UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-14306
INTERCELL CORPORATION
---------------------
(Exact name of registrant as specified in its charter)
Colorado 84-0928627
- ------------------------------- ---------------------------------------
(State of other jurisdiction of
incorporation or organization) (I.R.S. employer identification number)
370 Seventeenth Street, Suite 3580
Denver, Colorado 80202
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(Address and zip code of principal executive office)
Registrant's telephone number, including area code: (303) 592-1010
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class) Name of Each Exchange On Which Registered
-------------------------- -----------------------------------------
Common Stock, No Par Value NASDAQ:BB
Indicate by check mark whether the registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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As of the close of trading on July 13, 1999, there were 53,270,351 common shares
outstanding, 51,851,011 of which were held by non-affiliates. The aggregate
market value of the common shares held by non-affiliates, based on the average
closing bid and asked prices on July 13, 1999, was approximately $1,555,530.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Form 10-K for the year ended September 30, 1997.
(2) Form 10 QSB for the quarter ended December 31, 1997.
(3) Form 8-K, dated February 6, 1998.
(4) Form 8-K, dated February 26, 1998.
(5) Form 8-K, dated April 8, 1998.
(6) Form 10 QSB for quarter ended March 31, 1998.
(7) Form 10 QSB for quarter ended June 30, 1998.
Transitional Small Business Disclosure Yes X No ___
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PART I
ITEM 1. 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 ended December 31, 1994. During that time period, the Company
considered various new business and investment opportunities involving,
primarily, companies engaged in specialty lines of business in the wireless
communications and electronic technology industries.
ACQUISITION AND DISPOSITION OF CALIFORNIA TUBE LABORATORY, INC. ("CTL")
Acquisition of CTL
------------------
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").
Disposition of CTL
------------------
On February 6, 1998, the Company sold, transferred and delivered all of the
issued and outstanding shares of the capital stock of its wholly-owned
subsidiary, CTL to an unrelated third party, Jaymark, Inc., a California
Corporation, ("Jaymark"), pursuant to the terms and conditions set forth in a
Stock Purchase Agreement, between the Company, CTL and Jaymark and the
additional agreements contemplated therein. As consideration for the CTL stock,
rights and agreements conveyed by the Company to Jaymark, Jaymark delivered to
the Company $1,500,000 in cash; including $200,000 placed in Escrow (on
September 16, 1998 Jaymark Corporation received a distribution from the escrow
of approximately $184,000) and delivered to the Company an unsecured promissory
note in the principal sum of $500,000. The $500,000 unsecured promissory note
was payable by Jaymark only if the Company completed all required environmental
cleanup of the property which CTL formerly leased. The Company was obligated to
the owner of the property to pay 75% of any expenses related to the clean up.
After the sale, it was determined that the property required environmental
cleanup and the Company engaged a consultant to assist it in these endeavors.
The cleanup is estimated to cost between $350,000 to $450,000. It is expected
that the cleanup will take at least two more years to complete. The Company,
lacking the funds to pay its share of the anticipated expenses and facing the
likelihood that it would spend almost as much as the note receivable from
Jaymark, agreed with the owner of the property that if the owner of the property
would pay all expenses and assume the liability for the cleanup, then the
Company would assign all of its interest in the $500,000 note to her. On
January 12, 1999 the Company assigned the Note to the owner of the property
Upon completion of the environmental cleanup the owner of the property will
receive all of the proceeds from the note receivable. The Company recognized
a loss of approximately $832,000 from the disposition of CTL, and a loss
(income) from discontinued CTL operations of approximately $(215,000) and
$156,000 in 1998 and 1997, respectively. (Such event was reported on Form 8-K,
dated February 6,1998, incorporated by reference herein.)
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ACQUISITION OF ANTENNA TECHNOLOGY
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 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 Company subsequently sold the rights to the Antenna
technology to Intercell Technologies Corporation ("ITC") effective July 18,
1997.
ACQUISITION AND DISPOSITION OF-
PARTICLE INTERCONNECT CORPORATION ("PI CORP")
Acquisition PI Corp.
--------------------
On September 3, 1996 the Company completed the merger (the "PI Merger") of
Particle Interconnect, Inc., a California corporation ("Particle California"),
with and into the Company's wholly owned Colorado subsidiary, Particle
Interconnect Corporation ("PI Corp."). The PI Merger resulted in PI Corp
obtaining all of the properties, assets, liabilities and business operations of
Particle California, including, certain intellectual properties consisting of,
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 a
Proprietary Electroplating Process ("PE Process"). In exchange for the PI
Technology and the PE 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. In connection with a change in business strategy and
objectives which occurred in September 1997, PI Corp determined that certain
leasehold improvements, manufacturing equipment, raw materials and office
furniture and equipment were no longer necessary to achieve its objectives and,
accordingly, such leasehold improvements, manufacturing equipment, raw materials
and office furniture and equipment were either abandoned or sold between
September 19, 1997 and October 3, 1997 to non-affiliated parties for
approximately $50,000 which resulted in a loss on abandonment of assets of
approximately $801,000 in 1997.
Disposition of Particle Interconnect Technology
-----------------------------------------------
On February 26, 1998, the Company caused PI Corp, the owner of the PI
Technology and the PE Process to transfer all such properties to Nanopierce
Technologies, Inc. ("Nanopierce"), a Nevada corporation. At the time of the
acquisition the Company acquired a 74% equity interest in Nanopierce, based on
the then issued and outstanding common shares. In substance, the Company
acquired 7,250,000 common shares of Nanopierce Technologies, Inc. and 100 Series
A Convertible, Participating, Cumulative, Convertible Preferred Shares,
convertible at $0.3250 per share into an additional 7,250,000 shares. (This
event was reported on Form 8-K, dated February 26, 1998, which is incorporated
herein by reference.)
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ACQUISITION OF CELLULAR MAGNETICS, INC. AND SUBSEQUENT DISPOSITION OF IT AND
THE ANTENNA TECHNOLOGY TO INTERCELL TECHNOLOGIES CORPORATION
Acquisition of Cellular Magnetics
---------------------------------
Effective September 30, 1996, the Company, through its wholly owned
subsidiary Cellular Magnetics, Inc. ("Cellular Magnetics"), an Arizona
corporation, acquired AC Magnetics, Inc., d/b/a M.C. Davis Company ("M.C.
Davis"), an Arizona corporation, for an aggregate purchase price of $1,800,000,
comprised of a cash payment equal to $800,000 and issuance of 277,778 shares
of the Company's restricted common stock at a fair market 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.
Previously on March 13, 1996, Arizcan Properties, Ltd., a wholly owned
subsidiary of the Company ("Arizcan"), entered into an agreement with a group,
including certain minority shareholders of the Company, to acquire a 94-acre
development property located in Pinal County, Arizona for a total purchase price
of $1,424,362. This transaction was completed on June 18, 1996. As
consideration, the Company issued 400,000 shares of restricted common stock at a
fair value of $2.50 per share, and made cash payments of $57,000. In addition,
Arizcan assumed first and second mortgages on the property totaling $367,000.
The Company acquired this property for the purpose of constructing a
manufacturing facility for the products developed under the Antenna Technology.
Due to the Company's acquisition of M.C. Davis in 1996, this property was no
longer required for manufacturing purposes and it is currently being held for
sale. In December 1997, the Company granted a First Deed Trust on this property
to secure re-payment of the Debentures issued to the Augustine Fund as described
below.
Based on subsequent evaluations of the Antenna Technology by the Company
and the review of the Antenna technology by an independent investment banking
company, the Company determined that it was in the Company's best interest to
divest itself of the proposed design, development and production of the Antenna
Systems conducted by its wholly owned subsidiary Intercell Wireless Corporation
("Intercell Wireless"), as well as the manufacture of miniature and
non-miniature coils, transformers and other electronic assemblies conducted by
its wholly owned subsidiary Cellular Magnetics.
Disposition of Cellular Magnetics and Antenna Technology
--------------------------------------------------------
On July 18, 1997, the Company sold all of its right, title and interest in
the Antenna Technology and its wholly owned subsidiaries, Cellular Magnetics and
Intercell Wireless (the "Antenna Transaction") to ITC, a Colorado corporation,
of which Terry W. Neild and Lou L. Ross owned a controlling interest at the
time. At the time the transaction was proposed, Mr. Neild was a director and
Executive Vice President of the Company and Mr. Ross was a consultant to the
Company. As consideration for the sale, the Company received 6,269,226 shares
of ITC common stock, 1,100,000 shares of the Company's common stock, warrants to
acquire 500,000 shares of ITC at $2.00 per share, and 500,000 shares at $3.00
per share expiring July 18, 2000, a royalty agreement for sales of products
using the antenna technology, a secured promissory note in the amount of
$2,200,000, bearing interest at 10% due May 1, 2007, and an unsecured promissory
note for $375,000 bearing 10% interest due November 30, 1997. The total
consideration received was valued at approximately $2,300,000. As a result of
uncertainties with respect to realization of the consideration received, no gain
was recorded. (This transaction was reported on Form 8-K, dated July 18, 1997.)
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FAILURE OF ITC AND FORECLOSURE BY COMPANY ON ITS SECURED INTEREST
IN CELLULAR MAGNETICS, INC.
In November 1997, ITC advised the Company that it would be delinquent in
the payment of certain obligations owed to the Company and that it was unlikely
that it would be able to make any payments when due on the Secured Corporate
Promissory Note of ITC in the amount of $2,200,000, due 2007, and the unsecured
corporate promissory note in the amount of $375,000 due November 30, 1997.
Further, in January 1998, ITC advised the Company that it would default on all
obligations owed to the Company. The Company undertook immediate steps to
protect its secured interest including the repossession and foreclosure of the
primary asset of Cellular Magnetics. On April 9, 1998, the Company sold
Cellular Magnetics to its former owners for $700,000. (This transaction was
reported on Form 10QSB for the quarter ended June 30, 1998.) This amount was
used to reduce certain obligations owed to the Augustine Fund, LLC. (See
"December 1997 Augustine Debenture Financing") This has been accounted for as
discontinued operations and the results of operations have been excluded from
continuing operations in the consolidated financial statements for all
periods presented. The Company recognized a gain on the sale of subsidiaries of
approximately $544,000 and losses from discontinued operations for the years
ended September 30, 1998 and 1997 of $844,000 and $450,000, respectively.
In addition, the Company undertook extensive efforts to determine the value
of the Antenna Technology. Numerous contacts were made with knowledgeable
persons in the industry to determine the value, as well as to enter into a
development agreement, joint ventures or sale of the technology for the benefit
of the Company. Notwithstanding such efforts, and the willingness of the
Company to negotiate terms extremely favorable to outside financially capable
development partners to induce them to develop the antenna technology, all such
efforts proved futile. The technology was determined to essentially have very
little technical value, required significant lead-time to commercially develop
profitable applications and lacked market appeal for those in the industry.
Consequently, all further efforts to develop or realize any commercial value on
the technology for the Company were abandoned. The company recognized a loss of
$900,000 in 1998 due to impairment concerns associated with ITC's ability to
repay the Company.
ACQUISITION AND SUBSEQUENT CESSATION OF OPERATIONS OF SIGMA 7 CORPORATION
Acquisition of Sigma 7 Corporation
----------------------------------
On June 6, 1997, the Company acquired 4,500,000 shares of Sigma 7
Corporation ("Sigma") common stock in exchange for the payment of $550,000 for
the shares and for providing approximately $1,985,000 in additional financing,
consisting primarily of secured loans and standby letters of credit. The funds
were used for inventory purchases, standby letters of credit to a major memory
manufacturer, payment of obligations, the settlement of litigation, working
capital and the redemption of preferred stock from two individuals holding such
preferred stock. As a result of the transaction, the Company acquired
approximately 90% of the 5,000,000 issued and outstanding common shares of
Sigma. In addition, on September 30, 1997, the Company issued 1,085 shares of a
new class of its Series D Preferred Stock (the "Preferred Series"), to the
holders of certain preferred shares of BMI Acquisition Group, Inc. ("BMI"), to
eliminate such preferred shares of BMI, the wholly owned subsidiary of Sigma.
For the purposes of this exchange, the Series D Preferred Stock was valued at
$2,500 per share. The transaction was accounted for as a purchase. (The
acquisition of Sigma was reported on Form 8-K, dated May 28, 1997 and by a
subsequent Form 8-KA-1 Amendment, dated September 23, 1997.)
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Discontinued Operations of Sigma 7 Corporation
----------------------------------------------
On June 5, 1998 the Company discontinued all operations of Sigma. Due to
the cancellation of financing for reasons completely unrelated to the operations
of Sigma and the significant price erosion on a worldwide basis for memory
modules, Sigma did not have the capitalization to continue. On December 31,
1998, Sigma filed for voluntary liquidation under Chapter 7 of the U.S.
Bankruptcy Code. The Company recognized losses from discontinued operations of
approximately $2,947,000 and $7,096,000 for the years ended September 30, 1998
and 1997, respectively. (This discontinuation of operations of Sigma was first
reported on Form 10-QSB for the quarter ended March 31, 1998. Forms 10-QSB for
the Quarters ended March 31, 1998, dated October 31, 1998 and June 30, 1998,
dated November 20, 1998 are hereby incorporated by reference.)
DECEMBER 1997 $1,500,000 AUGUSTINE DEBENTURE FINANCING
In December 1997, the Company issued convertible debentures and attached
warrants to The Augustine Fund, LLC for $1,500,000 ("Debenture Offering").
This funding was used for general working capital for the Company, advances to
Sigma to continue the operations of Sigma and to otherwise reduce current
obligations of the Company. A subsequent restructuring of the Debenture
Offering required the Company to provide certain security for the financing,
including pledging 1,000,000 shares of its ownership of Nanopierce, delivering a
First Deed of Trust on certain land in Arizona owned by the Company and
assigning its First Perfected Security Lien on all the assets and proceeds
therefrom of Sigma to the Augustine Fund. (This financing was reported in Form
10-QSB for the quarter ended December 31, 1997 and filed September 17, 1998.)
During 1998, the Augustine Fund, LLC advanced additional loans of $421,373 to
the Company, bringing the total principal amount owed to the Augustine Fund to
approximately $1,921,373 plus accrued interest on the debentures and the
additional loans and expenses of approximately $31,691. When the Company
discontinued operations at Sigma it proceeded to liquidate the assets and pay
the proceeds to governmental taxing authorities, toward liquidation expenses and
to the Augustine Fund, LLC as the Secured Creditor.
As previously mentioned, the Company also paid to the Augustine Fund
$700,000 realized from the sale of Cellular Magnetics to its former owners.
MISCELLANEOUS TRANSACTIONS.
(a) Tooley/Putnam Transaction. In connection with the acquisition of
Cellular Magnetics in September 1996, the Company provided a
guarantee to the former shareholders of M.C. Davis, that the
277,778 shares of the Company's restricted common stock delivered
to them would have a value on October 8, 1998 of not less than $4.00
per share. Due to the severe decline in the price of the Company's
common stock at that date, the shares held by such shareholders did
not have that value. Certain shareholders made demand upon the
Company to honor its guarantee. After lengthy negotiations, and in
an effort to prevent litigation and excessive dilution to the
Company's outstanding common stock, on October 8, 1998, the
Company agreed to transfer 750,000 restricted common shares of its
Nanopierce Technologies, Inc. common stock to the Jerry W. and June
E. Tooley Trust and 100,000 shares to David Putnam. The Company
further agreed to cause its subsidiary, Nanopierce to register such
shares in a registration statement filed by Nanopierce. The
Registration Statement was declared effective January 11, 1999. In
addition, the Company agreed to issue to Jerry W. and June Tooley
Trust, 793,899 restricted shares of the Company's common stock and
500,000 common shares of its restricted common stock to David
Putnam. These transactions closed in November 1998.
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(b) William Scott Agreement. After the Company's acquisition of Sigma,
in June of 1997, Sigma conducted a private placement of its common
stock and related warrants through William Scott and Company, LLC
("William Scott and Company") a registered a broker-dealer. A
total of $1,700,000 was raised pursuant to such private placement.
As a result of the Company's decision to discontinue operations of
Sigma in June 1998, the Company as the controlling parent
corporation of Sigma was advised by William Scott and Company that
Sigma, the Company and William Scott and Company faced a
substantial likelihood of litigation in connection with the loss
incurred by the Sigma investors. After lengthy negotiations and in
an effort to avoid litigation, the Company agreed to place in
escrow 750,000 of its shares of Nanopierce, to be held for the
benefit of the Sigma investors. The Company entered into an
agreement, dated September 1, 1998 with William Scott and Company,
as Escrow Agent to sell up to 750,000 shares in an orderly fashion
in order to utilize the proceeds therefrom to pay the Sigma
investors. The 750,000 were included in a Registration Statement
filed by Nanopierce, which was declared effective January 11, 1999.
The Agreement provides that no sale of shares may be made is below
$2.00 per share and the volume of sales cannot exceed 20% of the
average weekly trading volume of the common stock of Nanopierce
prior to the date of the transaction. Any shares not required to
be sold to return such funds will be returned to the Company. The
Company is not required to provide any further shares of Nanopierce
or any other consideration in the event the sale of these shares
is insufficient to repay all the obligations.
Since the Company sold its former subsidiary CTL; sold the Antenna
Technology; discontinued the operations of Sigma; sold Cellular Magnetics, which
was pledged as collateral for the $2,200,000 note due to the Company from ITC;
and transferred the intellectual property relating to the PI Technology of PI
Corp. to Nanopierce, these events are of historical interest only and are no
longer representative of the Company's current or future business activities.
Consequently, persons interested in obtaining such historical information should
consult the prior filings of the Company; which have been incorporated herein by
reference.
As a result of these activities, the Company is engaged in only one line of
business through its subsidiary Nanopierce.
NANOPIERCE TECHNOLOGIES, INC. - PARTICLE INTERCONNECT TECHNOLOGY
Nanopierce is pursing a new line of business involving the development and
licensing of the PI Technology and the PE Process. The PI Technology utilizes
eleven patents and seven patent applications owned by Nanopierce to bond and
join metal surfaces to enhance electrical conductivity. Nanopierce's core
product is the application of the PI Technology in the formation of a wide and
varied range of highly efficient connectors. The PI Technology utilizes a
processed diamond particle treated with a conductive material (such as nickel)
which is affixed to a foundation in the final product as a socket, connector or
conductor. The PE Process broadens the application of the PI Technology by
making it possible to apply the diamond particles to many different bases,
whether flexible, rigid metallic or non-metallic.
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Nanopierce plans to market the PI Technology and products using the PI
Technology through two different but concurrent marketing efforts. The first
part of its marketing strategy involves the generation of revenues through
forming of joint ventures or strategic relationships with, or by licensing the
PI Technology to, established leading manufacturers. The second part of the
strategy involves the sales of products utilizing or incorporating the PI
Technology through joint ventures with small volume users of the technology.
Eventually, if warranted, Nanopierce may undertake direct marketing of products
utilizing the PI Technology. The development of applications utilizing the PI
Technology presents a long-range opportunity for Nanopierce to maximize the
commercialization of its technology.
ELECTRONICS INDUSTRY TRENDS
Over the past decade, consumers and original equipment manufacturers
("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 small, lighter and higher performing components
while reducing their production costs in order to remain competitive. New
developments in printed circuit boards (including flexible circuitry),
integrated circuits, integrated circuit 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 become
inadequate. The conventional methods of interconnecting electronic components
in a rematable (socket-able) fashion are limited by the miniaturization that the
electronic components can tolerate. The interconnect industry that serves the
personal computer, automotive, communication and select consumer industries is
aggressively pursuing technologies that will allow it to move to the next level
of performance and size.
