996 from 25% in 1995. The Company anticipates that gross margins will improve
in the 1997 fiscal year as development of these new tube types is now complete
and production should therefore become more efficient.
In addition to the above, the Company's current electron tube
manufacturing facility is operating at maximum capacity. The Company believes
that its move to the new Watsonville manufacturing facility, which is expected
to be completed by the end of June 1997, should satisfy the Company's production
needs for the foreseeable future. The Company anticipates that it may
experience minor disruptions in production due to the movement of equipment and
the familiarization of employees with the new manufacturing facility, which
disruptions are not expected to have a material impact on the Company's
operations.
Allowance for Returns and Doubtful Accounts. The Company's allowance
for returns and doubtful accounts increased from $81,000 in 1995 to $255,000 in
1996. This increase is primarily a result of the return of certain Pulsed
magnetrons, a new product of the Company, for which rework was requested by the
purchasers. The Company does not believe that similar returns will occur in the
future.
Selling, General and Administrative Expense. Selling, general and
administrative ("SGA") expenses increased 331.5% from $1,317,000 in 1995 to
$5,683,000 in 1996. This increase is primarily attributable to an increase in
compensation expense of $3,686,000 resulting from the vesting of stock options
to purchase an aggregate of 4,841,000 shares of Common Stock granted to the
Company's officers, directors, employees and consultants in 1996 at exercise
prices below the fair value of the Common Stock on the date of grant. The
Company
21
<PAGE>
recorded deferred compensation expense of $4,017,000 based on these grants. The
options were granted as an incentive to such persons at a time when the Company
did not have sufficient funds to otherwise compensate such persons. In the
future, the Company does not intend to grant stock options in the amounts
granted in 1996 or at less than the fair value of the Common Stock on the date
of grant.
In addition to the above, SGA expenses increased in 1996 due to higher
legal and audit costs ($387,000 in 1996 compared to $102,000 in 1995) associated
with the Company's acquisitions, financings and compensation arrangements, and
increased compensation paid to management and administrative personnel.
In the 1997 fiscal year, it is anticipated that sales and marketing
expenses will increase considerably over 1996 levels. In 1996, sales and
marketing expenses were limited to costs associated with CTL's operations. In
1997, significant costs will be incurred in order to bring the Company's Antenna
Systems and Particle Interconnect Products to market. In addition, the Company
intends to significantly expand its marketing activities for its electron tube
products in an effort to capture a larger share of the market.
Research and Development. Research and development expenses increased
from -0- in 1995 to $88,000 in 1996. This increase was attributable entirely to
costs associated with research and development of the Company's Antenna Systems.
It is anticipated that research and development activities will materially
increase in 1997 as the Company continues to develop its Antenna Technology and
the PI Technology.
Interest Income and Expense. The Company earned interest income of
$36,000 in 1996 compared to -0- in 1995. This increase was due to the
investment in Treasury Bills of undeployed cash resources realized through the
sale of its Series B Preferred Stock. The Company anticipates that interest
income will increase in 1997 as undeployed funds, including those raised through
the sale of its Series C Preferred Stock, will continue to be invested in low
risk interest bearing securities.
Interest expense increased to $90,000 in 1996 compared to $88,000 in
1995 due to continued bank financing and outstanding notes payable to related
parties. The Company repaid these financings and notes in October 1996 with the
proceeds received from the Series B Preferred Stock financing and does not
currently anticipate obtaining further debt financing.
Net Operating Loss Carryforwards for Tax Purposes. As of September
30, 1996 the Company had a net operating loss carryover for federal and
California income tax purposes of approximately $7,376,000 and $3,463,000
respectively. The federal net operating losses expire from 2007 to 2011. The
California net operating losses expire from 2000 to 2001. The benefit of these
net operating loss carryforwards has not been recorded by the Company as it is
uncertain that the Company will generate sufficient income in future periods to
utilize the loss carryforwards.
22
<PAGE>
Eleven Months Ended September 30, 1995 compared to Fiscal Year Ended
October 31, 1994.
On July 7, 1995, the Company acquired all of the assets and assumed
all of the liabilities of Energy through the issuance of 5,412,191 shares of
Common Stock. The principal asset acquired in this transaction was all of the
issued and outstanding common stock of CTL. Energy had acquired its investment
in CTL on May 1, 1994. In accordance with generally accepted accounting
principles, the results of operations disclosed in the Company's audited
consolidated financial statements include CTL's operations for the eleven-month
period ended September 30, 1995 for the 1995 fiscal year and for the six-month
period ended October 31, 1994 for the comparative 1994 fiscal year.
Net Sales and Gross Margins. The Company's net sales of $3,768,000,
which are attributable entirely to the operations of CTL, increased 82% in the
1995 fiscal year compared to net sales of $2,066,000 in 1994. This increase was
due primarily to the inclusion in the financial statements of eleven months of
CTL's operations in the 1995 fiscal year compared to only six months in fiscal
1994 as described above. Monthly sales in both the 1995 and 1994 fiscal years
averaged approximately $340,000 due to capacity limitations at CTL's
manufacturing facilities.
Although CTL's average monthly sales remained constant in the 1995 and
1994 fiscal years, the Company experienced a decline in gross margins on sales
of electron tubes to 23% of net sales in 1995 from 42% in 1994. This decrease
was due primarily to increased costs associated with the development and
manufacture of new types of tubes. In addition, the Company sold a greater
percentage of new tubes relative to rebuilt tubes in the 1995 fiscal year
compared to 1994. As new tubes carry a lower gross margin than rebuilt tubes,
an overall decline in gross margins was experienced.
Selling, General and Administrative Expenses. SGA expenses increased
by 11% in the 1995 fiscal year due to increased consulting, legal and audit
costs associated with the Energy transaction and the Company's financing
activities.
Interest Expense. Interest expense increased to $88,000 in 1995 from
$3,000 in 1994 primarily due to an increase in notes payable to former owners of
CTL and other third parties.
Loss on Investments. During fiscal 1995, the Company purchased
approximately 15% of the outstanding stock of American Microcell for 712,571
shares of common stock at a fair value of approximately $0.70 per share, or
$500,000. American Microcell was engaged in the research and development of
improved technologies for cellular phones. However, American Microcell proved
unsuccessful in its efforts to finance continuing development of the
technologies acquired, and the rights to these technologies reverted to the
original developers. Accordingly, the Company wrote off its investment in
American Microcell in fiscal 1995.
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<PAGE>
In addition, the Company sold certain microwave technology rights to a
related party for a note in the face amount of $1,250,000. Due to concerns
about collectibility, the Company reserved the remaining carrying value in
fiscal 1995. In addition, related deferred development costs totalling $44,631
were written off in fiscal 1995. Losses on investments in fiscal 1994 were not
significant.
Net Operating Loss Carryforwards for Tax Purposes. As of September
30, 1995 the Company had a net operating loss carryover for federal and
California income tax purposes of approximately $1,083,000 and $317,000
respectively. The federal net operating losses expire from 2007 to 2010. The
California net operating losses expire in 2000. The benefit of these net
operating loss carryforwards has not been recorded by the Company as it is
uncertain that the Company will generate sufficient income in future periods to
utilize the loss carryforwards.
Fiscal 1994 compared to Fiscal 1993
On May 1, 1994, Energy acquired all of the issued and outstanding
common shares of CTL for 762,031 shares of Energy's common stock (valued at
$1,069,140) and notes payable to two major stockholders of CTL for $955,860. In
addition, Energy bought out an employment contract with a former owner of CTL
for 222,572 shares of Energy common stock (valued at $312,272). From the date
of acquisition of CTL to October 31, 1994, the Company's net sales were
$2,066,462. For the 1994 fiscal year, the Company incurred a net loss of
$362,102.
Prior to the acquisition of CTL, Energy had been engaged in the
development of technologies designed to enhance the production of hydrocarbons
from oil properties. Subsequent to the acquisition of CTL, Energy incurred no
additional costs or revenues relating to the development of these technologies.
As discussed above, this technology was sold in the 1995 fiscal year in exchange
for certain royalty payouts and a note in the face amount of $1,250,000 bearing
interest at 6%. Due to concerns about collectibility, this note was fully
reserved as of September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had cash and cash equivalents on
hand of $4,224,000 as compared to $57,000 at September 30, 1995. This increase
in working capital was primarily due to net proceeds of $8,900,000 received from
the issuance of Series B Preferred Stock and warrants and the proceeds of
$1,342,000 received from sales of Common Stock. In addition, the Company
obtained $167,000 in connection with its acquisition of Particle California and
M.C. Davis and realized proceeds of $174,000 on the sale of property. The
Series B proceeds were used to finance the Company's operating activities of
$1,697,000, to repay bank debt of $190,000 during the 1996 fiscal year and other
debt totalling $994,000 after the end of the Company's 1996 fiscal year, and to
acquire property, plant, equipment and other assets of $472,000.
24
<PAGE>
The Company acquired assets comprised of working capital and property,
plant and equipment, and recorded related goodwill and other intangibles,
totalling $1,649,000 in 1996 as a result of the business combinations of M.C.
Davis and PI Corp. In addition, the Company acquired land in exchange for
400,000 shares of the Company's common stock valued at $1,000,000, the
assumption of mortgages of $367,000 and acquisition costs of $57,000. The
Company also disposed of equipment held for resale through the return and
cancellation of its Series A Preferred Stock for which it recognized neither a
gain or loss, except for $40,000 in storage costs.
During the three months ended December 31, 1996, working capital
increased by $3,184,000. This increase was due primarily to net proceeds of
$4,673,000 from the private placement of 525 Series C Preferred Shares and
warrants in December, 1996.
The Company anticipates that it will fund its financing and capital
requirements for the next 18 months through cash and cash equivalents on hand,
as well as proceeds, if any, from the exercise of the warrants by the Selling
Shareholders. The Company also believes that sales of its Antenna Systems and
Particle Interconnect Products, both anticipated to commence in the 1997 fiscal
year, in combination with the sales of the electronic assemblies of Cellular
Magnetics and the operations of CTL will provide sufficient funds to meet the
Company's capital requirements for the next two years. This assumption is based
on the Company's belief that it will be successful in entering into a joint
venture, co-manufacturing, licensing or other similar arrangement with existing
connector manufacturers (with respect to the manufacture of the Particle
Interconnect Product) and with existing manufacturers of the internal components
for cellular phones or cellular service providers (with respect to the Antenna
Systems). The failure to enter into such relationships could result in the
Company requiring substantial additional capital and resources to bring the
Particle Interconnect Products and its Antenna Systems to market. The Company
does not believe that, in the absence of such relationships, it will have the
necessary resources to compete in the Z-axis interconnect market or to produce a
customized cellular phone. To the extent the Company's operations are not
sufficient to fund the Company's capital requirements, the Company may enter
into a revolving loan agreement with a financial institution, or attempt to
raise additional capital through the sale of additional capital stock or through
the issuance of debt. At the present time the Company does not have a revolving
loan agreement with any financial institution nor can the Company provide any
assurances that it will be able to enter into any such agreement in the future
or be able to raise funds through the issuance of debt or equity in the Company.
In the 1997 fiscal year, the Company expects to make capital
expenditures of approximately $1,700,000 and an additional $2,000,000 in the
1998 fiscal year. With respect to the Antenna Technology, the Company estimates
that it will cost an additional $1,000,000 to complete the testing of its
Antenna Systems, develop various prototype Internal Antenna packages for
incorporation into existing cellular phone models and obtain a sufficient
inventory to begin commercial sales of its Antenna Systems. In regard to the
Company's Particle Interconnect Products, the Company believes it will be
required to invest approximately $10,000,000 over the next five years, with a
joint venture partner, co-manufacturing partner or
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licensee and substantially more in the absence of such a relationship. The
capital expenditures in the 1997 fiscal year will be made on CTL's new
manufacturing facility in Watsonville, California, establishing PI Corp.'s
initial full production line and facility in Colorado Springs, Colorado and
purchasing new equipment for the Company's manufacturing plants in Arizona City,
Arizona and Sonora, Mexico in connection with the manufacture of the Antenna
Systems. In the first quarter of fiscal 1997, capital expenditures totaled
$290,000.
TRENDS AND UNCERTAINTIES
As a result of its activities in 1996, the Company believes that it
has positioned itself to compete in several new markets through the acquisition
of M.C. Davis and by obtaining the rights to the Antenna Technology, the PI
Technology and the Proprietary Electroplating Process. The Company's activities
in fiscal 1997 will focus on bringing these new technologies to market and on
expanding the existing markets for its electron tube products and electronic
assemblies. However, the future operating results of the Company are subject to
certain trends and uncertainties within the industries in which the Company is
operating and within the Company itself.
OVERVIEW
In general, due to the Company's change of business purpose, the
Company has a limited operating history that is relevant to its current
business. Pursuant to the Company's initial business plans prepared in October
of 1996, the Company believed it would commence the sale of its external
retrofit antenna in December of 1996 and commence limited sales of its Particle
Interconnect Products in January of 1997. As discussed under "BUSINESS," the
Company subsequently has reconsidered its initial business plans and now does
not believe that the sale of its Particle Interconnect Products or Antenna
Systems will occur until the later part of the 1997 calendar year. In addition,
the Company can make no assurances that the sale of such products will occur at
this time.
The Company does not anticipate producing significant operating
revenues until such time, if ever, as products developed using the Antenna
Technology and PI Technology are completely developed, manufactured in
commercial quantities and available for commercial delivery, and accepted in the
marketplace. There can be no assurance that the Company's technology and
products, if developed and manufactured, will be able to compete successfully in
the marketplace and/or generate significant revenue. The Company anticipates
incurring significant costs in connection with the development of its
technologies and proposed products and there is no assurance that the Company
will achieve significant revenues to offset anticipated operating costs.
Included in such costs are research and development expenses, marketing costs,
increased capital expenditures for the expansion of its manufacturing facilities
and the research and development of its products, and general and administrative
expenses. See "RISK FACTORS-Limited Operating History; History of Losses" and
"-New Lines of Business."
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As a reflection of these increased costs and expenses, the Company's
operating losses increased from $433,000 in 1995 to $5,196,000 in 1996 and from
$291,000 in the first quarter of fiscal 1996 to $1,982,000 in the first quarter
of fiscal 1997. Similarly the net cash (used in) operating activities increased
from ($201,000) in 1995 to ($1,697,000) in 1996 and from $60,000 provided by
operations in the first quarter of fiscal 1996 to ($1,206,000) used in
operations in the first quarter of fiscal 1997.
Inasmuch as the Company will continue to have high levels of operating
expenses and will be required to make significant expenditures in connection
with its continued research and development activities, the Company anticipates
that such losses will continue until such time, if ever, as the Company is able
to generate sufficient revenues to exceed its total costs of operation. See
"RISK FACTORS-No Assurance of Successful Expansion of Operations."
SPECIFIC TRENDS AND/OR UNCERTAINTIES
The Company is currently attempting to expand its customer base for
its electron tube business by and through the development of new products and
increased marketing activities. At this time, it is uncertain whether the
Company will be able to create new markets for its products. In addition, the
response of larger competitors in the electron tube markets to the Company's
increased marketing activities is not determinable.
The Company also faces uncertainty over the effects of business
slowdowns relating to the move to its new electron tube manufacturing
facilities. While the Company believes that the impact of this move will be
minimal, unanticipated difficulties may arise, which could result in a negative
impact on the Company's operations. See "RISK FACTORS-Dependence on Company
Owned Manufacturing Facilities; Risk of Business Interruptions."
The acceptance of the Antenna Technology and Antenna Systems by
cellular phone users, cellular phone retailers and cellular service providers
has not yet been tested. While the Company has received significant expressions
of interest from third parties for the Antenna Technology, the existence and
extent of market opportunities for its Antenna Systems is unknown. In addition,
the response of competitors to the marketing of the Antenna Systems is unknown
at this time. See "RISK FACTORS-Uncertainty of Market Acceptance for Antenna
Technology."
The Company's PI Technology is currently in the development stage and
the marketability of the PI products has not yet been tested. The PI Technology
is currently being utilized by third parties in limited applications under
licenses granted from Louis DiFrancesco, the developer of the PI Technology or
from companies he previously controlled, such as Particle California. The wide
spread acceptance of the PI Technology and the Particle Interconnect Products by
the market has yet to be tested by the Company. In addition, no prediction can
be made as to competitive responses in the market place should the PI Technology
and the Particle Interconnect Products prove successful. Moreover, the
licensees of the PI Technology could compete directly with the Company in the
markets it intends to enter provided such markets are
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within the scope of the licenses granted. In addition, Louis D. DiFrancesco
purportedly assigned a one-half interest in certain patents underlying the PI
Technology to Mr. Kenneth Bahl. To the extent the assignment is valid, Mr. Bahl
could assign an additional interest in the PI Technology to competitors of the
Company. If such licensees or Mr. Bahl desire to do so, Mr. Louis DiFrancesco or
Mr. Bahl, as the case may be, and not the Company, would receive any increase in
royalty payments or other consideration due to such success. See "RISK FACTORS-
Uncertainty of Market Acceptance for PI Technology" "-Rights to PI Technology."
The Company is operating in three diverse businesses with different
operating and management requirements. As the operations of the Company expand
there will be a requirement for increased management expertise. The Company is
currently seeking to expand its management complement, particularly in the
marketing field, to cope with the anticipated growth in the Company's
operations. See "RISK FACTORS-Dependance on Key Personnel and Necessity to Hire
Additional Qualified Personnel."
PENDING ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets to Be Disposed Of," ("SFAS No. 121") which establishes
methods for determining when an impairment of long-lived assets has occurred and
for measuring the impairment of long-lived assets. The implementation of SFAS
No. 121 in the Company's 1997 fiscal year is not expected to have a material
effect on the Company's consolidated results of operations or financial
condition.
The FASB also issued SFAS No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") which encourages, but does not require,
employers to adopt a fair value method of accounting for employee stock-based
compensation, and which requires increased stock-based compensation disclosures
in lieu of expense recognition. The Company expects to continue to use the
intrinsic value-based method of accounting as allowed under SFAS No. 123. The
implementation of SFAS No. 123 in the Company's 1997 fiscal year is not expected
to have a material effect on the Company's reported consolidated results of
operations or financial position.
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BUSINESS
COMPANY OVERVIEW
Intercell Corporation (the "Company") was incorporated under the laws
of Colorado on October 4, 1983, and was originally engaged in the marketing of
business and cellular telephone equipment. This business was discontinued and
all remaining assets of the Company were liquidated or otherwise abandoned
during 1991, and all obligations of the Company were paid or otherwise
satisfied.
From 1991 until the acquisition of Modern Industries, Inc., on July 7,
1995, which subsequently changed its name to Energy Corporation ("Energy"), the
Company was generally inactive and reported no operating revenues prior to the
fiscal year ending December 31, 1994. During that time period, the Company
explored various new business and investment opportunities involving, primarily,
companies engaged in specialty lines of business in the wireless communications
and electronic technology industries.
On July 7, 1995, the Company purchased all of the assets and
liabilities of Energy. Energy's principal asset was its wholly owned subsidiary
California Tube Laboratory, Inc. ("CTL"). This transaction was accounted for as
an acquisition of the Company by Energy and, as such, the historical financial
statements contained herein reflect the financial statements of Energy. The
results of operations of the Company have been included only since the date of
such acquisition. See "INDEX TO FINANCIAL STATEMENTS."
As a result of the acquisition of Energy and additional acquisitions
made during the 1996 fiscal year (see "-Recent Acquisitions and Transactions"),
the Company is currently engaged in three lines of business: (i) the proposed
design, development and production of shielded cellular phone antennas (the
"Antenna Systems") that use the Company's proprietary antenna technology (the
"Antenna Technology") as well as the manufacture of miniature and non-miniature
coils, transformers and other electronic assemblies; (ii) the manufacture and
rebuilding of specialty electron power tubes; and (iii) the proposed design,
development and production of patented particle interconnect products ("Particle
Interconnect Products") that use the Company's patented particle interconnect
technology (the "PI Technology") and a proprietary trade secret electroplating
process (the "Proprietary Electroplating Process"). Currently, the only
products available for manufacture and sale are the Company's specialty
electronic power tubes and miniature and non-miniature coils, transformers and
other electronic assemblies.
The Company's operations are or will be conducted by and through its
wholly owned subsidiaries, CTL, Cellular Magnetics, Inc. ("Cellular Magnetics"),
Intercell Wireless Corp. ("Intercell Wireless"), which was formed after the end
of the 1996 fiscal year, and Particle Interconnect Corporation ("PI Corp.").
Because the Antenna Technology and the PI Technology are in the development
stage, the Company does not anticipate operating revenues from such lines of
business until such time, if ever, as products developed using the Antenna
Technology
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and PI Technology are completed, developed, manufactured in commercial
quantities, available for commercial delivery, and accepted in the market place.
The Company's officers and directors are responsible for the oversight
of the Company and its wholly owned subsidiaries (i.e., Cellular Magnetics,
Intercell Wireless, PI Corp. and CTL) or affiliated companies, such as Energy,
and for resolving any conflicts of interest that may arise between the Company
and its subsidiaries or among the subsidiaries. The officers and directors of
each subsidiary are responsible for the day to day operations of that subsidiary
and, in turn, are accountable to the Company, as the sole shareholder of each
subsidiary. Major decisions relating to the scope of each subsidiary's
operations or a subsidiary's capital needs are reviewed and approved by the
Company's board of directors in accordance with relevant law. However,
notwithstanding the foregoing, in view of the affiliations among the Company and
its affiliates, no assurance can be given that any such conflicts can be
resolved to the satisfaction of all parties involved. The Company's
relationships with Energy is described in Note 1 under "BENEFICIAL OWNERSHIP."
The statements contained in this Prospectus, if not historical, are
forward-looking statements and involve risks and uncertainties that could cause
actual results to differ materially from the results, financial or otherwise, or
other expectations described in such forward-looking statements. Therefore,
forward-looking statements should not be relied upon as a prediction of actual
future results or occurrences. In this regard, see "RISK FACTORS,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS-General" and "-Trends and Uncertainties."
RECENT ACQUISITIONS AND TRANSACTIONS
ACQUISITION OF M.C. DAVIS
Effective September 30, 1996, the Company, through its wholly owned
subsidiary Cellular Magnetics, an Arizona corporation, acquired AC Magnetics,
Inc., an Arizona corporation doing business as M.C. Davis Company ("M.C.
Davis"), for an aggregate purchase price of $1,800,000, comprised of a cash
payment equal to $800,000 and the issuance of 277,778 shares of the Company's
restricted Common Stock at a fair value of approximately $3.60 per share. M.C.
Davis was acquired by the Company to provide industrial engineering and
production capabilities for the Antenna Technology. M.C. Davis has production
facilities located in Arizona City, Arizona and Sonora, Mexico and has been
engaged in the production of miniature and subminiature electronic components
since 1968.
PARTICLE INTERCONNECT TRANSACTION
On September 3, 1996, the Company completed the merger (the "PI
Merger") of Particle Interconnect Inc., a California corporation ("Particle
California"), with and into the Company's wholly owned Colorado subsidiary,
Particle Interconnect Corporation ("PI Corp."). The PI Merger resulted in PI
Corp. obtaining all of the properties, assets, liabilities and business
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operations of Particle California, including, with certain exceptions, the
entire right, title and interest in and to the improvements of seven United
States patents and six patent applications involving the PI Technology and the
Proprietary Electroplating Process. The exceptions relate to the right to
receive royalty payments from five companies that previously obtained licenses
to the PI Technology and certain know-how relating to its electroplating
application from Mr. Louis DiFrancesco, the inventor of the PI Technology, or
companies that he controlled and a purported assignment of a one-half interest
in certain patents underlying the PI Technology from Mr. DiFrancesco to Mr.
Kenneth S. Bahl in February 1991. See "-Intellectual Property." In exchange
for the PI Technology and the Proprietary Electroplating Process, the Company
issued 1,400,000 shares of Common Stock to the shareholders of Particle
California in a transaction not involving a public offering. The PI Merger was
accounted for as an immaterial pooling-of-interest. The Company plans to incur
expenditures of not less than $1,500,000 to develop and equip PI Corp.'s new
manufacturing facility in Colorado Springs, Colorado.
RIGHT TO DUAL RESONANCE CELLULAR PHONE ANTENNA
On November 15, 1995, the Company entered into an agreement with
Arizona State University ("ASU") in connection with the development of a new
form of cellular phone antenna with certain features designed to reduce
potential health hazards that may be associated with electromagnetic signals and
to increase transmittal reception and range of cellular telephones. The
Agreement required the Company to pay to ASU a total amount of approximately
$78,000. On June 5, 1996, Dr. El-Badawy El-Sharawy ("Dr. Sharawy"), a tenured
professor of ASU, assigned to the Company, on a royalty-free basis, his entire
right, title and interest in, and to improvements on his U.S. Patent application
entitled "Dual Resonance Antenna with Portable Telephone Therewith" (the "Dual
Resonance Application"), and any and all patent applications thereon for nominal
consideration. The Dual Resonance Application and additional patent extensions
thereon constitute the basis of the Antenna Technology.
The Company subsequently entered into a license agreement with the
Arizona Board of Regents, on behalf of ASU, under which the Company, as
licensor, granted to the Arizona Board of Regents, strictly for education and
scientific purposes, a non-exclusive right and license to publish, make, use and
sell the technology covered by the Dual Resonance Application and any patents
that may issue thereon for the life of the patent upon which no royalties need
be paid. The Company believes the grant of such license will have a minimal
impact, if any, on any revenues the Company may earn on the Antenna Technology.
To the extent the Company acquires the rights to any future antennas developed
by ASU, it will be required to pay ASU a royalty for the licensing rights on
mutually agreed upon terms and prices.
MISCELLANEOUS TRANSACTIONS
Arizcan Properties, Ltd. On March 13, 1996, Arizcan Properties, Ltd.,
a wholly-owned subsidiary of the Company ("Arizcan"), entered into an agreement
with a group, including certain minority shareholders of the Company, to acquire
a 94-acre development property located in Pinal County, Arizona for a total
purchase price of $1,424,362. This transaction was
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completed on June 18, 1996. As consideration, the Company issued 400,000 shares
of restricted Common Stock at a fair value of $2.50 per share, and made cash
payments of $57,000. In addition, Arizcan assumed first and second mortgages on
the property totaling $367,000. The Company acquired this property for the
purpose of constructing a manufacturing facility for the products developed
under the Antenna Technology. Due the Company's acquisition of M.C. Davis, this
property is no longer required for manufacturing purposes and it is currently
being held for sale.
Asia Skylink Corp. On December 29, 1994, the Company executed an
Asset Purchase Agreement with Asia Skylink Corp., to acquire certain microwave
transmission and associated support equipment, in exchange for 210,000 shares of
the Company's Series A Preferred Stock (the "Series A Preferred Stock"). On
August 30, 1996, in return for the cancellation of all of the Series A Preferred
Stock outstanding, the Company re-assigned the microwave transmission and
associated support equipment to the original seller and paid the holders of the
Series A Preferred Stock an aggregate of $40,000 as storage charges for the
period July 7, 1995 through August 30, 1996.
THE COMPANY'S ANTENNA TECHNOLOGY
OVERVIEW OF ANTENNA TECHNOLOGY
The Company has the rights to certain patent applications relating to
the Antenna Technology that the Company jointly developed with the
Telecommunications Research Center at ASU. The Antenna Technology is designed
to reduce actual or perceived potential health hazards that may be associated
with exposure to electromagnetic signals by using a "shielded" antenna. The
Antenna Technology has been tested in working prototypes in cellular phones by
ASU. These tests indicated a significant reduction in radiation emissions
caused by wireless devices, and cellular phones in particular. The tests also
indicated several other benefits including increased range and reception, and
improved battery life. In addition, the Antenna Technology results in an
antenna that is smaller in size and lighter in weight than most antennas
currently on the market.
ANTENNA TECHNOLOGY INDUSTRY BACKGROUND
General
The wireless communications industry is relatively young and is
characterized by continual change. Currently, the wireless communications
industry is experiencing significant worldwide growth. Contributing to this
growth are improvements in wireless communication products, such as cellular,
personal communication service networks, global satellite telephones and
wireless data systems.
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Wireless Communication Market Segments and Technology
Cellular Communication Services. The market for cellular technology,
a subset of the wireless communications market, has materially increased in the
last decade, growing from approximately 92,000 subscribers in the United States
in 1983 to more than 33.5 million at the end of December 1995. Worldwide, the
Company believes there are currently approximately 60 million cellular phones in
operation. The Company believes that there are over 30 brand names and in
excess of 70 models of portable cellular phones for sale in the United States;
however, there are only approximately 18 manufacturers of cellular phones in the
world and eight of these manufacturers are original equipment manufacturers
("OEMs"). No one company dominates the market and there are only two
manufacturers with more than 10% of the market. Although industry revenue from
the manufacture and sale of cellular phones is expected by industry analysts to
grow just .2% in the 1996 calendar year to approximately $6.27 billion, the
number of cellular phones sold is expected by industry analysts to increase more
than 15% to 16.6 million in the 1996 calendar year.
The cellular communications process begins by carving a service area
into small areas called cells, which can range from one mile in diameter to 20
miles in diameter. Each cell is equipped with a radio transmitter and receiver,
which are connected through the cellular phone company's switching center to the
local phone network. Currently, cellular phones primarily transmit data through
the cellular phone antenna by means of analog transmission and, to a lesser
extent, through digital transmission.
Personal Communications Services. New digital communication standards
and technologies are rapidly emerging to provide the performance improvements
necessary to address overcrowding of existing cellular systems and provide
increased performance of communication equipment including Personal
Communications Services ("PCS").
PCS is a term encompassing a wide range of wireless mobile
technologies, primarily two-way paging and cellular-like calling services that
are transmitted at lower power and higher frequencies than other cellular
services. Unlike current cellular technology, plans call for broadband PCS to
be digital from the start. Because PCS services are digital, it is expected
that PCS telephone sets will be smaller and lighter in weight than most cellular
sets.
The Federal Communications Commission ("FCC") has stated that it
expects the PCS industry to compete with existing cellular and private advanced
mobile communications services, thereby yielding lower prices for existing users
of those services. In addition, the FCC has stated that it believes PCS service
will promote the development of a wide range of services and devices such as,
among others, smaller, lighter, multi-function portable phones; portable
facsimile and other imaging equipment; and multi-channel cordless phones. The
development of PCS services is also expected to permit the United States
industry to develop services and technologies for international markets.
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Narrowband PCS, which operate in the 900-901 MHz, 930-931 MHz and 940-
941 MHz range, will largely be used for advanced paging services, such as two-
way paging, in which a recipient can respond to a sender's message with a
message of his or her own, and voice messaging. The Company believes that, in
the near term, broadband PCS will consist of cellular-like services including
new categories of wireless voice and data transmissions over both local and wide
areas using low power, lightweight pocket phones and hand-held computers, all of
which require the use of an antenna.
Current Cellular Phone Technology
Operation of Cellular Phones and Related Potential Health Risk.
Cellular phones and their antennas must comply with a particular bandwidth and
directionality constraints. Conventional cellular telephones operate over a
relatively wide bandwidth of approximately 824 MHz to 896 MHz, or approximately
8% of the entire frequency. For a portable telephone to communicate more than a
few hundred feet, it must radiate a substantial amount of L-band (approximately
1,000 to 2,000 MHz) or S-band electromagnetic energy (approximately 2,000-3,500
MHz). A typical cellular portable telephone transmits at a power level of
around 600 microwatts. In normal use, electromagnetic energy radiates from a
cellular phone or portable telephone antenna which is used in a position
immediately adjacent to the user's head. Electromagnetic energy in the L-band
and S-band is absorbed by and may otherwise influence organic matter, such as
the human brain and other tissues. Research has indicated that up to 50% of the
energy radiated from a traditional antenna can be absorbed by the body tissue of
a user's head and hand.
Since many portable telephone users spend a significant amount of time
using portable telephones, the possibility exists for cumulative adverse health
effects to the extent that the electromagnetic energy is harmful to cellular
phone users. In this regard, there is growing concern both in the scientific
community and among the general public that cellular phone use could be
hazardous to the health of humans. In response to this concern, the Cellular
Telecommunications Industry Association commenced a multi-year, multi-million
dollar program to award grants to researchers who will investigate this issue.
In addition, certain cellular phone OEMs caution users in their advertisements
against prolonged usage of their cellular phones. To date, the Company is not
aware of any definitive studies that provide conclusive evidence on the
potential adverse health effect of electromagnetic energy on cellular phone
users. In addition, the FCC has not mandated any requirements for reducing the
electromagnetic radiation produced from cellular phones nor has it recognized
the potential health hazards associated with the use of cellular phones.
Accordingly, there can be no assurance that the market will recognize the
potential health hazards that may exist and that a demand will exist for the
Company's Antenna Systems.
Current Antenna Technology and Products
Existing cellular phones must meet weight, size and cost constraints
in attempting to limit the amount of electromagnetic energy radiated toward the
user's head and hand. For example,
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a cellular phone that uses a remote antenna so that antenna emissions do not
emanate from a location in close proximity to a user's head or hand, would
seriously diminish the convenience of the cellular phone. Other technologies and
techniques that might reduce radiation emission solutions generally lead to
increases in cellular phone cost, weight or require excessively large antennas.
For instance, many microstrip antennas have been adapted to various applications
having L-band and S-band frequencies. Generally, however, microstrip antennas
are too heavy, costly, and fragile for use in cellular and similar portable
telephones. Attempts to modify a monopole antenna by mounting it on a ground
plane and applying a metallic shield coated with an isotropic magnetic material
have succeeded in reducing the emission of electromagnetic radiation in the near
field but have encountered problems similar to those encountered by microstrip
antennas.
A more conventional technique of using shielding with a traditional
antenna design to decrease near-field radiation in one direction is generally
not practicable because such a technique tends to narrow bandwidth. Moreover,
this technique limits the omnidirectional antenna patterns necessary to ensure
that the quality of communication service will not vary with the direction a
user faces at any given point in time when using a cellular phone.
THE COMPANY'S ANTENNA TECHNOLOGY
Characteristics of Company's Antenna Technology
The Company's Antenna Technology is designed to minimize the radiation
emitted toward the user in order to reduce potential health hazards that may be
associated with exposure to electromagnetic energy. The Company has installed
prototypes of both the External Antenna and Internal Antenna in existing
cellular phone models. Preliminary testing of the prototype antennas indicated
that they reduce the amount of electromagnetic energy in the near field by 90%
while in use. In such testing, the prototype antennas also indicated evidence
of a significant increase in transmittal reception and range of the signal, and
a demonstrable extension of the life of the cellular phone battery. The Company
has substantially completed all internal testing of its Antenna Systems and
intends to distribute its Antenna Systems for independent testing in the near
future.
Due to the novel nature of the Antenna Technology, the prototype
antennas the Company has developed are also physically smaller in size, lighter
in weight. The Company believes that the simplicity, combined with the size
advantage, will enable it to manufacture the Antenna Systems at a cost
attractive to consumers, cellular phone retailers, cellular service providers
and possibly cellular phone OEMs. The Company also believes its Antenna Systems
and in particular, the Internal Antenna packages, will prove attractive to the
market due to the continuing trend in lighter weight and smaller cellular
phones, which trend should continue as a result of the emerging PCS market.
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Operation of Technology
The Company's Antenna Technology reduces the electromagnetic energy
emanating toward the user primarily through the use of a conductive ground plane
attached to existing substrates in cellular phones. The ground plane reflects
the electromagnetic energy away from the user. The Company's antenna resonates
at two distinctly different frequencies above and below the required or target
bandwidth. The frequencies are spaced sufficiently apart so that, after
impedance (the total opposition to current flow), the subject bandwidth resides
between the two resonances. Neither lower nor higher resonances alone achieve
the desired impedance for the antenna throughout the bandwidth, while also
reducing the radio frequencies near the user and maintaining omnidirectionality
in distances farther away.
In addition, attaching the ground plane to existing substrates adds no
appreciable cost or weight to the cellular phone. Moreover, radiating elements
of the antenna are assembled from a relatively rigid conductive material that
can support its own shape, weight and condition without the use of additional
structural substrates. As a result, the absence of additional substrates
reduces the weight of the antenna and, therefore, reduces the weight of the
cellular phones.
The Antenna Technology was designed to be used with both analog and
digital cellular phones and, therefore, if accepted in the market, should be
available for use in the emerging PCS market, as well as Europe and Australia.
COMPANY ANTENNA TECHNOLOGY STRATEGY
The Company intends to focus its efforts on the development of its
Internal Antenna in two product categories: an after market retro-fit for many
existing cellular phones, and a customized cellular phone that incorporates the
Antenna Technology. After analysis of the Antenna Technology, the Company
determined that the manufacture of an aftermarket retro-fit External Antenna for
existing cellular phones currently would not be marketable in the volumes
necessary to justify further development.
The Company plans to focus first on the development and design of
Internal Antenna packages for cellular phones that transmit via analog
transmission. Each Internal Antenna package developed will use the same Antenna
Technology, but each package will have a different external casing designed to
fit the particular model of cellular phone. Because of the large number of
different types and models of cellular phones, the Company has commissioned a
market research effort to determine the cellular phone models that offer the
greatest potential demand and opportunity. Another factor that will influence
the Company's decision on what Internal Antenna packages it will design and
produce is the difficulty of designing an Internal Antenna package for a
particular phone model. For example, at this time the Company has not been able
to develop an Internal Antenna package for the flip-phone marketed by Motorola,
Inc.
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The Company also plans to develop and market customized cellular
phones that contain the Internal Antenna, which the Company would sell under its
own logo or under the logo of the relevant cellular service provider or cellular
phone retailer. At the present time, the Company plans to market these phones
as rugged, shock-resistant cell phones that have a large keypad as well as the
Company's Antenna Technology. This strategy is contrary to the current trend by
cellular phone OEMs to manufacture increasingly smaller and lighterweight
cellular phones.
The Company intends to commence production of its Internal Antenna
products in the latter part of the 1997 fiscal year. Such production, is
dependent upon, among other things, final testing and design of the Internal
Antenna, obtaining strategic partnerships with cellular service providers or
cellular phone OEMs, and market acceptance of the Antenna Technology. There can
be no assurance that the Internal Antenna will be accepted by the market place
or that unforeseen problems will not arise in the final design and testing of
the Internal Antenna or in the development and marketing of the Company's
Antenna Technology.
While the safety of cellular phones is subject to question by
consumers and scientists, the Company believes there currently exists a
marketing opportunity for the development, manufacture and sale of its Antenna
Systems. The Company believes the overriding benefit of protection, whether
perceived or scientifically proven, will result in market demand for the Antenna
Technology. The Company also believes that the cellular phone industry will
find the Antenna Systems attractive due to their increased signal strength,
range, and battery life and their small and lightweight size.
Antenna Technology Sales and Marketing
Antenna Systems. The Company does not believe there exists sufficient
dollar volume or profit margin to market its Internal Antennas to cellular phone
OEMs for incorporation into the cellular phones these OEMs currently
manufacture. For this reason the Company currently plans on offering its
Internal Antenna packages through wireless carriers and wireless distributors
that have service shop capabilities, such as BellSouth, Tandy, Sears, BANM and
Choice Cellular among others. Such service capabilities are needed to install
an Internal Antenna package, as the cellular phone must be opened, the existing
external antenna removed and the Internal Antenna inserted to the cellular phone
backplane, with a solder connection made to the Internal Antenna post. The
Company intends to design its Internal Antenna packages to enable cellular phone
retailers to quickly modify existing cellular phones to insert the Internal
Antenna package.
The Company is preparing to work with cellular service providers who
are interested in assessing the new technology for range, signal strength, and
other significant benchmarks. The Company has had discussions with cellular
manufacturers in Europe and the Asia-Pacific Rim region and is working on
establishing sales arrangements with distributors and expanding the production
facilities of Cellular Magnetics to accommodate additional production. The
Company has received requests for working phone models incorporating the
Company's Antenna
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Technology from Telstar, one of the largest carriers and providers of cellular
technology in Australia, and Optus Communications, one of the largest
telecommunication carriers in Australia operating a nation-wide cellular
network. Although the terms of the testing and evaluation have not been
formalized, both Telstar and Optus Communications expressed interest in
evaluating the Company's Antenna Systems to determine the compatibility of the
Antenna Systems with their respective technologies and for potential performance
enhancements. There can be no assurance that, after testing and evaluations, any
orders will be placed by Telstar or Optus Communications with the Company or by
any other cellular service provider.
The Company intends to market its customized cellular phones and
Internal Antenna packages worldwide. At the present time, the Company intends
to sell its customized cellular phones under the Company's logo overseas and
under the logo of cellular service providers or cellular phone retailers
domestically. The Company will focus on marketing its products at key domestic
trade shows and may also support certain international trade shows. The Company
plans to establish an internet-based sales operation to sell the Company's
customized cellular phones.
Other Electronic Assemblies. The Company will continue to market
miniature and non-miniature coils, transformers, surface mount coils and
electronic assemblies previously produced by M.C. Davis. The customer base for
these products consists principally of electronic companies that manufacture
their own electronic equipment. The Company intends to sell these products
primarily in the Southwest region of the United States.
PRODUCT DEVELOPMENT OF ANTENNA SYSTEMS
The Company is currently working on engineering designs to manufacture
additional prototypes of its Internal Antenna packages. Based on the results of
its market research, the Company will develop Internal Antenna packages for
those cellular phone models that have the greatest market acceptance and for
which the Company can design a cost effective Internal Antenna package for
incorporation therein. The Company also intends to work on the design and offer
of its customized cellular phones for use with the cellular phone technology's
used in other countries, such as digital based technologies in Europe and
Australia.
The Company also plans to continue the development of the Antenna
Technology and related technologies in other markets, including the development
of its "strip" antenna system for use in specialty applications with exposure to
extreme conditions, such as those encountered in the military, and for satellite
communications.
The strip antenna is a form of micro-strip antenna that is currently
being designed by ASU. The Company is currently working with ASU in the
development of this technology and is in the process of negotiating an exclusive
licensing agreement for this technology. The strip antenna system is designed
to transmit at 500MHz to 20GHz. The strip antenna system consists of combining
("stacking") several micro-strip antennas, which have a long range, at reduced
power, but which transmit only in a specified direction. Because antennas used
for satellite
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transmission and military use require omnidirectional transmission and
reception, the Company believes that stacking the micro-strip antennas in
certain configurations will allow the completed product to have omnidirectional
transmission and reception. The strip antenna is currently in the development
stage and the Company can provide no assurances that it will operate as planned
or will be accepted by the industry. In addition, the Company can provide no
assurance that it will enter into an exclusive licensing agreement with ASU with
respect to this technology.
MANUFACTURING OF ANTENNA SYSTEMS
The Company will manufacture its Antenna Systems and continue to
produce electronic assemblies at its 8,000 square foot manufacturing facility in
Arizona City, Arizona and its 8,600 square foot plant in Sonora, Mexico. The
Company is currently working on the fixtures and tooling required for the
manufacture and sale of the Internal Antenna packages. The Company currently
does not intend to manufacture its own cellular phones; rather, it intends to
enter into contracts or joint venture relationships with manufacturers, which
may include cellular phone OEMs, that currently manufacture the internal
components for cellular phones. The Company would then encase such components
in the Company's customized design packages along with the Internal Antenna.
These manufacturing facilities will also manufacture the electronic
assemblies previously manufactured by M.C. Davis. The Company does not
anticipate that the manufacture of its Antenna Systems will affect the Company's
ability to continue to manufacture its electronic assembly products.
ANTENNA TECHNOLOGY COMPETITION
At present, the Company is not aware of any major OEMs, such as
Motorola, Inc., AT&T, Nokia, NEC and Panasonic, that have indicated a change in
the conventional approach to power or emissions with respect to their portable
phones; however, there can be no assurances that such a change may not be
instituted in the future or that, in fact, such changes may not currently be
contemplated. In the event any of the major OEMs decided to develop a
competitive antenna design, such an occurrence could materially adversely affect
the Company's operations.
The Company is aware of several small companies that currently address
the health hazard issue or promote increased range and reception for their
antennas, but the Company is not aware of any one company that addresses both of
these issues or of any company that has progressed significantly beyond the
development stage. While the Company is not aware of any company that would
directly compete with its Internal Antenna packages, the Company will face
normal market forces in obtaining cellular phone retailers to carry and sell the
Internal Antenna packages. These competitive factors, include, among others,
customer demand and limited space for the display of the Internal Antenna
packages at retail locations.
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In addition, many of the major cellular phone OEMs currently sell
their cellular phones through existing retail outlets such as Sears, Best Buy,
and Tandy, and provide cellular phones to current cellular carriers such as
BellSouth and Choice Cellular for resale under such cellular carriers logo. The
Company's customized phones, sold under the Company's own logo or the logo of
such cellular carriers and retail outlets, would directly compete with the
cellular phones manufactured by these OEMs, all of whom have greater financial
and other resources than the Company. These resources include brand name
recognition, market acceptance, an extensive distribution network for their
products, and substantial advertising and marketing resources.
THE COMPANY'S ELECTRON TUBE PRODUCTS
OVERVIEW OF COMPANY'S ELECTRON TUBE BUSINESS
The Company manufactures and rebuilds electron power tubes in numerous
forms and models which service the frequency range of 200 KHz to 18,000 MHz.
Currently, the Company provides rebuilt and new electron tubes to a wide variety
of customers who use microwave technology in various types of applications,
including AM and VHF radio, television, linear accelerators, radar, electron
guns and industrial microwave and heating use. This line of business will
continue to be conducted by and through the Company's wholly owned subsidiary,
CTL. The Company believes that it is one of the more significant domestic
companies engaged in rebuilding electron power tubes in the United States.
ELECTRON TUBE INDUSTRY BACKGROUND AND TECHNOLOGY
General
Electron power tubes or electron tubes are enclosed tubes, in which
electrons act as the principal conductors of current between at least two
electrodes. Electron tubes fall into two categories, oscillators and
amplifiers. Oscillators are typically magnetrons and power grid tubes (triodes
and tetrodes) and amplifiers are klystrons and traveling wave tubes. Electron
power tubes are commonly identified by reference to the frequency band of the
electromagnetic spectrum (generally the L-band through KU-band) within which
they operate.
Electron tubes are used in a wide variety of products, including
induction heating and AM radio transmission using the 200 KHz to the 500 MHz
range; VHF radio and television and linear accelerators using the 500 MHz to 600
MHz range; industrial microwave cooking and heating which use the 400 MHz to
2,450 MHz range; and radar and electron guns using the 3,000 MHz to 18,000 MHz
range. See "-The Company's Electron Tube Products."
Electron and vacuum tubes are generally recognized as the dominant
technology for the generation of high power radio frequency ("RF") and
microwaves. Consequently, these tubes are used by many companies for widely
varying applications. The manufacturing and rebuilding of these units is a
significant industry.
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The Company has focused on creating its own "niche" in this large
industry. Discussed below is relevant industry information for that segment of
the microwave technology industry in which the Company is engaged. The Company
is not aware of any industry trade associations or government statistics that
describe the electron tube industry segments in which the Company currently
competes. The information in the tables below is management's estimate of the
world-wide market for the industry segments in which the Company competes based
on its knowledge of industry needs and the activities of other competitors in
the industry. Accordingly, the information below should be considered a rough
approximation.
Magnetron Tubes
A "magnetron tube" is a vacuum tube in which the flow of electrons is
controlled by an exterior applied magnetic field to generate power at microwave
frequencies (400 MHz to 18,000 MHz). Magnetrons are generally categorized as
either continuous wave ("CW") or pulsed ("Pulsed") units. CW magnetrons are
used primarily in heating and drying applications. Pulsed magnetrons are used
primarily in measuring devices, such as radar and other applications.
New and rebuilt magnetron tubes are used in both commercial and
military radar units, high power industrial heating equipment and for medical
and industrial x-ray machines. The radar market consists of civilian weather
radar and military airborne and ground-based radar systems, among others.
Industrial heating magnetrons are used in food processing and drying systems at
L-band (between 500 MHz and 2,000 MHz) and S-band (approximately 2,000-4,000
MHz) frequency levels. Microwave heating is used for food cooking, drying and
processing, wood glue drying, waste management, clothes drying, oil reclamation
and plasma generation for production of diamond films.
Magnetrons used in x-ray equipment typically operate in the S-band or
X-band frequency range, focusing a beam of electrons on a tungsten target, which
produces x-rays.
<TABLE>
<CAPTION>
Annual Market (New and Rebuilt)
--------------------------------------
<S> <C>
Pulsed Magnetrons (Radar and Medical) $35.5 million
CW Magnetrons (Industrial use) $ 4.1 million
</TABLE>
Klystron Tubes
A "klystron tube" is an electron tube in which bunching of electrons is
produced by electric fields, which are then used for the amplification of
microwave energy. Klystrons tubes (both external cavity and internal cavity)
are commonly used in UHF television transmission, medical and nonmedical
accelerators, and navigational equipment. Klystron tubes are rebuilt for
television broadcasting firms and are used to transmit data from the studio
transmitter to land-based receivers, such as television, and from satellite
uplinks to satellites for further transmission. Some types of clinical x-ray
machines use klystron tubes, which can also be rebuilt.
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<TABLE>
<CAPTION>
Published
Annual Annual Approximate Company
New Units Units New Price/*/
Produced Rebuilt Price Rebuilt
----------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Television Broadcasting 2500 50 $40,000 $16,000
Transmission of Data 2000 10 $13,000 $ 6,000
Medical Use 200 or more 6 $40,000 $15,000
Navigation 400 or more 25 $12,000 $ 4,000
</TABLE>
/*/Subject to change depending on prevailing market and other financial
conditions.
Power Grid Tubes
Power grid tubes, also known as triode or tetrode tubes, are used in the
steel industry for radio frequency ("RF") heating and welding of all types of
steel products. They are also used in radio and VHF television transmission,
environmental test equipment and as switch tubes in high voltage pulsers. A
"triode tube" is an electron tube with three electrodes: an anode, a cathode and
a controlling grid; "tetrode tubes" are similar to triode tubes except that they
have four electrodes: an anode, cathode, a control grid and an additional grid.
Annual Rebuilt Market
---------------------
Power Grid $20 million
Other Industry Products
An "electron gun" is an electron-emitting cathode with its surrounding
assembly for directing, controlling and forcing a stream of electrons to a
target. A "linear accelerator" is a device in which charged particles are
accelerated in a straight line by successive impulses from a series of
alternating electric fields. One of the principal uses of linear accelerators
is in the medical field for the generation of high energy x-rays for the
therapeutic treatment of tumors.
THE COMPANY'S ELECTRON TUBE PRODUCTS
The Company, through CTL, manufactures and rebuilds a wide variety of
electron tubes in numerous iterations and models that service the frequency
range of 200 KHz to 18,000 MHz with power levels of up to three million watts.
The Company's product lines operate within the following frequency bands: HF and
UHF bands - 200 KHz to 1,000 MHz, L-band 500 MHz to 2,000 MHz; S-band 2,000 MHz
to 4,000 MHz; C-band 4,000 MHz to 8,000 MHz; X-band 7,000 MHz to 12,000 MHz and
Ku-band 12,000 MHz to 18,000 MHz. The Company primarily manufactures and
rebuilds electron power tubes categorized as follows: CW (continuous waive)
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magnetrons, pulsed magnetrons, klystrons, power grid tubes (triodes and
tetrodes), linear accelerators guides and electron guns.
The Company offers warranties for its rebuilt electron tubes that meet or
exceed the original manufacturer's warranty. The rebuilt electron tubes can be
purchased for approximately one half the cost of a new tube and are often
technologically superior to a new tube due to the Company's analysis of the
reasons for failure of the original manufacturers technology, which analysis
often results in the usage of components incorporating the latest technological
improvements, designs and performance specifications. The Company also
manufactures new electron power tubes for use in the industry.
The Company rebuilds and manufactures new electron tubes in the following
industry segments:
Magnetrons
General. The Company believes that it is one of the major suppliers of L-
band (operating in the 915 MHz frequency range), CW magnetrons in the world.
The Company services and sells magnetrons with power levels from 5 KW through 75
KW. It has developed its own 30 KW S-band, CW magnetron, which is used
primarily for industrial heating applications. The Company believes that this
product has the highest power rating at this frequency in the industry.
The Company is not considered a major supplier in the medical x-ray market,
since such market is essentially dominated by two major companies, Varian
Medical and Siemens Medical. The electron power tubes utilized by Varian
Medical and Siemens Medical operate in the S-band frequency range and are used
for diagnostic x-ray machines. Because the Company does not manufacture
electron power tubes operating in the S-band frequency range for the medical x-
ray market, it only offers repair services for these electron power tubes.
The Company, however, believes that it can effectively compete in the X-
band industrial and "medical systems" x-ray market (a relatively new, small and
growing market), where new magnetron tubes are being manufactured for use in
therapeutic x-ray systems, which systems are typically used in newer treatment
methods for certain cancer patients. To the knowledge of the Company, it
manufactures the only magnetron operating in the X-band frequency range, which
is used in x-ray machines for therapeutic medical applications. The Company
supplies magnetron tubes, operating in the X-band frequency range, for
therapeutic x-ray applications for companies such as Accuray, Schonberg Research
and Intraop.
Rebuilding Process. The rebuilding of magnetrons includes an incoming cold
test involving a microwave reflectometer, a hot test, disassembly and inspection
of the internal structure. Generally at a minimum, and if required, the cathode
heater assembly is replaced. Other damaged sub-assemblies can be replaced
depending on the cost effectiveness of such a repair. This product line
accounted for approximately 83% of the Company's net revenues in
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fiscal year 1996. Approximately 42% of these net revenues are generated from the
manufacturing and sale of new magnetrons, with the remaining 41% derived from
rebuilding magnetrons.
Klystrons and Linear Accelerators
General. The Company's rebuilding program for klystrons has, until
recently, been limited by a lack of suitable testing equipment. The Company has
recently obtained two test sets for klystron data transmission tubes and has
purchased a surplus television transmitter to test television klystrons. The
Company has entered into an agreement with a manufacturer of x-ray machines to
test the Company's rebuilt klystrons for the medical market. This line of
products accounted for less than 5% of the Company's net revenues in fiscal year
1996.
Rebuilding Process. The rebuilding process includes opening the vacuum
envelopes either by machining in the case of ceramic insulator tubes or by
cutting the glass on those tubes with glass insulators. The grids are removed
and salvaged and the cathodes are replaced. Typically, cathodes are directly
heated tungsten or thoriated tungsten filaments. These are replaced and
processed, the cleaned grids replaced and the envelope resealed. Tubes are then
pumped and baked for 48-hours, at which time they are burned-in and tested. All
klystron tubes are cleaned and finished in bright nickel plate. Workmanship and
material warranties prorated over 3,000 hours are provided with every klystron
tube. In rebuilding linear accelerators, as with klystron tubes, the electron
gun is removed and rebuilt, then the rebuilt unit is pumped, boiled and
processed.
High Power and High Frequency Triodes and Tetrodes
The Company believes that it is one of the major rebuilders of high power
and high frequency triode and tetrode tubes in the world. These units are
available with power output ranging from 10KW up to 300KW. These units
comprised approximately 7% of the net revenues of the Company in fiscal year
1996.
Electron Guns
The Company rebuilds various sizes and powers of electron guns up to 120
KV, 20A gridded electron sources for research application. Rebuilt electron
guns are also used on rebuilt medical accelerators. The rebuilding of electron
guns typically requires the removal of the old cathode and heater structure and
the replacement with a new unit. The electron gun is rebuilt under vacuum
conditions.
COMPANY ELECTRON TUBE STRATEGY
The Company, as one of the largest rebuilders of electron tubes in the
industry, intends to continue to strengthen its reputation for quality, customer
service, warranty and the
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performance of its rebuilt electron tubes by continuing to emphasize these
business characteristics.
For magnetron tubes, the Company concentrates on markets where the unit
price is high and competition is the least. For power grid tubes (i.e., triode
and tetrode tubes), the Company concentrates on the high power, and more
expensive units where new tubes are no longer manufactured and rebuilding is
necessary to avoid replacement of large, expensive equipment. With the addition
of two new test sets for klystron tubes, the Company also intends to focus more
heavily on this segment of the market.
Electron Tube Sales and Marketing
The Company recently hired a full-time, experienced marketing employee to
increase the Company's existing market and to create new markets for its
products and services. The efforts of such employee, to date, have resulted in
an increase in new orders from existing and new customers.
CUSTOMERS
The Company currently has approximately 100 customers in its electron tube
business and has shipped over 25,000 electron tubes to 350 customers. The
Company's client base is comprised of industrial companies, commercial service
firms and government agencies in the United States, Canada, Mexico, Europe, Asia
and Australia. The two largest customers of the Company, Amana Refrigeration,
Inc. and Ferrite Components System, accounted for approximately 14% and 12%,
respectively, of its annual revenues for fiscal year 1996. The loss of any one
such customer could have a materially adverse effect on the business of the
Company.
MANUFACTURING OF THE ELECTRON TUBES
The Company's existing 8,000 square foot manufacturing facility for its
electron tube business is currently operating at maximum capacity. In
recognition of these constraints, the Company has entered into an agreement with
the City of Watsonville, California for the lease, development and construction
of a 21,600 square foot manufacturing facility. Construction of this facility
began in March of 1996. In order to minimize the effects on the Company's
business, the Company plans to move into the facility over a period of several
months. The Company commenced moving into the new facility in March 1997 and
expects to have completed the move by the end of June 1997. Initially, the
Company will occupy approximately 12,000 square feet of the building and will
sublet the balance until such time as it requires the additional space. Upon
completion of the Watsonville manufacturing facility, the Company intends to
apply for ISO 9000 certification, which will enable it to more effectively
compete in overseas markets.
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Since the Company is engaged in manufacturing and rebuilding of electron
tubes designed by major manufacturers of such tubes, the Company does not
experience and does not contemplate encountering any substantial difficulties
relating to the sources or availability of materials with which to conduct its
principal business operations. The components to remanufacture and rebuild
these tubes are commonly available from numerous sources.
BACKLOG OF ELECTRON TUBES
As of September 30, 1996, the Company's production backlog represented by
customer orders in its electron tube business was approximately $3,170,000. For
the preceding year ended (or equivalent) September 30, 1995, the Company had
approximately $1,300,000 in firm backlog. The Company anticipates completing
all production backlog during its current fiscal year. There is no guarantee,
however, that the Company will recognize sales from any or all of the backlog
orders.
ELECTRON TUBE COMPETITION
The Company is engaged in a very narrow segment of the microwave technology
industry, the rebuilding of electron and microwave tubes, and has attempted to
avoid direct competition with the major manufacturers of microwave products.
The manufacturing of new microwave products is dominated by several very large
companies in the United States and internationally. These companies, however,
have not chosen to dedicate their resources to the rebuilding of such products
or the manufacture of the electron tube the Company manufactures.
The principal competitors of the Company are relatively few, but have with
the Company, significant segments of the narrow market area in which the Company
competes. Principal among these competitors are Litton Industries, Varian
Associates, English Electric Valve and Burle Industries, Inc. Although there
are a few small competitors, management believes that, based upon the Company's
latest internal market information, it has the largest market share in certain
product lines, such as the CW magnetrons.
Because of its perceived reputation for quality, customer service, warranty
and the performance of its new and rebuilt units, the Company believes that it
offers a competitive advantage equal to or superior to what is otherwise
provided by its competitors.
PRODUCT DEVELOPMENT OF ELECTRON TUBES
Research and development activities to be conducted for the Company with
respect to electron tubes will be conducted through institutions or other firms
qualified to conduct such research and development activities as independent
contractors to the Company. To the extent that the Company does engage in
business activities which will require research and development, it will seek to
decrease such costs by entering into joint ventures or other types of business
relationships wherein the costs of research and development activities will be
paid for by other parties, who in consideration of such payments will enjoy
partial ownership or other
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rights relating to any technologies or products which might develop from such
research and development.
THE COMPANY'S PARTICLE INTERCONNECT TECHNOLOGY
OVERVIEW OF PARTICLE INTERCONNECT TECHNOLOGY
The Company proposes to pursue a new line of business involving the
development and manufacturing of high performance, low-cost interconnect
products. The Company's PI Technology utilizes patents procured and owned by
the Company for the production of electronic interconnect products. The
Company's Proprietary Electroplating Process will be used in the manufacture of
12" x 18" panels used to mount, package or attach electronic devices and other
products utilizing the PI Technology. This new line of business will be
conducted through the Company's wholly owned subsidiary, PI Corp.
PI TECHNOLOGY INDUSTRY BACKGROUND
Electronics Industry Trends
Over the past decade, consumers and OEMs have demanded electronic products
that provide a significant increase in performance accompanied by reduced size,
weight and cost. These factors have forced manufacturers to produce smaller,
lighter and higher performing components while reducing their costs in order to
remain competitive. New developments in printed circuit boards (including
flexible circuitry), integrated circuits ("ICs"), IC packaging techniques, and
new forms of interconnect assemblies for connecting the various electronic
components, have contributed to the ability of electronic system manufacturers
to accomplish these objectives.
As these products have decreased in size and increased in complexity,
conventional techniques of connecting their components together have begun to
become inadequate. The conventional methods of interconnecting electronic
components in a rematable fashion have limits to the miniaturization the
electronic components can tolerate, while at the same time remaining cost
effective. The interconnect industry that serves the personal computer ("PC"),
automotive, communication and workstation markets is aggressively pursuing
technologies that will allow it to move to the next level of performance and
size.
Integrated Circuits
The Company believes that market trends in IC packaging will lead to
increased demand for emerging high density substrates. ICs have historically
been packaged by connecting the silicon die to a lead frame or by bonding the
silicon die to an interconnect substrate using fine wires. As ICs are becoming
increasingly powerful, they produce more heat and require a significantly
greater number of input/output ("I/O") electrical connections to attach the
silicon die, thus placing substantially greater demands on the IC packaging
materials. For instance, a
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typical IC six years ago required up to approximately 80 I/O connections to the
silicon die, whereas today typical ICs require up to approximately 250 I/O
connections. The number of high density IC packages requiring more than the
typical 250 I/O connections to the silicon die increased from an estimated 240
million in 1990 to an estimated 777 million in 1995, based on published industry
information. Market demands are currently forcing certain IC toward 1,000 I/O
connections. Further, IC packaging demands arise when multiple silicon dies are
integrated into one powerful package, known as a "Multi Chip Module" or "MCM."
The international interconnect market in 1995 was estimated by an
independent research organization, to be $26.3 billion. The Company believes
that the typical integrated circuit package is a 40 billion unit per year
market. The market for the "Ball Grid Array" technology ("BGAs"), a product
line in which the Company intends to compete, is expected to be approximately
200 million units in 1997.
The Company believes, based on interviews and contact with industry leaders
and experts, that the PI Technology has the potential and the capability to
solve this miniaturization problem and allow electronics manufacturers to move
to the next level of high-performance, low cost interconnect systems. The
potential advantage of PI Technology, in addition to potentially providing
increased performance and reliability, is that it replaces the fragile leads
which extend from the perimeter of current IC packages, resulting in improved
assembly yields and reduced size.
PI TECHNOLOGY-TECHNOLOGY AND PRODUCTS
General
Interconnect technology has not kept pace with micro-miniaturization in the
electronics industry. Thus, component packages and the connectors used to form
an electrical and/or mechanical interface between various components and
assemblies in electronic products are now the most expensive portion of such
products. Component packages, connectors, sockets, plugs and the like are also
the bulkiest and heaviest portion of such products.