INTEGRATED CIRCUITS
Nanopierce believes that market trends in integrated circuit packaging will
lead to increased demand for emerging high density bases. Integrated circuits
historically have been packaged by bonding the silicon die to an interconnect
base and connecting the silicon die to a lead frame using very fine wires. As
integrated circuits become increasingly powerful, they require a significantly
greater number of input/output ("I/O") electrical connections to attach the
silicon die, thus producing more heat and placing substantially greater
challenges on the integrated circuit interconnect methods. For instance, a
typical integrated circuit six years ago required up to approximately 80 I/O
connections to the silicon die, whereas today typical integrated circuits
require up to approximately 300 I/O connections. Market demands are currently
forcing certain ICs toward 1,000 I/O connections. Further IC packaging demands
arise when multiple silicon dies are placed into one powerful package, known as
a "Multi Chip Module". The Company believes, based on interviews and contact
with industry leaders and experts, that the PI Technology has the potential to
solve this miniaturization problem.
CURRENT TECHNOLOGY
"Wiping action technology" is still the prevailing means for
interconnecting electronic components. Wiping action interconnect technology
(for example, sockets, plugs and needle pins) forms a temporary electrical
interconnect and thus readily allows the remating of various components and
assemblies (for example, when replacing or upgrading a memory module in a
personal computer). One problem with using such technology is that it is
subject to the persistent formation of oxidation, a non-conductive material
(for example, rust), along the contacting surfaces, which increases contact
resistance and poor or intermittent connections. In time, the oxidation builds
up, hastening connection failure and thus equipment failure.
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Wiping action technology is only available in the form of certain
connectors and sockets. These devices usually provide a contact surface
formed from a limited range of special metals, alloys and other expensive
materials suitable for maintaining a sliding connection. The devices themselves
often have interfering and dissimilar electrical properties due to their size
and orientation on a circuit board, among others, and this tends to degrade
signal propagation (the time it takes a signal to traverse a given distance)
through the interconnect by introducing resistive components in the signal path.
This becomes especially critical at very high frequency operation levels.
Wiping action technology provides 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. Consequently, potential circuit operating
speeds are degraded due to propagation delays. 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 those in which a laptop computer is used. Wiper connections are subject
to shock, intense vibration, temperature extremes, and/or high levels of
contamination, which tend to induce disruption in the continuity of connection
made at a wiper interconnect. Wiper interconnects are mechanical devices, and
as such they corrode and are subject to wear. Thus, they have a limited useful
and reliable life.
LIMITATIONS OF CURRENT TECHNOLOGY
Because interconnect technology has not kept pace with
micro-miniaturization in the electronics industry, component packages and the
connectors used to form an electrical and/or mechanical interface between
various components and assemblies in electronic products have become one of the
most expensive portions of such products. Component packages, connectors,
sockets, plugs and the like are also the bulkiest and heaviest portion of these
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. These considerations have
an adverse impact on the potential gains in performance being realized by new
and emerging technologies.
Nanopierce 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 integrated
circuit packages increase in I/O count and complexity while maintaining a
constant or decreased 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 increase becomes difficult to achieve.
Designers of rematable connections, however, find this issue especially
troubling. As I/O counts rise, the amount of force or pressure-to-interface
also increases. A conventional contact technology like gold-to-gold wiping
connection uses approximately 40 grams of force per contact. When integrated
circuit 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 Ball Grid Array
socket must effectively accommodate 40 kg of force, equivalent to half the
weight of an average man.
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Requiring a printed circuit board, barely 3.5 cm on each side, to support
half the weight of a man is unreasonable, even with today's excellent materials
technology. Such pressure, concentrated in a small space, which is almost
always re-heated, is very likely to fail because of printed circuit 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 the challenging task of creating a socket that can: (i)
accommodate very high I/O count devices; (ii) receive high speed devices without
degrading their performance (i.e., a short versus long circuit path); and (iii)
be produced for a relatively low cost.
NANOPIERCE'S SOLUTION
Nanopierce believes that its PI Technology has the potential to provide a
cost effective solution to solving this industry-wide problem. As discussed
below, Nanopierce 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 integrated circuit socket
with the underlying printed circuit board base. Nanopierce believes this
reduction in force may enable manufacturers to connect complex integrated
circuits to products through the next several generations of electronics without
the high cost of associated mechanical solutions.
Additionally, the connection pathway provided using the PI Technology is
exceptionally short and has very low resistance. These features will allow the
connection of very high speed integrated circuits more reliably than
conventional techniques and without degrading their performance as conventional
techniques sometimes do. Moreover, the Company believes that the PI Technology
can be applied using its PE Process at a low cost.
THE PI TECHNOLOGY
The PI Technology begins with metallized, treated diamond particles, which
have been closely screened to a specified size. The particles are tightly
classified in sizes ranging from 5 microns to 125 microns, depending upon the
end-product application. These electrically conductive diamond particles are
attached onto contact sites using standard electroplating processes. The
embedded particles create a surface with many points that provide numerous
parallel electrical paths by penetrating through an oxide without requiring the
wiping action of conventional contacts. The Company believes that its
non-wiping action, oxide penetrating PI Technology is capable of penetrating
surface contamination and oils to create an effective and reliable electrical
contact.
The diamond particles concentrate the otherwise "wiping" insertion force
required by a conventional contact into a very small area or point. This gives
the diamond particle the force per square inch required to pierce oxides and
other contaminants on most surfaces without requiring large amounts of force on
the connector contact. Reliable, hermetic 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
an I/O pad on a silicon die) and provide low contact resistance. Moreover, the
diamond particles do insignificant damage to the mating surface. This provides
very long remate life with very little degradation of the connection. Because
there is no wiping action, contact coatings stay substantially intact.
Through the PE Process, these particles can be applied to many different
bases flexible, rigid, metallic and non-metallic. This wide range of bases,
coupled with the low contact force, gives the PI Technology the capability to
make reliable connectors out of materials that could collapse it subjected to
the normally required contact forces.
9
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SALES AND MARKETING STRATEGY
Nanopierce intends to adopt and implement a two-part approach to the
commercial exploitation of its PI Technology. The first part of its strategy
involves the generation of royalty revenues through forming strategic
relationships with, or licensing the PI Technology to, established leaders in
the industries in which Nanopierce plans to compete. Nanopierce believes that
the licensing of its technology to major industry partners will provide for
faster implementation and adoption of the PI Technology and will help establish
"brand" recognition for the PI Technology.
In each industry in which Nanopierce decides to compete, Nanopierce will
attempt to select market leaders that exhibit several key characteristics such
as: (i) significant market share and strong distribution channels; (ii)
manufacturing competencies that compliment those of Nanopierce; (iii) a
corporate culture that allows them to quickly respond to new technologies; and
(iv) sufficient capital and sales strength.
The second part of Nanopierce's strategy involves the sale of products
utilizing or incorporating the PI Technology ("PI Products") by developing joint
ventures with small volume users of the technology. These sales are anticipated
to generate the earliest revenues for Nanopierce. In connection with the sale
of the PI Products, Nanopierce plans to assist smaller-volume users and
licensees act as agents, independent contractors or otherwise.
The PI Technology has applications in several different industries where
electrical connections and interconnections are made. Initially, Nanopierce has
selected the electronic interconnect industry as the primary industry in which
to license the PI Technology and the PE Process. The PI Technology has been in
use in the connector industry for several years, mainly in test and burn-in
socket applications by licensees of the PI Technology. There is a current
demand in the connector industry for reliable Ball Grid Array and Land Grid
Array production sockets as well as other forms of Z-axis interconnect, such as
direct chip attachment and Multi-Chip Modules. Nanopierce believes the PI
Technology answers these demands and offers immediate advantages for these
products.
Nanopierce believes that approximately 60% of the potential market for
Z-axis interconnects exist outside the United States. Nanopierce believes that
entering into a joint venture relationship with a leading connector manufacturer
or a leading electronic technology OEM is the only practicable method of
bringing the PI Technology to market, particularly the international market,
given its current capital position. Nanopierce contemplates that a licensee or
joint venture partner will provide Nanopierce access to the licensee's or
partner's existing distribution channels and will assume a majority of the
marketing and engineering costs for the relevant Z-axis package. Nanopierce
will attempt to establish long-term strategic alliances with many of these
industry leaders to continue developing and manufacturing new products
incorporating the PI Technology. Nanopierce also intends to expand applications
of PI Technology into the communications, computer, consumer electronics,
commercial and transportation industries.
Eventually, if warranted, Nanopierce may undertake direct marketing of PI
Products. The development of applications utilizing the PI Technology presents
a long-range opportunity for Nanopierce to maximize the commercialization of its
technology.
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RESEARCH AND DEVELOPMENT
To date, Nanopierce has not incurred any research and development expense
and does not intend to incur any material research and development costs during
the fiscal year ending June 30, 1999. Nanopierce hopes to avoid incurring
substantial research and development cash requirements by entering into joint
ventures for the development of future PI Products.
COMPETITION
Competition in the electronic connector market is fierce. The principal
competitive factors are product quality, performance, price and service. While
Nanopierce is unaware of any competitors using diamond as an interconnect
material, Nanopierce and its licensees face competition from well-established
firms with other interconnect technologies such as Shinetsu, Ferro Corporation,
Deguyssa Corporation, Rockwell International and Lucent Technologies. However,
most of these competitors apply their technologies to very narrow markets or
applications and most have had only limited success in mass commercialization of
their technologies.
Nanopierce will face competition from the development of existing and
future competing technologies. There currently exists approximately 28
different technologies that can be used to create similar interconnect
solutions, including dendrite crystals, gold dot technology, anisotropic
technology (technologies using materials that exhibit unequal responses to
external stimuli), elastomerics (rubber-like synthetic materials) and Z-axis
conductive adhesives. These technologies currently are produced by materials
and chemical suppliers, flexible and rigid printed circuit board 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 Nanopierce. Nanopierce believes that each
existing technology currently has unacceptable limitations with regard to
electrical/mechanical performance, manufacturability or cost as compared to the
PI Technology. However, there are no assurances that Nanopierce or the PI
Technology can successfully compete with current or future technologies.
INTELLECTUAL PROPERTY
Nanopierce will rely on a combination of patents, patent applications,
trademarks, copyrights and trade secrets to establish and protect its
proprietary rights in the PI Technology and the PE Process. Nanopierce
currently owns eleven U.S. patents (which expire from February 14, 2006 to
October 15, 2013) and seven patent applications relating to the PI Technology.
Prior to Nanopierce's acquisition of the PI Technology, the inventor of the
PI Technology or companies controlled by him granted the following exclusive and
nonexclusive licenses to pursue the patents and patent applications relating to
the PI Technology: (i) an exclusive license to Exatron Automatic Test Equipment
Inc. ("Exatron") for use in the field of sockets in the automated handling and
testing of integrated circuits; (ii) an exclusive license to Micro Module
Systems, Inc. for use in the field of certain Multi-Chip Module thin film bases,
except attached or associated products including integrated circuits, socket,
lids, heat sinks, housings and printed circuit boards; (iii) a non-exclusive
license to Exatron in the filed of electrically conductive components; (iv) a
non-exclusive license to Johnson-Matthey Semiconductor Packagings, Inc. for use
in the field of laminate-based base products; (v) a non-exclusive license to
Multiflex, Inc. for use in the filed of the laminate-based bases and metal
bases; and (vi) a non-exclusive license to Myers Consulting, Inc. for use in the
field of laminate-based bases, metal bases, and wafer or semi-conductor
products. These licenses have indefinite terms and, provided certain conditions
are met, can be terminated by either party by written notice. Nanopierce
retains the right to exclude all other companies from using its patented
technology without a license. Consequently, Nanopierce may license such other
companies as it chooses, provided the licensees are consistent with the
exclusive licenses previously granted and other licensing restrictions that may
appear in the prior licenses.
11
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All but two of the foregoing license agreements have been idle since their
acquisition by Nanopierce and therefore these agreements have not produced any
royalty fees for Nanopierce. Royalties under the one active agreement are being
held in an escrow account, and maintenance payments on one license are being
held in a reserve account, outside of Nanopierce's control, until certain legal
issues are resolved, which may affect royalty payments payable on all the
licenses.
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 Nanopierce's PI Technology.
While Nanopierce intends to vigorously protect its intellectual property rights,
there can be no assurance that nay patents held by Nanopierce will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will provide competitive advantages to Nanopierce. Litigation may be necessary
to enforce Nanopierce'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 Nanopierce's business and results of
operations regardless of the final outcome of the litigation. Despite
Nanopierce's efforts to maintain and safeguard its proprietary rights, there can
be no assurances that Nanopierce will be successful in doing so or that
Nanopierce's competitors will not independently develop or patent technologies
that are substantially equivalent or superior to Nanopierce's technologies.
The semiconductor and interconnect industries are characterized by
uncertain and conflicting intellectual property claims. Nanopierce has in the
past and may in the future become aware of the intellectual property rights of
others that it may be infringing, although it does not believe that it is
infringing any third party proprietary rights at this time. To the extent that
it deems necessary, Nanopierce may license the right to use certain technology
patented by others in certain products that it manufactures. There can be no
assurance the Nanopierce 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 Nanopierce. 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
Nanopierce's business. In any event, patent litigation is expensive, and
Nanopierce's operating results could be materially adversely affected by any
such litigation, regardless of its outcome.
Nanopierce intends to protect it trade secrets and proprietary technology,
in part, through confidentiality and non-competition agreements. There can be
no assurance that these agreements will not be breached, that Nanopierce will
have adequate remedies for any breach, or that Nanopierce's trade secrets, such
as the PE 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 Nanopierce's proprietary rights to the same extent as do the laws
of the United States.
12
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GOVERNMENT REGULATION
The various business operations of the Company, throughout fiscal year 1998
are subject to numerous federal, state and local laws and regulations, including
those relating to the use and disposal of hazardous substances. Specifically,
the discontinued operations of the Company's subsidiaries CTL, PI Corp. and
Sigma 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.
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, 1998. The Company
has become aware of certain ground water and soil contamination at the Santa
Cruz facility formerly occupied by CTL. The company has engaged a consultant to
determine the extent of the contamination and the cost to remediate. As
previously discussed, the Company has made arrangements with the owner of the
property to assume the liability and responsibility for the environmental
cleanup of the property.
EMPLOYEES
As of September 30, 1998, the Company and its subsidiaries had 3 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.
ITEM 2. PROPERTIES
PRINCIPAL EXECUTIVE OFFICES
The principal executive office of the Company is located at 370 Seventeenth
Street, Suite 3580, Denver, Colorado 80202. The monthly lease payments are
$2,026.
NANOPIERCE TECHNOLOGIES, INC.
Nanopierce currently maintains its executive and administrative office in
space provided by the Company, its majority shareholder. Nanopierce owns no
real property. Nanopierce also has a small laboratory facility located at 770
Maroonglenn Court, Colorado Springs, Colorado 80906, which is the residence of
Dr. Herbert J. Neuhaus, Executive Vice President and a Director of Nanopierce
Technologies, Inc. Nanopierce uses such facility without any rental expense.
13
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Louis DiFrancesco, the inventor of Nanopierce's technology filed a lawsuit
on March 10, 1998 with the Superior Court of California, County of Santa Clara,
Case No. CV772523, purportedly against the Company and other parties. Mr.
DiFrancesco made numerous allegations purportedly against the Company, its
employees, directors and officers and other affiliated companies and licensees.
Pursuant to a stipulation among the parties, none of the defendants were
required to file responsive pleadings until Mr. DiFranscesco's Complaint was
amended or refiled. On December 24, 1998, DiFrancesco finally filed a First
Amended and Supplemental Complaint against the Company, Nanopierce and Paul H.
Metzinger. The Company filed responsive motions to dismiss or stay the claims
arguing among other grounds that Mr. DiFrancesco was merely "forum shopping" and
that the action was an attempt to retry the same matters which are the subject
of litigation pending in the District Court in and for the City and County of
Denver, Colorado and therefore should be dismissed or stayed by the court. The
Court entered an order staying any further prosecution of the action in
California pending the outcome of the Colorado litigation. The Company believes
that the California action is without merit and intends to vigorously defend
itself with respect to the matter alleged, if the lawsuit is further prosecuted.
The Company filed suit against Mr. Louis DiFrancesco on October 5, 1998,
with the District Court for the City and County of Denver, Colorado, to enjoin
him from certain specified actions against the Company and the licensees and to
confirm Nanopierce's ownership of its intellectual property rights. On October
19, 1998, the District Court for the City and County of Denver, Colorado issued
a temporary restraining order prohibiting Mr. DiFrancesco from, among other
things, claiming any ownership of Nanopierce's patents and claiming any rights
to royalty payments under Nanopierce's licenses. On November 5, 1998, the
District Court for the City and County of Denver, Colorado issued a preliminary
injunction prohibiting Mr. DiFrancesco from: (i) contacting any actual or
potential customer, licensee or investor of the Company or its related entities
using the name "Particle Interconnect Research & Development" or any other name
confusingly similar to the Company's trade name and trademark "Particle
Interconnect"; (ii) contacting any actual or potential customer, licensee or
investor of the Company or its related entities under the auspices that he
represents, works for, or its associated with the Company; and (iii) making any
statement to any actual or potential customer, licensee or investor of the
Company or its related entities which directly or by implication asserts that
(a) he owns all or any portion of the patents or patent applications which he
previously has assigned to the Company or (b) his consulting agreement with
Particle Interconnect Corporation has not expired.
On November 24, 1998, Mr. DiFrancesco filed an answer in the District Court
for the City and County of Denver, Colorado, generally denying the allegations
contained in the Company's complaint and asserting certain affirmative defenses.
He also filed a Third Party Complaint against the Company, Nanopierce and Paul
H. Metzinger. The answer also asserts counterclaims against the Company,
Intercell and Paul Metzinger, individually, for breach of contract, fraud in the
inducement and legal malpractice and seeks rescission of the merger pursuant to
which Particle Interconnect Corporation and seeks rescission of the merger
pursuant to which Particle Interconnect Corporation (a subsidiary of Intercell)
acquired the Particle Interconnect Technology and certain declaratory relief.
The Company, Nanopierce and Mr. Metzinger filed answers denying all of the
allegations contained in the DiFrancesco Complaint. In addition, they filed
motions requiring DiFrancesco's counterclaims to be more definite and certain in
their alleged claims against the Company, Nanopierce and Metzinger. The
District Court ruled in favor of the motions and required DiFrancesco to submit
amended counterclaims. DiFrancesco failed to timely file the amended
Counterclaims by February 19, 1999 when due. DiFrancesco did eventually file
amended counterclaims on April 5, 1999. The Company, Nanopierce and Metzinger
filed motions to strike or dismiss the amended counterclaims for lacking the
specificity required and because they were untimely filed. The Court denied
this motion. The Company, Intercell and Metzinger filed Answers generally
denying the allegations of the Third Party Complaint and the Counterclaims and,
14
<PAGE>
in turn, asserting affirmative defenses and Counterclaims against DiFrancesco.
DiFrancesco has yet to answer the Counterclaims. The Court has scheduled the
matter for trial setting.
On July 1, 1998, the Company was served a summons and complaint naming it,
its subsidiary, Sigma and others affiliated with the Company, by Classic
Trading, Inc., a California corporation, with the Superior Court of the State
California, Count of Orange, CV 796047 (the " Classic Trading Lawsuit").
Classic Trading, Inc. alleges breach of contact and believes that it is owed
$135,000. The Company has filed an answer denying the allegations. The
litigation has not been further prosecuted since then.
On August 6, 1998, the Company was served a summons and complaint naming
it, June and Jerry Tooley and its former subsidiary, Cellular Magnetics and
other individuals, by Ignition Coil Specialties, LLC. in the Superior Court of
Arizona, Maricopa County, case number CV 98-13820. The Company has contacted
counsel for Ignition Coil Specialties, LLC. to discuss the dismissal of the
Company from the case, since at the time of the allegations, Cellular Magnetics
was no longer a subsidiary of the Company. On November 2, 1998, the Company was
dismissed from the litigation.