Conventional interconnect technology complicates the electronic equipment
design and manufacturing processes by introducing special considerations into
such processes with regard to component placement, heat generation, power loss,
and signal propagation delay (the time it takes a signal to traverse a given
distance). These considerations have an adverse impact on potential gains in
performance being realized by new and emerging technologies.
Wiping Action Technology
Wiping Action Technology is still the prevailing means for interconnecting
electronic components. Wiping action interconnect technology (for example,
sockets, plugs, and needle pins) forms a temporary electrical interconnect and
thus readily allows the remating of various components and assemblies (for
example, when replacing a defective component, such as a
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random access memory chip in a personnel computer). A problem with using such
technology is that it is subject to the persistent formation of oxides (a non-
conductive material) along a contacting surface, which increases contact
resistance. In time, these oxides build up, hastening connection failure and
thus equipment failure.
Wiping action technology is only available in the form of various
connectors and sockets. These devices usually provide a contact surface formed
from a limited range of special metals, alloys, and other expensive materials,
as are suitable for maintaining a sliding connection. The devices themselves
have interfering electrical properties due to their size and orientation on a
circuit board, among others, and thus degrade signal propagation through the
interconnect (by introducing resistive, capacitive, and inductive components
into the signal path).
Wiping action technology provides high ohmic connections that produce
excessive and unwanted wear and heat, and therefore contribute to equipment
failure while wasting energy. The wiper mechanism, as in the case of a socket,
requires significant space on a circuit board. Thus, potential circuit
operating speeds are degraded due to propagation delays. In addition, sockets,
plugs, and similar interconnect devices are only available in a limited number
of configurations and materials. Thus, the evolution of electronic technology
is constrained by the limitations wiper interconnects impose upon a designer.
Additionally, wiper interconnects are unreliable in punishing environments
such as that in which a laptop computer is used. Wiper connections subject to
shock, intense vibration, temperature extremes, and/or high levels of
contamination tend to induce disruption in the continuity of connections made at
a wiper interconnect. As wiper interconnects are mechanical devices, they
corrode and are subject to wear. Thus, they have a limited useful life.
Identification of Problem
The Company and others in the industry are aware of the physical
constraints imposed upon the development of new products using existing
technologies. The problem is simple to identify and define, but difficult to
solve. As IC packages increase in I/O count and complexity while remaining
constant or decreasing in physical size, a problem arises in accommodating this
complexity in a reliable, technically efficient fashion. Whether the package is
connected to the device via solder, adhesive or socket, the connection process
as I/O counts move ever higher becomes difficult to achieve.
Designers of rematable connections, however, find this issue especially
troubling. As pin counts rise, the amount of force the device to package
interface must support also increases. Using conventional contact technology
like a gold to gold wiping connection, contact force measures around 40 grams
per contact. When IC packages had I/O counts of 100, this force was easy to
accommodate, but as I/O counts move toward 1,000 and beyond, current contact
technologies are inadequate. For example, at 40 grams per contact, a 1,000 I/O
BGA socket must effectively accommodate 40 kg of force, equivalent to half the
weight of an average man.
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Requiring a plastic substrate, barely 2 cm on a side to support half the
weight of a man is unreasonable, even with today's excellent plastic
technologies. Such force, concentrated in a small space contained by petroleum
based products that are almost always re-heated is very likely to fail because
of board warp, package warp, or outright physical failure.
This difficulty, when coupled with increasing intolerance from the market
to pay premium prices, presents today's socket manufacturer with an immense
task: create a socket that can:
. Accommodate very high I/O count devices.
. Receive high speed devices without seriously degrading their
performance (have as short a circuit path as possible).
. Be very low-cost.
The Company's Solution
The Company believes that its PI Technology provides a cost effective
solution to solving this industry-wide problem. As discussed below, the
Company believes the PI Technology can establish reliable, rematable connections
at only 10 grams of force. This means that only 10 kg versus 40 to 80 kg of
force is required to interconnect a 1,000 I/O IC socket with the underlying
substrate. The Company believes this reduction in force may enable
manufacturers to connect complex ICs to products through the next several
generations of electronics.
Additionally, the connection pathway provided by a connection using the PI
Technology is exceptionally short and has very low resistance. These features
allow the connection of very high speed ICs without seriously degrading their
performance as conventional techniques sometimes do. Moreover, the Company
believes that it can apply the PI Technology using its Proprietary
Electroplating Process at a very low cost.
There is no assurance, however, that the market place will accept the PI
Technology and proposed Particle Interconnect Products. In connection with the
development of commercially saleable prototypes, the Company must successfully
complete a testing program for such products before they can be marketed.
Unforeseen technical problems arising out of such testing could adversely affect
the Company's ability to manufacture a commercially acceptable version of its
Particle Interconnect Products.
THE COMPANY'S PI TECHNOLOGY
Overview
Background. The PI Technology was conceived in 1986, with the initial
patent thereon issued in 1987. A major aerospace firm took a special evaluation
contract in August 1988 to
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use the PI Technology for the development of the Space Defense Initiative
("SDI") "Super Computer Program" and for use in other portions of the SDI ("Star
Wars") Programs. The results of the SDI Programs demonstrated that the PI
Technology could meet and surpass military IC packaging and interconnect
requirements, designated MIL-STD 883C and MIL-STD 38510, which the Company
believes are more stringent than the requirements in the commercial marketplace.
The Company received the rights to seven patents and six patent
applications and the Proprietary Electroplating Process from Particle
California. See "BUSINESS-Recent Transactions." Five companies operate under
licenses from the Company to use the PI Technology. These licensees are
utilizing the PI Technology to produce products that do not currently compete
with the Company's proposed Particle Interconnect Products; however, nothing in
the license agreements would prohibit these companies from doing so in the
future provided the licensees have a right to use the PI Technology in that
field. In addition, Mr. Louis DiFrancesco, the inventor of the PI Technology,
purportedly assigned a one-half interest in certain patents underlying the PI
Technology to Mr. Kenneth S. Bahl in 1991. See "-Intellectual Property."
General. The PI Technology utilizes patents owned by the Company for
bonding and joining metal surfaces to enhance electronic connectivity and also
uses the Proprietary Electroplating Process to electroplate panels at an
anticipated lower cost than conventional manufacturing processes. The Company's
core product is similar to "conductive sandpaper" in appearance, and is formed
by attaching conductive diamond particles to a panel. The "conductive
sandpaper" creates a socket or connector for electronic devices, and replaces
the use of soldering to create such connections.
Operation of the Technology
PI Technology begins with sharp, metallized, doped diamond particles which
have been closely screened as to size. The particles are tightly classified in
sizes ranging from 10 microns to 125 microns, depending upon the end-product
application. Small particle size, 8 to 12 micron range, are for small pad
sizes, less than 5 mm in diameter, and have a small amount of penetration.
Medium particle size, in the 20 to 30 micron range, are for medium pads sizes, 5
mm to 100 mm in diameter, and have a medium amount of penetration. Large
particle size, 115 to 135 micron range, are for large pads sizes, greater than
100 mm in diameter, and have a large amount of penetration.
These electrically conductive diamond particles are attached onto contact
sites using standard masking and electroplating processes. The sharp, embedded
particles create a surface with many sharp points that make many parallel
electrical paths by penetrating though an oxide without requiring the wiping
action of conventional contacts. The Company believes that its non-wiping
action, oxide penetrating Particle Interconnect Products are capable of
penetrating surface contamination and oils to create a gas-tight electrical
contact.
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The sharpness of the diamond particles concentrates insertion force
transmitted by a contact into a very small area or point. This gives the
diamond particle the force per square inch required to pierce oxides and other
contaminates on most surfaces without requiring large amounts of force on the
contact. Reliable, gas-tight connections can be made with PI Technology with as
little as 10 grams of force per contact. This low-level of force is sufficient
to drive the particles into the mating surface (for example a I/O pad on a
silicon die) and provide low contact resistance. Moreover, the diamond
particles do very little damage to the mating surface. This provides very long
remate life with very little degradation of the connection. Since there is no
wiping action, contact coatings stay intact.
The Company can apply these particles to many different substrates, both
flexible, rigid, metallic and non-metallic. This ability coupled with the very
low contact force gives the Company the capability to make reliable connectors
out of materials that could collapse if exposed to the normally required contact
forces.
Proprietary Process of PI Technology Manufacturing
The Company's ability to compete on a cost-effective basis is driven by two
factors; the high-speed Proprietary Electroplating Process and a re-cycling,
pollution reduction process.
The Company believes it will be able to offer its Particle Interconnect
Products at costs competitive with conventional techniques because of its high
speed Proprietary Electroplating Process. This Proprietary Electroplating
Process allows the Company to electroplate at rates substantially higher than
industry standards while investing larger capital amounts in automated
equipment. Additionally, the Proprietary Electroplating Process uses fewer raw
materials and eliminates ancillary processes that cost competing technologies
both time and money.
The Company expects to additionally benefit from the Proprietary
Electroplating Process because the entire manufacturing operation is cleaner and
less environmentally hazardous with its recycling design, than existing plating
processes used in the electronics industry. Since electroplating is typically
an environmentally hostile process, the Company expects to gain advantages over
competitors by minimizing the costs associated with the control, removal and
processing of these pollutants.
COMPANY PI TECHNOLOGY STRATEGY
The PI Technology has application in many different industries where
electrical connections and interconnections are made. The Company initially has
selected the electronic interconnect industry as its primary industry to
potentially penetrate. The PI Technology has been in use in the connector
industry for several years, mainly in test and burn-in socket applications by
licensees of the PI Technology. There is a current demand in the connector
industry for reliable Ball Grid Array (BGA) and Land Grid Array (LGA) production
sockets as well as other forms of Z-axis interconnect such as direct chip
attachment and MCMs. The
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Company believes the PI Technology offers immediate advantages for these
products. As a result, the Company has developed the following short term and
long term strategies.
Initially, the Company intends to focus on high speed electroplating of
conductive diamond particles. The primary objective is to provide this service
to numerous connector manufacturers, in competing and non-competing
applications. The Company intends to provide this service to companies in the
form of teaming/co-manufacturing agreements, joint venture agreements or
exclusive or non-exclusive license agreements. The Company believes that
entering into joint venture relations with a leading connector manufacturer or a
leading electronic technology OEM would substantially reduce the period of time
to bring the Company's products to market. The Company contemplates that such
a relationship is necessary to gain worldwide access for its Particle
Interconnect Products (i.e., the Company believes approximately 60% of its
potential market for Z-axis interconnects exists outside the United States), and
to increase the Company's production capabilities by providing a second source
of plating for its Particle Interconnect Products. Currently, the Company
believes that customers of major electronic technology OEMs will not convert to
a prototype process unless there exists two sources of supply. The Company
contemplates that the joint venture partner, co-manufacturing partner or
licensee would provide access to its existing distribution channels and be
responsible for marketing and engineering costs for the relevant Z-axis package.
In many cases the Company will attempt to establish long term strategic
alliances with these industry leaders to continue development and manufacture of
new products that will incorporate the PI Technology. While the Company
continues to discuss such relationships and alliances with industry
participants, no agreements or understandings exist currently, and there can be
no assurances given that any such relationships or alliances will be established
or if established that they would be profitable to the Company.
The Company's initial product line will be particle plated panels for use
as an interposer in a BGA production socket. Assuming there is market demand
for this product, the Company expects to produce this interposer in moderate
quantities at its existing facility and using domestic subcontractors, until co-
manufacturing partner(s) are able to produce in larger quantities. If or when
this occurs, the Company will attempt to expand with proposed partners into
numerous other BGA and LGA applications and new products as they are designed.
The Company believes that in order to adequately penetrate all aspects of the Z-
axis interconnect market it will be required to design up to 5,000 separate
panel configurations over the next five years. The Company also believes that
this investment could approach $10 million dollars over the next five years, if
conducted with a joint venture partner, and substantially more if conducted
without a joint venture partner.
As these business relationships mature, the Company intends to begin
expansion into other industries in a similar fashion. The Company currently
contemplates that some of these industries will include the printed circuit
board ("PCB") industry with alternative interconnect attachment solutions,
automotive electronics and the utility power industry (splices and switches).
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PI Technology Sales and Marketing
Phase I Corporate Image. The Company, as an emerging Company with respect
to the design, manufacture, marketing and sales of its proposed Particle
Interconnect Products must become recognized in the industry. The Company's
focus on establishing a solid corporate image is based on management's belief
that OEMs and suppliers to OEMs will not put their own production schedules and
reputations at risk with companies they feel are unstable regardless of how
revolutionary the product or service may be. This is exceptionally true in the
connector industry. The Company believes that it has been successful at
projecting an image acceptable to the industry as evidenced by the willingness
of industry leaders to enter teaming and strategic alliance discussions with the
Company prior to production. The Company will continue to use conventional
methods such as attending industry conventions, meeting with high-level
executives in the industry's leading companies and contacting key analysts in
the industry to enhance and stabilize the Company's corporate image. In the
future the Company expects to expand its efforts to include:
. Traveling to meet individually with key executives.
. Generating interest through the trade press and presentations at trade
shows.
. Exhibiting with display booths at certain industry trade shows.
. Publishing and publicizing test results as they become available.
The Company believes this approach will provide it with an image that will
enhance the formation of relationships with key industry leaders.
Phase II - Forming Strategic Alliances. The Company believes that
establishment of a sound business image and an appropriate level of exposure for
PI Technology in the market place is only the first step in successfully
penetrating the market through a strategic partner. To be successful with this
approach, the Company must select an appropriate partner, convince this partner
of the viability and advantages of the PI Technology at its Proprietary
Electroplating Process, negotiate a mutually beneficial agreement, and perform
on the agreement. There is no guarantee that the Company will be able to
accomplish these tasks.
In each industry in which the Company decides to compete, the Company will
select market leaders that have key characteristics such as:
. Significant market share and strong distribution channels.
. Manufacturing competencies that compliment that of the Company.
. A corporate culture that allows them to quickly respond to a new
technology.
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. Sufficient capital and sales strength.
The Company is currently in preliminary discussions with two industry
leaders that satisfy all of the above criteria, however, there can be no
assurances given that any agreements will be consummated or, if consummated,
that any such agreements will be profitable to the Company.
Phase III - Penetrate Other Industries and Application Areas. Combinations
of the Company's intended strategies in Phases I and II above will be used in
Phase III to allow access to all the markets where PI Technology is potentially
viable. The steps the Company has taken and will take in the electronics
industry in Phases I and II, will be repeated in other industries in which the
Company may compete.
PI TECHNOLOGY COMPETITION
Competition in the electronic connector market is fierce. The principal
competitive factors are product quality, performance, price and service.
Multinational connector manufacturers (such as Berg Electronic, AMP, 3M, Molex
and Kamaichi), and major OEM electronic technology leaders (such as Intel,
Dupont, Siemens and IBM), each with established manufacturing facilities and
tremendous economies, compete with each other daily on both price and quality.
In the event the Company enters into a joint venture relationship with a major
connector manufacturer, its products will directly compete with the products of
the other connector manufacturers. The Company's current approach of supplying
rather than competing with these large firms means that it will not directly
compete with such well established leaders. The Company, however, will face
competition to its PI Technology primarily through the development of competing
technologies and technologies that currently exist.
There currently exists approximately 28 different sources/technologies for
use in creating Z-axis interconnects. These technologies include: dendrite
crystals, gold dot technology, fuzz button technology, elastromerics, z-axis
conductive adhesives and others. These technologies are currently produced by
materials suppliers, flexible and rigid PCB manufacturers, as well as
electronics manufacturers who produce their own materials and interconnect
systems. Many of these competitors have substantially greater financial and
other resources than the Company. The Company believes that each technology
currently has unacceptable limitations with regard to electrical/mechanical
performance, manufacturability or cost as compared to the PI Technology.
The risk of organizations developing new and competitive technologies also
exists. The Company will continually monitor the technical environment to
identify these risks early and develop strategies to respond to them quickly.
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PI TECHNOLOGY PRODUCT DEVELOPMENT
While the Company believes the area of quickest return and greatest initial
growth is in the Z-axis electronic interconnect market, PI Technology has
applications in many other areas. These areas include:
. Manufacture of complex PCB cards at low-costs.
. Heat Dissipation Products (Heat Sinks).
. High Voltage Splicing Products.
. High Voltage Contractors and Switches.
The Company will consider researching the potential of these markets and
develop appropriate manufacturing and penetration strategies for them, as
discussed in "-Company Strategy" above, whenever the electronic connector market
begins to show signs of maturation with declining profit margins, increased
competition and lack of opportunity.
GOVERNMENT REGULATION
The various business operations of the Company are subject to numerous
federal, state and local laws and regulations, including those relating to the
use and disposal of hazardous substances. Specifically, the operations of CTL
and PI Corp. involve the use and handling of environmentally hazardous
substances. The use of hazardous substances is subject to extensive and
frequently changing federal, state and local laws and substantial regulation
under these laws by governmental agencies, including the United States
Environmental Protection Agency, various state agencies and county and local
authorities acting in conjunction with federal and state authorities. Among
other things, these regulatory bodies impose restrictions to control air, soil
and water pollution. Furthermore, amendments to statutes and regulations and
the Company's expansion into new areas could require the Company to continually
modify or alter methods of operations at costs which could be substantial. The
Company believes that it is in substantial compliance with all material federal
and state laws and regulations governing its operations.
The Company believes that its Proprietary Electroplating Process will be
subject to less environmental regulation because the Company's Proprietary
Electroplating Process does not use a lead based interconnect technology and
generates less hazardous waste compared to current industry practices due to
improvements made in the Company's electroplating process.
Compliance with federal and state environmental laws and regulations did
not have a material effect on the Company's capital expenditures, earnings or
competitive position during fiscal year ended September 30, 1996. Similarly,
capital expenditures to comply with such laws and regulations are not expected
to be material in the fiscal year ending September 30, 1997.
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INTELLECTUAL PROPERTY
CELLULAR PHONE ANTENNAS AND PARTICLE INTERCONNECT TECHNOLOGY
The Company will rely on a combination of patents, patent applications,
trademarks, copyrights and trade secrets to establish and protect its
proprietary rights in the Antenna Technology and PI Technology and the
Proprietary Electroplating Process. The electron tube technology utilizes no
intellectual property rights belonging to the Company. The Company currently
owns seven U.S. patents (which expire from February 14, 2006 to October 15,
2013) on the PI Technology and seven patent applications, six related to the PI
Technology and one relating to the Antenna Technology.
Prior to the Company's acquisition of Particle California, Mr. Louis
DiFrancesco, the inventor of the PI Technology, or companies he controlled,
granted exclusive and nonexclusive licenses to use the patents and patent
applications on the PI Technology to the following Companies: Exatron Automatic
Test Equipment Inc., with an exclusive license to use the PI Technology in the
field of sockets for use in the automated handling and testing of integrated
circuits and a non-exclusive license to use the PI Technology in the field of
electrically conductive components; a non-exclusive license to Acsist Associates
Inc., now known as Johnson-Matthey Semiconductor Packagings, Inc., to use the PI
Technology in the field of laminate-based substrate products; an exclusive
license to Micro Module Systems, Inc., to use the PI Technology in the field of
MCM-D thin film substrates, except attached or associated products including
integrated circuits, sockets, lids, heat sinks, housings and printed circuit
boards; a non-exclusive license to Multiflex Inc., to use the PI Technology in
the field of laminate-based substrates and metal substrates; and a non-exclusive
license to Myers Consulting Inc., to use the PI Technology in the field of
laminate-based substrates, metal substrates, and wafer or semi-conductor
products. Mr. DiFrancesco, and not the Company, will receive any royalty
payments or other compensation received under the terms of these licenses. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS-Trends and Uncertainties" and "RISK FACTORS-License Rights to PI
Technology."
Subsequent to date of the Company's acquisition of Particle California, the
Company became aware of a purported assignment on February 14, 1991 of a one-
half interest, title and right to the then patent application, which is now U.S.
Patent No. 5,083,697 (a basic patent underlying the PI Technology) made by Mr.
Louis Difrancesco, the inventor of the PI Technology, to Mr. Kenneth Bahl.
Based upon documentation the Company has been able to obtain to date, the
Company believes the assignment was given in consideration of the formation of a
business that was never formed and, thus, the assignment appears to be invalid
due to a failure of consideration and appears to be voidable for failure of
performance. Mr. Bahl may have licensed at least one company, PI Materials,
Inc., to practice the inventions that are the subject of the assignment. To the
extent the assignment is valid, Mr. Bahl would have a one-half interest in
certain patents based on the PI Technology. Any future activity by Mr. Bahl
including assignment, sale or license of these patents by Mr. Bahl to other
persons or
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entities could materially adversely affect the Company's business, financial
condition and results of operations. The Company is currently vigorously
pursuing a resolution to this matter, including the possibility of initiating
all legal remedies available to it to obtain the full and unconditional rights
to the PI Technology. See "RISK FACTORS-Rights to PI Technology."
Consequently, PI retains the right, subject to any interest which Mr. Bahl
may retain, to exclude all other companies from using the patented technology
without a license. Concomitantly the company may license such other companies
as it chooses, provided the licenses are consistent with the exclusive licenses
previously granted and other licensing restrictions that may appear in such
prior licenses.
A basic Dual Resonance Application was filed in the United States Patent
and Trademark Office. The Company has subsequently filed a continuation to the
Dual Resonance Application to cover additional features made available through
the use of the Antenna Technology. The Company can provide no assurance that a
patent will be issued on the Dual Resonance Application. The Company has
granted a non-exclusive royalty free license to ASU to publish, make, use, and
sell the Antenna Technology strictly for educational purposes. The Company
believes that the grant of such license will have a minimal impact, if any, on
any revenue the Company may earn on the Antenna Technology.
The Company also owns certain proprietary techniques and trade secrets
relating to a Proprietary Electroplating Process. The Company recognizes the
benefits associated with developing a portfolio of corporate intellectual
property, particularly during the new product development process, and is
pursuing patentability searches and activities on several technologies. There
can be no assurance that patents will be issued from any of the pending
applications, or that any claims allowed from existing or pending patents will
be sufficiently broad enough to protect the Company's technology. While the
Company intends to vigorously protect its intellectual property rights, there
can be no assurance that any patents held by the Company will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
competitive advantages to the Company. Litigation may be necessary to enforce
the Company's patents, patent applications, trade secrets, licenses and other
intellectual property rights, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business and results of
operations regardless of the final outcome of the litigation. Despite the
Company's efforts to maintain and safeguard its proprietary rights, there can be
no assurances that the Company will be successful in doing so or that the
Company's competitors will not independently develop or patent technologies that
are substantially equivalent or superior to the Company's technologies.
The telecommunications and interconnect industries are characterized by
uncertain and conflicting intellectual property claims. The Company has in the
past and may in the future become aware of the intellectual property rights of
others that it may be infringing, although it does not believe that it is
infringing any third party proprietary rights at this time. To the extent
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that it deems necessary, the Company may license the right to use certain
technology patented by others in certain products that it manufactures. There
can be no assurance that the Company will not in the future be notified that it
is infringing other patent and/or intellectual property rights of third parties.
In the event of such infringement, there can be no assurance that a license to
the technology in question could be obtained on commercially reasonable terms,
if at all, that litigation will not occur or that the outcome of such litigation
will not be adverse to the Company. The failure to obtain necessary licenses or
other rights, the occurrence of litigation arising out of such claims or an
adverse outcome from such litigation could have a material adverse effect on the
Company's business. In any event, patent litigation is expensive, and the
Company's operating results could be materially adversely affected by any such
litigation, regardless of its outcome.
The Company also seeks to protect its trade secrets and proprietary
technology, in part, through confidentiality and non-competition agreements,
among other practices and procedures, with employees, consultants and other
parties. There can be no assurance that these agreements will not be breached,
that the Company will have adequate remedies for any breach, or that the
Company's trade secrets, such as the Proprietary Electroplating Process, will
not otherwise become known to or independently developed by others. In
addition, the laws of some foreign countries do not offer protection of the
Company's proprietary rights to the same extent as do the laws of the United
States.
EMPLOYEES
As of March 31, 1997, the Company and its three active wholly owned
subsidiaries had approximately 125 employees. None of the Company's employees
is represented by a labor union or is subject to a collective bargaining
agreement. The Company believes that its relations with its employees are
satisfactory.
PROPERTIES
PRINCIPAL EXECUTIVE OFFICES
The principal executive office of the Company is located at 999 West
Hastings Street, Suite 1750, Vancouver, B.C., Canada V6C 2W2. The Company
leases this office space from a company controlled by Alan M. Smith, an
executive officer and director of the Company, pursuant to a lease that expires
on July 31, 2001. The monthly lease payments are $3,000. The Company believes
that the lease payments are on terms at least as favorable as could be obtained
from an independent lessor.
PRINCIPAL CORPORATE OFFICES
The principal corporate office of the Company is located at 7201 E.
Camelback Road, Suite 250, Scottsdale, Arizona 85251. The Company leases this
office space. The monthly lease payments are approximately $3,500 pursuant to a
lease that expires July 31, 2001.
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PI CORP.
The Company conducts operations on a 10-acre site located at 3550 South
Marksheffel Road, Colorado Springs, Colorado. The building has 45,000 square
feet with 22,000 square feet currently allocated for production. The facility
also includes two 1000 square feet security vaults for storage of finished
products prior to shipping. The Company leases this facility pursuant to a
lease that expires on July 31, 1998. The monthly lease payments for the first
year are approximately $23,000, and approximately $23,500 for the remainder of
the term.
CELLULAR MAGNETICS
The Company will manufacture its Antenna Systems and continue to produce
electronic assemblies at its 8,000 square foot manufacturing facility in Arizona
City, Arizona and its 8,600 square foot plant in Sonora, Mexico. The Company
owns the land on which these facilities are located.
CTL
The Company's manufacturing facilities are presently located at 1305 17th
Avenue, Santa Cruz, California 95062. The current leased premises comprise
approximately 8,000 square feet at a monthly lease cost of approximately
$10,000. The Company has entered into a lease agreement dated June 16, 1995
with the City of Watsonville, California, for a new manufacturing facility
consisting of approximately 21,600 square feet. Construction of this facility
began in March 1996, with an anticipated final occupancy date of June 1997. The
Company will initially occupy approximately 12,000 square feet at the facility
and will sublet the remainder until such time as it requires additional space.
The lease is for a period of 15 years with an option to renew for 3 successive
five-year terms. The total lease cost will be approximately $15,000 per month,
exclusive of any sublease revenues.
LEGAL PROCEEDINGS
The Company has recently been notified of a potential litigation matter
(the "Complaint") which has been filed by American Microcell Corp. ("AMC") and
MicroAntenna, Inc. (collectively, "Plaintiffs") against but not yet served upon,
among others, the Company, Terry Neild, a director and Executive Vice President
of the Company, and Lucius Ross, a consultant to the Company (collectively, the
"Defendants"), in the Superior Court of Maricopa County, No. CV 97-00642.
The Complaint alleges that Messrs. Ross and Neild were, at the relevant time,
former directors of Plaintiffs and breached their fiduciary duties to Plaintiffs
by usurping a corporate opportunity, the acquisition of the Antenna Technology
from Plaintiffs for their personal benefit and the benefit of the Company. The
Complaint requests both compensatory damages, an assignment of all rights to the
Antenna Technology and a lien or constructive trust on the Antenna Technology
and all proceeds therefrom.
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The Company is currently conducting an extensive factual analysis of the
threatened litigation. Based upon such information, the Company believes the
Complaint lacks substantial merit and further believes it has and intends to
assert meritorious counterclaims against the Plaintiffs.
Other than the Complaint, no material legal proceedings (other than routine
litigation incidental to the business) to which the Company (or any officer or
director of the Company, or any affiliate or owners of record or beneficially of
more than 5% of the common stock) to management's knowledge, is a party or to
which the property of the Company is subject, is pending and no such material
proceedings are known by management of the Company to be contemplated.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, directors and significant employees of the Company
are as follows:
<TABLE>
<CAPTION>
Name and Age Position Period of Service
- --------------------------- ------------------------- ------------------------
<S> <C> <C>
Gordon J. Sales (59) Director, President and July 7, 1995 to Present
Chief Executive Officer
Terry W. Neild (56) Director and Executive July 7, 1995 to Present
Vice President and Director since
October 23, 1996 to
Present
Alan M. Smith (45) Director, Secretary, July 7, 1995 to Present
Treasurer and Chief and Director since June
Financial Officer 1996 to Present
Theodore A. Waibel (59) Director November 22, 1996 to
Present
Charles E. Bauer, Ph.D. Director November 22, 1996 to
(46) Present
Steven D. Clark (38) President of PI Corp. October 22, 1996 to
Present
Lawrence DiFrancesco (48) Executive Vice President September 3, 1996 to
and Chief Operations Present
Officer of PI Corp.
Jerry W. Tooley (53) President and Chief October 14, 1996 to
Executive Officer of Present
Cellular Magnetics
David Putnam (50) Chief Financial Officer October 14, 1996 to
of Cellular Magnetics Present
Richard Gibson (44) President and Chief February 6, 1997 to
Financial Officer of Present
Intercell Wireless Corp.
James D. Martin (40) Vice President, CTL February, 1977 to
Present
Anthony P. Wynn (53) Vice President, CTL January, 1979 to Present
David E. Blank (62) Vice President, CTL July, 1989 to Present
</TABLE>
The directors hold office until the next annual meeting of shareholders and
until their successors have been duly elected and qualified. The officers are
elected by the Board of Directors at its annual meeting immediately following
the shareholders' annual meeting and hold
62
<PAGE>
office until they resign or are removed from office. There are no family
relationships that exist between any director, executive officer, significant
employee or person nominated or chosen by the Company to become a director or
executive officer. The Company has not established an executive committee of the
Board of Directors or any committee that would serve similar functions such as
an audit, incentive compensation or nominating committee.
In connection with its merger with Particle California, the Company agreed
to appoint Lawrence DiFrancesco to the Board of Directors and elected Louis
DiFrancesco as Chief Technical Officer of PI Corp. Mr. Lawrence DiFrancesco
subsequently resigned from the Board of Directors on October 23, 1996. Mr.
Louis DiFrancesco resigned as Chief Technical Officer of PI Corp. and now serves
as a paid consultant to PI Corp.
In connection with the Company's acquisition of Energy, Mr. Sales was
appointed as Director and Chief Executive Officer of the Company and Messrs.
Neild and Smith were appointed as officers of the Company.
BIOGRAPHICAL INFORMATION ON OFFICERS AND DIRECTORS AND SIGNIFICANT EMPLOYEES
GORDON J. SALES. Mr. Sales has been President, Chief Executive Officer and
a Director of the Company since July 7, 1995. In addition, he has been
President and Chief Executive Officer of CTL since May 1, 1994 and of PI Corp.
from September 3, 1996 to October 22, 1996. Mr. Sales also has been President,
Chief Executive Officer and a Director of Energy since March of 1993. Prior to
his association with the Company, its parent and subsidiary, Mr. Sales was
involved in the building supply, forest products and real estate industries.
During the years 1977 to 1993, Mr. Sales was President of his privately owned
holding company, which had interests in truck parts manufacturing, wood fibre
processing and commercial real estate development. Mr. Sales devotes
substantially all of his professional time to the business affairs of the
Company.
TERRY W. NEILD. Mr. Neild became an Executive Vice President of the
Company on July 7, 1995 and was appointed to the Board of Directors on October
23, 1996. From August 1, 1993 to September 26, 1995, he served as President and
Chief Operating Officer of Energy. Prior to that time Mr. Neild was self-
employed as a business and financial consultant. Mr. Neild is a Certified
Management Accountant. Mr. Neild served as Chairman and Chief Executive Officer
of Clearly Canadian Beverage Corp. ("Clearly Canadian") from February 1986 to
March 1989, and as Chairman and Chief Executive Officer of Clearly Canadian's
majority shareholder, Camfrey Resources, Ltd., from March 1989 to February 1990.
Mr. Neild has been a Director of Baywest Capital Corp., MacNeill International
Corp., North American Contractors, Ltd., Barwell Development Corp., and Crest
Realty and Development Ltd. Mr. Neild devotes substantially all of his
professional time to the business affairs of the Company.
ALAN M. SMITH. Mr. Smith has been Secretary, Treasurer and Chief Financial
Officer of the Company since July 7, 1995 and a director since June 12, 1996.
Mr. Smith is a Chartered Accountant practicing in Vancouver, British Columbia,
Canada. Mr. Smith
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<PAGE>
established a financial consulting practice in Vancouver, Canada in 1985 and in
1990 obtained his license to practice as an independent accountant. He has been
a member of the Institute of Chartered Accountants of Ontario since 1978 and of
the Institute of Chartered Accountants of British Columbia since 1981. Mr. Smith
devotes substantially all of his professional time to the business affairs of
the Company.
THEODORE A. WAIBEL. Mr. Waibel has served as a director of the Company
since November 22, 1996. Mr. Waibel has been the President and Chief Executive
Officer of T.A.W. Vehicle Concepts, Inc. (an importer of magnesium wheels for
race cars) since March 1996. From March 1991 to March 1996, Mr. Waibel was the
President and Chief Executive Officer of TVX, Inc. (a high technology company
that has developed the placement of a camera on a computer chip for security
applications).
From July 1980 through February 1991, Mr. Waibel was President and Chief
Executive Officer of Ultrak, Inc. (NASDAQ: ULTK), a company he co-founded in
1980. From July 1975 until June 1980, he was Executive Vice President of
Marketing for Alarm Device Manufacturing Co., ADEMCO Division of Pittway
Corporation, Tyosset, New York which had purchased Sontrix, Inc., a public
company co-founded by Mr. Waibel. From October 1969 through July 1975, Mr.
Waibel served as President of Sontrix, Inc., Boulder, Colorado, which developed
a successful multi-head ultrasonic system for the security market.
Mr. Waibel is past National Director of the American Electronics
Association, a past member of the Dean's Advisory Council to Dean Firman of the
University of Denver and founded the Alarm Industry Telecommunications Committee
in Washington, D.C.
Mr. Waibel received his BS/BA from the University of Denver with a major in
marketing in 1967.
CHARLES E. BAUER, PH.D. Dr. Bauer has served as a director of the Company
since November 22, 1996. Dr. Bauer has been the Managing Director of TechLead
Corporation, an international consulting firm, since 1990. During his career,
Dr. Bauer has served as Director, Research and Technology of MicroLithics
Corporation, Golden, Colorado. At MicroLithics Corporation, Dr. Bauer was
responsible for a variety of technology programs with the Coors Advanced
Electronics Group, including, MicroLithics Coors Electronic Packaging Company,
two internal research groups of the Coors Ceramic Company and a joint venture
with W. R. Grace & Company. From 1978 through 1989 he was employed by
Tektronix, Incorporated, Beaverton, Oregon, in various capacities as a Material
Scientist/Engineer, Materials Science/Engineering Manager, Engineering
Scientific Manager, Bipolar Products Packaging Unit Manager and Integrated
Circuit Packaging Operations Manager.
Dr. Bauer received his BS in Materials Science and Engineering from
Stanford University in 1972, his MS in Metallurgical Engineering from Ohio State
University in 1975, his PhD in Materials Science and Engineering from Oregon
Graduate Center, Beaverton, Oregon in 1980 and his MBA from the University of
Portland in 1988.
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<PAGE>
Dr. Bauer has served as Assistant Adjunct Professor in Mechanical
Engineering and Business Administration with the University of Portland, as an
Associate Professor (visiting) in Mechanical Engineering with Florida
International University, Miami, Florida and is currently associated as
Assistant Adjunct Professor, with dual appointment in Mechanical Engineering and
Electrical and Computing Engineering with the University of Colorado. He is
currently Director, Industrial Relations for the Center for Advance
Manufacturing and Packaging of Microwave, Optical and Digital Electronics for
the University of Colorado.
Dr. Bauer served as the President of the Rocky Mountain Chapter, the
Microelectronic Society (ISHM) (1995-96). He has received the Fellow of Society
Award of ISHM (1993) and served as National Technical Vice President (1988-90).
Dr. Bauer is a Director and the Secretary of the Surface Mount Technology
Association (SMTA) and is currently serving as President of the Rocky Mountain
Chapter (1995-96). Dr. Bauer has been a member of the following professional
societies: ASM International (ASM) since 1971, International Electronics
Packaging Society (IEPS) since 1983 and Institute of Electronic and Electrical
Engineering (IEE) since 1993.
Dr. Bauer holds one U.S. Patent on Multilayer Interconnect Circuitry and
has five Patent Applications pending, relating to interconnect circuitry and
packaging. Dr. Bauer has published over 50 technical papers and presentations
in journals and conferences around the world. He founded and is currently
General Chair of Pan Pacific Microelectronics Symposium and Chip Scale Packaging
Advanced Technology Workshop.
SIGNIFICANT EMPLOYEES. The Company considers the following officers of its
subsidiaries as significant employees of the Company
STEVEN D. CLARK. Mr. Clark has served as President of PI Corp. since
October 22, 1996. Prior thereto, Mr. Clark worked on the B2 Bomber program as a
project manager in charge of new business acquisitions with Northrop Grumman
Corporation from 1981 to 1996. In addition, Mr. Clark has served as a
consultant in the development of the PI Technology for the past ten years.
LAWRENCE DIFRANCESCO. Mr. DiFrancesco has served as Director, Executive
Vice President and Chief Operating Officer of PI Corp. since September 3, 1996
and he served as a Director of the Company from September 3, 1996 to October 23,
1996. From March 1995 through May 1996, Mr. DiFrancesco was employed as an
engineer with Sheldahl Inc., Northfield, Minnesota, a large manufacturer of flex
circuits. From March 1994 through March 1995, Mr. DiFrancesco was employed by
Particle California, working jointly with his brother, Louis DiFrancesco, in the
further development of the PI Technology and the Proprietary Electroplating
Process. From December 1992 through March 1994, he was employed at Exatron-
Acsist Associates where he served as Program Coordinator and Process Engineer
for the development of a new, high density, fine pitch, surface mount
interconnect technology. From July 1992 through December 1992, he was employed
as an Engineer with Logical
65
<PAGE>
Services, Inc. From 1982 to 1991, he served as a Project Leader for Hughes
Aircraft Company where his responsibilities related to high volume manufacturing
operations.
Mr. DiFrancesco is the co-developer of the PI Technology and the
Proprietary Electroplating Process. He served as the Senior Scientist for
Particle California in an advisory capacity or as an employee from 1991 until
September 3, 1996 when it assigned the PI Technology and the Proprietary
Electroplating Process to the Company.
Mr. DiFrancesco received an AAE Electronic Technology degree from Chabot
College, Hayward, California and a Bachelor of Science degree in Electrical
Engineering from Cal Poly, San Luis Obispo, California.
JERRY W. TOOLEY. Mr. Tooley has served as President and Chief Executive
Officer of Cellular Magnetics since October 14, 1996. Prior thereto, Mr. Tooley
served as the President of M.C. Davis.
DAVID PUTNAM. Mr. Putnam has served as the Chief Financial Officer of
Cellular Magnetics since October 14, 1996. Prior thereto, Mr. Putnam served as
Vice President and Treasurer of M.C. Davis.
RICHARD GIBSON. Mr. Gibson has served as the President and Chief Financial
Officer of Intercell Wireless since February 6, 1997. From February 1992 until
February 1997, Mr. Gibson was employed by Motorola, Inc. most recently as the
head of Sales and Marketing for the Secured Product Division of Motorola, Inc.,
where he worked on the development of an encryption unit for the Motorola Elite
flip-phone, including the development of the market requirements for features
and functionality.
JAMES D. MARTIN, VICE PRESIDENT, CTL. Mr. Martin has been employed by CTL
since February, 1977 and has served as Vice President of CTL since 1993. He has
worked in every department of CTL from production and sales to customer service.
Mr. Martin provides technical support to customers in this highly technical
business and organizes and runs production lines for rebuilding triodes,
cyclotrons and medical linear accelerators.
ANTHONY P. WYNN, VICE PRESIDENT, CTL. Mr. Wynn has served as Vice
President of CTL since January, 1979. Mr. Wynn is a design engineer responsible
for developing a 50KW L-band magnetron and rebuilds high power magnetrons,
cyclotrons, triodes, medical linear accelerators, electron guns and ion pumps.
He has worked with English Electric Valve Co. (U.K.) and Litton Industries
(U.S.) as a professional microwave engineer in the magnetron tube divisions.
DAVID E. BLANK, VICE-PRESIDENT, CTL. Mr. Blank has been Vice-President of
Engineering at CTL since July, 1989. A graduate of Brunel College, London
University, England and a member of the Institute of Mechanical Engineers, he
has worked in senior
66
<PAGE>
engineering positions with Varian Associates, EEV Inc.'s Relmag Division of
Litton Industries. He has designed and developed numerous magnetrons at various
power levels during his career.
67
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning compensation
paid by the Company to the Chief Executive Officer ("CEO") and any other
executive officer whose total annual salary and bonus exceeded $100,000 for the
fiscal year ended September 30, 1996 (the "Named Executive Officers"):
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------------ ------------
Securities
Fiscal Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Options (#) Compensation($)
- ---------------------------------------- ------ -------------------- -------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Gordon J. Sales, President 1996 $105,917 -0- 700,000/(2)/ -0-
and Chief Executive Officer 1995 -0- -0- 500,000/(2)/ $82,265/(1)/
Alan M. Smith, Director, Secretary, 1996 93,371 -0- 550,000/(3)/ -0-
Treasurer and Chief Financial Officer 1995 15,000 -0- - 0- 40,000/(4)/
Terry W. Neild, Director and Executive 1996 40,000 -0- 700,000/(2)/ -0-
Vice President 1995 -0- -0- 500,000/(2)/ -0-
________________
</TABLE>
/(1)/ Received as compensation as an officer of CTL.
/(2)/ An option to purchase 500,000 shares of Common Stock was originally
granted to Messrs. Sales and Neild on July 7, 1995 at an exercise price of $.625
per share. On November 9, 1995 these options were repriced at an exercise price
of $.50 per share. Concurrently, an option to purchase an additional 200,000
shares of Common Stock was granted by the Company to Messrs. Sales and Neild at
the same exercise price. Messrs. Sales and Neild each subsequently transferred
options to purchase 50,000, of the 200,000 shares originally granted to them
to Alan M. Smith as a gift on October 21, 1996.
/(3)/ Mr. Smith received additional options to purchase 150,000 shares of Common
Stock from Messrs. Sales, Neild and the Company's general counsel. These options
have not been included in the above table as the options were not granted by the
Company.
/(4)/ Received as compensation as a consultant to Energy Corporation and CTL.
The foregoing compensation table does not include certain fringe benefits
made available on a nondiscriminatory basis to all Company employees such as
group health insurance, dental insurance, long-term disability insurance,
vacation and sick leave. In addition, the Company makes available certain non-
monetary benefits to its executive officers with a view to acquiring and
retaining qualified personnel and facilitating job performance. The Company
considers such benefits to be ordinary and incidental business costs and
expenses. The aggregate value of such benefits in the case of each executive
officer listed in the above table, which cannot be precisely ascertained but
which is less than 10% of the cash compensation paid to each such executive
officer, is not included in such table.
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<PAGE>
OPTION GRANTS TABLE
The following table provides information relating to the grant of stock
options to the Company's executive officers during the fiscal year ended
September 30, 1996.
OPTION GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT ASSUMED
ANNUAL RATES OF STOCK PRICE
INDIVIDUAL GRANTS APPRECIATION FOR OPTION TERM/(1)/
-------------------------- --------------------------------------
PERCENT
OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES FAIR MARKET
OPTIONS IN FISCAL EXERCISE VALUE ON EXPIRATION
NAME GRANTED(#) YEAR/(3)/ PRICE($/SH) GRANT DATE/(2)/ DATE 0% ($) 5% ($) 10% ($)
- ---- ---------- ---------- ----------- -------------- ---------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gordon J. Sales 200,000/(4)/ 4.1% .50 .625 11/9/2005 $ 25,000 $103,760 $223,760
500,000/(4)/ 10.3% .50 .625 7/7/2005 62,500 259,400 559,400
Alan M. Smith 50,000 4.1% .50 .625 11/9/2005 6,250 25,940 55,940
300,000 6.2% .50 4.860 6/12/2006 654,000 1,113,270 1,813,110
200,000 4.1% 4.00 4.750 9/3/2006 150,000 748,500 1,660,500
Terry W. Neild 200,000/(4)/ 4.1% .50 .625 11/9/2005 25,000 103,760 223,760
500,000/(4)/ 10.3% .50 .625 7/7/2005 62,500 259,400 559,400
</TABLE>
_________________
/(1)/ Potential realizable value is based on an assumption that the stock price
of the Common Stock appreciates at the annual rate shown (compounded annually)
from the date of grant until the end of the ten-year option term. These numbers
are calculated based on the requirements promulgated by the Securities and
Exchange Commission and do not reflect the Company's estimate of future stock
price growth which may or may not occur.
/(2)/ Computed based on the average closing bid and asked prices on the date the
options were granted.
/(3)/ All options granted were immediately exercisable on the date of grant.
/(4)/ An option to purchase 500,000 shares of Common Stock was originally
granted to Messrs. Sales and Neild on July 7, 1995 at an exercise price of $.625
per share. On November 9, 1995 these options were repriced at an exercise price
of $.50 per share. Concurrently, an option to purchase an additional 200,000
shares of Common Stock was granted by the Company to Messrs. Sales and Neild at
the same exercise price.
/(5)/ The Company granted options to other officers, directors, consultants and
employees, including employees of the Company's subsidiaries, to purchase an
aggregate of 4,841,180 shares of Common Stock during fiscal 1996.
69
<PAGE>
AGGREGATED OPTION EXERCISE AND FISCAL YEAR-END OPTION TABLE
The following table provides information relating to the exercise of
stock options during the fiscal year ended September 30, 1996 by the Company's
executive officers and the 1996 fiscal year-end value of unexercised options.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR,
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
AT FY-END/(1)/ AT FY-END($)/(1)/
--------------- -----------------
SHARES
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- ----------------- ------------ ------------- --------------- -----------------
<S> <C> <C> <C> <C>
Gordon J. Sales -0- -0- 650,000/0/(2)/ $2,315,625/0
Alan M. Smith 200,000 $687,500/(3)/ 150,000/0 534,375/0
200,000/0 12,500/0
Terry W. Neild -0- -0- 650,000/0/(2)/ 2,315,625/0
</TABLE>
______________
/(1)/ The average of the closing bid and asked price of the Common Stock on
December 20, 1996 ($4.0625) was used to calculate the option value.
/(2)/ The holders transferred 50,000 out of an original 200,000 stock options
issued to them on November 9, 1995 to Alan M. Smith at no cost.
/(3)/ The market value of the Common Stock on the date of exercise, June 27,
1996, minus the exercise price of $.50 per share. The average of the closing
bid and asked price of the Common Stock on June 27, 1996 was $3.9375.
DIRECTOR COMPENSATION
An option to purchase 100,000 shares of Common Stock was originally
granted to Mark S. Pierce on July 7, 1995 at an exercise price of $.625 per
share. On November 7, 1995 these options were repriced at an exercise price of
$.50 per share. Concurrently, an option to purchase an additional 100,000
shares of Common Stock was granted by the Company to Mr. Pierce at the same
exercise price. Mr. Pierce resigned as an officer of the Company effective July
7, 1995 and as a director of the Company on June 12, 1996.
In the future, the Company's Board of Directors intends to pay its
non-employee directors $1,500 for their attendance at each regular or special
meeting of the Board of Directors and award each non-employee director options
to purchase 100,000 shares of Common Stock, which options shall vest 25,000
shares per year for each full year served as a director of the Company.
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<PAGE>
EMPLOYMENT AGREEMENTS
On September 1, 1996, the Company entered into certain employment
agreements (the "Employment Agreements"), with Gordon J. Sales to serve as
President and Chief Executive Officer of the Company, Alan M. Smith to serve as
Chief Financial Officer of the Company, and Terry W. Neild to serve as Executive
Vice President of the Company (collectively, the "Employees" and individually an
"Employee"). The Employment Agreements are for a period of sixty months
beginning September 1, 1996 and ending August 31, 2001. Any extension or
renewal of the Employment Agreements must occur at least three months prior to
the end of the initial term or any renewal term and absent mutual agreement of
the parties, the failure to conclude such extension or renewal by such date
shall be deemed notice to the Company and the Employee, that the relevant
Employment Agreement shall not be extended. Under each Employment Agreement,
each Employee will be paid an annual salary of $120,000 ("Annual Salary") for
the first year, which amount will be increased to $180,000, $240,000, $270,000
and $300,000 on September 1, 1997, 1998, 1999 and 2000, respectively. Each
Employee also is entitled to participate in the Company's bonus and stock option
plans and participate in the customary employee benefits programs maintained by
the Company, including health, life and disability insurance to the extent
provided to other senior executives of the Company.
The Company or an Employee may terminate the applicable Employment
Agreement at any time with or without cause. In the event the Company
terminates an Employment Agreement for cause or an Employee terminates his
Employee Agreement without cause, all of such Employee's rights to compensation
would cease upon the date of his termination. If the Company terminates an
Employment Agreement without cause or the Employee terminates his Employment
Agreement for cause (which is limited to the Company's failure to pay the
Employee his monthly compensation) the Company will pay to the Employee, within
15 days of the effective date of such termination, all compensation and other
benefits that would have accrued and/or been payable to the Employee during the
full term of the Employment Agreement.
In the event of a change in control of the Company, each Employee is
be entitled to receive a lump sum payment equal to $400,000, if the change of
control occurs prior to August 31, 1999, and $430,000 if the change of control
occurs thereafter. A change of control is considered to have occurred when, as
a result of any type of corporate reorganization, execution of proxies, voting
trusts or similar arrangements, a person or group of persons (other than
incumbent officers, directors and principal shareholders of the Company)
acquires sufficient control to elect more than a majority of the Company's Board
of Directors. The Employment Agreements also include a non-compete and non-
disclosure provisions in which each Employee agrees not to compete with or
disclose confidential information regarding the Company and its business during
the term of the Employment Agreement and for a period of one year thereafter.
Additional Employment Agreements. The Company has entered into an
employment agreement with the Company's general counsel under terms
substantially similar to those discussed above. The Company, through its wholly
owned subsidiaries, has also entered into
71
<PAGE>
employment agreements with the following individuals, among others, Steven
Clark, Lawrence DiFrancesco, Jerry W. Tooley and David Putnam.
COMPENSATION PURSUANT TO PLANS
STOCK OPTION PLANS
The Company has one stock option plan entitled the Intercell
Corporation 1995 Compensatory Stock Option Plan (the "1995 Plan"). The Company
has reserved 7,000,000 shares of Common Stock for issuance. In the 1996 fiscal
year, the Company granted options to purchase 4,841,180 shares of Common Stock
to directors, officers, employees and consultants of the Company and its
subsidiaries.
EMPLOYEE STOCK OWNERSHIP PLAN
In 1988, CTL established an Employee Stock Ownership Plan (the "ESOP")
and a related trust for substantially all of its employees. To participate in
the ESOP, employees of CTL must have worked at least 1,000 hours during the year
and must be employed at the end of the ESOP year. Participants do not vest
until their third year of employment and then vest 20% per year through year
seven. Employer contributions are voluntary and are generally based on a
percentage of eligible payroll, limited to 15%. The contributions for 1995 and
1994 were approximately $158,000 and $247,000, respectively, and were recognized
as compensation expense. The Company discontinued the ESOP in 1996.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not have a compensation committee, all decisions on
the compensation of executive officers and directors of the Company are made by
the full Board of Directors. In the preceding fiscal year, the following
members of the Board of Directors participated in discussions involving the
compensation of executive officers of the Company: Messrs. Sales, Neild, Smith
and Pierce.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, and
the rules thereunder require the Company's officers and directors, and persons
who own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission and to furnish the Company with copies.
Based solely on its review of the copies of the Section 16(a) forms
received by it, or written representations from certain reporting persons, the
Company believes that, during the last fiscal year, all Section 16(a) filing
requirements applicable to its officers, directors and greater than ten-percent
beneficial owners were complied with except that Alan M. Smith failed
72
<PAGE>
to timely file a report on Form 4 reporting the grant of an option to purchase
50,000 shares of Common Stock on November 9, 1995 until June 1996.
CERTAIN TRANSACTIONS
As of September 30, 1996, the Company had an outstanding promissory
note due to Jerry W. Tooley, the Chief Financial Officer of Cellular Magnetics
in the amount of $80,000 with an interest rate of 8%, due annually. The
promissory note was issued as part of the consideration paid for the purchase of
M.C. Davis consummated on September 30, 1996. This note was repaid in October
1996.
The Company had noninterest bearing notes payable totaling $800,000
due to the former owners of M.C. Davis in consideration for the purchase of M.C.
Davis consummated on September 30, 1996. These notes were repaid in October
1996. See also Note 11 to the Company's Consolidated Financial Statements and
Notes thereto included elsewhere herein.
The Company leases its principal executive office from Alan M. Smith,
Ltd., a company controlled by Alan M. Smith, an executive officer and director
of the Company. The Company leases this office space pursuant to a lease that
expires on July 31, 2001. The monthly lease payments are $3,000. The Company
believes that the lease payments are on terms at least as favorable as could be
obtained from an independent lessor.
On September 3, 1996, the Company granted options to purchase 400,000
shares of Common Stock, with an exercise price of $4.00 per share, to 521508
B.C. Ltd. ("B.C. Ltd.") in return for which B.C. Ltd. agreed to promote the sale
of the Company's products and services in Canada. These options vest
immediately and expire 10 years from the date of grant. The Company recognized
a charge to income of $300,000 resulting from the grant of these options. B.C.
Ltd, which has its own management, is beneficially owned by the adult children
of Mr. Gordon J. Sales and by the father-in-law of Mr. Terry W. Neild. Both Mr.
Sales and Mr. Neild disclaim any direct or indirect beneficial ownership of, or
interest in, B.C. Ltd.
On July 8, 1996, Energy, which does not currently conduct any
operations and whose only assets consist of the Company's Common Stock and the
Company entered into a certain Plan of Liquidating Dissolution (the "Plan").
The Plan was approved by a majority of the shareholders of Energy on October 21,
1996 in accordance with the provisions of the Delaware General Corporation Law.
Under the Plan, the Company has agreed to register the shares of Common Stock
issued to Energy over a period of three years. The 5,412,191 shares of Common
Stock owned by Energy will be distributed to the beneficial owners of the shares
of common stock of Energy as of July 8, 1996, pro-rata as follows: 902,032 on
the effective date of the Company's Registration Statement of which this
Prospectus is a part, 902,032 ninety days thereafter, and approximately 902,032
shares on or about January 30 and April 30, 1998 and January 31 and April 30,
1999.
73
<PAGE>
B.C. Ltd., the Blonde Bear Trust, the beneficiary of which is the
spouse of Alan M. Smith and Messrs. James D. Martin, Anthony P. Wynn and David
E. Blank, significant employees of the Company, own shares of Energy and will
receive approximately 247,632, 119,000, 20,000, 20,000 and 20,000 shares of
Common Stock, respectively, in the distribution. The Blonde Bear Trust has an
independent trustee and Mr. Smith does not have the authority to revoke the
trust or direct the trustee in the voting or disposition of the trust proceeds.
Accordingly, Mr. Smith disclaims any beneficial ownership interest in the shares
of Common Stock the trust will receive from Energy.
74
<PAGE>
BENEFICIAL OWNERSHIP
The following table sets forth certain information regarding the
beneficial ownership of outstanding shares of Common Stock as of April 1, 1997,
by (i) each person known by the Company to own beneficially five percent or more
of the outstanding shares of Common Stock, (ii) the Company's directors, Chief
Executive Officer and executive officers whose total compensation exceeded
$100,000 for the last fiscal year, and (iii) all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
Name and Address of Percentage of
Beneficial Owner Number of Shares Class/(6)/
- ------------------- ----------------- --------------
<S> <C> <C>
Energy Corporation
999 West Hastings St., Suite 1750
Vancouver, B.C., V6C 2W2 5,412,191/(1)/ 30.04%
Gordon J. Sales, Chief Executive Officer
999 West Hastings St., Suite 1750
Vancouver, B.C., V6C 2W2 1,383,334/(1)(2)/ 7.68
Terry W. Neild, Executive Vice President
7201 E. Camelback Rd., Suite 250
Scottsdale, AZ 85251 1,383,334/(2)/ 7.68
Alan M. Smith, Chief Financial Officer
999 West Hastings St., Suite 1750
Vancouver, B.C., V6C 2W2 688,000/(3)/ 3.82
Cheri L. Perry
3236 Jellison Street
Wheat Ridge, CO 80033 1,269,340/(4)/ 7.04
Theodore A. Waibel, Director
890 S. Coors Drive
Lakewood, CO 80228 -0-/(5)/ -0-
Charles E. Bauer, Director
31321 Island Drive
Evergreen, CO 80439 -0-/(5)/ -0-
All officers and directors as a group (5 persons) 3,454,668 19.17
_______________
</TABLE>
/(1)/ Mr. Sales is President and a Director of Energy but does not beneficially
own any shares of common stock of Energy. As the sole director of Energy, Mr.
Sales has voting control of the Common Stock held by Energy. However, Mr. Sales
does not own any shares of Energy's common stock and disclaims any beneficial
ownership of the Common Stock held by Energy. Consequently, its ownership is
not attributed to or included in his ownership. No current shareholder of
Energy that will receive shares of Common Stock pursuant to the Plan of
Liquidating Dissolution owns in excess of 10% of the common stock of Energy and
no such current shareholder is an affiliate of the Company, except as described
under "Certain Transactions." Energy filed a Certificate of Dissolution with
the Delaware Secretary of State on November 13, 1996, and currently acts as a
holding company, whose only assets consist of the Common Stock being held for
distribution to Energy's shareholders.
/(2)/ Includes 650,000 shares of Common Stock subject to presently exercisable
stock options held by Messrs. Sales and Neild. The options are exercisable at
$0.50 per share and expire July 7, 2005 with respect to 500,000 shares and
November 9, 2005 with respect to 150,000 shares. The holders transferred 50,000
out of an original 200,000 stock options issued to them on November 9, 1995 to
Alan M. Smith at no cost.
/(3)/ Includes 500,000 shares of Common Stock subject to presently exercisable
stock options held by Mr. Smith. The options are exercisable at $0.50 per share
and expire on June 12, 2006 with respect to 150,000 shares; $0.50 per share and
expire on
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November 9, 2005 with respect to 150,000 shares (transferred to him, at no cost
by certain other shareholders) and at $4.00 per share and expire on October 21,
2006 with respect to 200,000 shares.
/(4)/ Includes 850,000 shares of Common Stock subject to presently exercisable
stock options held by such individual. The options are exercisable at $0.50 per
share and expire on July 7, 2005 with respect to 500,000 shares and on November
9, 2005 with respect to 150,000 shares; and at $4.00 per share and expire on
October 21, 2006 with respect to 200,000 shares.
/(5)/ The ownership indicated does not include options granted effective
November 22, 1996 to acquire up to one hundred thousand (100,000) shares of the
Common Stock at $4.00 per share. The options vest at the rate of twenty-five
thousand (25,000) shares per year for each year served as a director. As the
options are not presently exercisable, the option holder is not considered to be
the beneficial owner of the shares of Common Stock underlying the Options. The
Options have a term expiring on November 22, 2006.
/(6)/ Based upon 18,019,508 shares issued and outstanding on April 1, 1997.
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<PAGE>
SELLING SHAREHOLDERS
This Prospectus covers 6,336,987 shares of Common Stock and 1,837,450
Warrants being offered by the Selling Shareholders. The table below sets forth
(i) the identity of the Selling Shareholders and the Selling Shareholders of
Energy, (ii) the nature of any position or other material relationship, if any,
which the Selling Shareholders and the Selling Shareholders of Energy have had
with the Company, its predecessors or affiliates during the past three years,
(iii) the amount of shares of Common Stock owned by the Selling Shareholders and
the Selling Shareholders of Energy prior to the offering, (iv) the amount of
shares of Common Stock offered by the Selling Shareholders and the Selling
Shareholders of Energy hereby, and (v) the amount and (if one percent or more)
the percentage of shares of the outstanding Common Stock that will be owned by
the Selling Shareholders and the Selling Shareholders of Energy after the
offering is complete and assuming that all shares of Common Stock offered hereby
are sold.
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<PAGE>
<TABLE>
<CAPTION>
Amount of Amount of Amount of Amount of
Common Stock Common Stock Owned Warrants Owned Amount Shares/Warrants
Owned Prior to Prior Prior to of Shares/(4)// To Be Owned
Name of Selling Offering-Series to Offering-Series Offering-Series Warrants After the
Shareholder B/(2)/ C/(3)/ B/Series C Offered Offering/(5)/
------------ --------- --------- ----------- -------- --------------
<S> <C> <C> <C> <C> <C>
Selling Shareholders of
Energy/(1)/ 1,804,064/-0- -0-/3,608,127
AG Super Fund
International Partners L.P. -0- -0- 7,619/-0- 7,619/7,619 -0-/-0-
Banque Scandinave en Suisse -0- 193,950 30,476/38,462 262,888/68,938 -0-/-0-
Cameron Capital Ltd. -0- -0- 76,191/-0- 76,191/76,191 -0-/-0-
Capital Ventures
International 177,150 155,160 53,333/61,538 447,181/114,871 -0-/-0-
Darissco Diversified
Investments Inc. -0- -0- 11,429/-0- 11,429/11,429 -0-/-0-
Faisal Finance
(Switzerland) -0- -0- 49,524/-0- 49,524/49,524 -0-/-0-
GAM Arbitrage
Investments, Inc. -0- -0- 7,619/-0- 7,619/7,619 -0-/-0-
Global Bermuda, L.P. 24,801 174,555 15,238/69,231 283,825/84,469 -0-/-0-
Gracechurch & Co. -0- -0- 38,095/-0- 38,095/38,095 -0-/-0-
KA Investments LDC 31,887 -0- 11,429/-0- 43,316/11,429 -0-/-0-
Lake Management LDC -0- 193,950 38,095/38,462 270,507/76,557 -0-/-0-
Lakeshore International Ltd. -0- 135,765 -0-/53,846 189,611/53,846 -0-/-0-
Leonardo, L.P. -0- -0- 53,333/-0- 53,333/53,333 -0-/-0-
Olympus Securities Ltd. 354,300 -0- 76,191/-0- 430,491/76,191 -0-/-0-
Queensway Financial
Holdings -0- 193,950 22,857/38,462 255,269/61,319 -0-/-0-
Rana Investment Company -0- -0- 34,286/-0- 34,286/34,286 -0-/-0-
Raphael, L.P. -0- -0- 7,619/-0- 7,619/7,619 -0-/-0-
RIC Investment Fund Ltd. -0- -0- 34,286/-0- 34,286/34,286 -0-/-0-
Richcourt $ Strategies, Inc. -0- -0- 26,667/-0- 26,667/26,667 -0-/-0-
Santander Merchant Bank, Ltd. -0- 387,900 -0-/153,846 541,746/153,846 -0-/-0-
Swartz Investments, LLC/(6)/ -0- -0- 330,159/214,615 544,774/544,774 -0-/-0-
The Gifford Fund Ltd. -0- 193,950 38,095/38,462 270,507/76,557 -0-/-0-
The Matthew Fund N.V. 70,860 193,950 15,238/38,462 318,510/53,700 -0-/-0-
The Otato Limited
Partnership -0- 96,975 38,095/0 135,070/38,095 -0-/-0-
The Tail Wind Fund, Ltd. -0- 116,370 -0-/-0- 116,370/-0- -0-/-0-
Windward Island Limited -0- -0- 38,095/0 38,095/38,095 -0-/-0-
Wood Gundy London Ltd. -0- -0- 38,095/0 38,095/38,095 -0-/-0-
------- --------- ----------------- ------------------- -------------
Total 658,998 2,036,475 1,092,064/745,386 6,336,987/1,837,450 -0-/3,608,127
======= ========= ================= =================== =============
</TABLE>
_______________
/(1)/ Energy Corporation is a holding company whose only assets are the
shares of the Company's Common Stock being held for distribution to its
shareholders. See "PLAN OF DISTRIBUTION" and "BUSINESS-Recent Acquisitions
and Transactions." Appendix A to this Prospectus contains a listing of the
Selling Shareholders of Energy and the number of shares of Common Stock each
shareholder will receive pursuant to the Plan of Liquidating Dissolution and
the amount of such shares offered by this Prospectus.