Other than the above mentioned lawsuits, to the knowledge of the management
of the Company there are no material legal proceedings pending or threatened
(other than routine litigation incidental to the business) to which the Company
(or any officer, director, affiliate of beneficial owner of more than 5% of the
Company's voting securities) is party or to which property of the Company is
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no meetings of security holders during the period covered by
this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
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.
<TABLE>
<CAPTION>
1997 FISCAL YEAR ASK BID
<S> <C> <C>
December 31, 1996. $ 4.00 $ 3.875
March 31, 1997. . 2.4375 2.0625
June 30, 1997. . . .50 .375
September 30, 1997 .270 .220
1998 FISCAL YEAR
December 31, 1997. $ .125 $ .125
March 31, 1998. . .078 .063
June 30, 1998. . . .055 .040
September 30, 1998 .060 .040
</TABLE>
15
<PAGE>
As of September 30, 1998, there were approximately 496 holders of record of
the Company's Common Stock. Based upon information provided to the Company by
persons holding securities for the benefit of others, it is estimated that the
Company has in excess of 4,500 beneficial owners of its Common Stock as of that
date.
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.
RECENT SALES OF UNREGISTERED SECURITIES
The Company made the following unregistered sales of its securities from October
1, 1995 through September 30, 1998.
Date of
Sale Title of Securities Amount Consideration
(1) 11/9/95 Options to Purchase Common 700,000 Agreement to serve
Stock, at an exercise price as officers,
of $.50 per share Directors & Counsel
to the Company
(2) 11/9/95 Options to Purchase Common 265,000 Agreement to Continue
Stock, at an exercise price Employment at CTL and
of $.50 per share provide consulting
services to the
Company
(3) 12/22/95 Options to Purchase Common 716,180 Agreement to Provide
Stock, at an exercise price Consulting Services
of $.50 per share to the Company
(4) 2/1/96 Options to Purchase 800,000 Agreement to provide
Common Stock, at an exercise consulting services
price of $.75 per share for to the Company and
650,000 shares and $1.25 per for past services of
share for 150,000 shares consultant
(5) 3/3/96 Common Stock 96,606 Legal Services -
value $39,751
(6) 3/28/96 Common Stock 126,761 Contribution to ESOP
valued at $1.25 per
share for $158,451.15
(7) 3/29/96 Options to Purchase Common 550,000 Agreement to provide
Stock, at an exercise price consulting services
of $.50 per share for to the Company
300,000 shares and $.75 per
share for 250,000 shares
(8) 5/9/96 Common Stock 400,000 Conveyance of Land,
Recorded at $1,000,00
(9) 6/3/96 Options to Purchase Common 380,000 As consideration for
Stock, at an exercise price services as employees
of $.50 per share CTL
(10) 6/12/96 Options to Purchase Common 400,000 As consideration for
Stock, at an exercise price consulting services
of $.50 per share and an incentive to
remain officer of
the Company
(11) 5/17/96 Common Stock 14,780 Legal Services
value $16,554
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<PAGE>
(12) 7/10/96 Series B Preferred Stock 1,000 $10,000,000
and attached Warrants to
acquire shares of Common
Stock 761,905
(13) 7/10/96 Warrants to acquire Common 330,159 Services as Placement
Stock, at a price of $3.9375 Agent
per share
(14) 9/3/96 Common Stock 1,400,000 Exchange of shares of
Particle Interconnect
in a Triangular
Merger, which was
accounted for as an
immaterial pool of
interests.
(15) 9/3/96 Options to Purchase Common 800,000 Agreement to serve
Stock, at an exercise price as Officers, Counsel
of $4.00 per share or Consultant to
the Company
(16) 9/3/96 Options to Purchase Common 230,000 Agreement to serve
Stock, at an exercise price as officers or
of $4.00 per share employees of the
Company.
(17) 10/8/96 Common Stock 277,778 Exchange of shares of
A.C. Magnetics, Inc.
Triangular Merger,
with total share
value of $1,000,000.
(18) 12/16/96 Series C Preferred Stock 525 $ 5,250,000
and attached Warrants to 530,771
acquire Common Stock
(19) 12/16/96 Warrants to acquire Common 214,615 Services as Placement
Stock agent
(20) 7/3/97- Common Stock 14,411,846 Conversion of 358
7/14/97 Shares of Series C
and 782 shares of
Series B
Preferred Stock
(21) 9/11/97 Series D Preferred Stock 1,080 Preferred Shares of
B Preferred Stock
(22) 11/2/97 Common Stock 240,000 Interest on Loan
Repayment
(23) 11/3/97 Common Stock 160,000 Interest on Loan
Repayment
(24) 12/3/97 Common Stock 266,000 Public Relation
Services
(25) 12/3/97 Series A-1 Convertible 1 $750,000.00
Debenture
(26) 12/3/97 Attached Warrants to Acquire 600,000
Common Stock
(27) 12/3/97 Warrant to Acquire Common 200,000 Consulting Services
Stock
(28) 12/11/97 Common Stock 100,000 Loan to Sigma
(29) 12/11/97 Common Stock 75,000 Loan to Sigma
(30) 12/11/97 Common Stock 150,000 Loan to Sigma
(31) 12/31/97 Series A-2 Convertible 1 $750,000.00
Debenture
(32) 12/30/97 Common Stock 1,000,000 Augustine Financing
(33) 1/16/98 Common Stock 250,000 Bahl Settlement Share
(34) 2/3/98 Common Stock 678,761 Series B Conversion
(35) 2/3/98 Common Stock 1,270,810 Series C Conversion
(36) 2/6/98 Option to Purchase Common 100,000 Service as a Director
Stock, at an exercise price
of $0.10 per share
17
<PAGE>
(37) 2/9/98 Option to Purchase Common 150,000 Service as an Officer
Stock, at an exercise price
of $0.10 per share
(38) 3/3/98 Common Stock 660,100 Series C Conversion
(39) 3/23/98 Common Stock 2,273,888 Series C Conversion
(40) 6/1/98 Options to Purchase Common 150,000 Service of Employee
Stock, at an exercise price
of $$0.05 per share
(41) 5/8/98 Common Stock 250,000 Settlement
(42) 8/12/98 Common Stock 25,000 Interest on Loan
Repayment
__________________
1 During the period commencing September, 1996 through September 30, 1998,
certain holders of the Series B Preferred Stock, pursuant to the Certificate
of Designation , converted a total of 1,000 shares of Series B Preferred
Stock into 6,229,912 shares of Common Stock, which were issued without
registration pursuant to the exemption provided by Regulation S. At this
time all Series B Preferred Shares have been converted by the shareholders.
UNDERWRITERS. Other than Swartz Investments, LLC ("Swartz"), no
underwriter or selling or placement agent was involved in any of the
transactions described above. Swartz was engaged as selling agent in connection
with the sale of the Series B Preferred Stock and Series C Preferred Stock and
was paid compensation equivalent to 11% of the aggregate funds raised in such
placements. In addition, it received warrants to purchase shares of Common
Stock equal to 10% of the aggregate securities sold, assuming that the holders
of the Series B Preferred Stock and Series C Preferred Stock and related
warrants, converted their Series B and Series C Preferred Stock or exercised
their warrants at the Fixed Conversion Price.
EXEMPTION FROM REGISTRATION CLAIMED. All of the sales by the Company of
its unregistered securities (except for those described in Item 14, which were
made pursuant to Regulation S and those described in Item 20, which were made
pursuant to Rule 506 of Regulation D adopted under the Securities Act of 1933,
as amended) were made by Registrant in reliance upon Section 4(2) of the
Securities Act of 1933, as amended. All of the individuals who purchased the
unregistered securities were all known to the Company and its management,
through pre-existing business relationships, as long standing business
associates, friends, employees, relatives or members of the immediate family of
management. All purchasers were provided access to all material information,
which they requested, and all information necessary to verify such information
and were afforded access to management of the Company in connection with their
purchases. All purchasers of the unregistered securities acquired such
securities for investment and not with a view toward distribution acknowledging
such intent to the Company. All certificates or agreements representing such
securities that were issued contained restrictive legends, prohibiting further
transfer of the certificates or agreements representing such securities, without
such securities either being first registered or otherwise exempt from
registration in any further resale or disposition.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
The statements contained in this Form 10-KSB, 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 "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-General" and "-Trends
and Uncertainties."
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<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Certain Statements contained in this Form 10-KSB contain "forward-looking
statements" within the meaning of the private Securities Litigation Reform Act
of 1995. These are statements that do not relate strictly to historical or
current facts. Such forward-looking statements involve known and unknown risks
and uncertainties. The Company's actual results could differ materially from
the results discussed in the forward-looking statements. Factors that could
cause or contribute to such differences are discussed below. These risks and
uncertainties include, without limitation:
- the rate of market development and acceptance of the interconnect
technology, the industry within which its subsidiary, Nanopierce is
concentrating its business activities.
- The unpredictability of the Company's sales cycle;
- The limited revenues and significant operating losses generated to
date;
- The possibility of significant ongoing capital requirements;
- The loss of any significant customer;
- The ability of the Company to compete successfully with the other
providers of interconnect technologies. See Description of Business
Competition";
- The ability of the Company to secure additional financing as and when
necessary;
- The ability of the Company to retain the services of its key
management, and to attract new members of the management team;
- The ability of the Company to effect and retain appropriate patent,
copyright and trademark protection of its products;
For the purposes of the safe harbor protection for forward-looking
statements provided by the Private Securities Litigation Reform Act of 1995,
readers are urged to review the list of certain important factors set forth in
"Cautionary Statement for Purposes of the 'Safe Harbor' Provisions of the
Private Securities Litigation Reform Act of 1995".
The Company undertakes no obligation to release publicly any revisions to
the forward-looking statements or to reflect events or circumstances after the
date of this Report.
GENERAL
The following discussion should be read in conjunction with the Company's
audited consolidated financial statements and notes thereto for the two-year
period ended September 30, 1998. This report contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 31 E of the Securities Exchange Act of 1934, as amended.
Actual results could differ materially from those anticipated in forward-looking
statements.
19
<PAGE>
On February 6, 1998 the Company entered into a stock purchase agreement to
sell, transfer, and deliver all assets, liabilities, rights and obligations of
the Company related to its wholly-owned subsidiary California Tube Laboratory,
Inc. to Jaymark Corporation, in exchange for $1,500,000 in cash (which included
$200,000 of cash in escrow), and $500,000 in notes receivable. The company
recognized a loss from discontinued CTL operations of approximately $215,000 in
1998 income of $156,000 in 1997, based on the disposition. The Company also
recognized a loss on the disposition of CTL subsidiary of approximately
$832,000.
On February 26, 1998 Intercell Corporation transferred all of the
intellectual property (which had a historical carrying value of zero) of its
wholly owned subsidiary Particle Interconnect Corporation to Nanopierce
Technologies, Inc. for 7,250,000 shares of common stock of Nanopierce and 100
Series A 8% Voting, Convertible, Cumulative, Participating, Preferred shares of
Nanopierce. The 100 preferred shares are convertible into 7,250,000 shares of
common stock. Intercell Corporation owns approximately 60%of the outstanding
common stock of Nanopierce Technologies, Inc. and approximately 74% of the
common stock on a diluted basis, considering the voting and conversion rights
of the Series A preferred stock.
Intercell Corporation discontinued all operations of its majority owned
subsidiary Sigma 7 Corporation, a manufacturer of memory modules located in San
Diego, CA, on June 5, 1998. The market for the Sigma 7 Corporation's main
product line of memory modules experienced significant price erosion on a
worldwide basis. The Company did not have the capitalization to continue and
intends to seek protection under U.S. bankruptcy laws. The Company recognized a
loss from discontinued Sigma operations of approximately $2,947,000 in 1998
($7,096,000 in 1997).
On April 9, 1998, the Company entered into a stock purchase agreement to
sell 100 shares or 100% of the common stock of Cellular Magnetics, Inc., a
wholly owned subsidiary of Intercell Technologies Corporation to individuals for
$700,000 in cash. The Company held a secured interest in Cellular Magnetics,
Inc. due to the default on promissory notes totaling $2,575,000 from Intercell
Technologies Corporation to the Company. As soon as Intercell Technologies
Corporation announced that it would default on the notes payable to the Company,
the Company undertook steps to protect is secured interest, including the
repossession and foreclosure of the primary asset, Cellular Magnetics,
Inc. The Company used the proceeds of the sale of Cellular Magnetics, Inc. to
pay down $700,000 of the outstanding balance due on the convertible debentures.
The Company recognized a gain on the sale of a subsidiary of approximately
$544,000 and recognized a loss on discontinued operations of Cellular Magnetics
and Intercell Wireless $844,000 in 1998 ($450,000 in 1997).
The Company is currently engaged in the design, development and licensing
of products using its patented particle interconnect technology, through its
majority owned subsidiary Nanopierce Technologies, Inc.
In December 1997, the Company issued convertible debentures and attached
warrants for $1,500,000 of this total, $750,000 is the Series A-1 debenture and
$750,000 is the Series A-2 debenture. The convertible debentures were, at the
time of issue, unsecured obligations of the Company.
The $750,000 Series A-1 debenture requires quarterly interest payments at
9% per annum, beginning March 1, 1998 with the balance due on December 1, 1999.
The debenture may be converted at the option of the holder after 60 days from
the date of issuance at a conversion price per share equal to the lessor of 85%
of the market price as defined, or $0.75. In connection with the convertible
debt, three warrants were issued, each entitling the holder to purchase 200,000
shares of common stock for $0.17, $0.50, and $1.00 respectively. The warrants
expire three years from the date of issuance. The portion of the proceeds
allocable to the warrants was $15,000.
20
<PAGE>
The $750,000 Series A-2 debenture pays interest quarterly at 9% per annum,
beginning June 1, 1998, with a maturity date of April 1, 1999. The debt may be
converted at the option of the holder any time at the end of six business days
following the maturity date, at a conversion price for each share of common
stock at 85% of the market price as defined in the financing agreement. The
Company has recognized $225,000 in interest expense relating to the beneficial
conversion terms of the debentures.
At the request of the Company, purchase and payment for the Series A-2
debenture was accelerated to December 31, 1998. As consideration for the
acceleration, the Company provided security to the debenture holders for the
entire $1,500,000. The Company assigned a first priority secured lien on the
assets of Sigma 7 Corporation, a first deed of trust on property held for resale
in Arizona and a $2,200,000 note from Intercell Technologies Corporation to the
Company. In connection with the placement of the convertible debentures, the
Company paid a $180,000 commission to a third-party investment banker and issued
the investment banker warrants to purchase 200,000 shares of common stock at an
exercise price of $0.15 per share. The warrants were valued at $10,000. The
$180,000 and $10,000 have been included in general and administrative expense.
The Company also issued 2,491,000 shares (of which 1,000,000 shares were issued
to the debenture holders) of common stock for services rendered and in lieu of
interest expense during the fiscal year ended September 30, 1998 recognizing
$187,000 in general and administrative expense.
Recently Issued Accounting Standards
In 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, Reporting Comprehensive Income. This standard establishes requirements
for disclosures of comprehensive income which includes certain items previously
not included in the statements of operations, including minimum pension
liability adjustments and foreign currency translation adjustments, among
others. This statement is effective for fiscal years beginning after
December 15, 1997. Reclassification of earlier financial statements for
comparative purposes is required. Currently, the Company does not have any
items that would be classified as a component of comprehensive income.
Therefore, management believes that implementation of SFAS No. 130 will not
materially effect the Company's financial statements.
In 1997, the FASB also issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Financial Information, and in February 1998, the FASB
issued SFAS No. 132, Employers' Disclosure about Pensions and Other Post
Retirement Benefits. Both of these statements require disclosure only and
therefore will not impact the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement is effective for fiscal
years beginning after June 15, 1999. Currently, the Company does not have any
derivative financial instruments and does not participate in hedging activities.
Therefore, management believes that SFAS No. 133 will not have an impact on its
financial statements.
RESULTS OF OPERATIONS
REVENUES:
The Company had no revenue from continuing operations for the year ended
September 30 1997 or 1998.
21
<PAGE>
RESEARCH AND DEVELOPMENT
Research and development expenses were $0 in the fiscal year of 1998
compared to $94,000 in the fiscal year of 1997. This is primarily attributable
to the suspension of the research and development activities associated with the
Company's Particle Interconnect technology. Research and development costs of
discontinued operations were reduced from $1,224,000 in 1997 to $0 in 1998. The
Company has changed its focus from creating a manufacturing process and facility
to licensing its technology to companies that already have a manufacturing
process in place.
GENERAL AND ADMINISTRATIVE
General and administrative expenses from continuing operations decreased by
28% or $1,578,000 to $3,946,000 in the fiscal year of 1998 compared to
$5,524,000 in the 1997 fiscal year. This decrease was primarily attributable
to the reduction of administrative and labor costs associated with its Particle
Interconnect technology and a reduction in professional fees at the Company.
Selling, general and administrative expenses of discontinued operations
decreased by 27%, from $3,553,000 in 1997 to 2,599,000 in 1998.
OTHER INCOME/EXPENSE
The Company earned $129,000 in interest and other income in 1998
compared to $220,000 in 1997, while incurring interest and other expenses
of $1,278,000 and $59,000 respectively.
INCOME TAXES
As of September 30, 1998 the Company had a net operating loss carryover for
federal and State 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.
LIQUIDITY AND CAPITAL RESOURCES
The independent auditors' report on Intercell Corporation's consolidated
financial statements as of September 30, 1998, and for each of the years in the
two-year period ended September 30, 1998 includes a "going concern" paragraph
that describes substantial doubt about the Company's ability to continue as a
going concern.
The Company has taken several steps regarding future operations including
the following. In February and April 1998, the Company sold its interest in
California Tube Laboratory, Inc. and A.C. Magnetics, Inc. to raise additional
capital for ongoing operations. The Company received $1,500,000 in cash,
including $200,000 in escrow, and a $500,000 note receivable for the sale of
California Tube Laboratory, Inc. The Company received $700,000 in cash for the
sale of A.C. Magnetics, Inc. which, it used to pay down its debt on the
convertible debenture.
The Company has also discontinued operations at Sigma 7 Corporation and
Particle Interconnect Corporation during 1998, and in December 1998 Sigma filed
for protection under the U.S. bankruptcy laws. The intellectual property rights
to the Particle Interconnect technology have been transferred to Nanopierce
Technologies, Inc. resulting in an approximate 74% ownership of that company
on a diluted basis. Intercell Corporation has reduced its costs to a bare
minimum and is currently seeking its own financing.
During the year ended September 30, 1998 the Company's cash and cash
equivalents from continuing operations increased by $240,000. This increase
was due to net cash used in continuing operations of $1,625,000, net cash used
in discontinued operations of $1,690,000, and net cash provided by financing and
investing activities of $3,555,000.
22
<PAGE>
During the fiscal year ended September 30, 1998 the Company had no capital
expenditures.
The Company believes that if financing of Nanopierce Technologies, Inc. can
be completed, adequate funding is then available to support operations for the
next twelve months. The Company also believes that sales of its Nanopierce
Technologies, Inc. products and technology licenses will provide sufficient
funds to meet the Company's capital requirements for the next two years. This
assumption is based on the signing of a Technology Cooperation Agreement with
Meinen, Ziegel & Co., a Technology Development Agreement with ORGA
Kartensystemes, GmbH, an agreement to form a join venture with Cirexx
Corporation and an Application and Development Agreement with Multitape, GmbH &
Co during the Spring of 1999.
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 further issuance of debt or equity in the Company.
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000 date
are known risks. The Company is addressing this risk to the availability and
integrity of financial systems and the reliability of the operational systems.