/(2)/ Assumes all holders of Series B Preferred Stock convert their
shares to Common Stock one year and one day after July 10, 1996, the last
closing date, in accordance with the conversion formula at a conversion price
of $3.9375 per share. See "DESCRIPTION OF SECURITIES-Preferred Stock").
/(3)/ Assumes all holders of Series C Preferred Stock convert their
shares to Common Stock one year and one day after December 16, 1996, the last
closing date, in accordance with the conversion formula at a conversion price
of $3.25 per share. See "DESCRIPTION OF SECURITIES-Preferred Stock").
/(4)/ Includes the number of shares of Common Stock issuable upon
conversion of the Series B Preferred Stock and the Series C Preferred Stock
and underlying the Warrants offered hereby.
/(5)/ Assumes that all of the shares of Common Stock and Warrants being
offered hereby are sold by such Selling Shareholders unless otherwise
indicated. There is no assurance that the Selling Shareholders will sell any
or all of the Common Stock or Warrants offered pursuant to this Prospectus.
/(6)/ Swartz Investments, LLC was engaged as selling agent in connection
with the sale of the Series B Preferred Stock and Series C Preferred Stock and
was paid compensation equivalent to 11% of the aggregate funds raised in such
placements. In addition, it received warrants to purchase shares of Common
Stock equal to 10% of the aggregate securities sold, assuming that the holders
of the Series B Preferred Stock and Series C Preferred Stock and related
warrants, converted their Series B Preferred Stock and Series C Preferred
Stock or exercised their warrants at the fixed Conversion Price. See
"DESCRIPTION OF SECURITIES."
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<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 100 million
shares of the Company's common stock, no par value per share (the "Common
Stock"), and 10,000,000 shares of the Company's preferred stock, no par value
per share. Of the Preferred Stock, 210,000 shares of Series A Non-Dividend
Bearing, Convertible, Redeemable Preferred Stock ("Series A Preferred Stock"),
1,000 shares of the Series B Preferred Stock and 600 shares of the Series C
Preferred Stock have been reserved for issuance. No shares of the Series A
Preferred Stock are currently outstanding. In addition, the Company has
Warrants outstanding to purchase 1,837,450 shares of Common Stock.
COMMON STOCK
As of April 1, 1997, there were 18,019,508 shares of Common Stock
issued and outstanding. Holders of the Common Stock are entitled to one vote
per share of record on each matter submitted to a vote of shareholders, the
right to receive such dividends, if any, as may be declared by the Board of
Directors out of assets legally available therefor and the right to receive net
assets in liquidation after payment of all amounts due to creditors and any
liquidation preference due to Preferred Stock shareholders. Holders of Common
Stock have no conversion rights and are not entitled to any preemptive or
subscription rights. The Common Stock is not subject to redemption or any
further calls or assessments. The Common Stock has noncumulative voting rights
in the election of directors.
PREFERRED STOCK
SERIES B PREFERRED STOCK
General
As of April 1, 1997, there were 186 shares of Series B Preferred Stock
(the "Series B Preferred Stock") outstanding. Each share of Series B Preferred
Stock is currently convertible at the option of the holder into Common Stock.
In general, each share of Series B Preferred Stock is convertible into
shares of Common Stock pursuant to the following formula: (1,000) x (N/365) +
10,000/Conversion Price (with N being the number of days that have expired
between the date of conversion and July 10, 1996, and the "Conversion Price"
being the lessor of: $3.9375 or 85% of average closing bid price (the "Closing
Bid Price") of the Common Stock for the 5 trading days immediately preceding the
date of conversion). Each holder is also entitled to convert shares of the
Series B Preferred Stock pursuant to the above formula with the Conversion Price
equal to the closing bid price on the over-the-counter market on the date of
conversion. Under the latter method, the Company may elect to redeem the shares
of Series B Preferred Stock offered for conversion where the Conversion Price
is less than $3.9375 per share of Common Stock on the conversion date pursuant
to the following formula (the "Redemption Formula"):
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<PAGE>
Closing Bid Price on Date of Conversion
---------------------------------------
1,000 x (N/365) + 10,000 x Conversion Price
The Company also has the right to redeem the Series B Preferred Stock on or
after July 11, 1997, provided that the Company purchases Series B Preferred
Stock with an aggregate value $1,500,000 (using the Original Issuance Price, as
defined below), for a price equal to 130% of the Stated Value (Original Issuance
Price plus any accrued and unpaid Premium as defined below) of the shares of the
Series B Preferred Stock being redeemed for the first 18 months, which
percentage is decreased by 5% for every 6 month period that expires thereafter.
The holders of the Series B Preferred Stock are not entitled to
receive dividends thereon and shall have no voting power whatsoever, except as
otherwise provided by the Colorado Business Corporation Act (which generally
provides voting rights for any action that directly adversely affects the rights
of the holders of the Series B Preferred Stock). In the event of any
liquidation, dissolution or winding up of the Company with respect to
distributions of assets upon liquidation, dissolution or winding up of the
Company's affairs (collectively "Distributions"), the holders of Series B
Preferred Stock shall be entitled to receive, after any Distribution to senior
securities, if any, and prior to any Distribution to any junior securities
(including holders of Common Stock) the sum of $10,000 per share (the "Original
Issuance Price") and an amount equal to ten percent (10%) of the Original
Issuance Price (the "Premium") per annum for the period that has passed since
July 10, 1996. In addition, at the option of each holder of Series B Preferred
Stock, a sale, conveyance or disposition of substantially all of the assets of
the Company or the effectuation by the Company of a transaction, or series of
transactions, in which more than 50% of the voting power of the Company is
disposed of, shall be deemed to be a liquidation, dissolution or winding up as
set forth above.
So long as shares of Series B Preferred Stock are outstanding, the
Company may not, without the written approval of the holders of at least 75% of
the then outstanding shares of Series B Preferred Stock (i) alter or change the
rights, preferences or privileges of the Series B Preferred Stock or any senior
securities, if any, that would adversely effect the holders of the Series B
Preferred Stock, and (ii) create any class or series of capital stock having a
preference over or on parity with the Series B Preferred Stock with respect to
Distributions.
Regulation S Subscription Agreement
The Regulation S Subscription Agreement (the "Subscription Agreement")
under which shares of the Series B Preferred Stock were sold, granted the
holders of the Series B Preferred Stock certain additional rights, which
include, among others, the following:
Subscriber's Rights in the Event Shares Issued with a Restrictive
Legend. Generally, in the event the Company issues shares of Common Stock with
a restrictive legend upon conversion by the holder of Series B Preferred Stock,
then the holder of Common Stock, at its option, may
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<PAGE>
require the Company immediately to either (i) redeem the Series B Preferred
Stock submitted for conversion at the redemption price determined under the
Redemption Formula or (ii) demand (without any other holder's participation)
that the Company file a registration statement under the Securities Act covering
the registration of the Common Stock which has been issued with such restrictive
legend and the Common Stock issuable upon conversion of such holders's remaining
Preferred Stock then outstanding pursuant to the terms of the Registration
Agreement (as defined below).
Payments for Failure to Register. The Company shall pay to a holder
who has demanded registration, as set forth above, an amount equal to five
percent (5%) per month of the Original Issue Price of such holders's shares of
Series B Preferred Stock that were outstanding immediately prior to the delivery
of the notice of conversion, compounded monthly and accruing daily, payable in
cash by the fifth (5th) day of the month following such demand and the fifth
(5th) day of each month thereafter (i) if a demand registration is not
effective, or (ii) if the Company has not re-issued and delivered to the holder
of Series B Preferred Stock shares of Common Stock without a restrictive legend,
whichever is earlier.
Capital Raising Limitations. The Company also agreed to provide the
Series B shareholders with a right of first refusal in proportion to the
percentage of Series B Preferred Stock purchased in the Series B Offering for
any offering conducted within 240 days of July 10, 1996, (the limitations
referred to in this paragraph are collectively referred to as the "Capital
Raising Limitation"). In general, the Capital Raising Limitation does not apply
to any transaction involving the Company's commercial banking arrangements or
issuances of securities in connection with a merger, consolidation or purchase
or sale of assets, or exercise of options by employees, consultants or directors
or any transaction with a strategic corporate partner.
SERIES C PREFERRED STOCK.
General
As of April 1, 1997, there were 525 shares of Series C Preferred Stock
(the "Series C Preferred Stock") outstanding. Each share of Series C Preferred
Stock is convertible at the option of the holder into Common Stock as described
below during the following periods: (i) up to 20% of the Series C Preferred
Stock initially issued to the holder at any time on and after April 16, 1997;
and (ii) an additional 20% per month on the 16th day of each month thereafter;
provided, however, that the holder of the Series C Preferred Stock may not
convert more than 25% of the aggregate Series C Preferred Stock initially issued
to such holder in any given one month period beginning on April 16, 1997 and
ending on August 16, 1997.
In general, each share of Series C Preferred Stock is convertible into
shares of Common Stock pursuant to the following formula (the "Conversion
Formula"): (800) x (N/365) + 10,000/Conversion Price (with N being the number of
days that have expired between the date of conversion and December 16, 1996, and
the "Conversion Price" being the lessor of: $3.25 (the "Fixed Conversion Price")
or 85% of average closing bid price (the "Closing Bid Price")
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<PAGE>
of the Common Stock for the 5 trading days immediately preceding the date of
conversion (the "Variable Conversion Price")). If at the time of conversion the
Variable Conversion Price is less than the Fixed Conversion Price, the Company
may elect, in its sole discretion, to redeem each share of Series C Preferred
Stock offered for conversion in an amount equal to the Stated Value ($10,000
plus any Accrued Premium, as defined below) x 117.60%.
The Company also has the right to redeem the Series C Preferred Stock
on or after December 16, 1997, provided the Company purchases at least
$1,500,000 of Series C Preferred Stock (based on the Original Issuance Price
defined below) for a price equal to 130% of the Original Issuance Price for the
first 18 months. For each six months thereafter, the redemption percentage
decreases by 5% until the expiration of three years.
Each share of Series C Preferred Stock outstanding on December 16,
1999, automatically shall either be converted in accordance with the Conversion
Formula or, if the Company provides the holders of the Series C Preferred Stock
with a notice of redemption by December 11, 1999, at the Original Issuance Price
plus an accrued premium of 8% per year (the "Accrued Premium").
The holders of the Series C Preferred Stock are not entitled to
receive dividends and shall have no voting power, except as otherwise provided
by the Colorado Business Corporation Act. In the event of any liquidation,
dissolution or winding up of the Company (a "Liquidation Event"), the holders of
Series C Preferred Stock shall be entitled to receive, after any distribution to
the holders of the Series B Preferred Stock and other senior securities, if any,
and prior to any Distribution to any junior securities (including holders of
Common Stock) the sum of $10,000 per share (the "Original Issuance Price") and
the Accrued Premium. At the option of each holder of Series C Preferred Stock,
a sale, conveyance or disposition of substantially all of the assets of the
Company or the effectuation by the Company of a transaction, or series of
transactions, in which more than 50% of the voting power of the Company is
disposed of, will generally be deemed to Liquidation Event.
So long as shares of Series C Preferred Stock are outstanding, the
Company may not, without the written approval of the holders of at least 75% of
the then outstanding shares of Series C Preferred Stock (i) alter or change the
rights, preferences or privileges of the Series C Preferred Stock or any senior
securities, if any, that would adversely effect the holders of the Series C
Preferred Stock, and (ii) create any class or series of capital stock having a
preference over or on parity with the Series C Preferred Stock with respect to
Distributions; (iii) cause the holders of the Series C Preferred Stock to be
taxed under Section 305 of the Internal Revenue Code; or (iv) issue any
additional shares of Series C Preferred Stock.
Regulation D Subscription Agreement
The Regulation D Subscription Agreement (the "Subscription Agreement")
under which shares of the Series C Preferred Stock were sold, granted the
holders of the Series C Preferred Stock certain additional rights, which
include, among others, the following:
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<PAGE>
Payments for Failure to Register. The Company shall pay to a holder
who has demanded registration an amount in Common Stock equal to two percent
(2%) per month of the amount of Series C Preferred Stock sold to the holder in
the offering, compounded monthly and accruing daily until the registration
statement is declare effective. In addition, if the Company is unable to issue
Common Stock upon conversion of the Series C Preferred Stock or upon exercise of
the Series C Warrants, and is unable to cure the default within 75 days, the
Company shall pay a Conversion Default Payment equal to: (N/365) x (.24) x the
sum of the Original Issuance Price of all shares of Series C Preferred Stock
held by each holder (where N equals the number of days from the date of default
to the date that the Company cures the default).
Capital Raising Limitations. The Company shall not issue any debt or
equity securities for cash in capital raising transactions ("Future Offerings")
for a period beginning on December 16, 1996 and ending one hundred twenty (120)
days thereafter without obtaining the prior written approval of the holders
holding a majority of the purchase price of Series C Preferred Stock then
outstanding. The Company also agreed to provide the Series C shareholders with
a right of first refusal in proportion to the percentage of Series C Preferred
Stock purchased in the Series C Offering for any offering conducted within 240
days of December 16, 1996, (the limitations referred to in this paragraph are
collectively referred to as the "Capital Raising Limitation"). In general, the
Capital Raising Limitation does not apply to any transaction involving the
Company's commercial banking arrangements or issuances of securities in
connection with a merger, consolidation or purchase or sale of assets, or
exercise of options by employees, consultants or directors or any transaction
with a strategic corporate partner.
Miscellaneous Provisions
Assuming all shares of Preferred Stock currently issued and
outstanding are converted during the term of this Offering, the Company will be
authorized to issued up to an additional 10,000,000 shares of Preferred Stock.
The Board of Directors has authority to issue the Preferred Stock in one or more
series and to fix the number of shares constituting any such series, and the
voting powers, designations, preferences, and relative participating, optional
or other special rights and qualifications, limitations or restrictions thereof,
including the dividend rights, dividend rate, terms of redemptions, redemption
prices, conversions and voting rights, and liquidation preferences, without any
further vote or action by the holders of the Common Stock.
Although the Board of Directors currently has no intention of doing
so, its authority to issue preferred stock, without further vote or action by
the holders of the Common Stock, could be used to discourage attempts by others
to obtain control of the Company through a merger, tender offer, proxy or
consent solicitation, or otherwise, by making such attempts more difficult to
achieve and more costly. The Board of Directors may also issue preferred stock
with voting rights that could adversely affect the voting power of the then
existing holders of Common Stock. There are currently no agreements or
understandings for the issuance of additional
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<PAGE>
preferred stock, and the Board of Directors has no present intention of issuing
any additional shares of preferred stock.
Reference is made to the Company's Articles of Incorporation, as
amended (which is filed as an exhibit to the Registration Statement) for a
complete description of the terms and conditions of the Preferred Stock and the
description of the Preferred Stock contained herein is qualified in its entirety
by reference thereto.
WARRANTS
GENERAL. As of April 1, 1997, 24 persons held Warrants to purchase an
aggregate of 1,092,064 shares of Common Stock at an exercise price of $3.9375
per share (the "Class B Warrants"), and 10 persons held Warrants to purchase an
aggregate of 745,386 shares of Common Stock at an exercise price of $3.25 per
share (the "Class C Warrants" and together with the Class B Warrants, the
"Warrants"), subject to adjustments in certain events. The Warrants may be
exercised at any time commencing on October 14, 1996 and ending at 5:00 p.m.
Eastern time, on July 1, 2001 for the Class B Warrants and June 1, 1997 and
ending at 5:00 p.m. Eastern time on November 30, 2001 for the Class C Warrants.
If all Warrants are exercised, the Company will receive proceeds of
approximately $6,722,506 million.
The Warrants may also be exercised pursuant to a cashless exercise
procedure. The cashless exercise procedure is not available if shares of Common
Stock to be issued upon such exercise would be (i) immediately transferable,
free of restrictive legend under Rule 144 of the Securities Act; (ii) then
registered pursuant to an effective registration statement under Registration
Rights Agreement (hereinafter defined); or (iii) otherwise registered under
Securities Act. The Company has registered all shares of Common Stock issuable
upon exercise of the Warrants for sale under the Registration Statement of which
this Prospectus is a part. Therefore, the cashless exercise procedure will be
unavailable after the time the Registration Statement is declared effective.
The exercise price and number of shares of Common Stock or other
securities issuable on exercise of the Warrants are subject to adjustment in
certain circumstances, including in the event of a stock dividend,
recapitalization, reorganization, merger or consolidation or the Company's
distribution to the holders of Common Stock cash, evidences of indebtedness or
other securities or assets (other than cash dividends or distributions payable
out of earned surplus or net profits for the current or preceding year) of the
Company.
The Company will not issue fractional shares or scrip representing
fractional shares of Common Stock upon exercise of the Warrant. If, on exercise
of the Warrant, the holder would be entitled to a fractional share of Common
Stock or a right to acquire a fractional share of Common Stock, such fractional
share shall be disregarded and the number of shares of Common Stock issuable
upon conversion shall be the next higher number of shares.
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Reference is made to the Warrant Agreements (which are filed as
exhibits to the Registration Statement) for a complete description of the terms
and conditions of the Warrants and the description of the Warrants contained
herein is qualified in its entirety by reference thereto.
REGISTRATION RIGHTS AGREEMENT
The Registration Rights Agreements for the Series B Preferred Stock
and the Series C Preferred Stock (the "Registration Agreement") grants certain
registration, demand and piggyback registration rights to the holders of the
Preferred Stock and applies to shares of the Common Stock issuable upon
conversion of the Preferred Stock and upon exercise of the Warrants. The Common
Stock subject to the Registration Agreement is referred to herein as "Registered
Securities."
The Registration Agreement requires the Company to file a registration
statement (the "Initial Registration Statement") by October 8, 1996 (the "Series
B Due Date") and January 16, 1997 which must become effective by April 16, 1997
(the "Series C Due Date" and together with the Series B Due Date, the "Due
Date"). Any holder of Registerable Securities may elect not to have their
shares included in the registration statement. Such holder (together with
holders owing at least 25% of the Registerable Securities) may, after expiration
of the Due Date, require the Company to effect a Demand Registration (as defined
below) or at any time following the Due Date to have their shares included in a
registration statement subsequently filed by the Company (a "Piggyback
Registration").
If the registration statement is not filed by the Due Date, at least
25% of the Shareholders owning Registerable Securities may demand that the
Company file a registration statement under the Securities Act (a "Demand
Registration"). To date, neither the holders of the Series B Preferred Stock or
Series C Preferred Stock have requested a Demand Registration.
In the event any Registrable Securities are included in a registration
statement of the Company, to the extent permitted by law, the Company and the
holders of the Preferred Stock and Warrants have agreed to indemnify and hold
harmless each other against any losses, claims, damages, expenses, or
liabilities (joint or several) (hereinafter referred to singularly as "Loss" and
collectively as "Losses") to which they may become subject under the Securities
Act, the Securities Exchange Act of 1934, as amended, or other federal or state
law, insofar as such Losses (or actions in respect thereof) arise out of or are
based upon any of the following statements, omissions or violations.
If the Initial Registration Statement required is not filed on or
prior to the Due Date or, with respect to holders of the Series B Preferred
Stock, if a Demand Registration is not effective within ninety (90) days of
demand or if the Company fails to respond to any request for information from
the Securities and Exchange Commission related to such registration statement
within fifteen (15) days of such request, then the Company shall pay to all
holders of outstanding Preferred Stock an aggregate amount equal to two percent
(2%) per month of the aggregate
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amount of Preferred Stock sold in the Regulation S Offering or Resolution D
Offering, compounded monthly, and accruing daily, payable in Common Stock.
With respect to Holders of the Series B Preferred Stock, if the
Company is not eligible to effect a registration statement under Form S-1 or SB-
2 or S-3 or other appropriate registration statement at the time of a Demand
Registration under the terms of the Registration Agreement, solely through the
act or failure to act by the Company, the Company shall pay the holders of
outstanding Preferred Stock an amount equal to the "Conversion Default Payment"
for each day beyond sixty (60) days on the receipt of the request for a Demand
Registration until such registration statement is effective. In addition, if,
on the date that the Preferred Stock becomes eligible for conversion into Common
Stock or the Warrants are exercisable, the Common Stock is not listed on the OTC
Bulletin Board or other national stock exchange or automated quotation system,
then the Company shall pay to all holders of outstanding Preferred Stock an
aggregate penalty equal to the amount of the Conversion Default Payment.
The Conversion Default Payment is equal to the amount of (N/365) x
(.24) x the sum of the Original Issuance Price of all shares of Series B
Preferred Stock held by each holder (where N equals the number of days from the
date of default to the date that the Company cures the default).
TRANSFER AGENT AND REGISTRANT
The transfer agent and registrar for the Common Stock is Corporate
Stock Transfer, Inc., 870 Seventeenth Street, Suite 2350, Denver, Colorado
80202.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
22,552,431 shares of Common Stock (giving effect to the exercise of 1,837,450
Warrants, but assuming no exercise of outstanding stock options). Of these
shares, all of the 6,336,987 shares sold in the Offering will be freely
transferable by persons other than "affiliates" of the Company, without
restriction or further restriction under the Securities Act.
An aggregate of 1,654,668 shares of Common Stock are "restricted" or
"control" securities within the meaning of Rule 144 under the Securities Act and
may not be sold in the absence of registration under the Securities Act unless
an exemption from registration is available, including the exemption contained
in Rule 144.
In general, under Rule 144 as currently in effect, a person (or
persons whose shares are aggregated) who has beneficially owned his or her
shares for at least two years, including an "affiliate" of the Company (as that
term is defined under the Securities Act), is entitled to sell, within any
three-month period, the number of shares that does not exceed the greater of (i)
1% of the then outstanding shares of Common Stock or (ii) the average weekly
trading volume of the then outstanding shares during the four calendar weeks
preceding each such sale. A person
86
<PAGE>
(or persons whose shares are aggregated) who is not deemed an "affiliate" of the
Company and who has beneficially owned shares for at least three years is
entitled to sell such shares under Rule 144 without regard to the volume
limitations described above. Affiliates, including members of the Board of
Directors and senior management, continue to be subject to such limitations.
The Company has filed a registration statement on Form S-8 to register
3,581,180 shares of Common Stock. The Company has reserved 7,000,000 shares of
Common Stock under its 1995 Compensatory Stock Option Plan. As of January 31,
1997, options to purchase 4,396,000 shares of Common Stock were outstanding.
Sales of substantial amounts of Common Stock in the public market, or
the perception that such sales could occur, could have an adverse impact on the
market price of the Common Stock.
LEGAL MATTERS
Certain legal matters with respect to the Common Stock will be passed
upon for the Company by Kutak Rock, Denver, Colorado.
The statements in the Prospectus under the captions "RISK FACTORS-
Uncertainty Regarding Protection of Proprietary Rights," "-Rights to PI
Technology," "-License Rights to PI Technology" and "BUSINESS-Intellectual
Property" have been reviewed by Michael A. Glenn, Esq., with respect to the PI
Technology, and Meschkow & Gresham, P.L.C., with respect to the Antenna
Technology, each of whom serves as patent counsel for the Company, and are
included herein in reliance upon that review.
EXPERTS
The financial statements and schedules of Intercell Corporation as of
September 30, 1996 and 1995 and for the year ended September 30, 1996 and the
eleven-month period ended September 30, 1995 and the financial statements for
A.C. Magnetics, Inc. doing business as M.C. Davis Co. Inc., as of December 31,
1995 and September 30, 1996 and for the years ended December 31, 1994 and 1995
and the nine-month period ended September 30, 1996, have been included herein
and in the registration statement in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of the Company as of October 31,
1994 included in this Prospectus and Registration Statement have been audited by
Mark Shelley, CPA, to the extent and for the periods indicated in their report,
and are included in reliance upon such reports given upon the authority of such
firm as experts in accounting and auditing.
87
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the following Regional
Offices of the Commission: Northeast Regional Office, 7 World Trade Center,
Suite 1300, New York, New York 10048; and Midwest Regional Office, Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material can be obtained from the Public Reference Section of the
Commission, Washington, D.C. 20549 upon payment of prescribed fees. Such
reports, proxy statements and other information may also be inspected at the
offices of The National Association of Securities Dealers, 1735 K Street, N.W.,
Washington, D.C. 20006, which supervises the NASDAQ system in which the Common
Stock is traded. In addition, the Commission maintains a worldwide web site
that contains reports, proxy and information statements and other information
regarding the Company, which the Company is required to file electronically with
the Commission, at the following internet address: http://www.sec.gov.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on
Form S-1, including amendments thereto, relating to the Common Stock and
Warrants offered hereby (the "Registration Statement"). This Prospectus, which
is a part of the Registration Statement, does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules thereto.
For further information with respect to the Company and the Common Stock and
Warrants offered hereby, reference is hereby made to the Registration Statement
and the exhibits and schedules filed as a part thereof, which may be obtained
from the Commission in the manner set forth above. Statements contained in this
Prospectus concerning the provisions or contents of any contract, agreement or
any other document referred to herein are not necessarily complete. With
respect to each such contract, agreement or document filed as an exhibit to the
Registration Statement, reference is made to such exhibit for a more complete
description of the matters involved, and each statement shall be deemed
qualified in its entirety by such reference to the copy of the applicable
document filed with the Commission.
88
<PAGE>
GLOSSARY
The following are definitions of certain technical terms used in this
Prospectus.
"AM" amplitude modulation, which means the encoding of an
electromagnetic wave by variation of its amplitude in accordance with its input
signal.
"Antenna Systems" means the Company's products developed using the
Antenna Technology.
"Antenna Technology" means the technology included within the scope of
patent applications assigned to the Company from Arizona State University.
"Analog Transmission" means the transmission of information in
continuous form which is transmitted by electrical signals. This is the
traditional method of modulating radio signals so that they can carry
information. AM (amplitude modulation) and FM (frequency modulation) are the
two most common methods of analog modulation.
"Anode" means a positively charged electrode.
"Ball Grid Array" or "BGA" means an advanced IC package in which the
silicon die is attached to a high density substrate which is in turn placed on
an array of small solder balls forming the base of the package. The Ball Grid
Array is soldered directly to an electronic circuit, without using pins or wire
leads coming out of the perimeter of the package.
"Band Width" means a relative range of frequencies that can carry a
signal without distortion on a transmission medium.
"Cathode" means a negatively charged electrode.
"Die" see "IC" and "IC Package."
"Dielectric" means a nonconductive material, such as a plastic film or
coating used to provide an insulating layer on a printed circuit or other
substrate.
"Digital Transmission" means the conversion of voice communications to
computer binary language of zeros and ones. Digital transmission offers a
cleaner signal and solves many of the problems that plague analog such as fading
and static.
"Electrode" means a conductor through which an electric current
passes.
"Electron Gun" is an electron-emitting cathode and its surrounding
assembly for directing, controlling and forcing a stream of electrons to a
target. It is sold separately for use as an electron source in medical linear
accelerators for generation of high energy x-rays.
89
<PAGE>
"Electron Power Tubes" or "Electron Tubes" are enclosed tubes, in
which electrons act as the principal conductors of current between at least two
electrodes. Electron tubes fall into two categories, oscillators and
amplifiers. Oscillators are typically magnetrons and power grid tubes (triodes
and tetrodes) and amplifiers are klystrons and traveling wave tubes.
"External Antenna" means the Company's Antenna System that will be
used as an aftermarket "retrofit" on existing cellular phones.
"Flexible Circuit" is a circuit manufactured from a Flexible Laminate.
Flexible circuits can be single-sided, double-sided or multi-layer.
"FM" means frequency modulation, which operates through the encoding
of a electromagnetic wave by variation of its frequency in accordance with its
input signal.
"Frequency" means a measure of the energy, as one or more waves per
second, in an electrical or lightwave information signal. A signal's frequency
is stated in either cycles-per-second or Hertz.
"GHz" means gigahertz (one billion cycles per second).
"Hertz" or "Hz" means a measurement of electromagnetic energy,
equivalent to one "wave" or one cycle per second.
"High Density Substrate" are electronic circuits manufactured from
thin film flexible laminates with very thin circuit traces down to 1 millimeter
(.001").
"High Power and High Frequency Triode Tubes and Tetrode Tubes" is an
electron tube with three electrodes: an anode, a cathode and a controlling grid.
Tetrode Tubes are similar to triode tubes except that it has four electrodes: an
anode, cathode, a control grid and an additional grid. Tetrodes and triodes are
used in RF induction heaters in the steel industry, AM-FM radio communications,
plastic sealing units, wood gluing units, silicone crystal growing, induction
heat treating of gears and other metals requiring hardening, environmental
vibration tables and numerous other applications.
"IC" and "IC Package" means an integrated circuit, which is a type of
semiconductor in which a number of transistors and other elements are combined
to form a more complicated circuit. These elements are fabricated in a small
chip of silicon, known as a "silicon die," which is attached to a substrate and
then encased in plastic, ceramic or other advanced forms of packaging to prevent
damage and facilitate handling. This package is known as an IC package.
"Interconnect" and "Interconnect Products" means a circuit used to
provide electrical connection between components and electronic systems and also
as a substrate to support electronic devices. Interconnect products are those
products or methods of connection used to
90
<PAGE>
connect electrical components (e.g., a computer chip) to other substrates (e.g.,
a printed circuit board) which are required to operate electronic equipment.
"Internal Antenna" means the Company's Antenna System that is
internally incorporated into cellular phones and has no external antenna.
"KHz" means kilohertz (one thousand cycles per second).
"Klystron Tube" is an electron tube in which bunching of electrons is
produced by electric fields, which are then used for the amplification of
microwave energy. Klystron tubes (both external cavity and internal cavity) are
commonly used in UHF television transmission, medical and nonmedical
accelerators, and navigational equipment.
"Linear Accelerator" is a device in which charged particles are
accelerated in a straight line by successive impulses from a series of electric
fields. One of the principal uses of linear accelerators is in the medical
field for the generation of high energy x-rays for therapeutic treatment of
tumors.
"Magnetron Tube" is a vacuum tube in which the flow of electrons is
controlled by an exterior applied magnetic field to generate power at microwave
frequencies (400 MHz to 18 GHz). The principal use of magnetrons is in
industrial microwave cooking and heating units. Some of the applications are:
drying foods such as pasta; pre-cooking bacon, potato chips and snacks; thawing
of meats and butter; processing chicken: dewater oil and heat, and reprocess
asphalt. Pulsed X-Band Magnetrons are used in radar and accelerator
applications.
"MHz" means megahertz (one million cycles per second).