Management believes the total cost of compliance and its effect on the Company's
future results of operations will be insignificant.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements required to be filed are indexed on
page F-2 and are incorporated herein.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 8, 1998, the Company dismissed KPMG Peat Marwick and engaged
Gelfond Hochstadt Pangburn & Co., as its new principal independent accountants,
effective April 8, 1998. There is no adverse opinion or disclaimer of opinion,
or qualification or modification as to uncertainty, audit scope, or accounting
principles for either of the Company's past two years except, that the former
principal independent accountant's report on the consolidated financial
statements of Intercell Corporation and subsidiaries as of and for the years
ended September 30, 1997 and 1996, did include a going concern uncertainty
paragraph. There were no disagreements within the meaning of Item 304(a)(1)(iv)
of Regulation S-K during the Company's two most recent fiscal years.
23
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, directors and significant employees of the Company
are as follows:
<TABLE>
<CAPTION>
NAME AND AGE POSITION
<S> <C>
Paul H. Metzinger (60) Director, President and Chief Executive
Officer
Charles E. Bauer, Ph.D. (47) Director
Alan M. Smith (47) . . . Former Director, Secretary, Treasurer
and Chief Financial Officer
Thomas W. Vander Stel (39) . Former Chief Financial Officer and Secretary
Gilbert Olachea (43) Former President & Chief Executive Officer
of Nanopierce Technologies, Inc.
Kevin B. Waide (47 ) Director
NAME AND AGE PERIOD
<S> <C>
Paul H. Metzinger (60) May 28, 1997
Charles E. Bauer, Ph.D. (47) Director November 22, 1996 to present.
Alan M. Smith (47) July 1995 to February 1998.
Thomas W. Vander Stel (39) February 1998 to December 31, 1998.
Gilbert Olachea (43) May 6, 1998 to December 1, 1998.
Kevin B. Waide (47 ) January 1998 to present.
</TABLE>
The directors hold office until the next annual meeting of shareholders and
until their successors have been duly elected and qualified. The officers are
elected by the Board of Directors at its annual meeting immediately following
the shareholders, annual meeting and hold office until they resign or are
removed from office. There are no family relationships that exist between any
director, executive officer, significant employee or person nominated or chosen
by the Company to become a director or executive officer. The Company has not
established an executive committee of the Board of Directors or any committee
that would serve similar functions such as an audit, incentive compensation or
nominating committee.
BIOGRAPHICAL INFORMATION ON OFFICERS AND DIRECTORS AND SIGNIFICANT EMPLOYEES
PAUL H. METZINGER. Mr. Metzinger has been President, Chief Executive
Officer and a director of the Company since May 28, 1997. In addition, he
serves as the President and Chief Executive Officer and a Director of
Nanopierce. Prior to becoming a director and officer of the Company, Mr.
Metzinger served as Intercell's General Counsel and practiced securities law in
Denver, Colorado for over 30 years.
24
<PAGE>
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.
Dr. Bauer received his B.S. in Materials Science and Engineering from Stanford
University in 1972, his M.S. in Metallurgical Engineering from Ohio State
University in 1975, his Ph.D. in Materials Science and Engineering from Oregon
Graduate Center, Beaverton, Oregon in 1980 and his M.B.A. from the University of
Portland in 1988.
THOMAS W. VANDER STEL. Mr. Vander Stel served as the Chief Financial
Officer, Secretary and Treasurer of the Company from February 1998 to November
31, 1998 and Chief Financial Officer and Vice President of Operations of
Nanopierce Technologies, Inc. from February 1998 to December 31, 1998. From
October 1992 until January 1998, Mr. Vander Stel served as Chief Financial
Officer and Vice President for TVX., Inc., a high technology manufacturer of
security systems.
KEVIN B. WAIDE. Mr. Waide has been a director of the Company, since
January 28, 1998. Mr. Waide's experience includes five years of sales and
marketing for a large, independent, Denver-based accounting firm and fourteen
years in various positions in the securities industry. Mr. Waide has an
extensive background in business analysis, mergers, acquisitions and
franchising. Mr. Waide is a graduate of Central College in Pella, Iowa.
SIGNIFICANT EMPLOYEES
The Company considers the following individuals as significant employees of
the Company.
HERBERT J. NEUHAUS, PH.D. Dr. Neuhaus has been the Executive Vice
President of Marketing and Technology and a Director of Nanopierce since January
1, 1999. Dr. Neuhaus previously served as the Managing Director of Particle
Interconnect Corporation from August 18, 1997 to November 1, 1997. From August
1989 to August 1997, he was associated with Electronic Material Venture Group in
the new Business Development Department of Amoco Chemical Company, Naperville,
Illinois. While associated with Amoco chemical Company he held among other
positions: Business Development Manger/Team Leader; Project manager --High
Density Interconnect; Product Manager MCM Products and as a research scientist.
During his tenure with Amoco, his professional efforts and responsibilities
were directed towards the identification, analysis and development of new market
opportunities for Amoco's electronic materials products, the development of new
applications for such products, including multichip module products, polyamide
coatings and processes for multichip module applications.
Dr. Neuhaus received his Ph.D. degree in Physics form the Massachusetts
Institute of Technology, Cambridge, Massachusetts in 1989 and his BS in Physics
from Clemson University, Clemson, South Carolina in 1980.
Dr. Neuhaus is associated with numerous professional associations and has
served with such associations in the capacity of project leader of the technical
chair for conferences.
GILBERT OLACHEA. Mr. Olachea served as the President and Chief Executive
Officer and a Director of Nanopierce Technologies, Inc. from May 6, 1998, until
his resignation on December 1, 1998. Previously he was President, Chief
Executive Officer and a director of Sigma 7 Corporation, from December 11, 1997
to December 1, 1998. From July 1993 to September 1, 1997, Mr. Olachea served as
Vice President Corporate Marketing and Communications of Amkor Electronics.
25
<PAGE>
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 101% 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 10%.
Beneficial owners were complied with, with the exception of Dr. Charles E.
Bauer's Form 5 for the last fiscal year. Dr. Charles E. Bauer failed to report
two transactions on a timely basis. Dr. Charles E. Bauer's failure to timely
file a report was a failure known by the Company.
ITEM 10. EXECUTIVE COMPENSATION
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 $100,000 for the fiscal
year ended September 30, 1998 and 1997 (the "Named Executive Officers"):
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------
OTHER ANNUAL
NAME & PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
($) ($) ($)
<S> <C> <C> <C> <C>
Paul H. Metzinger, 1998 $143,501 $-0- $-0-
Director, President & CEO(1) 1997 $ 70,000 $-0- $-0-
Alan M. Smith, 1998 $ 8,333 $-0- $-0-
Former Secretary, Treasurer & CFO(2) 1997 $146,667 $-0- $-0-
LONG TERM COMPENSATION
--------------------------------------------------
AWARDS PAYOUTS
--------------------------------------------------
RESTRICTED SECURITIES LTIP ALL OTHER
STOCK UNDERLYING PAYOUTS COMPENSATION
AWARDS ($) OPTIONS ($) ($)
NAME & PRINCIPAL POSITION (#)
<S> <C> <C> <C> <C>
Paul H. Metzinger, -0- -0- $ -0- $-0-
Director, President & CEO(1) _____ 2,350,000 $ -0- $-0-
Alan M. Smith, -0- -0- $500,000 $-0-
Former Secretary, Treasurer & CFO(2) _____ 1,050,000 $ -0- $-0-
<FN>
1 Paul Metzinger was elected President and Chief Executive officer on May 28, 1997. He is compensated pursuant to a written
Employment Agreement, dated June 1, 1998 at an annual salary of $210,000.00. For the period October 1, 1997 to September 30,
1998, Mr. Metzinger was paid $143,500.69 (gross). The wife of Mr. Metzinger is the holder of presently exercisable options
to acquire 650,000 shares at $0.50 per share and 1,700,000 shares at $0.3750 per share issued September 30, 1997 and expiring
September 30, 2007. Mr. Metzinger should be deemed the beneficial owner of such shares.
2 Mr. Smith resigned all positions on February 6, 1998. Mr. Smith was paid $400,000 to compromise his Employment Agreement
and $129,000 to pay off a lease liability Mr. Smith incurred on behalf of the Company. Mr. Smith is the holder of presently
exercisable options to acquire 150,000 shares at $0.50 per share and 850,000 at $0.3750 per share, issued September 30, 1997
and expiring September 30, 2007. Mr. Smith canceled an option to acquire 1,000,000 shares at $0.3750 per share when he
resigned on February 6, 1998. Mr. Smith owns an additional, presently exercisable option to acquire 150,000 shares at $0.50
per share, issued with a new term commencing September 30, 1997, expiring September 30, 2007, which he received from three
other individuals on October 21, 1996. This 150,000 option has not been included in this table as the option was not granted
by the Company.
</TABLE>
26
<PAGE>
The foregoing compensation table does not include certain fringe benefits
made available on a nondiscriminatory basis to all Company employees such as
group health insurance, dental insurance, long-term disability insurance,
vacation and sick leave. In addition, the Company makes available certain
non--monetary benefits to its executive officers with a view to acquiring and
retaining qualified personnel and facilitating job performance. The Company
considers such benefits to be ordinary and incidental business costs and
expenses. The aggregate value of such benefits in the case of each executive
officer listed in the above table, which cannot be precisely ascertained but
which is less than 10% of the cash compensation paid to each such executive
officer, is not included in such table.
OPTION/SAR GRANTS TABLE
The following table provides information relating to the grant of stock
options to the Company's executive officers during the fiscal year ended
September 30, 1998.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
--------------------------------------------------------------
% OF TOTAL
OPTIONS/SARS OPTIONS/ SARS
NAME GRANTED GRANTED EXERCISE OR
- ---- IN FISCAL TO EMPLOYEES BASE PRICE EXPIRATION
YEAR (#) IN FISCAL YEAR ($/SH) DATE
------------ -------------- ----------- ----------
Thomas
Vander Stel 150,000 50% $0.10 2/9/08
OPTION/SAR GRANTS IN LAST FISCAL YEAR
NAME POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR OPTION TERM
-------------------------------------
5% ($) 10% ($)
-------- ---------
Thomas
Vander Stel $9,433 $23,906
1 Potential realizable value is based on an assumption that the stock price of
the Common Stock appreciates at the annual rate shown (compounded annually) from
the date of grant until the end of the 10 year option term. The numbers are
calculated based on the requirements promulgated by the Securities and Exchange
Commission and do not reflect the Company's estimate of future stock price
growth, which may or may not occur.
2 Computed based on the average closing bid and asked prices on the date of
grant February 9, 1998.
3 All options granted were immediately exercisable on the date of grant,
February 9, 1998.
4 Based on a total of 300,000 options granted to employees in the fiscal year
ended September 30, 1998.
5 Mr. Vander Stel resigned as an Officer of the Company, effective
November 1998.
27
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION/SAR VALUES
The following table provides information relating to the exercise of stock
options during the fiscal year ended September 30, 1998 by the Company's
executive officers and the 1998 fiscal year-end value of unexercised options.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR,
AND FISCAL YEAR-END OPTION/SAR VALUES
NAME -----------------------------------------------------
SHARES ACQUIRED ON EXERCISE (#) VALUE REALIZED ($)
------------------------------- ------------------
<S> <C> <C>
Paul H. Metzinger 0 0
Alan M. Smith2,3 0 0
Charles E. Bauer 0 0
Thomas W. Vander Stel4 0 0
Kevin B. Waide 0 0
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR,
AND FISCAL YEAR-END OPTION/SAR VALUES
NAME ---------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SAR
FISCAL YEAR 1 ($) (1)
--------------------------- ---------------------
<S> <C> <C>
Paul H. Metzinger 2,350,000/0 1,175,000/0
Alan M. Smith2,3 1,050,000/0 525,000/0
Charles E. Bauer 100,000/0 50,000/0
Thomas W. Vander Stel4 150,000/0 75,000/0
Kevin B. Waide 150,000/0 75,000/0
_______________
1 The average of the closing bid and asked price of the Common Stock on September 30, 1998 ($0.50) was
used to calculate the option value.
2 Mr. Smith resigned as a Director and officer of the Company effective February 9, 1998.
3 Does not include 150,000 unexercised presently exercisable options held by Alan Smith, which he
received from three individuals and not the Company.
4 Mr. Vander Stel resigned as an officer of the Company, effective December 1998.
</TABLE>
DIRECTOR COMPENSATION
Non-employee directors of the Company have in the past and will in the
future receive $1,500 for their attendance at each regular or special meeting of
the Board of Directors. In addition, the Board of Directors intends to grant
non-employee directors options to purchase shares of Common Stock on a
case-by-case basis in the future. The basis for determining the number of
options to award future non-employee directors of the Company will be based on a
variety of factors including the following: experience of the director in the
industries the Company currently competes; previous management experience; the
size of the entity the director is currently or was formerly associated with;
and the overall value the current Board of Directors believes that non-employee
director will provide to the Company.
28
<PAGE>
EMPLOYMENT AGREEMENTS
On June 1, 1998, the Company entered into a certain employment agreement
(the "Employment Agreement") with Paul H. Metzinger to serve as President and
Chief Executive Officer of the Company ( an "Employee"). The Employment
Agreement is for a period of four years beginning June 1, 1998. Any extension
or renewal of the Employment Agreement 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 such Employment Agreement,
Mr. Metzinger will receive an annual salary of $210,000 (each referred to as an
"Annual Salary") for the year. If an Employment Agreement is subsequently
extended by the Board, the Employee's Annual Salary will increase by the amount,
if any, in which the Consumer Price Index increased during the previous year.
The 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 Employment Agreement at any
time with or without cause. In the event the Company terminates an Employment
Agreement for cause or the Employee terminates his Employee Agreement without
cause, all of such Employee's rights to compensation would cease upon the date
of his termination. If the Company terminates an Employment Agreement without
cause, the Employee terminates his Employment Agreement for cause, or in the
event of a change in control, the Company will pay to the Employee all
compensation and other benefits that would have accrued and/or been payable to
the Employee during the full term of the Employment Agreement.
A change of control is considered to have occurred when, as a result of any
type of corporate reorganization, execution of proxies, voting trusts or similar
arrangements, a person or group of persons (other than incumbent officers,
directors and principal shareholders of the Company) acquires sufficient control
to elect more than a majority of the Company's Board of Directors, acquires 50%
or more of the voting shares of the Company, or the Company adopts a plan of
dissolution of liquidation. The Employment Agreement also include a noncompete
and nondisclosure 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.
COMPENSATION PURSUANT TO PLANS
STOCK OPTION PLANS. During the fiscal year ended September 30, 1998, the
Company granted options to purchase 400,000 shares of common stock to directors,
officers, employees and consultants of the Company and its subsidiaries. As of
September 30, 1998, 6,927,000 options are exercisable.
The Company has one Stock Option Plan titled the Intercell Corporation 1995
Compensatory Stock Option Plan (the "1995 Plan"). The Company has reserved
14,000,000 shares of common stock for issuance under the 1995 Plan.
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
The Company does not have a compensation committee, all decisions on the
compensation of executive officers and directors of the Company are made by the
full Board of Directors. In the preceding fiscal year, the following members of
the Board of Directors participated in discussions involving the compensation of
executive officers of the Company: Messrs. Bauer, Waide and Metzinger.
29
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP
The following table sets forth certain information regarding the beneficial
ownership of outstanding shares of Common Stock as of September 30, 1998, by (a)
each person known by the Company to own beneficially 5% or more of the
outstanding shares of Common Stock, (b) the Company's directors, Chief Executive
Officer and executive officers whose total compensation exceeded $100,000 for
the last fiscal year, and (c) all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES % OF OUTSTANDING
<S> <C> <C>
Paul H. Metzinger, President
Chief Executive Officer and Director
370 Seventeenth Street, Suite 3580
Denver, CO 80202 3,852,541 1 10.20%
Alan M. Smith, Former Chief
Financial Officer and Director
999 West Hastings St., Suite 1750
Vancouver, B.C., V6C 2W2 1,250,000 2 3.31%
Cheri L. Perry
3236 Jellison Street
Wheat Ridge, CO 80033 3,852,541 1 10.20%
Charles E. Bauer, Chief Operating
Officer and Director
313121 Island Drive
Evergreen, CO 80439. 100,000 3 0.26%
Thomas W. Vander Stel, Chief
Financial Officer
370 17th Street, Suite 3580
Denver, CO 80202 150,000 4 0.40%
Kevin B. Waide, Director
5790 Yukon Street
Arvada, CO 80002 100,000 5 0.26%
All officers and directors (present
& former) as a group (5 persons) 5,452,541 6 14.44%
<FN>
1 Includes the following shares and options currently held by corporations whose sole shareholder,
president and director is Cheri L. Perry, the wife of Mr. Metzinger: 1,419,340 shares owned of record and
beneficially; 650,000 shares of common stock subject to a presently exercisable option, exercisable at
$.050 per share, issued September 30, 1997, expiring September 30, 2007; and 1,700,000 shares of common
stock subject to a presently exercisable option, exercisable at $0.3750 per share, issued September 30,
1997, expiring September 30, 2007. Mr. Metzinger owns directly, of record and beneficially, 83,201
shares of common stock. His wife should be deemed the beneficial owner of such shares. Mr. Metzinger's
and his wife's stock ownership are not duplicated in this computation.
2 Includes 300,000 shares of common stock subject to a presently exercisable option, exercisable at $0.50
per share, issued September 30, 1997, expiring September 30, 2007 and 750,000 shares of common stock
subject to a presently exercisable option exercisable at $0.3750 per share, issued September 30, 1997,
expiring September 30, 2007. Mr. Smith canceled an option for 1,000,000 shares upon his resignation on
February 9, 1998.
3 Includes 100,000 shares of common stock subject to a presently exercisable option, exercisable at
$0.3750 per share, issued September 30, 1997, expiring on September 30, 2007.
4 Mr. Vander Stel resigned as an Officer of the Company, effective November 31, 1998.
5 Shares underlying a presently exercisable option, at $0.10 per share, issued February 6, 1998,
expiring February 6, 2008.
6 Based on 37,770,634 shares of common stock issued and outstanding on September 30, 1998. The total
number of shares outstanding is increased to reflect the number of shares underlying individual options
in computing that individual or group percentage ownership interest in the Company. Mr. Metzinger's and
his wife's stock ownership are not duplicated in this computation.
</TABLE>
30
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leased an office from Alan M. Smith, Ltd., a company controlled
by Alan M. Smith, an executive officer and director of the Company. The Company
leased this office space pursuant to a lease that expires on July 31, 2001. The
monthly lease payments are $3,000. The Company paid off this lease, in full,
upon the resignation of Mr. Smith. The Company also paid Mr. Smith $400,000 to
cancel his employment agreement. The Company in 1997 paid Gordon Sales $400,000
to cancel his employment agreement.
During the fiscal year ended September 30, 1997, the Company sold its
wholly owned subsidiaries, Intercell Wireless Corp. and Cellular Magnetics,
Inc., including all of its right title and interest in the antenna technology to
Intercell Technologies Corporation, a Colorado corporation on July 18, 1997.
Terry W. Neild, former director and officer of the Company and Louis L. Ross, a
former consultant to the Company, owns a controlling interest in Intercell
Technologies Corporation. As previously disclosed when ITCO failed the Company
foreclosed its security interest on Cellular Magnetics, Inc. and subsequently
sold it to Jerry W. Tooley for $700,000. Jerry W. Tooley was formerly an
officer of this former subsidiary of the Company. See "BUSINESS-Recent
Acquisitions, Dispositions and Transactions."
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following is a complete list of exhibits filed as part of this
Form 10-KSB. Exhibit numbers correspond to the numbers in the Exhibit
Table of Item 601 of Regulation S-K.
EXHIBIT NO. DESCRIPTION
2.17 Agreement and Plan of Reorganization, dated July 7, 1995, between
the Company and Modern Industries, Inc.
2.23 Plan and Agreement of Merger dated September 3, 1996, by and
between Particle Interconnect, Inc., Particle Interconnect
Corporation and the Company.
2.34 Agreement and Plan of Merger dated October 14, 1996, by and between
AC Magnetics, Inc., doing business as M.C. Davis Company, Cellular
Magnetics, Inc. and the Company.
2.45 Stock Purchase Agreement dated July 18, 1997 between Intercell
Corporation and Intercell Technologies Corporation and Addendum
2.56 Stock Sale and Purchase Agreement dated June 6, 1997 between
Intercell Corporation and Sigma Corporation.
2.611 Offer for Development Agreement of Microlink Technologies
Corporation.
2.79 Stock Purchase Agreement dated February 6, 1998 by and among
Intercell Corporation, California Tube Laboratory and Jaymark, Inc.
2.810 Agreement dated February 26, 1998 by and among Intercell
Corporation, Particle Interconnect Corporation and Sunlight
Systems, Ltd.
2.912 Securities Purchase Agreement between the Company and the Augustine
Fund, LLC, dated December 3, 1998.
31
<PAGE>
3.17 Articles of Incorporation of the Company, and all amendments
thereto, as amended.
3.27 Bylaws of the Company.
4.17 Form of Common Stock Certificate.
4.211 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.
4.31 Specimen of Warrant attached to Series B Preferred Stock.
4.411 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.
4.57 Form of Warrant attached to Series C Preferred Stock.
4.611 Certificate of Designation for Series D Preferred Stock
4.77 Specimen of Registration Rights Agreement for Series B Preferred
Stock.
4.87 Specimen of Registration Rights Agreement for Series C Preferred
Stock.
4.97 Plan of Liquidating Dissolution of Energy Corporation dated
July 8, 1996.
10.12 1995 Compensatory Stock Option Plan.
10.27 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.
10.37 Assignment Agreement dated June 5, 1996, assigning the Patent
Application for the Antenna Technology to the Company, as assignee,
and El-Badawy Amien El-Sharaway, as assignor.
10.4* Employment and Non-Disclosure Non-Competition Agreement, dated
June 1,1998, between Paul H. Metzinger and the Company.
10.59 Side Letter Agreement and Security Agreement dated as of
January 30, 1998 between Intercell Corporation and Jaymark, Inc.
10.69 Environmental Remediation and Indemnity Agreement dated as of
February 6, 1998 by and among Intercell Corporation, California
Tube Laboratory, and Jaymark, Inc.
10.79 Promissory Note, dated as of February 6, 1998 between Intercell
Corporation and Jaymark, Inc.
10.89 Indemnity escrow agreement dated as of February 6, 1998 by and
among Intercell Corporation, Jaymark, Inc. and Chicago Title
Company.
10.95 Warrant Agreement dated as of July 18, 1997 between Intercell
Corporation and Intercell Technologies Corporation.
10.105 Royalty Agreement dated as of July 18, 1997 between Intercell
Corporation and Intercell Technologies Corporation.
32
<PAGE>
10.115 $2,200,000 Promissory Note dated as of July 18, 1997 between
Intercell Technologies Corporation and Intercell Corporation.
10.125 Stock Pledge and Security Agreement dated July 18, 1997 between
Intercell Corporation and Intercell Technologies Corporation.
10.1311 Microlink Technologies Corporation Standard Industrial Lease.
10.1411 Sigma Corporation Lease.
10.1511 CTL Lease
11* Statement regarding Computation of Per Share Earnings.
217 Subsidiaries of the Company.
27* Financial Data Schedule.
_______________
*Filed herewith.
1 Incorporated by reference to the Company's Current Report on Form 8-K dated
July 10, 1996.
2 Incorporated by reference to the Company's Current Registration Statement on
Form S-8, Registration No. 333-604 effective January 24, 1996.
3 Incorporated by reference to the Company Current Report on Form 8-K dated
September 3, 1996.
4 Incorporated by reference to Company Current Report on Form 8-K dated the
October 14, 1996.
5 Incorporated by reference to the Company Current Report on Form 8-K dated July
18, 1997.
6 Incorporated by reference to the Company Current Report on Form 8-K dated May
28, 1997.
7 Incorporated by reference to the Company Annual Report on Form 10-K for the
year ended September 30, 1996.
8 Incorporated by reference to the Company Quarterly Report on Form 10-KSB for
the quarter ended December 31, 1997.
9 Incorporated by reference to the Company Current Report on Form 8-K dated
February 6, 1998.
10 Incorporated by reference to the Company Current Report on Form 8-K dated
February 26, 1998.
11 Incorporated by reference to the Company Annual Report on Form 10-K for the
year ended September 30, 1997.
12 Incorporated by reference to the Company Form 10QSB for the quarter ended
December 31, 1997, filed September 17, 1998.
(b) Reports on Form 8-K:
(i) Form 8-K dated February 6, 1998 regarding the
disposition of California Tube Laboratory, Inc.
(ii) Form 8-K dated February 26, 1998 regarding the transfer
of the PI Technology to Sunlight Systems, Ltd.
(iii) Form 8-K dated April 6, 1998 regarding the change in
independent accountants.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERCELL CORPORATION, (a Colorado corporation)
Date: July 26, 1999 By /s/ Paul H. Metzinger
---------------------
Paul H. Metzinger, Director, Chief Executive
Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and the capacities and on the dates indicated.
Date: July 26, 1999 By /s/ Paul H. Metzinger
---------------------
Paul H. Metzinger, Director, Chief Executive
Officer, President & Chief Financial Officer
Date: July 26, 1999 By /s/ Kevin B. Waide
------------------
Kevin B. Waide, Director
34
<PAGE>
LIST OF EXHIBITS
Exhibit 10.4 Employment and Non-Disclosure Non-Competitive Agreement, dated
June 1, 1998, between Paul H. Metzinger and the Company
Exhibit 11: Statement of computation of earnings per share
Exhibit 27: Financial Data Schedule
35
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
September 30, 1998 and 1997
(With Independent Auditors' Report Thereon)
F-1
<PAGE>
FINANCIAL STATEMENTS
INTERCELL CORPORATION
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report F-3
Consolidated Balance Sheet - September 30, 1998 F-4
Consolidated Statements of Operations - Years ended
September 30, 1998 and 1997 F-5
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
- Years ended September 30, 1998 and 1997 F-6
Consolidated Statements of Cash Flows - Years ended
September 30, 1998 and 1997 F-8
Notes to Consolidated Financial Statements F-10
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Intercell Corporation
We have audited the accompanying consolidated balance sheet of Intercell
Corporation and subsidiaries as of September 30, 1998, and the related
consolidated statements of operations, changes in stockholders' equity (deficit)
and cash flows for each of the years in the two-year period ended September 30,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits 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, 1998, and the results of their
operations and their cash flows for each of the years in the two-year period
ended September 30, 1998, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring net losses and has a
net capital deficiency that raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans with regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
GELFOND HOCHSTADT PANGBURN & CO.
Denver, Colorado
July 9, 1999
F-3
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
September 30, 1998
<TABLE>
<CAPTION>
Assets
- ------
<S> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 251,000
Restricted cash . . . . . . . . . . . . . . . . . . . . . . 16,000
Note receivable, current portion (Note 4) . . . . . . . . . 12,000
------------
Total current assets. . . . . . . . . . . . . . . . . . . 279,000
Note receivable, less current portion (Note 4). . . . . . . . 26,000
Investment in land held for sale (Note 5) . . . . . . . . . . 500,000
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . 38,000
------------
Total assets . . . . . . . . . . . . . . . . . . . . . $ 843,000
============
Liabilities and Stockholders' Deficit
- -------------------------------------
Current liabilities:
Notes payable to related parties (Note 6) . . . . . . . . . $ 86,000
Accounts payable and accrued liabilities. . . . . . . . . . 813,000
Convertible debentures (Note 6) . . . . . . . . . . . . . . 826,000
Liabilities of discontinued operations (Note 7) . . . . . . 3,280,000
------------
Total liabilities (all current) . . . . . . . . . . . . . 5,005,000
------------
Minority interest in subsidiary (Note 8). . . . . . . . . . . 590,000
------------
Commitments and contingencies (Note 11)
Stockholders' deficit (Note 9):
Convertible preferred stock; 10,000,000 shares authorized:
Series C; 147 shares issued and outstanding
(liquidation preference of $1,653,750) . . . . . . . . . 1,362,000
Series D; 1,080 shares issued and outstanding
(liquidation preference of $2,700,000) . . . . . . . . . 2,387,000
Warrants to acquire common stock. . . . . . . . . . . . . . 3,075,000
Common stock; no par value; 100,000,000 shares authorized
36,670,634 shares issued and outstanding. . . . . . . . . 21,329,000
Additional paid-in capital. . . . . . . . . . . . . . . . . 4,098,000
Accumulated deficit . . . . . . . . . . . . . . . . . . . . (37,003,000)
------------
Total stockholders' deficit . . . . . . . . . . . . . . ( 4,752,000)
------------
Total liabilities and stockholders' deficit . . . . . $ 843,000
============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended
September 30,
--------------------
1998 1997
---- ----
<S> <C> <C>
General and administrative expense. . . . . . . . . . . . $ 3,946,000 $ 5,524,000
Research and development expense. . . . . . . . . . . . . - 94,000
--------------- ------------
Loss from operations. . . . . . . . . . . . . . . . . . . ( 3,946,000) ( 5,618,000)
---------- ----------
Interest income . . . . . . . . . . . . . . . . . . . . . 118,000 220,000
Interest expense. . . . . . . . . . . . . . . . . . . . . ( 354,000) ( 59,000)
Impairment of investment in land (Note 5) . . . . . . . . ( 924,000) -
Other income. . . . . . . . . . . . . . . . . . . . . . . 11,000 -
---------- ----------
( 1,149,000) 161,000
---------- ----------
Loss from continuing operations before minority interest. ( 5,095,000) ( 5,457,000)
---------- ----------
Minority interest . . . . . . . . . . . . . . . . . . . . - 164,000
---------- ----------
Loss from continuing operations . . . . . . . . . . . . . (5,095,000) (5,293,000)
--------- ---------
Discontinued operations (Note 7):
Loss from operations to be disposed of. . . . . . . . . ( 4,110,000) (11,188,000)
Loss on sale of subsidiaries. . . . . . . . . . . . . . ( 288,000) -
---------- ----------
Loss from discontinued operations . . . . . . . . . . . . ( 4,398,000) (11,188,000)
---------- ----------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . ( 9,493,000) (16,481,000)
Deemed dividend on Series B, C and D preferred stock
relating to in-the-money conversion terms (Note 9). . . ( 57,000) ( 1,072,000)
Accrued dividends on Series D preferred stock (Note 9). . ( 113,000) -
Accretion on Series B and C preferred stock (Note 9). . . ( 123,000) ( 460,000)
---------- ----------
Net loss applicable to common stockholders. . . . . . . . $ ( 9,786,000) $(18,013,000)
========== ==========
Net loss per share, basic and diluted, applicable
to common stockholders:
Loss from continuing operations . . . . . . . . . . . . $ ( 0.16) $( 0.38)
Loss from discontinued operations . . . . . . . . . . . ( 0.13) ( 0.61)
---------- ----------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . $ ( 0.29) $( 0.99)
========== ==========
Weighted average number of common shares outstanding. . . 33,992,163 18,114,038
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity(Deficit)
Years Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Convertible Additional
Preferred Stock Warrants to Common Stock Paid-In
------------------------------- Acquire -------------------------
Shares Amount Common Stock Shares Amount Capital
---------------- ------------- ------------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balances, October 1, 1996 787 $ 5,393,000 $ 1,870,000 15,734,229 $12,187,000 $1,765,000
Shares of Series C preferred stock and
Warrants issued in private placement,
Net of issuance costs of $577,500 525 2,560,000 1,180,000 -- -- 932,000
Deferred compensation related to stock
Option grants . . . . . . . . . . . . -- -- -- -- 148,000 --
Compensation recorded on transfer
of stockholder options. . . . . . . . -- -- -- -- 530,000 --
Amortization of deferred compensation . -- -- -- -- -- --
Exercise of stock options . . . . . . . -- -- -- 200,000 150,000 --
Conversion of Series B preferred stock
to common stock . . . . . . . . . . . (782) (5,686,000) -- 4,962,271 5,686,000 --
Conversion of Series C preferred stock
to common stock . . . . . . . . . . . (358) (2,542,000) -- 9,449,575 2,542,000 --
Shares issued in exchange for services. -- -- -- 25,000 42,000 --
Shares of Series D preferred stock
Issued in connection with acquisition
of Sigma 7. . . . . . . . . . . . . . 1,000 2,223,000 -- -- -- 277,000
Shares of Series D preferred stock
Issued as payment for covenant not
to compete. . . . . . . . . . . . . . 80 178,000 -- -- -- 22,000
Treasury shares received as
Consideration for asset sale. . . . . -- -- -- -- -- --
Accretion on preferred stock. . . . . . -- 460,000 -- -- -- --
Amortization of deemed dividend . . . . -- 1,072,000 -- -- -- --
Net loss. . . . . . . . . . . . . . . . -- -- -- -- -- --
---------------- ------------- ------------- ---------- ----------- ----------
Balances, September 30, 1997. . . . . . 1,252 3,658,000 3,050,000 30,371,075 21,285,000 2,996,000
Total
Stockholders'
Deferred Treasury Accumulated Equity
Compensation Stock Deficit (Deficit)
-------------- --------- --------------- -------------
<S> <C> <C> <C> <C>
Balances, October 1, 1996 . . . . . . . $ (331,000) -- $ (9,204,000) $ 11,680,000
Shares of Series C preferred stock and
Warrants issued in private placement,
Net of issuance costs of $577,500. . -- -- -- 4,672,000
Deferred compensation related to stock
Option grants . . . . . . . . . . . . (148,000) -- -- --
Compensation recorded on transfer
of stockholder options. . . . . . . . (530,000) -- -- --
Amortization of deferred compensation . 1,006,000 -- -- 1,006,000
Exercise of stock options . . . . . . . -- -- -- 150,000
Conversion of Series B preferred stock
to common stock . . . . . . . . . . . -- -- -- --
Conversion of Series C preferred stock
to common stock . . . . . . . . . . . -- -- -- --
Shares issued in exchange for services. -- -- -- 42,000
Shares of Series D preferred stock
Issued in connection with acquisition
of Sigma 7. . . . . . . . . . . . . . -- -- -- 2,500,000
Shares of Series D preferred stock
Issued as payment for covenant not
to compete. . . . . . . . . . . . . . -- -- -- 200,000
Treasury shares received as
Consideration for asset sale. . . . . -- (385,000) -- ( 385,000)
Accretion on preferred stock. . . . . . -- -- (460,000) --
Amortization of deemed dividend . . . . -- -- (1,072,000) --
Net loss. . . . . . . . . . . . . . . . -- -- (16,481,000) (16,481,000)
-------------- --------- --------------- -------------
Balances, September 30, 1997. . . . . . ( 3,000) (385,000) (27,217,000) 3,384,000
</TABLE>
CONTINUED
F-6
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity(Deficit)
Years Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Convertible Additional
Preferred Stock Warrants to Common Stock Paid-In
------------------------------- Acquire -------------------------
Shares Amount Common Stock Shares Amount Capital
---------------- ------------- ------------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balances, September 30, 1997 . . . . . . 1,252 $ 3,658,000 3,050,000 30,371,075 $21,285,000 $2,996,000
Constructive retirement of treasury
Stock. . . . . . . . . . . . . . . . . -- -- -- (1,100,000) (385,000) --
Warrants issued in connection with
Convertible debenture. . . . . . . . . -- -- 25,000 -- -- --
Shares issued in lieu of interest. . . . -- -- -- 2,000,000 187,000 --
Shares issued for services . . . . . . . -- -- -- 516,000 40,000 --
Common stock issued by subsidiary. . . . -- -- -- -- -- 877,000
Amortization of deferred compensation. . -- -- -- -- -- --
Amortization of deemed dividend. . . . . -- 57,000 -- -- -- --
Accrual of preferred stock dividend. . . -- 113,000 -- -- -- --
Accretion on preferred stock . . . . . . -- 123,000 -- -- -- --
Conversion of Series B preferred stock
to common stock. . . . . . . . . . . . (5) (40,000) -- 678,761 40,000 --
Conversion of Series C preferred stock
to common stock. . . . . . . . . . . . (20) (162,000) -- 4,204,798 162,000 --
Beneficial conversion feature related to
Series A-1 and A-2 debentures. . . . . -- -- -- -- -- 225,000
Net loss . . . . . . . . . . . . . . . . -- -- -- -- -- --
--------------- ------------ ------------- ----------- ------------ -----------
Balances, September 30, 1998 . . . . . . 1,227 $ 3,749,000 $ 3,075,000 36,670,634 $21,329,000 $4,098,000
=============== ============ ============= =========== ============ ==========
Total
Stockholders'
Deferred Treasury Accumulated Equity
Compensation Stock Deficit (Deficit)
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Balances, September 30, 1997 . . . . . . $ (3,000) $ (385,000) $ (27,217,000) $ 3,384,000
Constructive retirement of treasury
Stock. -- 385,000 -- --
Warrants issued in connection with
Convertible debenture. . . . . . . . . -- -- -- 25,000
Shares issued in lieu of interest. . . . -- -- -- 187,000
Shares issued for services . . . . . . . -- -- -- 40,000
Common stock issued by subsidiary. . . . -- -- -- 877,000
Amortization of deferred compensation. . 3,000 -- -- 3,000
Amortization of deemed dividend. . . . . -- -- ( 57,000) --
Accrual of preferred stock dividend. . . -- -- ( 113,000) --
Accretion on preferred stock . . . . . . -- -- ( 123,000) --
Conversion of Series B preferred stock
to common stock. . . . . . . . . . . . -- -- -- --
Conversion of Series C preferred stock
to common stock. . . . . . . . . . . . -- -- -- --
Beneficial conversion feature related to
Series A-1 and A-2 debentures. . . . . -- -- -- 225,000
Net loss . . . . . . . . . . . . . . . . -- -- (9,493,000) (9,493,000)
-------------- -------------- --------------- -------------
Balances, September 30, 1998 . . . . . . -- -- $ (37,003,000) $( 4,752,000)
============== =============== =============== =============
</TABLE>
F-7
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended
September 30,
------------------------------
1998 1997
--------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $ ( 9,493,000) $(16,481,000)
Less loss from discontinued operations . . . . . . . . . . 4,398,000 11,188,000
--------------- -------------
Loss from continuing operations. . . . . . . . . . . . . ( 5,095,000) ( 5,293,000)
Adjustments to reconcile net loss to net cash used in
in operating activities:
Amortization of intangible assets . . . . . . . . . . . . 3,000 --
Loss on abandonment/sale of property, plant and equipment 900,000 204,000
Loss from asset impairment. . . . . . . . . . . . . . . . 924,000 --
Common stock and warrants issued for interest/services. . 252,000 42,000
Common stock of subsidiary issued for services. . . . . . 877,000 --
Loss from assignment of note. . . . . . . . . . . . . . . 500,000 --
Amortization of deferred compensation . . . . . . . . . . 3,000 1,006,000
Changes in operating assets and liabilities:
Increase in accounts receivable. . . . . . . . . . . . . -- ( 54,000)
Increase in restricted cash. . . . . . . . . . . . . . . ( 16,000) --
Increase in prepaid expenses
and other current assets . . . . . . . . . . . . . . . ( 180,000) ( 143,000)
Increase in accounts payable and accrued liabilities . . 121,000 657,000
Increase in accounts payable to related parties. . . . . 86,000 --
--------------- -------------
Net cash used in continuing operations. . . . . . . . . ( 1,625,000) ( 3,581,000)
--------------- -------------
Net cash used in discontinued operations. . . . . . . . ( 1,690,000) ( 3,795,000)
--------------- -------------
Cash flows from investing activities:
Other assets . . . . . . . . . . . . . . . . . . . . . . . ( 77,000) 194,000
Cash paid in connection with acquisitions. . . . . . . . . -- ( 486,000)
Proceeds from maturity of short-term investments . . . . . -- 3,063,000
Proceeds from disposition of business and sales
of property and equipment. . . . . . . . . . . . . . . . 2,200,000 --
Payments received on notes receivable. . . . . . . . . . . 1,000 --
Cash transferred/loaned in disposition of subsidiary . . . -- ( 562,000)
Loans extended to subsidiary prior to acquisition. . . . . -- ( 1,345,000)
--------------- -------------
Net cash provided by investing activities of
continuing operations 2,124,000 864,000
--------------- -------------
Cash flows from financing activities:
Repayments of notes payable to related parties . . . . . . -- ( 932,000)
Proceeds from notes payable. . . . . . . . . . . . . . . . 1,500,000 720,000
Repayments of notes payable. . . . . . . . . . . . . . . . ( 659,000) ( 339,000)
Payment of debt issuance costs . . . . . . . . . . . . . . -- ( 42,000)
Repayments of long-term debt . . . . . . . . . . . . . . . -- ( 212,000)
Proceeds from issuance of preferred stock and warrants 4,672,000
Proceeds from sale of preferred stock by subsidiary. . . . 590,000 --
Proceeds from stock options -- 150,000
--------------- -------------
Net cash provided by financing activities of
continuing operations . 1,431,000 4,017,000
--------------- -------------
Net increase (decrease) in cash and cash equivalents. . . . 240,000 ( 2,495,000)
Cash and cash equivalents beginning of year . . . . . . . . 11,000 2,506,000
--------------- -------------
Cash and cash equivalents end of year . . . . . . . . . . . $ 251,000 $ 11,000
=============== =============
Supplemental disclosure of cash flow information:
Cash paid for interest . . . . . . . . . . . . . . . . . . $ 81,000 $ 16,000
=============== =============
</TABLE>
(CONTINUED)
F-8
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Supplemental disclosure of noncash investing and financing activities:
1998 1997
---- ----
Additional paid-in capital from conversion
feature of debentures $ 225,000 $ --
Deferred compensation related to stock option grants -- 678,000
Conversion of Series B and C preferred stock to
common stock 202,000 8,228,000
Treasury shares received in disposition of
Cellular Magnetics, Inc. (CMI) -- 385,000
Noncash consideration received on sale of CMI and
Intercell Wireless Corp. -- 1,273,000
Series D preferred stock issued in exchange for BMI
Acquisition Group, Inc. preferred stock and in consideration
for non-compete agreement -- 2,700,000
Accretion on preferred stock 123,000 460,000
Amortization of deemed dividend on preferred stock 57,000 1,072,000
Accrual of preferred stock dividend 113,000 --
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
(1) BASIS OF PRESENTATION, BUSINESS AND PLAN OF RESTRUCTURING
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Intercell Corporation, a Colorado corporation (the Company, or Intercell), and
its significant subsidiaries: California Tube Laboratory, Inc. through February
6, 1998, Cellular Magnetics, Inc. and Intercell Wireless Corporation through
April 9, 1998, Nanopierce Technologies, Inc. acquired February 26, 1998, Sigma 7
Corporation, Particle Interconnect Corp, and Arizcan Properties, Ltd. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Business and Plan of Restructuring
During 1998 and 1997, the Company manufactured products in three industry
segments: (1) the production of fully functional computer memory modules from
defective memory chips, (2) the production and rebuilding of electron power
tubes in various forms and models, and (3) the production of electronic
components. During 1998 and 1997, due to continuing operating losses,
management decided to restructure the Company primarily through various
acquisitions and divestitures, described below.