"Micro-Strip Antenna" means an antenna that does not use wires like a
conventional antenna, but rather transmits data through a transmission line
configuration which consists of a substrate.
"Multi-Chip Module" or "MCM" is a high performance IC package
containing more than one silicon die on a single high density substrate.
"Near Field Radiation" means radiation within a few feet of the
Antenna.
"OEMs" means original equipment manufacturers.
"Panel" as used in the electronic industry means the substrate used to
mount, package or attach electronic devices.
"Particle Interconnect Products" means products produced using the PI
Technology.
91
<PAGE>
"PI Technology" means the particle interconnect technology described
and covered by certain patents and patent applications, know-how and trademarks
assigned to the Company by Particle Interconnect, Inc.
"Printed Circuit" is a generic term referring to a circuit fabricated
by transferring a circuit pattern to a copper or other laminate through imaging,
etching and plating processes.
"Proprietary Electroplating Process" means the Company's proprietary
trade secret electroplating process used to manufacture the Particle
Interconnect Products.
"RF" means radio frequency.
"Silicon Die" see "IC" above.
"Substrate" means a material that provides a supporting surface.
"Vacuum Tube" means an electron tube having an internal vacuum
sufficiently high to permit electrons to move with low interaction with any
remaining gas molecules.
"UHF" means ultra high frequency.
"VHF" means very high frequency.
"Wireless" means a radio-based system allowing transmission of
telephone and/or data signals through the air without a physical connection,
such as a metal wire or fiber optic cable.
"Z-axis" means an electronic interconnect method that uses vertical
butt contacts to connect two electronic components without the use of any
horizontal wiping or sliding action.
92
<PAGE>
APPENDIX A
<TABLE>
<CAPTION>
Number of Shares Shares to be
Name of owned Prior to Amount of Shares Owned After this
Selling Shareholder Offering/(1)/ to be Offered/(2)/ Offering/(3)/
------------------- ----------------- ------------------ ----------------
<S> <C> <C> <C>
504804 B C Ltd/(4)/ 270,634 82,544 188,090
The Big D's Antiques 167 56 111
Joyce Babel 334 111 223
Jean M Baier 334 111 223
Roger Barnett 4,833 1,611 3,222
John F Bauer & Shirley M 167 56 111
Bauer JTWROS
Darren Begley 86,798 26,666 60,132
c/o Modern Industries Inc
Leonardo S Bilancia & 834 278 556
Phillys R Bilancia JTWROS
David Blank/*/ 94,999 6,666 88,333
c/o Modern Industries
Gerard D Blank 167 56 111
Diane A Blanks & Tim 167 56 111
Blanks JTWROS
Orlando A Bove & Dorothy 667 222 445
Bove JTWROS
Olivia J. Bradley 417 139 278
Albert H Bradshaw & 34 11 23
Carolyn Bradshaw JTWROS
Robert Branch 42 14 28
David Brandman 542 181 361
Robert L Brath 680 227 453
John Bridgeman 3,334 1,111 2,223
C/O Modern Industries
Linda Bridges 292 97 195
Harry Z Bristman 33,333 11,111 22,222
William F Broderick & 834 278 556
Violet A Broderick JTWROS
Shirley K Brown Admin Est 6,250 2,083 4,167
Richard Dick Reilly
C/O Joe Hoff
Richard Bullock Ttee The 119,047 39,682 79,365
Blonde Bear Trust/(4)/
Douglas Burnett 6,667 2,222 4,445
Guy W Bush & Genevieve Mae 9 3 6
Bush JTWROS
Guy W Bush c/f Gregory 9 3 6
Walter Bush Utma Il
</TABLE>
A-1
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Shares to be
Name of owned Prior to Amount of Shares Owned After this
Selling Shareholder Offering/(1)/ to be Offered/(2)/ Offering/(3)/
------------------- ---------------- ------------------ ----------------
<S> <C> <C> <C>
Guy W Bush c/f Kevin Troy 9 3 6
Bush Utma Il
Guy W Bush c/f Suzanne Mae 9 3 6
Bush Utma Il
Joseph Butz 42 14 28
California Tube Laboratory 593,843 156,703 437,140
Inc Stock Bonus Employee
Stock Ownership Plan &
Trust c/o James Martin/Tony Wynn
TTEES
California Tube Laboratory 375,328 125,097 250,231
Inc Money Purchase
Pension Employee Stock
Ownership Plan & Trust
C/O James Martin/Tony Wynn
TTEES
California Tube 75,000 25,000 50,000
Laboratory, Inc. ESOP
Trust
Adriana M. Cantelli 30 10 20
Raymond A. Cantelli 30 10 20
Ronald Q. Cantelli 30 10 20
Steve M. Carpenter 30 10 20
Cede & Co/(5)/ 7,466,019 432,810 7,033,209
Charmirathor Inc 31,446 5,555 25,891
c/o Mira M Theisen
Ben Chee 1,667 556 1,111
James S. Clifton 188 63 125
Lee C Cook & Dorrit B Book 668 223 445
JTWROS
Corporate Advisors Inc 100,003 1 100,002
Charles T. Cummings 59 20 39
Keith P Cyr & Terri A Cyr 400 133 267
JTWROS
Julian Daggett & D Sharon 1,334 445 889
Grant JTWROS
Benjamin G Dettling 15,001 5,000 10,001
John Dickman 99,998 33,329 66,669
D & M Reilly 3,334 1,111 2,223
c/o Modern Industries
Barbara J Drew Ttee 300,870 61,457 239,323
Barbara J Drew Rev Liv Tr
Ua Dtd Jan 30 1987
John W. Dye & Florence A. 30 10 20
Dye Jt Ten
David Edmiston 334 111 223
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Shares to be
Name of owned Prior to Amount of Shares Owned After this
Selling Shareholder Offering/(1)/ to be Offered/(2)/ Offering/(3)/
------------------- -------- ------------- --------
<S> <C> <C> <C>
Tom Ehrichs 125 42 83
The Royal Bank Of Scotland 71,093 23,695 47,398
(NASSAU) Limited Ttee
Emmen Trust
c/o Modern Industries
Richard J Euler 667 222 445
Shirley Ann Farrell & 167 56 111
Michael Farrell JTWROS
First United Trust 16,666 5,555 11,111
Constance Fischer 16,666 5,555 11,111
William Jeffrey Fitzhugh 134 45 89
Paul A Fiumara & Mary L Fiumara 334 111 223
Frank Flournoy 4,757 1,586 3,171
Jack C Fong 334 111 223
Charles D Foster & M 300 100 200
Dennis Stratton JTWROS
Leon F French 7,834 2,611 5,223
Emma Frizzell 167 56 111
Muriel Fulton 58,000 13,332 44,668
The Gap Trust 191,661 63,881 127,780
Kenneth J. Garber 42 14 28
Paul Gill 42 14 28
Charlotte Given 13,334 4,444 8,890
c/o Terry Neild
Judith A Gomolski & Adrian 67 22 45
Gomolski JTWROS
David Graff 89,998 29,996 60,002
Nathan Greene 454 151 303
Marion Greenler 59 20 39
Randy Hall 334 111 223
Lori J R Harris & Alice 334 111 223
Jean Barnette JTWROS
Philip Hermsen & Joann 167 56 111
Hermsen JTWROS
Hilad Holdings Limited 33,334 11,110 22,224
Harold Hofmann 334 111 223
</TABLE>
A-3
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Shares to be
Name of owned Prior to Amount of Shares Owned After this
Selling Shareholder Offering/(1)/ to be Offered/(2)/ Offering/(3)/
------------------- -------- ------------- --------
<S> <C> <C> <C>
Richard Paul Hourdequin & 67 22 45
Angela M Hourdequin JTWROS
Cynthia W Jansen 334 111 223
David A Jansen 334 111 223
Janina A Johns 668 223 445
Leon W Jones & Michelle S Jones JTWROS 1,167 389 778
Mary Ann Keeley & Robert M Keeley JTWROS 334 111 223
Ethel A Kelley & James J Kelley JTWROS 667 222 445
Ethel Ann Kelley 667 222 445
Mahjabin Q Kidwai 63 21 42
Barbara C Klaver 1,334 445 889
Nicolaas M Klaver 1,334 445 889
Earl Komarin & Chester 334 111 223
Komarin JTWROS
Anthony Kovanic Sr & Anna C Kovanic Ttees
Anthony P Kovanic Sr 2,500 833 1,667
Tr Ua Dtd Oct 14 1993
Kray & Co 25 8 17
Shellie Kremer 200 67 133
Edgar L Lancaster & Minnie 167 56 111
L Lancaster JTWROS
Richard A Lane 3,334 1,111 2,223
Richard J. Linnevers 84 28 56
James 1d Litwinovich & 2,334 778 1,556
Sally A Litwinovich
George Lycas 84 28 56
Robert E. MacNab 59 20 39
Madison Foundation 8,334 2,778 5,556
James Martin/*/ 94,999 6,666 88,333
c/o Modern Industries
Nelson M Martin & Dustin T 501 167 334
Martin JTWROS
Albert Maurer 334 111 223
Patricia D Maynord 80 27 53
James F McCabe Jr 1,667 556 1,111
Dave McConkey 42 14 28
</TABLE>
A-4
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Shares to be
Name of owned Prior to Amount of Shares Owned After this
Selling Shareholder Offering/(1)/ to be Offered/(2)/ Offering/(3)/
------------------ -------- ------------- --------
<S> <C> <C> <C>
Elizabeth McCrea 334 111 223
Robert Peter Meeske 17 6 11
c/o Jack Meier
Thomas F Metzger & Eileen 1,667 556 1,111
J Metzger JTWROS
Paul Metzinger/**/ 83,199 27,730 55,469
Mary Ann Miller & Thomas S Miller JTWROS 300 100 200
Randall J Milligan 25 8 17
J Patrick Moss 16,667 5,555 11,112
Steve Mulder 84 28 56
Les Nance 167 56 111
Charles P Neild 213,329 71,103 142,226
Gordon J Nevers 13,334 4,444 8,890
c/o Modern Industries
Charles Newell 19,027 6,342 12,685
Nancy Nottingham 16,666 5,555 11,111
Betty Fae Nusinow & Bernard Nusinow JTWROS 167 56 111
Carol K Owens & Thomas F Owens JTWROS 167 56 111
William H Payne 167 56 111
Michael Pedone 67 22 45
Marshall Pekarsky 334 111 223
PhilaDep & Co/(6)/ 2,704,554 10,949 2,693,605
Pittco 557 14 543
c/o Rafco Financial Corp./(7)/
Albert Pogorelec 5,000 1,667 3,333
Randall Pullen 273,517 91,172 182,345
The Royal Bank Of Scotland 66,665 22,219 44,446
(NASSAU) Limited Ttee
Radium Trust
c/o Modern Industries
Gordon L Raphael & Mindy L Raphael JTWROS 334 111 223
Bruce Reed 188 63 125
D Reilly & M Reilly JTWROS 16,666 5,555 11,111
</TABLE>
A-5
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Shares ot be
Name of owned Prior to Amount of Shares Owned After this
Selling Shareholder Offering/(1)/ to be Offered/(2)/ Offering/(3)/
------------------- -------- ------------- --------
<S> <C> <C> <C>
Joseph Reilly & Celine C 6,250 2,083 4,167
Reilly Ttees Revocable Family Tr Ua Dtd
May 15, 1990
Reilly Minerals Ltd 31,249 10,415 20,834
c/o Joe Hoff
Rexco 334 111 223
Marj Rielly & Dean Rielly JTWROS 334 111 223
Radley Robinson 67 22 45
Rocha Holdings Ltd 79,999 26,664 53,335
Bert Roosen 4,252 1,417 2,835
Lou L. Ross/*/ 273,517 91,172 182,345
Royal Bank Of Scotland 10,886 3,628 7,258
(NASSAU) Ttee Windemere Trust
c/o Modern Industries
Groves & Sanders 2,501 834 1,667
Arlene Schott 6,868 2,289 4,579
Glenda Schroeder 42 14 28
Royal Bank Of Scotland 13,334 4,444 8,890
(NASSAU) Ttee Radium Trust
c/o Modern Industries
Royal Bank Of Scotland 14,219 4,739 9,480
(NASSAU) Ttee Emmen Trust
c/o Modern Industries
The Royal Bank Of Scotland 54,426 18,140 36,286
(NASSAU) Limited Ttee
Windermere Trust
c/o Modern Industries
Paul D Scott & Weldonna 2,334 778 1,556
Drew-Scott JTWROS
Christine A Sedlak & Kenneth T Hassel JTWROS 166 55 111
Pushpa Sharan 1,000 333 667
Gregory M. Sprigg & Nancee K. Sprigg Jt Ten 42 14 28
St James Group Ltd 29,999 9,999 20,000
Glen Standefer 42 14 28
Alex L Stein 3,334 1,111 2,223
Donald William Stumpf 667 222 445
Tracey L Sturm & Dan Dale Sturm JTWROS 2,267 756 1,511
Charles George Suchy 1,666 555 1,111
</TABLE>
A-6
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Shares to be
Name of owned Prior to Amount of Shares Owned After this
Selling Shareholder Offering/(1)/ to be Offered/(2)/ Offering/(3)/
------------------- -------- ------------- --------
<S> <C> <C> <C>
Joseph Sudol & Ann Sudol JTWROS 334 111 223
Sunlight Systems Ltd 283,330 94,434 188,896
M K Theodoratus & Robert J Theodoratus JTWROS 334 111 223
Marshall Thompson 602 201 401
Edward Threet 3,334 1,111 2,223
Joe Tinianow 167 56 111
Joe Tinianow & Betty Tinianow Jt Ten 67 22 45
Albert Toboll 334 111 223
Thinh Trinh 2,801 934 1,867
Richard D Tuttle & Carol 334 111 223
Lynn Tuttle Community Property
James M Tyler 6,667 2,222 4,445
James Tyler 60,000 19,998 40,002
Nuchanath Vandenbosch & 500 167 333
Alfred Vandenbosch JTWROS
Kaylene F Veron 42 14 28
Charles F Vogdes 1,667 556 1,111
Kurt Waber 109,998 19,997 90,001
James P Walterhoefer 334 111 223
Carol Weber 667 222 445
Jerome Wenger 33,333 11,110 22,223
Donald Westphal 67 22 45
Robert Alan Wheeler 249 83 166
James P Wherley & Vivian F Wherley JTWROS 334 111 223
G & B Wilde 4,001 1,334 2,667
Bruce W Willett c/f Andrew N Willett Ugma Ar 167 56 111
Chris Wilson & Tiffany Wilson JTWROS 334 111 223
Christopher D Wilson & 668 223 445
Tiffany J Wilson JTWROS
Frances Wilson 167 56 111
John E Wright Retirement Plan 3,334 1,111 2,223
Mary Wulff 6,250 2,083 4,167
c/o Joe Hoff
</TABLE>
A-7
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Shares to be
Name of owned Prior to Amount of Shares Owned After this
Selling Shareholder Offering/(1)/ to be Offered/(2)/ Offering/(3)/
------------------- ---------------- ------------------ ----------------
<S> <C> <C> <C>
Anthony Wynn/*/ 94,999 6,666 88,333
c/o Modern Industries
Yorkton Securities Inc 3,359 1,120 2,239
Leona C Zinky Ttee Leona C 1,167 389 778
Zinky Living Trust Ua Dtd
May 4, 1988
Blane L Zirilli 10,009 3,336 6,673
---------- -------------- ----------
Totals 14,929,688 1,803,943/(8)/ 13,125,745
========== ============== ==========
</TABLE>
/*/Currently serves as an employee or consultant to the Company or its
subsidiaries.
/**/Currently serves as the Company's general counsel.
/(1)/ The shares reflected in this Column also include shares of the Company
that are presently owned by the Selling Shareholders of Energy (prior to
distribution), as required by the rules and regulations of the Securities and
Exchange Commission. The total number of shares to be distributed to the Selling
Shareholders of Energy and which may be resold by them remains 5,412,191. As
previously disclosed, these shares will be distributed to the Selling
Shareholders of Energy in six equal installments over a three year period.
/(2)/ Indicates shares registered in this Offering for resale by the Selling
Shareholders of Energy, which will be distributed to such Selling Shareholder of
Energy in two equal installments.
/(3)/ Indicates shares which will be distributed to the Selling Shareholder of
Energy in four equal installments on January 31 and April 30 for each of the
years 1998 and 1999, which are not registered in this Offering but which may be
sold by the Selling Shareholder of Energy after distribution pursuant to Rule
144 of the Securities Act of 1933.
/(4)/ The beneficial owners of these entities are affiliated with certain of the
Company's executive officers. See "CERTAIN TRANSACTIONS."
/(5)/ Cede & Co. is a registered Depository Company holding shares for broker-
dealers and others, which in turn hold them for their customers. The amount
shown here includes shares of the Company held by Cede & Co. The actual number
of shares of Energy Corporation held by Cede & Co., upon which the Company's
shares will be distributed for resale by the beneficial owners is 1,298,600
shares. None of the 1,298,600 shares are currently held by an officer, director
or affiliate of the Company or any other person that has had a material
relationship with the Company during the past three years.
/(6)/ PhilaDep & Co. is a registered Depository Company holding shares for
broker-dealers and others, which in turn hold them for their customers. The
amount shown includes shares of the Company held by PhilaDep & Co. The actual
number of shares of Energy Corporation held by PhilaDep & Co., upon which the
Company's shares will be distributed for resale by the beneficial owners, is
32,852 shares. None of the 32,852 shares are held by an officer, director or
affiliate of the Company or any other person that has had a material
relationship with the Company during the past three years.
/(7)/ Pittco is a registered Depository Company holding shares for broker-
dealers and others, which in turn hold them for their customers. The amount
shown includes shares of the Company held by Pittco. The actual number of shares
of Energy Corporation held by Pittco, upon which the Company's shares will be
distributed for resale by the beneficial owners, is 42 shares.
/(8)/ Difference between 1,804,064 and 1,803,943 is due to rounding.
A-8
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 1996,
THE ELEVEN MONTH PERIOD ENDED SEPTEMBER 30, 1995,
AND THE YEAR ENDED OCTOBER 31, 1994
INTERCELL CORPORATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Reports.................................................................................... F-3 F-4
Consolidated Balance Sheets - September 30, 1996 and September 30, 1995.......................................... F-5
Consolidated Statements of Operations - Year ended September 30, 1996, Eleven-month period ended
September 30, 1995 and the Year ended October 31, 1994.......................................................... F-6
Consolidated Statements of Stockholders' Equity (Deficit) - Year ended September 30, 1996, Eleven-month period
ended September 30, 1995 and the Year ended October 31, 1994.................................................... F-7
Consolidated Statements of Cash Flows - Year ended September 30, 1996, Eleven-month period ended
September 30, 1995 and the Year ended October 31, 1994.......................................................... F-8
Notes to Consolidated Financial Statements....................................................................... F-9
Schedule II - Valuation and Qualifying Accounts/*/............................................................... F-28
Condensed Consolidated Balance Sheets - December 31 and September 30, 1996 (unaudited)........................... F-29
Condensed Consolidated Statement of Operations - Three-month period ended
December 31, 1996 and 1995 (unaudited)......................................................................... F-30
Condensed Consolidated Statement of Cash Flows - Three-month period ended
December 31, 1996 and 1995 (unaudited)......................................................................... F-31
Notes to Condensed Consolidated Financial Statements (unaudited)................................................. F-32
</TABLE>
*The remaining schedules for which provision is made in Regulation S-X
are not required under the instructions contained therein, are inapplicable, or
the information required is included in the financial statements or footnotes.
F-1
<PAGE>
<TABLE>
<CAPTION>
AC MAGNETICS, INC. DBA
M.C. DAVIS CO., INC.
<S> <C>
Independent Auditors' Report.................................................................................................. F-33
Consolidated Balance Sheets - December 31, 1995 and September 30, 1996........................................................ F-34
Consolidated Statements of Operations - For the years ended December 31, 1994 and December 31, 1995 and the Nine months ended
September 30, 1996........................................................................................................... F-35
Consolidated Statements of Stockholders' Equity - For the years ended December 31, 1994 and December 31, 1995 and the Nine
months ended September 30, 1996.............................................................................................. F-36
Consolidated Statements of Cash Flows - For the years ended December 31, 1994 and December 31, 1995 and the Nine months ended
September 30, 1996........................................................................................................... F-37
Notes to Consolidated Financial Statements.................................................................................... F-38
PRO FORMA STATEMENT OF OPERATIONS
INTERCELL CORPORATION AND AC MAGNETICS INC.
Unaudited Pro Forma Combined Statement of Operations for Intercell Corporation and AC Magnetics, Inc. for the Year ended
September 30, 1996........................................................................................................... F-44
Note to Unaudited Pro Forma Combined Statement of Operations.................................................................. F-45
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Intercell Corporation:
We have audited the accompanying consolidated balance sheets of Intercell
Corporation and subsidiaries (the Company), formerly Modern Industries, Inc. and
subsidiaries, as of September 30, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year ended
September 30, 1996, and for the eleven-month period ended September 30, 1995.
In connection with our audits of the aforementioned consolidated financial
statements, we also have audited the financial statement schedule as listed in
the accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Intercell
Corporation and subsidiaries as of September 30, 1996 and 1995, and the results
of their operations and their cash flows for the year ended September 30, 1996,
and for the eleven-month period ended September 30, 1995, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
San Jose, California
December 6, 1996
F-3
<PAGE>
MARK SHELLEY, CPA
110 S. Mesa Drive #31
Mesa, Arizona 85210
(602) 833-4054
INDEPENDENT AUDITOR'S REPORT
The Shareholders and Board of Directors
Intercell Corporation:
I have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows for the year ended October 31, 1994 of
Intercell Corporation and subsidiary, formerly Modern Industries, Inc. and
subsidiaries, (the Company). These consolidated financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these consolidated financial statements based on my audit.
I have conducted my audit in accordance with generally accepted
auditing standards. Those standards require that I plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. I believe that my audit provides a reasonable basis for
my opinion.
In my opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows for the year ended October 31, 1994 of Intercell Corporation and
subsidiary in conformity with generally accepted accounting principles.
This updated report above and corresponding financial statements do
not include the balance sheet of the Company as of October 31, 1994. This
balance sheet is not required to be included in the current 1996 filings. This
balance sheet was included in previous filings of the Company. At those times
an unqualified opinion was given for the October 31, 1994 balance sheet.
/s/ Mark Shelley, CPA
March 14, 1995
Updated December 31, 1996
F-4
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30,
---------------------------
Assets 1996 1995
- ------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,224,000 57,000
Short-term investments 3,063,000 -
Accounts receivable, less allowance for returns
and doubtful accounts of $255,000 and $81,000
in 1996 and 1995, respectively 746,000 637,000
Inventories 1,066,000 773,000
Prepaid expenses and other current assets 102,000 79,000
Investment land held for sale 1,424,000 -
Equipment held for sale - 250,000
----------- ----------
Total current assets 10,625,000 1,796,000
Property, plant, and equipment, net 1,418,000 885,000
Goodwill and other intangible assets, net 1,583,000 388,000
Other assets 200,000 -
----------- ----------
$13,826,000 3,069,000
=========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Loan payable to bank $ - 190,000
Note payable 266,000 71,000
Notes payable to related parties 932,000 495,000
Current portion of long-term debt 120,000 2,000
Accounts payable and accrued liabilities 742,000 829,000
Accounts payable to related parties - 212,000
----------- ----------
Total current liabilities 2,060,000 1,799,000
Long-term debt, less current portion 86,000 48,000
Commitments
Stockholders' equity:
Convertible preferred stock; 10,000,000 shares authorized:
Series A; 210,000 shares issued and outstanding
as of September 30, 1995 - 250,000
Series B; 787 shares issued and outstanding
as of September 30, 1996 (liquidation preference
of $10,225 per share) 5,533,000 -
Warrants to acquire common stock 1,870,000 -
Common stock; no par value; 100,000,000 shares authorized;
15,734,229 and 10,409,244 shares outstanding, respectively 12,187,000 3,109,000
Deferred compensation (331,000) -
Accumulated deficit (7,579,000) (2,137,000)
----------- ----------
Total stockholders' equity 11,680,000 1,222,000
----------- ----------
$13,826,000 3,069,000
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Eleven-month
Year ended period ended Year ended
September 30, September 30, October 31,
1996 1995 1994
-------------- -------------- ------------
<S> <C> <C> <C>
Net sales $ 3,405,000 3,768,000 2,066,000
Cost of goods sold 2,830,000 2,884,000 1,208,000
----------- ---------- ---------
Gross profit 575,000 884,000 858,000
Selling, general, and
administrative expenses 5,683,000 1,317,000 1,182,000
Research and development 88,000 - -
----------- ---------- ---------
Operating loss (5,196,000) (433,000) (324,000)
Other income (expense):
Interest income 36,000 - -
Interest expense (90,000) (88,000) (3,000)
Loss on investments - (795,000) -
Other (33,000) (3,000) (16,000)
----------- ---------- ---------
(87,000) (886,000) (19,000)
------------ ----------- ----------
Loss before income taxes (5,283,000) (1,319,000) (343,000)
Income taxes - 2,000 19,000
----------- ---------- ---------
Net loss $(5,283,000) (1,321,000) (362,000)
Deemed Preferred Stock Dividend
relating to in-the-money
conversion terms 1,624,648 -- --
----------- ---------- ---------
Net loss applicable to common stockholders (6,907,648) (1,321,000) (362,000)
=========== ========== =========
Net loss per common share $(.54) (.18) (.08)
=========== ========== =========
Weighted average number of shares of
common stock outstanding 13,072,683 7,391,275 4,828,007
=========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Year ended September 30, 1996, eleven-month period ended
September 30, 1995, and year ended October 31, 1994
<TABLE>
<CAPTION>
Convertible
preferred stock Warrants Common stock Additional
-------------------- to acquire ------------------ paid-in Deferred
Shares Amount common stock Shares Amount capital compensation
------ ------ ------------ ------ ------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances as of October 31,
1993 - $ - - 2,352,081 $ 7,000 242,000 -
Conversion of debt to
equity - - - 676,777 2,000 473,000 -
Shares issued in exchange
for prepaid promotion - - - 35,637 - 50,000 -
Shares issued in exchange
for consulting services - - - 14,255 - 20,000 -
Acquisition of California
Tube Laboratory, Inc. - - - 762,031 2,000 1,067,000 -
Employment contract buy out - - - 222,572 1,000 311,000 -
Shares issued in exchange
for microwave technology - - - 178,188 500 250,000 -
Shares issued in exchange
for services - - - 178,188 500 69,000 -
Purchase of treasury stock - - - - - (206,000) -
Net loss - - - - - - -
----------- ----------- --------- ---------- ----------- ---------- ------------
Balances as of October 31,
1994 - - - 4,419,729 13,000 2,276,000 -
Shares issued in lieu of
interest payment to
related party - - - 17,819 - 13,000 -
Shares issued in exchange
for investment in
American Microcell - - - 712,751 2,000 498,000 -
Shares issued in private
placement - - - 85,530 - 60,000 -
Contribution to ESOP - - - 176,362 1,000 246,000 -
Conversion of additional
paid-in capital to common
stock - - - - 3,093,000 (3,093,000) -
Acquisition of Intercell 210,000 250,000 - 4,997,053 - - -
Net loss - - - - - - -
----------- ----------- --------- ---------- ----------- ---------- ------------
Balances as of September
30, 1995 210,000 250,000 - 10,409,244 3,109,000 - -
Repurchase of shares of
Series A preferred stock (210,000) (250,000) - - - - -
Shares of Series B
preferred stock and
warrants issued in private
placement, net of issuance
costs of $1,100,000 1,000 7,030,000 1,870,000 - - - -
Shares issued in exchange
for land - - - 400,000 1,000,000 - -
Contribution to ESOP - - - 126,761 158,000 - -
Shares issued to effect
business combination with
Particle Interconnect,
Inc. treated as an
immaterial pooling - - - 1,400,000 8,000 - -
Deferred compensation
related to stock option
grants - - - - 4,017,000 - (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 - - - - - - -
----------- ----------- --------- ---------- ----------- ---------- ------------
Balances as of September
30, 1996 787 $ 5,533,000 1,870,000 15,734,229 $12,187,000 - (331,000)
=========== =========== ========== =========== ============ ========== ============
Total
stockholders'
Accumulated equity
deficit (deficit)
----------- -------------
Balances as of October 31,
1993 (454,000) (205,000)
Conversion of debt to
equity - 475,000
Shares issued in exchange
for prepaid promotion - 50,000
Shares issued in exchange
for consulting services - 20,000
Acquisition of California
Tube Laboratory, Inc. - 1,069,000
Employment contract buy out - 312,000
Shares issued in exchange
for microwave technology - 250,500
Shares issued in exchange
for services - 69,500
Purchase of treasury stock - (206,000)
Net loss (362,000) (362,000)
----------- -----------
Balances as of October 31,
1994 (816,000) 1,473,000
Shares issued in lieu of
interest payment to
related party - 13,000
Shares issued in exchange
for investment in
American Microcell - 500,000
Shares issued in private
placement - 60,000
Contribution to ESOP - 247,000
Conversion of additional
paid-in capital to common
stock - -
Acquisition of Intercell 250,000
Net loss (1,321,000) (1,321,000)
----------- -----------
Balances as of September
30, 1995 (2,137,000) 1,222,000
Repurchase of shares of
Series A preferred stock - (250,000)
Shares of Series B
preferred stock and
warrants issued in private
placement, net of issuance
costs of $1,100,000 - 8,900,000
Shares issued in exchange
for land - 1,000,000
Contribution to ESOP - 158,000
Shares issued to effect
business combination with
Particle Interconnect,
Inc. treated as an
immaterial pooling (159,000) (151,000)
Deferred compensation
related to stock option
grants - -
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) (5,283,000)
----------- -----------
Balances as of September
30, 1996 (7,579,000) 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 Energy Corporation (formerly known as Modern
Industries, Inc.)
In July 1995, Intercell entered into an Agreement and Plan of
Reorganization with Modern Industries, Inc., a Delaware corporation,
which subsequently changed its name to Energy Corporation ("Energy").
The Company issued 5,412,191 shares of common stock to Energy in
exchange for all of the assets and liabilities of Energy and its
wholly owned subsidiary, California Tube Laboratory, Inc. (CTL).
The 5,412,191 shares issued to Energy represented approximately 52% of
the Company's outstanding common stock upon completion of the
transaction. As such, the transaction was treated for financial
reporting purposes as a purchase of Intercell by Energy. The assets of
Intercell have been recorded at their estimated fair value at the date
of acquisition and Intercell's results of operations have been
included in the consolidated statements of operations subsequent to
the date of the acquisition. Energy's historical share amounts have
been adjusted on a retroactive basis in a manner similar to a reverse
stock split.
The following table presents unaudited pro forma results of operations
as if the acquisition of Intercell had occurred on November 1, 1993.
These pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of what would have occurred
had the acquisition been made at the beginning of fiscal 1994 or of
results which may occur in the future.
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Net sales $3,768,000 $2,173,000
Operating loss 512,000 266,000
Net loss 1,397,000 308,000
Net loss per common share 0.23 0.09
</TABLE>
Distribution of Common Stock
On July 8, 1996, Energy, which does not currently conduct any
operations and whose only assets consist of the Company's Common
Stock, and the Company entered into a certain Plan of
(Continued)
F-9
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Liquidating Dissolution (the "Plan"). The Plan was approved by a majority
of the shareholders of Energy on October 21, 1996. The 5,412,191 shares of
Common Stock owned by Energy will be distributed to the beneficial owners
of the shares of common stock of Energy as of July 8, 1996, on a pro-rata
basis over a period of three years.
Acquisition of California Tube Laboratory, Inc.