a. Disposition of California Tube Laboratory, Inc.
Through January 1998, the Company's wholly owned subsidiary
California Tube Laboratory, Inc. (CTL) manufactured and rebuilt
electron power tubes. On February 6, 1998, the Company sold CTL to
an unrelated third party. As consideration for the sale, the
Company received $1,500,000 in cash, including $200,000 in Escrow
(on September 16, 1998 the buyer received a distribution from
escrow of approximately $184,000) and a $500,000 promissory note
(Note 4).
b. Acquisition of Nanopierce Technologies, Inc.
Through August 1997, the Company's wholly owned subsidiary Particle
Interconnect Corp. (PI Corp.), was engaged in the development and
manufacturing of particle-coated substrates for integrated circuits
using patented interconnect technology (the PI Technology) and a
proprietary trade secret electro-plating process (the PE Process).
In September 1997, in connection with a change in business strategy
the Company discontinued operations and recorded a charge of
$801,000 related to the write-off of manufacturing equipment
($599,000) and lease abandonment ($202,000).
F-10
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 1998, the Company transferred all of the intellectual
property of PI Corp.(which had a historical carrying value of
zero) to Nanopierce Technologies, Inc. (Nanopierce, formerly
Sunlight Systems, Inc.) for 7,250,000 restricted shares of common
stock and 100 Series A, 8%, voting, convertible, cumulative,
participating, preferred shares of Nanopierce. The preferred
shares are convertible to 7,250,000 restricted shares of
Nanopierce's common stock. The Company has a 73% controlling
interest in Nanopierce on a fully diluted basis. Nanopierce had
no significant operations prior to this transaction. This
transaction was accounted for using the purchase method of
accounting and the results of operations of Nanopierce have been
included in the Company's financial statements from the date of
acquisition. The unaudited results of operations of the Company
on a pro forma basis, as though Nanopierce had been acquired as
of October 1, 1997 and October 1, 1996 are as follows:
1998 1997
---- ----
Revenue -- --
Loss from continuing operations $(5,262,000) $( 5,391,000)
Net loss $(9,623,000) $(16,543,000)
Net loss applicable to
common shareholders $(9,916,000) $(18,075,000)
Net loss per share $ (.29) $ (1.00)
c. Acquisition and Disposition of Cellular Magnetics, Inc. and
Intercell Wireless Corporation
Through June 1997, the Company's wholly owned subsidiaries Cellular
Magnetics Inc. (CMI), (which owned all the assets and liabilities of
A.C. Magnetics, Inc., d.b.a. M.C. Davis Co., Inc.) and Intercell
Wireless Corporation (IWC), manufactured and distributed electronic
components. In July 1997, the Company entered into a stock purchase
agreement to sell CMI and IWC to Intercell Technologies Corporation
(ITC) in exchange for ITC common stock and notes valued at
$1,835,000, and 1,100,000 shares of the Company's common stock owned
by ITC, valued at $385,000. At the time the transaction was
proposed, a former Director/Executive Vice President of the
Company owned a controlling interest in ITC. No gain or loss was
recognized on the transaction. The following is a list of assets
sold, including cash loaned and liabilities transferred to ITC:
Current assets $ 600,000
Property, plant and equipment 349,000
Goodwill and other intangibles 1,026,000
Accounts payable ( 175,000)
---------
Net assets sold 1,800,000
Cash loaned to ITC 345,000
Sale of corporate office furniture 75,000
---------
Total assets sold, including cash loaned,
and liabilities transferred $2,220,000
=========
F-11
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In September 1997, the Company evaluated the recoverability of its
investment in ITC and concluded that an impairment charge of
$835,000 was necessary to reflect continued uncertainties regarding
the realization of its investment in and advances to ITC. The
$835,000 charge represented the difference between the carrying
amount of the investment in and advances to ITC and the estimated
fair value of assets collateralizing the advances.
In January 1998, ITC advised the Company that it would default on
all obligations owed to the Company. The Company undertook
immediate steps to protect its interest including the repossession
and foreclosure of the primary assets of CMI. The Company
recognized a loss of $900,000 due to impairment concerns associated
with ITC's inability to repay the Company. On April 9, 1998, the
Company sold CMI to its former owners for $700,000.
d. Acquisition and Liquidation of Sigma 7 Corporation
In June 1997, the Company acquired Sigma 7 Corporation (Sigma), and
through its subsidiary BMI Acquisition Group, Inc. (BMI), it
developed and utilized a proprietary patch technology to produce
fully functional computer memory modules from defective memory
chips. The purchase price for Sigma of $550,000 was allocated to
the net assets acquired based on estimated fair values, as follows:
Fair value of assets acquired $1,430,000
In-process research and development 2,022,000
Goodwill and other intangible assets 2,495,000
Liabilities assumed (5,461,000)
---------
Cash paid, net of $64,000 cash acquired $ 486,000
=========
As of September 30, 1997, the Company determined that goodwill and
other intangible assets, which represented the cost of the
Company's investment in excess of the net tangible assets acquired
was not recoverable based on the uncertainties surrounding the
subsidiary's future cash flows and wrote off the remaining balance
of approximately $2.3 million.
The results of Sigma were included in the Company's consolidated
results of operations from June 1997 until June 1998 when all
operations were discontinued. On December 31, 1998, Sigma filed
for voluntary liquidation under Chapter 7 of the U.S. Bankruptcy
Code.
At September 30, 1998, the Company's remaining operating subsidiary is
Nanopierce, which is engaged in the design, development and licensing of
products using its intellectual property and PI Technology. The PI Technology
improves electrical, thermal and mechanical characteristics of electronic
products. The Company markets the PI Technology to technology companies for
use in various industries for a wide range of applications. The Company has not
recognized any royalty revenue through September 30, 1998, pending the
resolution of litigation regarding a license agreement (Note 11).
F-12
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company
has incurred significant operating losses in 1998 and 1997, and has a
working capital deficiency and a stockholders' deficit at September 30,
1998. These conditions raise substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability
and classification of assets or amounts and classifications of
liabilities that might result from the outcome of this uncertainty.
The Company has formulated plans and strategies to address the Company's
financial condition and increase profitability, including the following:
a. Through 1998, the Company discontinued, sold, and/or abandoned
certain of its operations, which management anticipates will
eliminate significant operating and overhead expenses, and which
have contributed to the Company's operating losses in the past.
b. The Company completed the acquisition of Nanopierce in 1998, which
the Company intends to market its PI Technology, primarily
through the development of strategic relationships with
established leaders in the technology industry, the licensing of
the PI Technology and/or the sale of products incorporating the
PI Technology.
c. The Company is continuing efforts to seek and obtain debt and/or
equity financing to further support its operating needs.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 periods. Actual results could
differ from those estimates.
Cash Equivalents and Restricted Cash
Cash equivalents consist of highly liquid investments with an original
maturity of less than three months at the date of purchase. Restricted
cash consists of cash held in an escrow account in connection with the
Company's sale of CTL.
F-13
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes Receivable
Management periodically evaluates receivable balances. Evaluations are
based primarily on assessments of the borrowers' financial condition and
the underlying value of the collateral to determine if any impairment is
evident.
Revenue Recognition
Revenues associated with discontinued operations were recognized when
earned, generally upon product shipment. A provision was made for
estimated customer returns at the time of sale.
Inventories
Inventories associated with discontinued operations were generally stated
at the lower of cost (first in, first out), or market. During 1998,
$110,000 of inventories associated with discontinued operations were
written down, and the charge was included in the loss from discontinued
operations. As of September 30, 1998, there are no remaining
inventories.
Property, Plant and Equipment
Property, plant and equipment associated with discontinued operations
were stated at cost. Depreciation expense was 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, software,
and vehicles, and the shorter of the useful life of the asset or the
remaining lease term for leasehold improvements. During 1998, property
and equipment associated with discontinued operations with a carrying
value of $302,000 was written down, and the charge was included in the
loss from discontinued operations.
Long-Lived Assets
The Company reviews its long-lived assets, including intangible assets,
for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of long-lived assets is measured by comparison of its carrying amount to
future net cash flows expected to be generated from the operation and
sale of the long-lived assets. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount in
which the carrying amount of the long-lived assets exceeds its fair
value.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, restricted cash, the
note receivable, accounts payable and accrued liabilities, and
convertible debentures approximate fair values due to the short
maturities of such instruments. Management is not able to practicably
estimate the fair value of the liabilities of discontinued operations
due to uncertainties in connection with the Sigma 7 Chapter 7 bankruptcy
(Note 7) or the related party notes payable, due to the related party
nature of the underlying transaction.
F-14
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 amounts
expected to be realized.
Net Loss Per Share
Net loss per share of common stock is computed based on the weighted
average number of common shares outstanding during the year. Stock
options, warrants and convertible preferred stock are not considered
in the calculation as the impact of the potential common shares would be
to decrease loss per share. Therefore, diluted loss per share is
equivalent to basic loss per share.
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 128 Earnings Per Share during 1998. This statement requires dual
presentation of basic and diluted earnings per share (EPS) with a
reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS
computation. Basic EPS excludes dilution. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings
of the entity. The adoption of SFAS 128 did not result in a change to
the previously presented EPS for 1997.
Stock-Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation, allows companies
to choose whether to account for employee stock-based compensation on a
fair value method, or to continue accounting for such compensation under
the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). The
Company has chosen to continue to account for employee stock-based
compensation using APB 25.
Recently Issued Accounting Standards
In 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, Reporting Comprehensive Income. This standard establishes
requirements for disclosures of comprehensive income which includes
certain items previously not included in the statements of operations,
including minimum pension liability adjustments and foreign currency
translation adjustments, among others. This statement is effective for
fiscal years beginning after December 15, 1997. Reclassification of
earlier financial statements for comparative purposes is required.
Currently, the Company does not have any items that would be classified
as a component of comprehensive income. Therefore, management believes
that implementation of SFAS No. 130 will not materially effect the
Company's financial statements.
F-15
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1997, the FASB also issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Financial Information, and in February 1998,
the FASB issued SFAS No. 132, Employers' Disclosure about Pensions and
Other Post Retirement Benefits. Both of these statements require
disclosure only and therefore will not impact the Company's financial
statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement is effective for
fiscal years beginning after June 15, 1999. Currently, the Company does
not have any derivative financial instruments and does not participate in
hedging activities. Therefore, management believes that SFAS No. 133
will not have an impact on its financial statements.
Reclassifications
Certain amounts in the 1997 financial statements have been reclassified
to conform with the 1998 presentation.
(3) RISK CONSIDERATIONS
Business Risk
The Company is subject to risks and uncertainties common to
technology-based companies, including rapid technological change,
dependence on principal products and third party technology, new product
introductions and other activities of competitors, dependence on key
personnel, and limited operating history.
Year 2000 Conversion
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due
to processing errors potentially arising from calculations using the
Year 2000 date are a known risk. The Company is addressing this risk to
the availability and integrity of financial systems and the reliability
of the operational systems. The Company has established processes for
evaluating and managing the risks and costs associated with this problem.
Management believes the total cost of compliance, and its effect on the
Company's future results of operations will be insignificant.
(4) NOTES RECEIVABLE
The note receivable of $38,000 at September 30, 1998, is non-interest
bearing, due in installments through June 2001, and is collateralized by
property and equipment. Interest was imputed on the note at 10%, and at
September 30, 1998, the unamortized balance of the discount was $6,000.
In connection with the Company's 1998 sale of CTL, the Company received a
$500,000, 3% unsecured promissory note from the buyer, payable only once
an environmental cleanup of the property formerly leased by CTL was
complete. The Company was obligated to the owner of the property to pay
75% of any expenses related to the environmental cleanup, estimated to
cost between $350,000 to $450,000. In January 1999, the Company entered
into an agreement to assign its interest in the $500,000 note to the
property owner in consideration of the property owner releasing the
Company from any environmental cleanup liability. The Company recognized
a loss of $500,000 in connection with the note assignment.
F-16
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) INVESTMENT IN LAND HELD FOR SALE
The investment in land held for sale consists of approximately 94 acres
of undeveloped rangeland located in Arizona. In September 1998, the
Company evaluated the recoverability of its investment in land held for
sale and concluded that an impairment charge of $924,000 was necessary to
reduce the carrying value of the land to its estimated net realizable
value of $500,000. The net realizable value of $500,000 at
September 30, 1998, is based on management's assessments, negotiations
with a potential third-party buyer, and other matters.
(6) NOTES PAYABLE TO RELATED PARTIES AND CONVERTIBLE DEBENTURES
Notes Payable to Related Parties
Notes payable to related parties consist of two notes payable, due on
demand, one to an affiliate of a minority shareholder and one to a
minority shareholder/officer of the Company, which have balances of
$24,000 and $44,000 at September 30, 1998, and bear interest at 10% and
8%, respectively. In addition, the Company has an unsecured,
non-interest bearing, $18,000 note payable due on demand to an officer
of the Company at September 30, 1998.
Convertible Debentures
In December 1997, the Company issued $750,000 of Series A-1 and $750,000
of Series A-2 convertible debentures with warrants attached. The
convertible debentures were, at the time of issue, unsecured obligations
of the Company. In connection with the debt issue, warrants were issued
to the debt holders, entitling each holder to purchase 200,000 shares of
the Company's common stock for $.17, $.50 and $1.00 per share,
respectively. The warrants expire three years from the date of issue.
The portion of the proceeds applicable to these warrants was $15,000. In
addition, the Company paid a third-party investment banker a $180,000
commission and issued warrants to purchase 200,000 shares of the
Company's common stock at an exercise price of $.15 per share. The
$180,000 commission and the warrants, which were valued at $10,000, have
been included in general administrative expense.
The Series A-1 debentures require quarterly interest payments at 9% per
annum, beginning March 1, 1998 with the balance due on December 1, 1999.
The debenture may be converted at the option of the holder after 60 days
from the date of issuance at a conversion price per share equal to the
lessor of 85% of the market price as defined, or $0.75.
The Series A-2 debentures require quarterly interest payments at 9% per
annum, beginning June 1, 1998, with an original maturity date of April
1999, at a conversion price for each share of common stock at 85% of the
market price as defined in the financing agreement. At the Company's
request, the Series A-2 debentures were accelerated to December 31, 1998.
As consideration for the acceleration, the Company provided collateral to
the debenture holders for the entire $1,500,000. The Company assigned a
first priority secured lien on the assets of Sigma, a first deed of trust
on the land held for sale, and an assignment of the $2,200,000 note from
ITC to the Company. In addition, the Company issued 1,000,000 shares of
its common stock to the debenture holders in lieu of interest expense
during the year ended September 30, 1998, of $100,000. During 1998,
$659,000 was paid on the debentures, and at September 30, 1998, $826,000,
plus accrued interest of $36,000 is due.
F-17
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A beneficial conversion feature of $225,000, representing the "in the
money portion" of the debentures at the date of issuance, was recognized
as a discount on the debentures and an increase to additional paid in
capital. The discount was amortized to interest expense in 1998.
(7) DISCONTINUED OPERATIONS
The Company sold its wholly-owned subsidiary, CTL, on February 6, 1998;
the Company effectively terminated the non-PI Technology related
operations and activities of PI Corp. in September 1997 and transferred
the PI Technology to Nanopierce in February, 1998; the Company sold CMI
and IWC in July 1997, and in June 1998, the Company discontinued all
operations of Sigma. The summarized resulting discontinued operations
are as follows:
1998 CTL CMI IWC SIGMA PI CORP TOTAL
- ---- ------ ------ ------ ------- -------- -----
Net sales $1,583,000 814,000 -- 669,000 -- 3,066,000
Loss from
Operations $( 215,000) ( 6,000) (838,000) (2,947,000) (104,000) (4,110,000)
Gain/(Loss)
on Disposal $( 832,000) 544,000 -- -- -- ( 288,000)
1997 CTL CMI IWC SIGMA PI CORP TOTAL
- ---- ------ ------ ------ ------- -------- -----
Net sales $4,655,000 1,480,000 -- 1,594,000 -- 7,729,000
Income
(loss) from
operations $ 156,000 ( 64,000) (386,000) (7,096,000)(3,798,000) (11,188,000)
Liabilities of discontinued operations at September 30, 1998, consist of
Sigma liabilities as follows:
Accounts payable and accrued liabilities $ 986,000
Notes payable 2,173,000
Other liabilities 121,000
----------
$ 3,280,000
==========
Notes payable of discontinued operations primarily consist of $1,700,000,
10%, unsecured notes payable issued in a 1997 private placement,
originally due in October 1998(Note 11).
(8) MINORITY INTEREST IN SUBSIDIARY AND SUBSIDIARY STOCK TRANSACTIONS
In July 1998, Nanopierce executed a securities purchase agreement with a
third-party buyer (Buyer) pursuant to which the Buyer agreed to acquire
150,000 shares of Nanopierce Series B preferred stock (Series B) and
700,000 shares of Nanopierce Series C preferred stock (Series C) at $10
per share at specified closing dates. The agreement was for a two-year
period and would have allowed Nanopierce to issue the Buyer up to
$8,500,000 of preferred stock. In addition, Nanopierce would have issued
warrants to the Buyer on each closing date.
F-18
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Through September 30, 1998, Nanopierce issued 75,000 shares of Series B
Preferred Stock at $10 per share, resulting in net proceeds of $660,000
(net of $90,000 of issuance costs). The balance due on the remaining
closings was canceled by mutual consent of Nanopierce and the Buyer.
The Series B shares are non-voting with cumulative dividends of $.70 per
share per year and are redeemable by Nanopierce at $12 per share plus any
accumulated and unpaid dividends. The Series B shares are convertible
into shares of Nanopierce common stock at a conversion rate of $10 per
share plus accumulated and unpaid dividends, divided by the lessor of
110% of the average closing bid price of the Nanopierce common stock for
the five days prior to the purchase of the Series B shares or 80% of the
average closing bid price of Nanopierce's common stock for the five days
prior to the conversion date.
In September 1998, 8,000 shares of the Series B Preferred Stock were
converted into common shares of Nanopierce, and at September 30, 1998,
67,000 shares of Nanopierce Series B Preferred Stock were outstanding
with a balance of $590,000, which has been presented as a minority
interest in subsidiary in the accompanying consolidated financial
statements.
During 1998, Nanopierce also issued 1,265,093 shares of its common stock
in exchange for services valued at approximately $877,000, based upon the
market price of the Nanopierce common stock at the date the services were
performed. Approximately 970,000 shares ($174,000 of the total expense)
was attributed to employee compensation.
(9) STOCKHOLDERS' EQUITY (DEFICIT)
Series B Preferred Stock
In July 1996, the Company issued 1,000 shares of Series B redeemable
convertible preferred stock (Series B Preferred Stock) and detachable
warrants for proceeds of $8,900,000 (net of issuance costs of
$1,100,000). Each share of Series B Preferred Stock was convertible into
common stock at the exchange rate in effect at the time of the
conversion. 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 $140,000, of the dividend in its 1997
net loss applicable to common stockholders calculation. In addition, the
conversion terms included a beneficial adjustment to the exchange rate
equal to the original issue price plus 10% of the original issue price
per annum since July 10, 1996. The beneficial adjustment was treated as
an accretion on the Series B Preferred Stock. For the year ended
September 30, 1997, the amount of accretion was $193,000.
During the year ended September 30, 1998, 5 shares of Series B Preferred
Stock were converted into 678,761 shares of common stock. During the
year ended September 30, 1997, 782 shares of Series B Preferred Stock
were converted into 4,962,271 shares of common stock. At September 30,
1998, all shares of Series B Preferred Stock have been converted to
common stock.
F-19
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Each share of Series B Preferred Stock was 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 Stock divided by a fixed conversion rate of $3.9375
per share, exercisable 105 days after original issuance. The amount of
proceeds allocated to the warrants was based on the fair value of the
warrants on the date of the Series B Preferred Stock offering as
determined using the Black-Scholes pricing model. As of
September 30, 1998, warrants to acquire 1,092,063 shares of common stock
were outstanding. The warrants will expire if not exercised by
July 1, 2001.
Series C Preferred Stock
In December 1996, the Company issued 525 shares of no par value Series C
Preferred Stock (Series C Preferred Stock) and detachable warrants in a
private placement for $4,672,500 (net of issuance costs of $577,500).
Each share of Series C 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 C Preferred Stock
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
$932,000 that was recognized by the Company in 1997.
In addition, the conversion terms include a beneficial adjustment to the
exchange rate equal to the original issue price plus 8% of the original
issue price per annum since December 16, 1996. The beneficial adjustment
is treated as an accretion on the Series C Preferred Stock. For the
years ended September 30, 1998 and 1997 the amount of accretion was
$123,000 and $267,000, respectively. The Series C Preferred Stock
contains a liquidation preference equal to the original issue price plus
8% of the original issue price per annum to the date of liquidation.
Shares of Series C Preferred Stock are not entitled to voting rights.
Shares of Series C Preferred Stock, purchased in excess of certain
quantities as described in the preferred stock agreements, or purchased
in addition to previous purchases of shares of Series B Preferred Stock,
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 shares of Series C Preferred Stock
divided by a fixed conversion rate of $3.25 per share, exercisable 105
days after original issuance. The amount of proceeds allocated to the
warrants was based on the fair value of the warrants on the date of the
Series C Preferred Stock offering as determined using the Black-Scholes
pricing model. As of September 30, 1998, warrants to acquire 745,386
shares of common stock were outstanding. The warrants will expire if
not exercised by November 30, 2001.
During the year ended September 30, 1998, 20 shares of Series C Preferred
Stock were converted into 4,204,798 shares of common stock. During the
year ended September 30, 1997, 358 shares of Series C Preferred Stock
were converted into 9,449,575 shares of common stock. A total of 147
shares of Series C Preferred Stock are outstanding at September 30, 1998.
F-20
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Series D Preferred Stock
In September 1997, the Company issued 1,000 shares of Series D redeemable
convertible preferred stock (Series D Preferred Stock) in exchange for
1,000 shares of BMI preferred stock. Each share of Series D Preferred
Stock is convertible into the Company's common stock beginning
January 1, 1999, at the option of each holder, or automatically upon the
affirmative vote of the holders of a majority of the Series D Preferred
Stock. Each share of Series D Preferred Stock converts into three common
shares of the Company which would be acquired at the then current market
price multiplied by the conversion factor as described in the preferred
stock agreements. In September 1997, the Company also issued 80 shares
of Series D Preferred Stock as partial payment on non-compete agreements
with two related parties.
In January 2003, the exchange rate will be equal to 90% of the then
prevailing market rate, resulting in a deemed dividend of approximately
$300,000. The Company is recognizing the dividend in its net income
(loss) per common share calculation over the period beginning with the
date of issuance through January 1, 2003. The amount of deemed dividend
for the year ended September 30, 1997, was not significant. The amount
of deemed dividend for the year ended September 30, 1998 was $57,000.
In the event the total number of shares issuable upon conversion exceeds
10% of the then issued and outstanding shares, the Company must redeem
the Series D Preferred Stock within 90 days, which, if converted, would
exceed the 10% limitation, at their face value, plus all accrued
dividends.
The Series D Preferred Shares contain a liquidation preference equal to
the sum of the deemed purchase price of $2,500 per share, and 6% of the
deemed purchase price per annum for the period from January 1, 1998 to
the date of the event of liquidation. Shares of Series D Preferred Stock
are not entitled to voting rights; shares are entitled to receive a
cumulative 6% dividend commencing January 1, 1998, are redeemable by the
Company, and will receive registration rights permitting the resale of
not more than 20% of the outstanding Series D Preferred Stock in
connection with any registered firm commitment to underwrite the
Company's common stock after December 31, 1998. For the year ended
September 30, 1998 accrued dividends on the Series D Preferred Stock
approximated $113,000.
Stock Options
Intercell has established a Compensatory Stock Option Plan (the Option
Plan) and has reserved 14,000,000 shares of common stock for issuance
under the Option Plan. Incentive stock options can be granted under the
Option Plan at prices not less than 110% of the fair market value of
the stock at the date of grant, and nonqualified options can be granted
at not less than 50% of the stock's fair market value at the date of
grant or the date the exercise price of any such option is modified.
Vesting provisions are determined by the Board of Directors. All stock
options expire 10 years from the date of grant.
F-21
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Option Plan is as follows:
December 31,
-------------------------------------------
1998 1997
------------ -----------
Weighted- Weighted-
Average Average
Shares Exercise Shares Exercise
Price Price
---------- ------- ---------- -------
Outstanding at
beginning of year 8,952,000 $0.77 3,996,000 $1.56
Granted 400,000 0.08 6,831,000 0.61
Forfeited (2,425,000) 0.37 (1,675,000) 2.01
Exercised -- 0.00 ( 200,000) 0.75
--------- ---------
Outstanding at end of year 6,927,000 0.87 8,952,000 0.77
========= =========
Options exercisable at
end of year 6,927,000 0.87 8,896,000 0.77
Weighted-average fair value of
options granted during the
year at market 0.10 0.098
Weighted-average fair value of
options granted during the
year at less than market 0.05 --
The following table summarizes information about stock options outstanding
as of September 30, 1998:
Options Outstanding Options Exercisable
---------------------------------- ----------------------
Weighted-
Average Weighted- Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- -------- ----------- ----------- -------- ----------- --------
$0.05-0.50 5,670,000 8.66 years $0.40 5,670,000 $0.40
0.75-1.50 296,000 7.54 0.93 296,000 0.93
2.00-4.00 961,000 7.89 3.60 961,000 3.60
--------- ---------
6,927,000 8.30 0.87 6,927,000 0.87
========= =========
During 1998, options to purchase 400,000 shares of the Company's common
stock at exercise prices ranging from $.05 to $.10 per share, were
granted to two employees and a director of the Company. The exercise
prices were based on the estimated market value of the Company's common
stock at the date of grant and expire through 2008.
F-22
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options granted during 1997 include options to purchase 100,000 shares of
the Company's common stock were granted to a nonemployee for consulting
services. The options were granted at the market value on the grant
date, vested 1/12 per month and expire 10 years from the date of grant.
The Company recorded an expense of $148,000 related to the grant based
on the fair value of the options as determined using the Black-Scholes
pricing model.
The Company recorded deferred compensation of $678,000 in 1997 for the
difference between the exercise price and the fair value of the common
stock related to stock options granted. Compensation expense of $3,000
in 1998 and $1,006,000 in 1997 has been included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations.
Accounting for Stock-Based Compensation Under SFAS No. 123
The Company applies APB 25 for its stock plans. Had compensation cost
for the Company's stock plan been determined based on the fair value at
the grant dates for awards under the plan consistent with the method
prescribed under SFAS No. 123 the Company's net loss and net loss per
share would have changed to the pro forma amounts indicated below:
1998 1997
---- ----
Net loss, as reported $(9,493,000) $(16,481,000)
Net loss, pro forma (9,514,000) (17,472,000)
Net loss per share, as reported (0.26) (0.99)
Net loss per share, pro forma (0.26) (1.05)
The fair value of options granted during 1998 and 1997 is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
1998 1997
---- ----
Expected dividend yield 0% 0%
Expected stock price votality 79.5% 60%
Risk-free interest rate 6.00% 5.74%
Expected life of options 6.5 years 1.50 years
F-23
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants
At September 30, 1998, the following warrants to purchase common stock
were outstanding:
Number of Common Purchase Expiration
shares covered by warrants price date
-------------------------- -------- ----------
1,092,063 (a) $3.94 July 1, 2001
745,386 (b) $3.25 November 30, 2001
600,000 (c) $0.17 - 1.00 December 3, 2000
200,000 (d) $0.15 December 3, 2002
---------
2,637,450
=========
(a) Warrants issued in connection with series B Preferred Stock.
(b) Warrants issued in connection with Series C Preferred Stock.
(c) Warrants issued in connection with Convertible Debentures.
(d) Warrants issued for consulting services.
Other
During 1998 the Company issued 1,516,000 shares of the Company's common
stock to third parties, valued at $127,000 based upon the market value
of the stock at the date of issue, primarily as consideration for
services performed.
(10) INCOME TAXES
The Company did not incur an expense for income taxes in 1998 and 1997.
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:
Years Ended
September 30,
---------------------
1998 1997
---- ----
Computed "expected" tax benefit $(3,235,000) $(5,659,000)
State "expected" tax benefit ( 665,000) (1,495,000)
Change in valuation allowances 3,686,000 6,526,000
Net operating loss carryforwards
for state purposes not available
for future utilization 214,000 628,000
--------- ---------
$ -- $ --
========== ==========
F-24
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets at September 30, 1998 are as follows:
Deferred tax assets:
Net operating loss carryforwards $11,080,000
Basis in land held for sale 378,000
Goodwill and other intangibles 1,285,000
----------
12,743,000
Less valuation allowance (12,743,000)
----------
Net deferred tax assets $ --
==========
As of September 30, 1998, the Company had net operating loss
carryforwards for federal and state income tax purpose of approximately
$27,000,000 and $20,000,000, respectively. The federal net operating
losses expire from 2007 to 2018. The state net operating losses expire
from 2000 to 2018. The difference between the federal and state loss
carryforwards results primarily from a 50% limitation on California net
operating losses. The Company's net operating loss carryforwards may be
subject to annual limitations which could reduce or defer the utilization
of the losses should the Company have an ownership change as defined in
section 382 of the Internal Revenue Code. The Company's net operating
loss carryforwards may be further reduced or restricted by approximately
50% as a result of the liquidation of certain subsidiaries.
(11) COMMITMENTS AND CONTINGENCIES
Office Lease
The Company leases office space under a non-cancelable operating lease
agreement. This lease requires future minimum lease payments of $24,000
per year through September 30, 2001. The lease also requires the Company
to pay tax, maintenance, insurance, and certain other operating costs of
the leased property.
Rent expense under this lease was approximately $24,000 and $20,000 in
1998 and 1997, respectively.
Related Party Facilities Leases
CTL, which the Company sold in February, 1998, leased its principal
facility on a month-to-month basis from a significant stockholder.
Monthly rental payments under this facility lease were $10,000.
The Company also leased a facility in Vancouver, Canada, from a former
executive and director of the Company with monthly rental payments of
$3,000. This lease was terminated in February, 1998 upon payment of a
lease termination fee of $129,000. Related party lease expense was
$178,000 and $156,000 in 1998 and 1997, respectively.
F-25
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Guarantee Agreement
In connection with the acquisition of M.C. Davis Co., Inc. (M.C. Davis)
in 1996, the Company guaranteed the former shareholders of M.C. Davis
that the 277,778 shares of the Company's common stock issued to them
would have a value on October 8, 1998 of not less than $4.00 per share.
On October 8, 1998, the price per share of the Company's common stock
was $.025. In satisfaction of the guarantee, in October 1998, the
Company agreed to transfer 850,000 restricted common shares of its
Nanopierce common stock held by the Company and issue 1,293,899
restricted shares of the Company's common stock to the former
shareholders. As a result of these transactions, the Company recorded
a loss of $32,000 in 1998, which represented: (1) the difference between
the estimated market value of the subsidiary stock and the Company's
recorded cost of its investment in the subsidiary stock at the date of
the transaction ($689,000 gain) and (2) the guaranteed obligation of
$721,000.
Subsidiary Shareholder Agreement
Subsequent to the Company's 1997 acquisition of Sigma, Sigma issued
$1,700,000 of promissory notes in a private placement. In connection
with the Company's decision to discontinue operations of Sigma in June
1998, the Company entered into an agreement in September 1998 to place
750,000 shares of Nanopierce common stock in escrow, to be held for the
benefit of the Sigma investors. The agreement stipulates that the
750,000 shares may be sold in order to utilize the proceeds to pay the
Sigma investors. The Agreement provides that no sale of shares may be
made below $2.00 per share and the volume of sales cannot exceed 20% of
the average weekly trading volume of the common stock of Nanopierce prior
to the date of the transaction. Any shares not required to be sold are
to be returned to the Company. The Company is not required to provide
any further shares of Nanopierce or any other consideration in the event
the sale of these shares is insufficient to repay all the obligations.
License Agreements
Nanopierce has license agreements with third parties which allow the
third parties to utilize defined aspects of the intellectual property
rights in return for royalty fees. All but one license agreement is idle
and therefore these agreements have not produced any royalty fees for
Nanopierce. With regard to all current licensees, Nanopierce is involved
in pending litigation with a third party who is asserting ownership of
the rights to the related royalty revenues. Royalties under this
agreement through September 30, 1998 total approximately $38,000. These
monies are being held in an escrow account, outside of Nanopierce's
control, until the litigation is resolved. Although management believes
that Nanopierce will ultimately be successful in defending this matter,
the Company has not recognized any royalty revenue until the ultimate
outcome can be determined. In the opinion of management, the ultimate
disposition of this matter will not have a material impact on the
Company's operations or the further development of the PI Technology.
F-26
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), made and entered into as of
June 1, 1998, by and between Intercell Corporation (the "Corporation"), a
Colorado corporation, and Paul H. Metzinger, an individual with his principal
business address at 370 Seventeenth Street, Suite 3290, Denver, Colorado 80202
(the "Executive");
1. EMPLOYMENT AND TERM.
(a) Employment. The Company hereby employs Executive and
Executive hereby accepts such employment, in the capacity of President and
Chief Executive Officer of the Corporation to act in accordance with the
terms and conditions hereinafter set forth.
(b) Term. Executive's employment hereunder shall be for
an initial term of four years (the "Initial Term") commencing on June 1,
1998 (the "Effective Date") and terminating on May 31, 2002, subject to
the extension or earlier expiration of the Initial Term as provided in
this Agreement. Within forty-five (45) days of May 31, 2002 the
Corporation's Board of Directors (the "Board") shall review Executive's
performance under this Agreement and, in its sole discretion, renew the
Agreement for a term of one year (a "Renewal Term") commencing on the
first day immediately following the Expiration Date (as defined below).
The board shall provide Executive written notice of its decision to renew
or not renew this Agreement at least 30 days prior to the date of this
Agreement expires under the Initial Term of any Renewal Term (the
"Expiration Date"). If the Board fails to provide Executive with such
written notice, within the time period set forth above, the Agreement
shall terminate on the Expiration Date of the Initial Term or Renewal
Term, as the case may be. Whenever the word "Term" is used in this
Agreement is shall refer to either the Initial Term or the Renewal Term,
as the case may be.
(c) Location of Employment. Effective upon the date of
this Agreement, and through the Initial Term the Corporation shall maintain
an office for Executive at 370 Seventeenth Street, Suite 3290, Denver,
Colorado 80202, or such other location upon which the Corporation and
Executive shall mutually agree at which location Executive shall carry
out his duties.
2. DUTIES.
(a) During the period of employment as provided in
Paragraph 1(b) hereof, Executive shall serve as President and Chief
Executive Officer of the Corporation, and shall have all powers and
duties consistent with such position subject to the direction of the
Board. Such duties shall include, without limitation, the following:
(i) Chief Executive Officer and president. The Chief
Executive Officer and President's primary duties and
responsibilities consist of the following: establishing,
with the primary advice of the Chief Financial Officer and
Chief Operations Officer the Corporation's business plan and
strategy. This Officer will primarily be responsible for
dealing with the Corporation's securities, intellectual
property and other counsel, Corporation's auditors, transfer
agencies, investment banking firms, banks, financial
institutions, the Securities and Exchange Commission,
the National Association of Securities Dealers and other
<PAGE>
regulatory authorities. In addition, the Chief Executive
Officer and President will be responsible for dealing with
persons of similar position on major corporate transactions,
acquisitions, reorganizations and similar types of activities.
(b) Executive shall devote substantially his entire
professional time, attention and energy exclusively to the business and
affairs of the Corporation and its subsidiaries, as its business and
affairs now exist and as they hereafter may be changed, and shall not
during the term of his employment hereunder be engaged in any other
business activity whether or not such business activity is pursued for
gain or profit. The foregoing shall not be construed as preventing
Executive from (a) managing his personal investments or investing his
assets in such form or manner as will not require any significant services
on his part in the operation of the affairs of the businesses or entities
in which such investments are made, provided Executive shall not invest
in any business competitive with the Corporation and its affiliates,
except those companies whose securities are listed on a national
securities exchange or quoted daily in the Over-the-Counter Market listing
of the The Wall Street Journal; or (B) preclude Executive from continuing
to serve on the board of directors of any business corporation or any
charitable organization on which he now serves and which has been
disclosed to the Corporation in writing or, subject to the prior approval
of the Board, from accepting employment to additional board of directors,
provided that such activities do not materially interfere with the
performance of Executive's duties hereunder.