In May 1994, Energy acquired all of the issued and outstanding shares of
CTL for 762,031 shares of its common stock (valued at $1,069,000) and notes
payable to two major stockholders of CTL for $956,000. Energy also bought
out an employment contract with a former owner of CTL for 222,572 shares of
Energy common stock (valued at $311,000).
CTL is an electronic parts manufacturer located in Northern California. CTL
manufactures, rebuilds, and repairs magnetrons, klystrons, high power
triodes and tetrodes, electron guns, and linear accelerators for customers
located primarily in the United States.
Acquisition of Particle Interconnect, Inc.
In September 1996, Intercell formed a wholly owned subsidiary, Particle
Interconnect Corp. (PI Corp.), a Colorado corporation, which merged with
Particle Interconnect, Inc. (Particle), a California corporation. Particle,
located in Colorado Springs, Colorado, is engaged in the development and
manufacturing of particle-coated substrates for integrated circuits using
patented particle interconnect technology (the "PI Technology") and a
proprietary trade secret electroplating process (the "Proprietary
Electroplating Process"). At the time of the acquisition, Particle owned
rights to the PI Technology and the Proprietary Electroplating Process and
was developing an initial production line for the manufacture of particle
coated substrates at its manufacturing facility. The Company exchanged
1,400,000 shares of Intercell common stock for all of the outstanding stock
of Particle. The transaction was accounted for by the pooling-of-interest
method of accounting. The results of operations of Particle are not
material to the Company's consolidated financial position, results of
operations, and cash flows. Accordingly, the consolidated financial
statements for periods prior to the date of acquisition have not been
restated, except for loss per common share information. The weighted
average number of shares of common stock outstanding and loss per common
share has been restated for all periods presented to reflect the 1,400,000
shares of common stock issued in the transaction.
The book value of Particle at the date of acquisition was as
follows:
<TABLE>
<CAPTION>
<S> <C>
Assets acquired $ 273,000
Liabilities assumed (424,000)
--------
Stockholders' deficit $(151,000)
========
</TABLE>
(Continued)
F-10
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At the date of acquisition, stockholders' deficit was comprised of $8,000
common stock and ($159,000) accumulated deficit.
Acquisition of A.C. Magnetics, Inc.
On September 30, 1996, Intercell formed a wholly owned subsidiary, Cellular
Magnetics Inc., an Arizona corporation, which acquired all the assets and
liabilities of A.C. Magnetics, Inc. dba M.C. Davis, Co. Inc. (M.C. Davis)
in exchange for 277,778 shares of Intercell common stock (valued at
$1,000,000) and an $800,000 note. M.C. Davis is a manufacturer and
distributor of electrical devices and equipment with manufacturing
facilities near Phoenix, Arizona, and in the province of Sonora, Mexico.
The transaction was accounted for by the purchase method of accounting. The
results of operations for M.C. Davis have not been included in the
Company's consolidated results of operations as the transaction occurred on
the last day of Intercell's fiscal year. The total purchase price of
$1,800,000 has been allocated to the net assets acquired based on their
relative fair values as follows:
<TABLE>
<CAPTION>
<S> <C>
Current assets $ 544,000
Property, plant, and equipment 383,000
Goodwill and other intangibles 1,223,000
Current liabilities (293,000)
Other liabilities assumed (57,000)
----------
Total purchase price $1,800,000
==========
</TABLE>
The following table presents unaudited pro forma results of operations as
if the acquisition had occurred on November 1, 1994. These pro forma
results have been prepared for comparative purposes only and do not purport
to be indicative of what would have occurred had the acquisition been made
at the beginning of 1995, or indicative of results which may occur in the
future.
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Net sales $5,164,000 5,471,000
Operating loss 5,323,000 531,000
Net loss 5,427,000 1,451,000
Net loss per common share .53 .20
</TABLE>
(Continued)
F-11
<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.
(Continued)
F-12
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Inventories
Inventories generally are stated at the lower of cost (first in, first
out) or market. Costs incurred in the manufacture of new tubes is recorded
on a standard cost basis, which approximates the first-in, first-out
method, with the costs of raw materials, labor, and overheads adjusted
periodically when actual costs change. Each tube repair is unique and is
costed out on a specific item basis with costs accumulated as incurred.
Tubes rebuilt for the U.S. government follow governmental cost allocation
guidelines.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation expense is
provided by use of the accelerated and straight-line methods over the
estimated useful lives of the assets, generally 5 to 12 years for
furniture, equipment, and vehicles and 31 years for buildings.
Goodwill and Other Intangibles
Goodwill and other intangibles, which include costs in excess of fair
value of net assets of businesses acquired, proprietary technology, and
trade names are being amortized over 3 to 15 years using the straight-line
method. The Company periodically evaluates the carrying amount of its
intangibles to determine whether any impairment of the assets has occurred
based on estimated undiscounted future cash flows. This evaluation
necessarily involves significant management judgment and actual results
could differ from the estimates and forecasts used. There were no
adjustments to the carrying value of intangible assets resulting from these
evaluations in 1996, 1995, and 1994. Accumulated amortization amounted to
$61,000 and $28,000 as of September 30, 1996 and 1995, respectively.
Income Taxes
Income taxes are accounted for by the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. Valuation allowances are established
when necessary to reduce deferred tax assets to the amounts expected to be
realized.
(Continued)
F-13
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Net Loss Per Common Share
Net loss per common share is computed by dividing the sum of net loss
and deemed preferred stock dividend by the weighted average number of
common shares and dilutive common equivalent shares outstanding during each
period presented. Net loss per common share in the accompanying 1996
consolidated statement of operations has been increased by nine cents per
share from amounts previously reported to reflect a deemed dividend on
Series B Preferred Stock in accordance with recently published views of the
Staff of the Securities and Exchange Commission (Note 7). Common
equivalent shares consist of stock options that are computed using the
treasury stock method.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued Statement
of Financial Accounting Standards (SFAS) No. 121, Accounting, for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. SFAS No. 121 will be effective for fiscal years beginning after
December 15, 1995, and requires long-lived assets to be evaluated for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company will adopt
SFAS No. 121 in fiscal 1997 and does not expect its provisions to have a
material effect on the Company's consolidated results of operations.
FASB also has issued SFAS No. 123, Accounting for Stock-Based Compensation.
SFAS No. 123 will be effective for fiscal years beginning after December
15, 1995, and will require that the Company either recognize in its
consolidated financial statements costs related to its employee stock-based
compensation plans, such as stock option and stock purchase plans, or make
pro forma disclosures of such costs in a footnote to the consolidated
financial statements.
The Company expects to continue to use the intrinsic value-based method of
Accounting Principles Board Opinion No. 25, as allowed under SFAS No. 123,
to account for all of its employee stock-based compensation plans.
Therefore, in its consolidated financial statements for fiscal 1997, the
Company will make the required pro forma disclosures in a footnote to the
consolidated financial statements. SFAS No. 123 is not expected to have a
material effect on the Company's consolidated results of operations or
financial position.
(Continued)
F-14
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
<C> <S>
(3) BALANCE SHEET COMPONENTS
Inventories
A summary of inventories follows:
September 30,
-----------------
1996 1995
-------- -------
<S> <C> <C>
Raw materials $422,000 296,000
Work in process 453,000 477,000
Finished goods 191,000 -
-------- -------
$1,066,000 773,000
========= =======
Property, Plant, and Equipment
A summary of property, plant, and equipment follows:
September 30,
-----------------
1996 1995
-------- -------
Furniture and fixtures $339,000 76,000
Equipment and machinery 845,000 690,000
Land and buildings 282,000 230,000
Leasehold improvements 71,000 -
Vehicles 23,000 -
-------- -------
1,560,000 996,000
Less accumulated depreciation 142,000 111,000
-------- -------
$1,418,000 885,000
========= =======
</TABLE>
(Continued)
F-15
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Accounts Payable and Accrued Liabilities
A summary of accounts payable and accrued liabilities follows:
<TABLE>
<CAPTION>
September 30,
-----------------
1996 1995
-------- -------
<S> <C> <C>
Accounts payable $376,000 208,000
Warranty reserves 130,000 130,000
Accrued employee compensation 191,000 153,000
Accrued ESOP contribution - 158,000
Other liabilities 45,000 180,000
-------- -------
$742,000 829,000
======== =======
</TABLE>
(4) SUPPLEMENTAL CASH FLOW INFORMATION
For the year ended September 30, 1996, and the eleven-month period ended
September 30, 1995, cash paid by the Company for interest was $87,000 and
$15,000, respectively. Cash paid by the Company for interest in 1994 was
not significant.
(Continued)
F-16
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A summary of noncash investing and financing activities follows:
<TABLE>
<CAPTION>
Eleven-month
Year ended period ended Year ended
September 30, September 30, October 31,
1996 1995 1994
------------- ------------- -----------
<S> <C> <C> <C>
Shares issued in acquisition of Intercell $ - 250,000 -
Shares issued in exchange for investment in
American Microcell - 500,000 -
Shares issued in exchange for microwave technology - 250,000 -
Contribution to ESOP 158,000 247,000 -
Shares issued in lieu of interest payment to
related party - 13,000 -
Shares issued in acquisition of CTL - - 2,025,000
Conversion of debt to equity - - 475,000
Shares issued in exchange for prepaid promotion - - 140,000
Employment contract buy out - - 311,000
Shares issued in exchange for microwave technology - - 250,000
Shares issued in exchange for services 56,000 - -
Shares issued in exchange for land 1,000,000 - -
Debt assumed in land acquisition 367,000 - -
Shares to be issued for acquisition of M.C. Davis 1,000,000 - -
Debt incurred in acquisition of M.C. Davis 800,000 - -
Shares issued in acquisition of Particle
common stock and net liabilities assumed,
accounted for as an immaterial pooling 151,000
Deferred compensation related to stock option grants 4,017,000 - -
Repurchase of shares of Series A preferred stock 250,000 - -
Conversion of Series B preferred stock to
common stock 1,497,000 - -
</TABLE>
(5) EQUIPMENT HELD FOR SALE
On December 29, 1994, Intercell executed an Asset Purchase Agreement
with Asia Skylink Corp. to acquire microwave transmission and associated
support equipment in exchange for 210,000 shares of Series A redeemable
convertible preferred stock. In August 1996, the shares were returned to
the Company, and the equipment was returned to Asia Skylink, Corp. No gain
or loss was recognized by the Company in connection with the reversal of
this transaction.
(6) BORROWINGS
Loan Payable to Bank
In June 1995, the Company obtained a revolving loan for up to $500,000
based on a percentage of eligible assets. This loan expires on December
31, 1996, bears interest at the bank's base rate
(Continued)
F-17
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8.25% as of September 30, 1996) plus 1/2% for administration fees and an
additional 6%, and is secured by all assets of the Company.
Note Payable
The note payable of $266,000 is unsecured, with principal and interest
of 12% per annum due on June 24, 1997. The note payable and accrued
interest were paid in full in October 1996.
(Continued)
F-18
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Long-Term Debt
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
September 30,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
Note payable to bank; interest at prime plus 2%; due
April 4, 1997; collateralized by various assets; repaid
in October 1996 $100,000 -
Note payable; noninterest bearing; due June 1998;
collateralized by building 47,000 -
Note payable to bank; interest at 9.75%;
due in 36 monthly payments of $481;
collateralized by a vehicle; repaid in October 1996 15,000 -
Note payable to bank; interest at 9.75%; due May 2008;
secured by real property; repaid in April 1996 - 50,000
Other 44,000 -
-------- -------------
206,000 50,000
Less current portion 120,000 2,000
-------- -------------
Long-term debt, net $ 86,000 48,000
======== =============
</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>
(Continued)
F-19
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) STOCKHOLDERS' EQUITY
Preferred Stock
As of September 30, 1996 and 1995, the Company is authorized to issue
10,000,000 shares of preferred stock.
In December 1994, the Company issued 210,000 shares of Series A redeemable
convertible preferred stock (Series A preferred) in exchange for microwave
transmission equipment. During 1996, the Series A preferred shares were
surrendered to and canceled by the Company in exchange for the return of
the microwave transmission equipment (see Note 5).
In July 1996, the Company issued 1,000 shares of Series B redeemable
convertible preferred stock (Series B preferred) and detachable warrants
for proceeds of $8,900,000 (net of issuance costs of $1,100,000). Each
share of Series B preferred stock is convertible into common stock at the
exchange rate in effect at the time of the conversion, as described in the
preferred stock agreements, and is subject to appropriate adjustment for
common stock splits, stock dividends, and other similar transactions.
Conversion of the Series B preferred is automatic upon the expiration of
three years from the original date of issuance. At the date of issuance,
the exchange rate was equal to 85% of the then prevailing market rate,
resulting in a deemed dividend of $1,764,704. The Company recognized
$1,624,648 of the dividend in its fiscal 1996 net loss per common share
calculation. The amount recognized was calculated on a pro rata basis over
the period beginning with the issuance of the security to the first date
conversion could occur.
The Series B preferred contain a liquidation preference equal to the
original issue price plus 10% of the original issue price per annum to the
date of liquidation. Series B preferred shares are not entitled to voting
rights.
Each share of Series B preferred is accompanied by a detachable warrant to
purchase a number of shares of common stock of the Company equal to 30% of
the original aggregate purchase price of the shares of Series B preferred
divided by a fixed conversion rate of $3.9375 per share, exercisable 105
days after original issuance. As of September 30, 1996, warrants to acquire
1,092,063 shares of common stock were outstanding. The warrants will expire
if not exercised by July 1, 2001.
Stock Options
In July 1995, Intercell established a Compensatory Stock Option Plan (the
Plan) and reserved 5,000,000 shares of common stock for issuance under the
Plan. In June 1996, an additional 2,000,000 shares were reserved for
issuance under the Plan. Incentive stock options can be granted under the
Plan, at prices not less than 110% of the fair market value of the stock at
the date of grant, and nonqualified options can be granted at not less than
50% of the stock's fair
(Continued)
F-20
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
market value at the date of grant or the date the exercise price of any
such option is modified. All stock options expire 10 years from the date of
grant.
A summary of stock option activity under the Plan follows:
<TABLE>
<CAPTION>
Options outstanding
Shares ----------------------------------
available Price
for grant Shares per share
----------- -------------------- ------------
<S> <C> <C> <C>
Balances as of July 1995 5,000,000 - $ -
Options granted (1,600,000) 1,600,000 0.50
---------- ---------- ------------
Balances as of September 30, 1995 3,400,000 1,600,000 0.50
Additional shares authorized 2,000,000 - -
Options granted (4,841,000) 4,841,000 0.50 - 4.00
Options canceled 150,000 (150,000) 0.50
Options exercised - (2,295,000) 0.50 - 2.00
---------- ---------- ------------
Balances as of September 30, 1996 709,000 3,996,000 0.50 - 4.00
========== ==========
</TABLE>
As of September 30, 1996, options to purchase approximately 3,366,000
shares of common stock were exercisable.
Options granted during 1996 include 2,791,180 granted to nonemployees for
legal services, placement agent services, consulting services and product
promotion services. Nonemployee stock options were generally granted at
discounts ranging from 15% to 90% of the quoted market value of the stock
on the date of grant with prices ranging between $.50 per share and $4.75
per share, and expire 10 years from the date of the grant. Options to
acquire 2,391,180 shares that were granted to nonemployees were exercisable
immediately upon grant. The remaining options to acquire 400,000 shares
vest, as to 150,000 shares, on December 1, 1996 and 1997 and, as to 100,000
shares, on December 1, 1998.
The Company recorded deferred compensation of $4,017,000 for the difference
between the exercise price and the fair value of the common stock related
to stock options granted in 1996. Certain of the options vested immediately
and, therefore, the related compensation expense of $3,686,000 was recorded
at the grant date. The compensation expense has been included in selling,
general, and administrative expense in the accompanying 1996 consolidated
statement of operations. The remaining deferred compensation will be
amortized over the vesting period of the options, generally four years.
(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
(Continued)
F-21
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
must have worked at least 1,000 hours during the year and must be employed
at the end of the plan year. Participants do not vest until their third
year of employment and then vest 20% per year through year seven. Employer
contributions are voluntary and generally are based on a percentage of
eligible payroll, limited to 15%. In 1995, the Company elected to
contribute 126,761 shares of the Company's common stock valued at $158,000
to the Employee Plan. The Employee Plan was terminated in 1996, and, as
such, the Company has not made any additional contributions.
(9) PURCHASE OF AMERICAN MICROCELL
During fiscal 1995, the Company acquired approximately 15% of the
outstanding stock of American Microcell in exchange for 712,751 shares of
common stock at a deemed value of approximately $0.70 per share. American
Microcell was engaged in the research and development of improved
technologies for cellular phones. However, American Microcell proved
unsuccessful in its efforts to finance continuing development of
technologies acquired, and the rights to these technologies reverted to the
original developers. Accordingly, the Company's investment in American
Microcell has been written off as a charge to income in the accompanying
1995 consolidated statement of operations.
(10) ADVANCES TO INTERPRETEL, INC.
In anticipation of a merger, the Company advanced $100,000 to Interpretel,
Inc. in January 1995. The proposed merger was not completed and
Interpretel, Inc. repaid $45,000 of the advance and will issue 100,000
shares of Wavetech, Inc. common stock to the Company in fiscal 1997.
(11) RELATED PARTY TRANSACTIONS
Notes Payable
As of September 30, 1995, the Company had an outstanding promissory note
due to a former owner of CTL in the amount of $495,000, bearing interest at
8%. The note was repaid during fiscal 1996.
As of September 30, 1996, the Company had an outstanding promissory note
due to a former owner and current president of M.C. Davis in the amount of
$80,000, bearing interest at 8%, due December 15, 1996. The note was
repaid in October 1996.
As of September 30, 1996, the Company had an outstanding promissory note
due to a former owner of Particle in the amount of $52,000, bearing
interest at 8%, due on demand.
The Company has noninterest bearing notes payable totaling $800,000 due to
the former owners of M.C. Davis in consideration for the purchase of M.C.
Davis consummated on September 30, 1996 (see Note 1). The notes were paid
in full in October 1996.
(Continued)
F-22
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Purchase of Land
During April 1996, the Company entered into an agreement with a related
party whereby in exchange for 400,000 shares of the Company's common stock
(valued at $1,000,000) and assumption of mortgages of $367,000, the Company
acquired development land located in Arizona. In connection with the
exchange, the Company incurred acquisition costs of $57,000. The land,
including acquisition costs, is recorded on the accompanying 1996
consolidated balance sheet as investment land held for sale.
Purchase and Sale of Microwave Technology
In June 1994, the Company purchased one half of the rights to a technology
that utilizes microwaves to enhance the production of oil wells for 178,188
shares of its common stock. The Company already owned the one half interest
in the technology. In January 1995, the Company sold these rights to Reland
International, Inc. (Reland) for certain royalty payouts and a note
receivable with a face amount of $1,250,000, bearing interest at 6%, with
accrued interest payable annually on or before January 15 of each year, and
principal payable on or before January 16, 2000. Due to concerns about
collectibility, this note and related accrued interest was written off as a
charge to income in the accompanying 1995 consolidated statement of
operations.
Operating Leases
CTL leases its principal facility on a month-to-month basis from a
significant stockholder. Monthly rental payments for the facility lease are
$10,000, and the lease expires in August 1999. The Company paid rent
related to this lease of $118,000, $106,000, and $29,000, during 1996,
1995, and 1994, respectively.
The Company leases a facility in Vancouver, Canada, from a executive and
director of the Company with monthly rental payments of $3,000. The lease
expires in August 2001.
Grant of Stock Options to Related Party
On September 3, 1996, the Company granted options to purchase 400,000
shares of Common Stock, with an exercise price of $4.00 per share, to a
related party in return for which the related party agreed to promote the
sale of the Company's products and services in Canada. The options vest
immediately and expire 10 years from the date of grant.
(Continued)
F-23
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) COMMITMENTS
Operating Leases
The Company leases office space, manufacturing facilities, and certain
equipment under various operating lease agreements. Future minimum lease
payments under noncancelable leases as of September 30, 1996, are as
follows:
<TABLE>
<CAPTION>
Year ending
September 30,
-------------
<S> <C>
1997 $ 513,000
1998 475,000
1999 262,000
2000 254,000
Thereafter 2,048,000
----------
Total $3,552,000
==========
</TABLE>
Rent expense under operating leases was approximately $277,000, $145,000,
and $116,000 during 1996, 1995, and 1994, respectively.
Litigation
The Company is subject to various legal proceedings and claims. In
the opinion of management, the ultimate liability with respect to these
actions will not materially affect the Company's consolidated financial
position or results of operations.
(13) INCOME TAXES
Income tax expense in 1996 was not significant. In 1995 and 1994, income
tax expense was $2,000 and $19,000, respectively.
Income tax expense differed from amounts computed by applying the federal
statutory income tax rate of 34% to pretax loss as a result of the
following:
(Continued)
F-24
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Eleven-month
Year ended period ended Year ended
September 30, September 30, October 31,
1996 1995 1994
-------------- -------------- ------------
<S> <C> <C> <C>
Computed "expected" tax benefit $(1,616,000) (448,000) (117,000)
State income taxes (442,000) 2,000 19,000
Change in valuation allowance 1,912,000 249,000 117,000
Net operating loss carryforwards for
state purposes not available
for future utilization 146,000 142,000 -
Other - 57,000 -
----------- -------- -----------
$ - 2,000 19,000
=========== ======== ===========
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- ---------
<S> <C> <C>
Deferred tax assets:
Stock options $ 688,000 -
Net operating loss carryovers 1,610,000 398,000
Allowance for returns and doubtful accounts 47,000 35,000
----------- --------
2,345,000 433,000
Less valuation allowance 2,345,000 433,000
----------- --------
Net deferred tax assets $ - -
=========== ========
</TABLE>
The change in the valuation allowance was an increase of $1,912,000 and $164,000
in fiscal 1996 and 1995, respectively. The valuation allowance applies primarily
to those temporary differences that are expected to be deductible at a point in
the future when taxable income is uncertain.
Since the Company is entitled to a deduction for federal and state tax purposes
resulting from the exercise of nonqualified stock options and employees' early
dispositions of stock acquired through incentive stock options, a portion of the
deferred tax asset, when recognized by a reduction of the valuation allowance,
will be credited to additional paid-in capital. As of September 30, 1996,
approximately $1,262,000 of the deferred asset will be credited to additional
paid-in capital when recognized.
As of September 30, 1996, the Company had a net operating loss carryover for
federal and California income tax purpose of approximately $7,376,000 and
3,463,000, respectively. The federal net operating losses expire from 2007 to
2011. The California net operating losses expire
(Continued)
F-25
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
from 2000 to 2001. The difference between the federal and California loss
carryforwards results primarily from a 50% limitation on California net
operating losses.
The Tax Reform Act of 1986 and the California Conformity Act of 1987
impose substantial restrictions on the utilization of net operating loss
carryforwards in the event of an ownership change, as defined by Internal
Revenue Code, Section 382. Federal loss carryforwards of approximately
$439,000 are subject to an annual limitation of approximately $176,000.
Any unused annual limitation can be carried forward and added to the
succeeding years annual limitation, subject to the expiration dates
discussed above.
(14) SIGNIFICANT CUSTOMER AND INDUSTRY SEGMENT INFORMATION
Two customers individually accounted for 10% or more of the Company's
net sales in 1996, 1995, and 1994. Sales and the related receivable
percentages to these customers as of September 30, 1996 and 1995, and
October 31, 1994 are summarized as follows:
<TABLE>
<CAPTION>
Percentage of Percentage of
net sales accounts receivables
---------------------- -----------------------
1996 1995 1994 1996 1995 1994
------- ------ ----- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Customer A 14% 15% 22% 6% 9% 15%
Customer B 12% 12% 35% 11% 12% 17%
</TABLE>
As of and through September 30, 1996, substantially all of the Company's
net sales and gross profits from operations have been generated by CTL.
As of September 30, 1996 and 1995, identifiable assets of CTL and M.C.
Davis, a business purchased by Intercell in September 1996, were as
follows:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
CTL $3,371,000 3,950,000
M.C. Davis 2,150,000 -
</TABLE>
(15) SUBSEQUENT EVENT (UNAUDITED)
In December 1996, the Company issued 525 shares of no par value Series C
preferred stock (Series C preferred) and detachable warrants in a private
placement for $4,672,500 (net of issuance costs of $577,500).
Each share of Series C preferred is convertible into common stock at the
exchange rate in effect at the time of the conversion, as described in the
preferred stock agreements, and is subject to appropriate adjustment for
common stock splits, stock dividends, and other similar transactions.
(Continued)
F-26
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Conversion of the Series C preferred is automatic upon the expiration of
three years from the original date of issuance. The Series C preferred is
convertible into common stock at the exchange rate in effect at the date of
conversion, as described in the preferred stock agreements. At the date of
issuance, the exchange rate was equal to 85% of the then prevailing market
rate, resulting in a deemed dividend of $932,000 to be recognized by the
Company in fiscal 1997. The Series C preferred are junior to the Company's
Series B preferred shares and contain a liquidation preference equal to the
original issue price plus 8% of the original issue price per annum to the
date of liquidation. Series C preferred shares are not entitled to voting
rights.
Shares of Series C preferred purchased in excess of certain quantities as
described in the preferred stock agreements, or purchased in addition to
previous purchases of Series B preferred shares are accompanied by
detachable warrants to purchase a number of shares of common stock of the
Company equal to between 25% and 50% of the original aggregate purchase
price of the Series C preferred shares divided by a fixed conversion rate
of $3.25 per share, exercisable 105 days after original issuance.
(Continued)
F-27
<PAGE>
INTERCELL CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charged to
Beginning Costs and Balance at
Classification of Year Expenses Deductions End of Year
-------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Allowance for returns and doubtful
accounts
Year ended October 31, 1994 $-- $ 15 $-- $ 15
Eleven months ended September 30, 1995 $15 $ 81 $(15) $ 81
Year ended September 30, 1996 $81 $174 $-- $255
</TABLE>
F-28
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
December 31, 1996 September 30, 1996
------------------ -------------------
ASSETS
------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 8,116,000 $ 4,224,000
Short term investments 975,000 3,063,000
Accounts receivable, net 810,000 746,000
Inventories 1,156,000 1,066,000
Prepaid expenses and other current 141,000 102,000
assets
Investment land held for sale 1,424,000 1,424,000
------------- ------------
Total current assets 12,622,000 10,625,000
Property, plant and equipment, net 1,638,000 1,418,000
Goodwill and other intangible assets, 1,510,000 1,583,000
net
Other assets 213,000 200,000
------------- ------------
Total assets $ 15,983,000 $ 13,826,000
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
----------------------------------------
Current liabilities
Notes payable $ - $ 266,000
Notes payable to related parties - 932,000
Current portion of long-term debt 15,000 120,000
Accounts payable and accrued 858,000 742,000
liabilities ------------- ------------
Total current liabilities 873,000 2,060,000
Long term debt, less current portion 29,000 86,000
------------- ------------
Total liabilities 902,000 2,146,000
------------- ------------
Commitments
Stockholders' equity:
Convertible preferred stock:
10,000,000 shares authorized
Series B; 228 and 787 issued and 1,603,000 5,533,000
outstanding as of
December 31, 1996 and September 30,
1996 respectively
Series C; 525 and 0 issued and
outstanding as of 3,492,000 -
December 31, 1996 and September 30,
1996 respectively
Warrants to acquire common stock 3,051,000 1,870,000
Common stock; no par value;
100,000,000 shares authorized
17,663,459 and 15,734,229 shares 16,690,000 12,187,000
outstanding as of
December 31, 1996 and September 30,
1996 respectively
Deferred compensation (254,000) (331,000)
Accumulated deficit (9,501,000) (7,579,000)
------------- ------------
Total stockholders' equity 15,081,000 11,680,000
------------- ------------
$ 15,983,000 $ 13,826,000
============= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-29
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31
----------------------------------
1996 1995
------------------- -------------
<S> <C> <C>
Net sales $ 1,599,000 $ 853,000
Cost of goods sold 1,143,000 571,000
------------- -----------
Gross profits 456,000 282,000
Selling, general and administrative 2,064,000 541,000
expenses
Research and development 374,000 12,000
------------- -----------
Operating loss (1,982,000) (271,000)
Other income (expense) 60,000 (20,000)
-------------
Loss before income (1,922,000) (291,000)
taxes
Income taxes - -
------------- -----------
Net loss $ (1,922,000) $ (291,000)
Deemed Preferred Stock Dividend
relating to 221,000 -
in-the-money conversion terms
Accretion on Preferred Stock 139,000 -
------------- -----------
Net loss applicable to common $ (2,282,000) $ (291,000)
stockholders
Net loss per common share $ (.14) $ (0.03)
Weighted average number of shares of
common stock outstanding 16,527,588 10,457,547
============= ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-30
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31
----------------------------------
1996 1995
------------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (1,922,000) $ (291,000)
Adjustments to reconcile net loss to
cash (used in)
provided by operating activities: 143,000 11,000
Depreciation and
amortization
Amortization of deferred 607,000 210,000
compensation
Common stock issued for interest 43,000 -
Changes in operating assets and
liabilities
Accounts receivable (64,000) 127,000
Inventory (90,000) (6,000)
Prepaid expenses (39,000) 3,000
Current liabilities 116,000 6,000
------------- ----------
Net cash provided by (used in) (1,206,000) 60,000
operating activities ------------- ----------
Cash flows from investing activities
Proceeds from sales and maturities 2,088,000 -
of short-term investments
Acquisition of property, plant and (290,000) (15,000)
equipment
Acquisition of other assets (13,000) -
------------- ----------
Net cash provided by (used in) 1,785,000 (15,000)
investing activities ------------- ----------
Cash flows from financing activities
Proceeds from issuance of common - 39,000
stock
Proceeds from issuance of Series C 4,673,000 -
preferred stock
and warrants
Repayments of notes payable (1,198,000) (86,000)
Repayments of long term debt (162,000) (1,000)
Net cash provided by (used in) 3,313,000 (48,000)
financing activities ------------- ----------
Net increase (decrease) in cash and 3,892,000 (3,000)
cash equivalents
Cash and cash equivalents at beginning 4,224,000 57,000
of period ------------- ----------
Cash and cash equivalents at end of $ 8,116,000 $ 54,000
period ============= ==========
Cash paid during the period for interest $ - $ 25,000
Non-cash investing and financing
activities
Series B preferred stock converted $ 3,930,000 $ -
to common stock ============= ==========
Transfer of stock options from
principal shareholders to $ 530,000 $ -
Company officer ============= ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-31
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Intercell Corporation and its wholly owned subsidiaries (the "Company"). All
intercompany transactions have been eliminated.
The condensed consolidated financial statements are unaudited (except for the
balance sheet information as of September 30, 1996, which is derived from the
Company's audited financial statements) and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion
of management, necessary for a fair presentation of the financial position
and operating results for the periods presented. The condensed consolidated
financial statements should be read in conjunction with the September 30,
1996 audited financial statements of Intercell Corporation and the notes
thereto. The results of operations for the three months ended December 31,
1996 are not necessarily indicative of the results for the entire year ended
September 30, 1997, or any future period.
2. NET LOSS PER SHARE
Net loss applicable to common stockholders is computed by dividing the sum of
net loss, deemed preferred stock dividends and accretion on preferred stock
by the weighted average number of common shares and dilutive common
equivalent shares outstanding during each period presented. Common stock
equivalent shares consist of stock options that are computed using the
treasury stock method.
<TABLE>
<CAPTION>
3. INVENTORIES
Inventories consist of: December 31, 1996 September 30, 1996
----------------- ------------------
<S> <C> <C>
Raw materials $ 483,000 $ 422,000
Work in process 482,000 453,000
Finished goods 191,000 191,000
---------- ----------
$1,156,000 $1,066,000
========== ==========
</TABLE>
4. SERIES C PREFERRED SHARES
In December 1996, the Company issued 525 shares of no par value Series C
preferred stock (Series C preferred) and detachable warrants in a private
placement for $4,672,500 (net of issuance costs of $577,500).
Each share of Series C preferred is convertible into common stock at the
exchange rate in effect at the time of the conversion, as described in the
preferred stock agreements, and is subject to appropriate adjustment for
common stock splits, stock dividends, and other similar transactions.
Conversion of the Series C preferred is automatic upon the expiration of
three years from the original date of issuance. At the date of issuance, the
exchange rate was less than the prevailing market rate, resulting in a deemed
dividend of $932,000, of which $81,000 has been recognized on a pro rata
basis in the first quarter of the 1997 fiscal year. The Series C preferred
are junior to the Company's Series B preferred shares and contain a
liquidation preference equal to the original issue price plus 8% of the
original issue price per annum to the date of liquidation, Series C preferred
shares are not entitled to voting rights.
Shares of Series C preferred purchased in excess of certain quantities as
described in the preferred stock agreements, or purchased in addition to
previous purchases of Series B preferred shares are accompanied by detachable
warrants to purchase a number of shares of common stock of the Company equal
to between 20% and 50% of the original aggregate purchase price of the Series
C preferred shares divided by a fixed conversion rate of $3.25 per share,
exercisable 105 days after original issuance.
F-32
<PAGE>
5. STOCK-BASED COMPENSATION
In October 1996, the Company recognized compensation expense totaling
$530,0000 related to the transfer of 150,000 stock options from certain
officer/shareholders to an officer of the Company. The options are
exercisable at $.50 per share, expire ten years from the date of grant and
vest immediately. The fair value of the stock on the date of transfer was
$4.03 per share. The Company recognized compensation expense associated
with these options using the intrinsic value method.
F-33
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
AC Magnetics, Inc.:
We have audited the accompanying consolidated balance sheets of AC
Magnetics, Inc. and subsidiary as of December 31, 1995 and September 30, 1996
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years ended December 31, 1994 and 1995 and the nine-month
period ended September 30, 1996. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of AC
Magnetics, Inc. and subsidiary as of December 31, 1995 and September 30, 1996
and the results of their operations and their cash flows for the years ended
December 31, 1994 and 1995 and the nine-month period ended September 30, 1996 in
conformity with generally accepted accounting principles.
/S/ KPMG PEAT MARWICK LLP
Phoenix, Arizona
November 21, 1996
F-34
<PAGE>
AC MAGNETICS, INC.
dba M.C. DAVIS CO., INC.
Consolidated Balance Sheets
December 31, 1995 and September 30, 1996
<TABLE>
<CAPTION>
Assets December 31, 1995 September 30, 1996
------ ----------------- ------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 66,309 $111,821
Accounts receivable, net of
allowance of $0 at
December 31, 1995 and $2,938 at
September 30, 1996 125,799 155,922
Inventories 224,062 265,390
Prepaid expenses 7,127 10,591
-------- --------
Total current assets 423,297 543,724
Property, plant and equipment, net 311,792 297,821
-------- --------
$735,089 $841,545
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current portion of long-term debt $ 67,133 $105,000
Note payable to related party 80,000 80,000
Accounts payable 34,195 98,268
Accrued wages 20,336 9,432
Other accrued liabilities 7,032 335
-------- --------
Total current liabilities 208,696 293,035
Long-term debt, less current portion 47,000 56,964
Total liabilities 255,696 349,999
-------- --------
Subsequent event (note 9)
Stockholders' equity:
Common stock, no par value per
share. Authorized
1,000,000 shares; one vote per
share; 1,000 shares
issued and outstanding 200,000 200,000
Retained earnings 279,393 291,546
-------- --------
Total stockholders' equity 479,393 491,546
-------- --------
$735,089 $841,545
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-35
<PAGE>
AC MAGNETICS, INC.
dba M.C. DAVIS CO., INC.
Consolidated Statements of Operations
Years ended December 31, 1994 and 1995 and
nine-month period ended September 30, 1996
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1994 1995 1996
------------- ------------- --------------
<S> <C> <C> <C>
Revenue $1,513,844 $1,702,951 $1,338,401
Cost of goods sold 1,293,014 1,248,653 924,969
---------- ---------- ----------
Gross margin 220,830 454,298 413,432
Operating expenses:
Selling, general and administrative 226,146 244,848 286,659
---------- ---------- ----------
Total operating 226,146 244,848 286,659
expenses
Operating income (5,316) 209,450 126,773
(loss)
Other income (expense):
Interest income -- 609 1,176
Interest expense (28,717) (23,767) (9,880)
Other, net (11,233) (8,896) (363)
Total other expense (39,950) (32,054) (9,067)
Net income (loss) $ (45,266) $ 177,396 $ 117,706
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-36
<PAGE>
AC MAGNETICS, INC.
dba M.C. DAVIS CO., INC.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1994 and 1995 and
nine-month period ended September 30, 1996
<TABLE>
<CAPTION>
Common Stock
---------------------- Total
Retained Stockholders'
Shares Amount Earnings Equity
------------ -------- ---------- --------------
<S> <C> <C> <C> <C>
Balance at January 1, 1994 1,000 $200,000 $ 147,263 $ 347,263
Net Loss -- -- (45,266) (45,266)
----- -------- --------- ---------
Balance at December 31, 1994 1,000 200,000 101,997 301,997
Net Income -- -- 177,396 177,396
----- -------- --------- ---------
Balance at December 31, 1995 1,000 200,000 279,393 479,393
Net Income -- -- 117,706 117,706
Dividends paid ($106 per share) -- -- (105,553) (105,553)
----- -------- --------- ---------
Balance at September 30, 1996 1,000 $200,000 $ 291,546 $ 491,546
===== ======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE>
AC MAGNETICS, INC.
dba M.C. DAVIS CO., INC.
Consolidated Statements of Cash Flows
Years ended December 31, 1994 and 1995 and
nine-month period ended September 30, 1996
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1994 1994 1994
------------- ------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(45,266) 177,396 117,706
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation 48,647 51,221 41,588
(Gain) loss on sale of property,
plant and equipment 7,454 (1,945) (11,660)
Changes in operating assets and
liabilities:
Decrease (increase) in accounts
receivable 58,045 13,202 (30,123)
Decrease (increase) in inventories (304) 23,461 (41,328)
Decrease (increase) in prepaid
expenses and other assets (39,029) 66,624 (3,464)
Increase (decrease) in accounts
payable (25,849) (68,610) 64,073
Increase (decrease) in accrued
liabilities (3,378) 2,938 (17,601)
Net cash provided by operating
activities 320 264,287 119,191
Cash flows from investing activities:
Purchase of property, plant and
equipment (78,182) (30,860) (36,529)
Proceeds from sale of property,
plant and equipment 7,000 4,000 20,572
-------- --------- ---------
Net cash used in investing activities (71,182) (26,860) (15,957)
-------- --------- ---------
Cash flows from financing activities:
Repayment of long-term debt (1,417) (161,167) (67,133)
Repayment of related party notes
payable -- (10,000) --
Borrowing from financial institutions 67,000 -- 114,964
Payment of dividends -- -- (105,553)
-------- --------- ---------
Net cash provided by (used in)
financing activities 65,583 (171,167) (57,722)
-------- --------- ---------
Net increase (decrease) in cash and
cash equivalents (5,279) 66,260 45,512
Cash and cash equivalents, beginning
of period 5,328 49 66,309
-------- --------- ---------
Cash and cash equivalents, end of
period $ 49 $ 66,309 $ 111,821
======== ========= =========
Supplemental disclosure of cash flow
information:
Cash paid for: Interest $ 21,172 $ 27,958 $ 13,234
======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE>
AC MAGNETICS, INC.
dba M.C. DAVIS CO., INC.
Notes to Consolidated Financial Statements
1. ORGANIZATION
AC Magnetics, Inc. dba M.C. Davis Company (the Company) manufactures and
markets miniature and sub-miniature custom passive electronics for use by
original equipment manufacturers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of AC
Magnetics, Inc., dba M.C. Davis Company and its wholly owned subsidiary,
M.C. Davis International S.P. de C.B. All significant intercompany
balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
All highly liquid securities with original maturities of three months or
less at the date of purchase are considered to be cash equivalents.
Concentrations of Credit Risk
The Company sells products to customers, primarily electronic equipment
manufacturers, and extends credit based on an evaluation of the customer's
financial condition, generally without requiring collateral. Exposure to
losses on receivables is principally dependent on each customer's
financial condition. The Company monitors its exposure for credit losses
and maintains allowances for anticipated losses.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method)
or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreciated using
an accelerated method over the estimated useful lives of the assets.
Buildings are depreciated over thirty-one years; equipment, fixtures and
vehicles are depreciated over five to seven years.
F-39
<PAGE>
AC MAGNETICS, INC.
dba M.C. DAVIS CO., INC.
Notes to Consolidated Financial Statements
Revenue Recognition
The Company recognizes revenue from sales when a product is shipped.
Income Taxes
The stockholders have elected that the Company be taxed as a Subchapter "S"
Corporation (S Corporation) for federal and State of Arizona income tax
purposes. All tax attributes of the Company are passed through to the
stockholders and related income taxes are to be paid by the stockholders.
Therefore, no provision or liability for federal or State of Arizona corporate
income taxes is reflected in the accompanying financial statements.
Foreign Currency Translation
The functional currency for the Company's foreign operations is their local
currency. Assets and liabilities of foreign operations are denominated in U.S.
dollars, and revenue and expenses are translated into U.S. dollars using
average exchange rates for the year. Transaction gains and losses are included
in operations and were not significant for the years ended December 31, 1994
and 1995 and for the nine-month period ended September 30, 1996.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-40
<PAGE>
AC MAGNETICS, INC.
dba M.C. DAVIS CO., INC.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
3. INVENTORIES
Inventories are summarized as follows:
December 31, September 30,
1995 1996
------------ -------------
<S> <C> <C>
Raw materials $169,363 $186,273
Work in process 36,257 38,000
Finished goods 43,442 71,117
Less: reserve for obsolescence (25,000) (30,000)
-------- --------
$224,062 $265,390
======== ========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows:
<TABLE>
<CAPTION>
December 31 September 30
1995 1996
------------ -------------
<S> <C> <C>
Land $ 5,000 $ 5,000
Buildings 222,000 222,000
Machinery and equipment 374,899 370,984
Office furniture and fixtures 14,512 19,132
Vehicles 17,550 22,718
--------- ---------
Total 633,961 639,834
Less accumulated depreciation (322,169) (342,013)
--------- ---------
$ 311,792 $ 297,821
========= =========
</TABLE>
F-41
<PAGE>
AC MAGNETICS, INC.
dba M.C. DAVIS CO., INC.
Notes to Consolidated Financial Statements, Continued
5. LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
------------ -------------
<S> <C> <C>
Note payable, bank, interest at prime
plus 2%; due April 4, 1997;
collateralized by various assets;
repaid October 1996 $ -- $100,000
Note payable, bank, interest at 9.75%;
due in 36 monthly payments of
$481; collateralized by a vehicle;
repaid October 1996 -- 14,964
Note payable, bank, interest at prime
plus 2%; due August 14, 1996;
24 monthly payments of $9,615;
collateralized by real property
deed of trust 40,769 --
Note payable, no interest; due
June 1998; collateralized by
building 67,000 47,000
Other 6,364
-------- --------
114,133 161,964
Less current portion 67,133 105,000
-------- --------
Long-term debt, net of current portion $ 47,000 $ 56,964
======== ========
</TABLE>
The future maturities of long-term debt after September 30, 1996 are as
follows:
<TABLE>
<CAPTION>
Years Ending September 30:
<S> <C>
1997 $105,000
1998 56,964
--------
Total $161,964
========
</TABLE>
F-42
<PAGE>
6. RELATED PARTY TRANSACTIONS
On November 1, 1993, the Chairman of the Board of Directors of the Company
loaned $90,000 to the Company. The loan bears interest at 10% with interest
and principal payable upon demand. The loan is unsecured. At December 31,
1994 and 1995 and September 30, 1996, the loan principal balances were
$90,000, $80,000 and $80,000, respectively. Interest is paid upon demand
and unpaid accrued interest is included in other accrued liabilities. The
loan and interest was paid in October 1996.
7. MAJOR CUSTOMERS
One customer accounted for 33%, 25% and 23% of revenue for the fiscal
periods ended December 31, 1994, December 31, 1995 and September 30, 1996,
respectively. Another customer accounted for 18%, 11% and 18% of revenue
for the fiscal periods ended December 31, 1994, December 31, 1995 and
September 30, 1996, respectively. A third and fourth customer accounted for
14% and 13%, respectively, of revenue for the fiscal year ended December
31, 1995.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments," requires that the Company disclose
estimated fair values for its financial instruments. The following summary
presents a description of the methodologies and assumptions used to
determine such amounts.
Limitations
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument;
they are subjective in nature and involve uncertainties, matters of
judgment and, therefore, cannot be determined with precision. These
estimates do not reflect any premium or discount that could result from
offering for sale, at one time, the Company's entire holdings of a
particular instrument. Changes in assumptions could significantly affect
these estimates.
Since the fair value is estimated as of September 30, 1996, the amounts
that will actually be realized or paid at settlement or maturity of the
instruments could be significantly different.
Accounts Receivable, Accounts Payable and Accrued Liabilities
The carrying amount is assumed to be the fair value because of the short-
term maturity of these instruments.
F-43
<PAGE>
Long-Term Debt
The carrying value of the Company's long-term debt approximates the terms
in the marketplace at which they could be replaced. Therefore, the fair
value approximates the carrying value of these financial instruments.
9. SUBSEQUENT EVENT
Effective September 30, 1996, the Company was purchased by Intercell
Corporation in a stock for stock transaction. Each share of common stock of
the Company was exchanged for 277.78 shares of Intercell common stock. In
addition, the stockholders of the Company received $800,000 in cash from
Intercell.
F-44
<PAGE>
INTERCELL CORPORATION AND AC MAGNETICS, INC.
Unaudited Pro Forma Combined Statement of Operations
The following unaudited pro forma combined statement of operations
gives effect to the acquisition by Intercell Corporation ("Intercell" or the
"Company") of AC Magnetics, Inc. dba M.C. Davis Co., Inc. ("M.C. Davis") in a
transaction accounted for by the purchase method. The unaudited pro forma
combined statement of operations includes the consolidated statement of
operations of Intercell for the year ended September 30, 1996, and M.C. Davis
for the twelve months ended September 30, 1996. The twelve months ended
September 30, 1996 for M.C. Davis includes the period from January 1, 1996
through September 30, 1996, appearing elsewhere in this Form 8-K, and the three-
month period from October 1, 1995 through December 31, 1995. Pro forma
adjustments have been made to give effect to the September 30, 1996 acquisition
of M.C. Davis as if the acquisition had occurred on October 1, 1995.
The following unaudited pro forma combined statement of operations is
not necessarily indicative of the future results of operations of the Company or
the results of operations which would have resulted had the Company and M.C.
Davis been combined during the period presented. In addition, the pro forma
results are not intended to be a projection of future results. The unaudited
pro forma combined statement of operations should be read in conjunction with
the consolidated financial statements of the Company and subsidiaries and the
consolidated financial statements of M.C. Davis and subsidiary appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Intercell M.C. Davis
------------------- --------------------------------------
Year ended Period ended Period ended Pro forma Pro forma
September 30, 1996 September 30, 1996 December 31, 1995 adjustments/(1)/ combined
------------------- ------------------ ----------------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
Net Revenue $ 3,405,000 $1,338,000 $421,000 -- $ 5,164,000
Cost of sales 2,830,000 925,000 286,000 -- 4,041,000
----------- ---------- -------- --------- ------------
Gross profit 575,000 413,000 135,000 -- 1,123,000
Selling, general and
administrative expenses 5,241,000 287,000 81,000 307,000 5,916,000
----------- ---------- -------- --------- ------------
Operating profit (loss) (4,666,000) 126,000 54,000 (307,000) (4,793,000)
Interest expense, net 87,000 9,000 8,000 -- 104,000
----------- ---------- -------- --------- ------------
Net income (loss) $(4,753,000) $ 117,000 $ 46,000 $(307,000) $ (4,897,000)
=========== ========== ======== ========= ============
Net loss per share (0.41)
Shares used computing
per share information 12,057,565
============
</TABLE>
See Note to Unaudited Pro Forma Combined Statement of Operations.
F-45
<PAGE>
INTERCELL CORPORATION AND AC MAGNETICS, INC.
Note to Unaudited Pro Forma Combined Statement of Operations
(1) Pro Forma Adjustments:
The total purchase price of $1,800,000 has been allocated to the net
assets acquired based on their relative estimated 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 assumed (293,000)
Other liabilities assumed (57,000)
----------
Total purchase price $1,800,000
==========
Purchase price to be paid in cash $ 800,000
Fair market value of stock to be issued 1,000,000
$1,800,000
==========
</TABLE>
The pro forma adjustments applied to the historical statement of
operations to arrive at the pro forma combined statement of operations reflects
amortization expense of $262,000 related to goodwill and other intangibles
resulting from the acquisition of M.C. Davis over its estimated useful life.
The pro forma adjustments also reflect depreciation expenses of $45,000 related
to fixed assets acquired in the M.C. Davis acquisition over their estimated
useful lives.
F-46
<PAGE>
===============================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE SELLING SHAREHOLDERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY ANY OF THE SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE SUCH DATE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUMMARY......................................................................... i
RISK FACTORS............................................................................... 1
PLAN OF DISTRIBUTION....................................................................... 14
USE OF PROCEEDS............................................................................ 14
PRICE RANGE OF COMMON STOCK................................................................ 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...... 17
BUSINESS................................................................................... 29
MANAGEMENT................................................................................. 62
EXECUTIVE COMPENSATION..................................................................... 68
CERTAIN TRANSACTIONS....................................................................... 73
BENEFICIAL OWNERSHIP....................................................................... 75
SELLING SHAREHOLDERS....................................................................... 77
DESCRIPTION OF SECURITIES.................................................................. 79
SHARES ELIGIBLE FOR FUTURE SALE............................................................ 86
LEGAL MATTERS.............................................................................. 87
EXPERTS.................................................................................... 87
AVAILABLE INFORMATION...................................................................... 88
ADDITIONAL INFORMATION..................................................................... 88
GLOSSARY................................................................................... 89
INDEX TO FINANCIAL STATEMENTS.............................................................. F-1
</TABLE>
================================================================================
================================================================================
INTERCELL CORPORATION
Common Stock
Common Stock Purchase Warrants
-----------------
PROSPECTUS
-----------------
May __, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS. The following is a complete list of exhibits filed as
part of the Registration Statement. Exhibit numbers correspond to the
numbers in the Exhibit Table of Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
2.1/(1)/ Agreement and Plan of Reorganization, dated July 7, 1995, between
the Company and Modern Industries, Inc.
2.2/(4)/ Plan and Agreement of Merger dated September 3, 1996, by and
between Particle Interconnect, Inc., Particle Interconnect
Corporation and the Company.
2.3/(5)/ Agreement and Plan of Merger dated October 14, 1996, by and
between AC Magnetics, Inc., doing business as M.C. Davis Company,
Cellular Magnetics, Inc. and the Company.
3.1/(1)/ Articles of Incorporation of the Company, and all amendments
thereto, as amended.
3.2/(1)/ Bylaws of the Company.
4.1/(1)/ Form of Common Stock Certificate.
4.2 Certificate of Designation for Series B Preferred Stock is
included in the Company's Articles of Incorporation filed as
Exhibit 3.1 and incorporated herein by reference.
4.3/(2)/ Specimen of Warrant attached to Series B Preferred Stock.
4.4 Certificate of Designation for Series C Preferred Stock is
included in the Company's Articles of Incorporation filed as
Exhibit 3.1 and is incorporated herein by reference.
4.5/(1)/ Form of Warrant attached to Series C Preferred Stock.
4.6/(1)/ Specimen of Registration Rights Agreement for Series B Preferred
Stock.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
4.7/(1)/ Specimen of Registration Rights Agreement for Series C Preferred
Stock.
4.8/(1)/ Plan of Liquidating Dissolution of Energy Corporation dated July
8, 1996.
5.1/*/ Opinion of Kutak Rock as to the legality of the Common Stock
being registered.
10.1/(3)/ 1995 Compensatory Stock Option Plan.
10.2/(1)/ Assignment Agreement dated September 3, 1996, assigning certain
Patents and Patent Applications and trade secrets relating to the
PI Technology to the Company, as assignee, and Particle
Interconnect, Inc. as assignor.
10.3/(1)/ Assignment Agreement dated June 5, 1996, assigning the Patent
Application for the Antenna Technology to the Company, as
assignee, and El-Badawy Amien El-Sharawy, as assignor.
10.4/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996, between Gordon J. Sales and the Company.
10.5/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996, between Alan M. Smith and the Company.
10.6/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996 between Terry W. Neild and the Company.
10.7/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 22, 1996 between Steven D. Clark and PI Corp.
10.8/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996 between Lawrence DiFrancesco and PI Corp.
10.9/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 8, 1996 between Jerry W. Tooley and Cellular Magnetics.
10.10/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 8, 1996 between David Putnam and Cellular Magnetics.
11/**/ Statement regarding Computation of Per Share Earnings.
21/(1)/ Subsidiaries of the Company.
23.1/*/ Consent of KPMG Peat Marwick LLP.
23.2/*/ Consent of Mark Shelley, CPA.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
23.3/**/ Consent of Michael A. Glenn, Esq.
23.4/**/ Consent of Meschkow & Gresham, P.L.C.
23.5 Consent of Kutak Rock is included in Exhibit 5.1 and incorporated
herein be reference.
27/**/ Financial Data Schedule.
</TABLE>
_________________
/*/ Filed herewith.
/**/ Previously filed.
/(1)/ Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended September 30, 1996.
/(2)/ Incorporated by reference to the Company's Current Report on Form 8-K
dated July 10, 1996.
/(3)/ Incorporated by reference to the Company's Current Registration Statement
on Form S-8, Registration No. 333-604, effective January 24, 1996.
/(4)/ Incorporated by reference to the Company Current Report on Form 8-K dated
September 3, 1996.
/(5)/ Incorporated by reference to the Company Current Report on Form 8-K dated
October 14, 1996.
(b) FINANCIAL STATEMENT SCHEDULES. See "Index to Financial
Statements" on page F-1.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Pre-Effective Amendment No. 2 to the Form S-1 Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Vancouver, Province of British Columbia, Canada on
April 29, 1997.
INTERCELL CORPORATION
Dated: April 29, 1997
By /s/ Alan M. Smith
-----------------
Alan M. Smith, Secretary,
Treasurer, Chief Financial
Officer and Director
II-4
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this Pre-
Effective Amendment No. 2 to the Form S-1 Registration Statement has been
signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
By:/s/ ** President, Chief Executive Officer
------------------ and Director April 29, 1997
Gordon J. Sales (Principal Executive Officer)
By:/s/ Alan M. Smith Secretary, Treasurer, Chief
------------------ Financial Officer and Director April 29, 1997
Alan M. Smith (Principal Financial and
Accounting Officer)
By:/s/ ** Executive Vice President and April 29, 1997
------------------ Director
Terry W. Neild
By:/s/ ** Director April 29, 1997
------------------
Charles E. Bauer
By:/s/ ** Director April 29, 1997
------------------
Theodore A. Waibel
** By:/s/ Alan M. Smith
------------------
Alan M. Smith, as attorney-in-fact
pursuant to a power-of-attorney
previously filed with this
Registration Statement
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
2.1/(1)/ Agreement and Plan of Reorganization, dated July 7, 1995, between
the Company and Modern Industries, Inc.
2.2/(4)/ Plan and Agreement of Merger dated September 3, 1996, by and
between Particle Interconnect, Inc., Particle Interconnect
Corporation and the Company.
2.3/(5)/ Agreement and Plan of Merger dated October 14, 1996, by and
between AC Magnetics, Inc., doing business as M.C. Davis Company,
Cellular Magnetics, Inc. and the Company.
3.1/(1)/ Articles of Incorporation of the Company, and all amendments
thereto, as amended.
3.2/(1)/ Bylaws of the Company.
4.1/(1)/ Form of Common Stock Certificate.
4.2 Certificate of Designation for Series B Preferred Stock is
included in the Company's Articles of Incorporation filed as
Exhibit 3.1 and incorporated herein by reference.
4.3/(2)/ Specimen of Warrant attached to Series B Preferred Stock.
4.4 Certificate of Designation for Series C Preferred Stock is
included in the Company's Articles of Incorporation filed as
Exhibit 3.1 and is incorporated herein by reference.
4.5/(1)/ Form of Warrant attached to Series C Preferred Stock.
4.6/(1)/ Specimen of Registration Rights Agreement for Series B Preferred
Stock.
4.7/(1)/ Specimen of Registration Rights Agreement for Series C Preferred
Stock.
4.8/(1)/ Plan of Liquidating Dissolution of Energy Corporation dated July
8, 1996.
5.1/*/ Opinion of Kutak Rock as to the legality of the Common Stock
being registered.
10.1/(3)/ 1995 Compensatory Stock Option Plan.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
10.2/(1)/ Assignment Agreement dated September 3, 1996, assigning certain
Patents and Patent Applications and trade secrets relating to the
PI Technology to the Company, as assignee, and Particle
Interconnect, Inc. as assignor.
10.3/(1)/ Assignment Agreement dated June 5, 1996, assigning the Patent
Application for the Antenna Technology to the Company, as
assignee, and El-Badawy Amien El-Sharawy, as assignor.
10.4/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996, between Gordon J. Sales and the Company.
10.5/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996, between Alan M. Smith and the Company.
10.6/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996 between Terry W. Neild and the Company.
10.7/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 22, 1996 between Steven D. Clark and PI Corp.
10.8/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996 between Lawrence DiFrancesco and PI Corp.
10.9/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 8, 1996 between Jerry W. Tooley and Cellular Magnetics.
10.10/(1)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 8, 1996 between David Putnam and Cellular Magnetics.
11/**/ Statement regarding Computation of Per Share Earnings.
21/(1)/ Subsidiaries of the Company.
23.1/*/ Consent of KPMG Peat Marwick LLP.
23.2/*/ Consent of Mark Shelley, CPA.
23.3/**/ Consent of Michael A. Glenn, Esq.
23.4/**/ Consent of Meschkow & Gresham, P.L.C.
23.5 Consent of Kutak Rock is included in Exhibit 5.1 and incorporated
herein be reference.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
27/**/ Financial Data Schedule.
</TABLE>
_________________
/*/Filed herewith
/**/Previously filed
/(1)/ Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended September 30, 1996.
/(2)/ Incorporated by reference to the Company's Current Report on Form 8-K
dated July 10, 1996.
/(3)/ Incorporated by reference to the Company's Current Registration Statement
on Form S-8, Registration No. 333-604, effective January 24, 1996.
/(4)/ Incorporated by reference to the Company Current Report on Form 8-K dated
September 3, 1996.
/(5)/ Incorporated by reference to the Company Current Report on Form 8-K dated
October 14, 1996.
<PAGE>
EXHIBIT 5.1
KUTAK ROCK ATLANTA
A PARTNERSHIP KANSAS CITY
INCLUDING PROFESSIONAL CORPORATIONS LITTLE ROCK
SUITE 2900 NEWPORT BEACH
717 SEVENTEENTH STREET NEW YORK
DENVER, COLORADO 80202-3329 OKLAHOMA CITY
(303) 297-2400 OMAHA
FACSIMILE (303) 292-7799 PHOENIX
PITTSBURGH
http://www.kutakrock.com WASHINGTON
April 30, 1997
Board of Directors
Intercell Corporation
999 West Hastings Street, Suite 1750
Vancouver, B.C. Canada V6C 2W2
Re: Registration Statement on Form S-1
Gentlemen:
We have acted as counsel to Intercell Corporation (the "Company") in
connection with the filing of a registration statement on Form S-1, including a
related prospectus, under the Securities Act of 1933, as amended (the "Act").
The registration statement covers a proposed offering by certain shareholders of
the company of 6,336,987 shares of common stock, no par value (the "Common
Stock") and 1,092,064 Series B Warrants ("Series B Warrants") and 745,386 Series
C Warrants ("Series C Warrants" and, together with the Series B Warrants, the
"Warrants") to purchase Common Stock of Intercell Corporation (the "Company").
Of the securities covered by the registration statement, the Warrants, 1,837,450
shares of Common Stock issuable upon exercise of the Warrants, and 2,695,473
shares of Common Stock issuable upon conversion of Series B Preferred Stock, no
par value (the "Series B Preferred Stock") and Series C Preferred Stock, no par
value ("Series C Preferred Stock") are being offered by certain shareholders of
the Company; and 1,804,064 shares of Common Stock are being offered by the
shareholders (the "Selling Shareholders of Energy") of Energy Corporation, an
affiliate of the Company ("Energy"), which shares Energy will distribute to its
shareholders pursuant to a Plan of Liquidating Dissolution. Such registration
statement and prospectus on file with the Securities and Exchange Commission
(the "Commission") at the time such registration statement becomes effective
(including financial statements and schedules, exhibits and all other documents
filed as
<PAGE>
Intercell Corporation
April 30, 1997
Page 2
a part thereof or incorporated therein) are herein called, respectively, the
"Registration Statement" and the "Prospectus."
In connection with this opinion, we have made such investigations and
examined such records, including the Company's Articles of Incorporation, as
amended, Bylaws and corporate minutes as we deemed necessary to the performance
of our services and to give this opinion. We have also examined and are
familiar with the originals or copies, certified or otherwise identified to our
satisfaction, of such other documents, corporate records and other instruments
as we have deemed necessary for the preparation of this opinion. In express
this opinion, we have relied, as to any questions of fact upon which our opinion
is predicated, upon representations and certificates of the officers of the
Company.
In giving this opinion we assumed:
(a) the genuineness of all signatures and the authenticity and
completeness of all documents submitted to us as originals;
(b) the conformity to originals and the authenticity of all documents
supplied to us as certified, photocopied, conformed or facsimile copies and
the authenticity and completeness of the originals of any such documents;
and
(c) the proper, genuine and due execution and delivery of all
documents by all parties to them and that there has been no breach of the
terms thereof.
Based upon the foregoing and subject to the qualifications set forth above,
and assuming (i) that the Registration Statement has become effective under the
Act, (ii) that the full amount of consideration is received for the Common Stock
and Warrants, and (iii) that the shares of the Series B Preferred Stock and
Series C Preferred Stock are converted in accordance with the Company's Articles
of Incorporation, as amended, we are of the opinion that:
(w) upon issuance of the shares of the Common Stock underlying the
Warrants, such Common Stock will be legally issued, fully paid and
nonassessable;,
(x) upon issuance of the shares of Common Stock upon conversion of the
Series B Preferred Stock and Series C Preferred Stock, such Common Stock
will be legally issued, fully paid and nonassessable;
(y) the Warrants have been legally issued, and are fully paid and
nonassessable; and
<PAGE>
Intercell Corporation
April 30, 1997
Page 3
(z) the Common Stock to be distributed by Energy and sold by the
Selling Shareholders of Energy has been legally issued, and is fully paid
and nonassessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and the use of our name in the Registration Statement. In giving such
consent, we do not thereby admit that we come within the category of persons
whose consent is required under Section 7 of the Act or the Rules and
Regulations of the Commission promulgated pursuant thereto.
Very truly yours,
/s/ Kutak Rock
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Intercell Corporation:
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
San Jose, California
April 29, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF MARK SHELLEY, CPA
I hereby consent to the reference to my name under the heading of "Experts"
included in the Registration Statement of Intercell Corporation of which this
Exhibit is a part, and in any amendments to the Registration Statement.
Date: April 28, 1997 By:/s/ Mark Shelley
---------------------------
Mark Shelley, CPA