(c) Executive further agrees that during the term of his
employment under this Agreement he will engage in no business or other
activities, directly or indirectly, which are or may be competitive with
or which might place him in a competing position to that of the Corporation
and its affiliates without obtaining the prior written consent of the
Board, including, without limitation, the solicitation or acceptance of
consulting work from clients of the Corporation and its affiliates for
whom he has performed services by virtue of this Agreement or who he has
met in connection with his employment under this Agreement.
3. COMPENSATION.
(a) Base Salary. For services performed by Executive for
the Corporation pursuant to this Agreement during the Term, the Corporation
shall pay Executive a base salary at the rate of $210,000.00 per year (the
"Base Salary"), payable in accordance with the Corporation's normal payroll
practices but in no event less than once a month. Any compensation paid to
Executive under any additional compensation or incentive plan of the
Corporation, or that may be otherwise authorized from time to time by the
Board, shall be in addition to the base salary to which Executive shall be
entitled under this Agreement.
(b) Salary Adjustments. On each anniversary of the
Effective Date during the Initial Term and on each anniversary of the
Expiration Date thereafter, if the Board, in its sole discretion,
determines to renew the Agreement for an additional Term, the Base
Salary shall be increased (but not decreased) by an amount equal to the
Base Salary for the previous year multiplied by one (1) plus the
percentage change in the Consumer Price Index during the previous Term,
unless otherwise specified by the Board. The Base Salary as so increased
shall constitute the Base Salary of Executive for purposed of
Paragraph 3(a) hereof.
<PAGE>
(c) Tax Withholding. The Corporation shall provide for
the withholding of any taxes required to be withheld by federal, state and
local law with respect to any payment in cash, shares of capital stock or
other property made by or on behalf of the corporation to or for the
benefit of Executive under this Agreement or otherwise. The Corporation
may, at its option: (I) withhold such taxes from any cash payments owing
to the Corporation to Executive, including any payments owing under any
other provision of this Agreement, (ii) require Executive to pay to the
Corporation in cash such amount as may be required to satisfy such
withholding obligations or (iii) make other satisfactory arrangements with
Executive to satisfy such withholding obligations.
4. BENEFITS. In addition to the base Salary, Executive shall also be
entitled to the following:
(a) Participation in Benefit Plans. Executive shall be
entitled to participate in the various retirement, welfare, fringe benefit,
group long-term disability plans and other executive perquisite plans,
programs and arrangements of the Corporation available for senior executive
level officers of the Corporation. Executive and his dependents, at
Executive's request shall be enrolled in the Corporation's health, life,
disability and other insurance plans and programs immediately upon his
commencement of employment hereunder.
(b) Vacation and Sick Leave. Executive shall be entitled
to two weeks of vacation during each calendar year during which this
Agreement is in effect, or such greater period as the Board may approve,
and to paid holidays given by the Corporation to its domestic employees
generally, without reduction in salary or other benefits. Executive shall
also be entitled to sick leave according to the sick leave policy, which
the Corporation may adopt from time to time.
(c) Basic Stock Option. Executive shall be eligible for
grants of stock options in accordance with the Corporation's 1998 Stock
Option Plan or such other stock option plan developed by the Board.
(d) Expenses. The Corporation shall reimburse Executive,
upon proper accounting, for reasonable business expenses and disbursements
incurred by him in the course of the performance of his duties under this
Agreement and in accordance with the Corporation's policies as in effect
from time to time.
(e) Proration of Benefits. Any payments or benefits
hereunder, in any year during which Executive is employed by the
Corporation for less than the entire year shall, unless otherwise
provided in the applicable plan or arrangement, be prorated in accordance
with the number of days in such year during which Executive is employed by
the Corporation.
5. INDEMNIFICATION AND INSURANCE. Executive shall be entitled to the
maximum indemnification provided by the Bylaws and the Articles of Incorporation
of the Corporation for officers and employees of the Corporation. Executive's
rights under this Paragraph shall continue without time limit so long as he may
be subject to any such liability, whether or not the Term of employment has
ended. The Corporation shall obtain and maintain, in effect, officers and
directors liability insurance in an amount not less than $1,000,000 without
time limit so long as Executive may be subject to any such liability, whether
or not the Term of employment has ended.
6. REPRESENTATIONS AND WARRANTIES OF EXECUTIVE. Executive hereby
represents and warrants to the Corporation that (a) Executive's execution and
delivery of this Agreement and his performance of his duties and obligations
hereunder will not conflict with, or cause a default under, or give any party
a right to damages under, or to terminate, any other agreement to which
Executive is a party or by which he is bound, and (b) there are no agreements
or understandings that would make unlawful Executive's execution or delivery
of this Agreement or his employment hereunder.
<PAGE>
7. REPRESENTATIONS AND WARRANTIES OF THE CORPORATION. The Corporation
hereby represents and warrants to Executive as follows:
(a) The Corporation is duly organized and established as a
corporation under the laws of the State of Nevada and has all requisite
power and authority to enter into this agreement and to perform its
obligations hereunder. The consummation of the transactions contemplated
by this Agreement will neither violate nor be in conflict with any
agreement or instrument to which the Corporation is a party or by which it
is bound.
(b) The execution, delivery and performance of this
Agreement and the transactions contemplated hereby have been duly and
validly authorized by all requisite corporate action on the part of the
Corporation and are valid, legal and binding obligations of the
Corporation, enforceable in accordance with their terms except as may be
limited by the laws of general application relating to bankruptcy,
insolvency, moratorium or other similar laws relating to or affecting the
enforcement or creditors' rights, and rules of law governing specific
performance, injunctive relief or other equitable remedies.
8. TERMINATION.
(a) Cause. The Corporation may terminate Executive's
employment at any time for Cause (as defined herein), by reason of
Disability (as defined herein), or without Cause; provided, however,
that for any reason constituting Cause, Executive is given (x) reasonable
notice ("Notice of Termination for Cause") setting forth the reasons for
the Corporation's intention to terminate for Cause and the effective date
of such termination (which effective date may be the date of such notice),
(y) an opportunity for Executive, together with his counsel, to be heard
before the Board within two weeks of such notice and (z) within five (5)
business days after Executive's hearing before the Board, written notice
to Executive from the Board of its good faith determination that the
reasons specified in the Notice of Termination for Cause constitute Cause
under this Paragraph 8(a), and that Executive's employment is terminated
effective as of the date specified in the Notice of Termination for Cause.
Executive's rights to receive his salary and benefits hereunder shall not
be affected during the period between the receipt of the Notice of
Termination for Cause and the determination, if any, by the Board that
the reasons specified in such notice constituted Cause. For purposes of
this Agreement, "Cause" means:
(i) Executive commits a breach of any material term of
this Agreement, or any material obligation of the Corporation, and such
breach constitutes gross negligence or willful misconduct and, if such
breach is capable of being cured, Executive Fails to cure such breach
within 30 days of notice of such breach;
(ii) Executive is convicted of, or pleads guilty or nolo
contendere to a felony;
(iii) Executive's commission of any act that would cause any
license of the Corporation or its subsidiaries or affiliates to be revoked,
suspended, or not be renewed after proper application;
(iv) gross negligence in the performance of Executive's
duties and responsibilities;
(v) refusal of Executive to follow proper and achievable
written direction of the Board, provided that this shall not be Cause if
Executive in good faith believes the direction to be illegal, unethical or
immoral and so notifies the Board;
<PAGE>
(vi) material fraud or dishonesty with regard to the
Corporation (other than good faith expense account disputes); or
(vii) continuous refusal to attempt to perform Executive's
responsibilities and duties after written notice.
(b) Good Reason. Executive may terminate his employment at any
time for any of the following reasons (each of which is referred to herein
as "Good Reason") by giving the Corporation notice of the effective date
of such termination (which effective date may be the date of such notice):
(i) the Corporation commits a breach of any material term
of this Agreement and, if such breach is capable of being cured, the
Corporation fails to cure such breach within 30 days of receipt of notice
of such breach; or
(ii) a material change of position, duties or the
assignments of duties materially inconsistent with Executive's position
as Executive Officer of the Corporation.
(c) Change in Control. Executive may, at his option, terminate
his employment upon a "Change in Control." For purposes of this Agreement,
"Change of Control" shall mean:
(i) the obtaining by any party of fifty percent (50%) of
more of the voting shares of the Corporation pursuant to a "tender offer"
for such shares as provided under Rule 14d-2 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
any subsequent comparable federal rule or regulation governing tender
offers; or
(ii) individuals who were members of the Board immediately
prior to any particular meeting of the Corporation's shareholders which
involves a contest for the election of directors fail to constitute a
majority of the members of the Board following such election; or
(iii) the Corporation's executing an agreement concerning
the sale of substantially all of its assets to a purchaser which is not a
subsidiary; or
(iv) the Corporation's adoption of a plan of dissolution or
liquidation;
(v) the Corporation's executing an agreement concerning a
merger of consolidation involving the Corporation in which the Corporation
is not the surviving corporation or if, immediately following such merger
or consolidation, less than fifty percent 50%) of the surviving
corporation's outstanding voting stock is held by persons who are
stockholders of the Corporation immediately prior to such merger of
consolidation.
(d) Executive's Rights to Terminate. Executive may, at his
option, terminate his employment hereunder for any reason upon 60 days'
prior written notice to the Corporation.
(e) Death. This Agreement shall terminate automatically upon
Executive's death.
(f) Disability. The term "Disability" as used in connection with
termination of the employment of Executive shall mean the inability of
Executive to substantially perform his material duties hereunder due to
physical or mental disablement which continues for a period of six (6)
consecutive months, during the term of employment (during which six (6)
month period Executive's salary and benefits shall continue) as determined
by an independent qualified physician mutually acceptable to the
Corporation and Executive (or his personal representative).
<PAGE>
Notwithstanding the above, in the event of Disability, Executive shall be
entitled to participate in and be covered by the Corporation's group health
plan until Executive is able to obtain health insurance on substantially
the same terms and conditions as provided in the Corporation's group health
plan; provided, however, that if the Corporation's group health plan does
not allow Executive and his dependents to continue coverage, then the
Corporation and Executive agree to negotiate a mutually satisfactory
alternative to provide Executive with the benefits intended by this
Paragraph 8(f).
(g) Without Cause. The Corporation may, at its option,
terminate Executive's employment without Cause at any time upon written
notice to Executive.
(h) Date of Termination. For purposes of this Agreement, the
term "Date of Termination" shall mean the date that any party gives notice,
through action or otherwise, that it intends to terminate this Agreement
pursuant to the terms hereof or the date, if any, specified by the
terminating party in such notice as the effective date of termination;
provided, however, with respect to termination for Cause, the Date of
Termination shall be the date of receipt by Executive of written notice
form the Board as required by Paragraph 8(a) hereof. In addition, where
Executive gives notice to terminate this Agreement and the effective date
of termination is other than the date the Corporation receives notice of
termination, the Corporation reserves the right to accelerate the
Termination Date to the date Executive notified the Corporation of his
intent to terminate this Agreement.
9. OBLIGATIONS OF THE CORPORATION UPON TERMINATION.
(a) Without cause or for Good Reason. If the
Corporation shall terminate Executive's employment without Cause or if
Executive shall terminate his employment for Good Reason, this Agreement
shall terminate without further obligation to Executive hereunder, other
that the obligation (i) to continue to pay Executive in accordance with
the Corporation's normal payroll payment procedures his Base Salary from
the Date of Termination at the rate in effect on the Date of Termination
through the next anniversary of the Effective Date; and (ii) to continue
to provide Executive with the benefits set forth in Paragraph 4(a) through
the next anniversary of the Effective Date.
(b) Voluntary. If Executive terminates his employment for
other than Good Reason (a "Voluntary Termination"), this Agreement shall
terminate without further obligation to Executive hereunder, other than
the obligation (i) to continue to pay Executive in accordance with the
Corporation's normal payroll payment procedures his Base Salary through
the Date of Termination at the rate in effect on the Date Termination; and
(ii) to continue to provide Executive with benefits of the type described
in Paragraph 4(a) through the day preceding the Date of Termination.
(c) Cause. If Executive's employment shall be terminated
by the Corporation for "Cause" the Corporation shall continue to pay
Executive his Base Salary through the Date of Termination at the rate in
effect upon the Date of Termination. Thereafter, the Corporation shall
have no further obligation to Executive.
(d) Death. If Executive's employment is terminated by
reason of Executive's death, the corporation shall pay to Executive's
heirs or estate, the Base Salary at the rate in effect on the day
preceding death through the next anniversary of the Effective Date,
in one lump sum, payable within sixty days of the date of death.
<PAGE>
(e) Disability. If Executive's employment is terminated
by reason of Disability, the Corporation shall (i) continue in accordance
with the Corporation's normal payroll payment procedures to pay Executive
his Base Salary form the Date of Termination at the rate in effect on the
Date of Termination, through the next anniversary of the Effective Date;
provided, however, that if an event or condition is determined to be the
cause of Disability, by an independent qualified physician acceptable to
Executive and the Corporation, and such event or condition occurs at any
time in the last six months of the Term, then the Corporation shall
continue to pay Executive his Base Salary in accordance with the
Corporation's normal payroll procedures for a period of Six (6) months
beyond the Term; and (ii) continue to provide Executive with benefits of
the type described in Paragraph 4(a) through the next anniversary of the
Effective Date; provided, however, that if the Corporation's group health
plan does not allow Executive and his dependents to continue coverage,
then the Corporation and Executive agree to negotiate a mutually
satisfactory alternative to provide Executive with the benefits intended
by this Paragraph 9(e).
(f) Change of Control. If Executive terminates his
employment within 90 days following a Change of Control, the
Corporation shall (i) continue in accordance with the Corporation's
normal payroll payment procedures to pay Executive his Base Salary at the
rate in effect on the Date of Termination through the next anniversary of
the Effective Date; and (ii) continue to provide Executive with benefits
of the type described in Paragraph 4(a) through the day preceding the Date
of Termination.
10. NON-COMPETITION. Executive acknowledges and recognizes the highly
competitive nature of the Corporation and its affiliates and Executive
accordingly covenants and agrees, that at all times for a period of twelve (12)
consecutive months subsequent to the end of the Term or the Date of Termination,
whichever occurs earlier, as follows:
(a) Executive will not directly or indirectly own, manage,
operate, finance, join control or participate in the ownership, management,
organization , financing or control of, or be connected as an officer,
director, employee, partner, principal, agent, representative, consultant
or otherwise with any business or enterprise engaged in a business the same
as or substantially similar to the business of the Corporation and its
affiliates except as a holder of fewer that 5% of the outstanding shares
or other equity interests of a company whose shares or other equity
interests are registered under Section 12 of the Exchange Act.
(b) Executive will not directly or indirectly induce
any employee of the Corporation or any of its affiliates to engage in
any activity in which Executive is prohibited from engaging by
subparagraph (a) above or to terminate their employment with the
corporation or any of its affiliates, and will not directly or indirectly
employ or offer employment to any person who was employed by the
Corporation or any of its affiliates unless such person shall have been
terminated without cause or ceased to be employed by any such entity for a
period of at least 12 months.
(c) Executive will not use or permit his name to be used
in connection with any business or enterprise engaged in the business the
same as or similar to Corporation or its affiliates or any other business
engaged in by Corporation or any of its affiliates.
(d) Executive will not use the name of the Corporation or
any name similar thereto, but nothing in this clause shall be deemed, by
implication, to authorize or permit use of such name after expiration of
such period.
<PAGE>
(e) Executive will not make any statement or take any
action intended to impair the goodwill or the business reputation of the
Corporation or any of is affiliates, or to be otherwise detrimental to the
interests of the Corporation or any of its affiliates, including any action
or statement intended, directly or indirectly, to benefit a competitor of
the Corporation or any of its affiliates, except as may be required by
applicable law or by a local, state or federal regulatory agency.
(f) Executive will not (a) disclose any customer lists or
any part thereof to any person, firm, corporation, association or other
entity for any reason or purpose whatsoever; (b) assist in obtaining any
of the Corporation's customers for any other similar business; (c)
encourage any customer to terminate, change or modify its relationship
with the Corporation; or (d) solicit or divert or attempt to solicit or
divert the Corporation's customers.
(g) The Corporation shall have the right, subject to
applicable law, to inform any other third party that the Corporation
reasonably believes to be, or to be contemplating participating with
Executive or receiving from Executive properties of the Corporation in
violation of this Agreement and of the rights of the Corporation
hereunder, and that participation by any such third party with Executive
in activities in violation of this Paragraph 10 may give rise to claims
by the Corporation against such third party;
(h) Executive and the Corporation agree that in light of
the specialized nature of the industry and the national-customer base of
the Corporation's business, that the restrictions set forth in this
Paragraph 10 shall apply to Executive within the territory of the United
States of America. It is expressly understood and agreed that although
Executive and the Corporation consider the restriction contained in the
Paragraph 10 to be reasonable, if a final judicial determination is made
by a court of competent jurisdiction that the time or territory or any
other restriction contained in this Agreement is an unenforceable
restriction against Executive, the provisions of this Agreement
shall not be rendered void but shall be deemed amended to apply as to such
maximum time and territory and to such maximum intent as such court may
judicially determine or indicate to be enforceable. Alternatively, if any
court of competent jurisdiction finds that any restriction contained in
this Agreement is unenforceable, and such restriction cannot be amended so
as to make it enforceable, such finding shall not affect the enforceability
of any of the other restrictions contained herein; provided, however that
the provisions of this Paragraph 10 shall not apply if Executive is
terminated without Cause or Executive terminates for Good Reason.
(i) The failure of Executive to abide by the provisions
of this Paragraph 10 shall be deemed a material breach of this Agreement.
The primary purpose of the covenant not to compete is the Corporation's
legitimate interest in protecting its economic welfare and business
goodwill. The Corporation and the Executive further agree that this
covenant shall in no way be construed as a mere limitation on competition
nor shall it be construed as a restraint on Executive's right to engage in
a common calling.
11. PROPRIETARY INFORMATION. Executive agrees that at all times during
the Term of this Agreement and after Executive is no longer employed by the
Corporation, Executive shall not use for his personal benefit, or disclose,
communicate or divulge to, or use for the direct or indirect benefit on any
person, firm, association or company other than the Corporation, any
Proprietary Information. "Proprietary Information" means information relating
to the properties, prospects, products, services or operations of the
Corporation or any direct or indirect affiliate thereof that is not generally
known, is proprietary to the Corporation or such affiliate and is made known to
Executive or learned or acquired by Executive while in the employ of the
Corporation, including, by way of illustration, but not limitation, information
<PAGE>
concerning trade secrets, processes, structures, formulae, data and know-how,
improvements, inventions, product concepts, techniques, marketing plans,
strategies, forecasts, customer lists and information about the Corporation's
employees and/or consultants (including, without limitation, the compensation,
job responsibility and job performance of such employees and/or consultants).
However, Proprietary Information shall not include (i) at the time of disclosure
to Executive such information that was in the public domain or later entered the
public domain other than as result of a beach of an obligation herein; or (ii)
subsequent to disclosure to Executive, Executive received such information form
a third party under no obligation to maintain such information in confidence,
and the third party came into possession of such information other than as a
result of a breach of an obligation herein. All materials or articles of
information of any kind furnished to Executive by the Corporation or developed
by Executive in the course of his employment thereunder are and shall remain the
sole property of the Corporation; and if the Corporation requests the return of
such information at any time during, upon or after the termination of
Executive's employment hereunder, Executive shall immediately deliver the same
to the Corporation.
12. OWNERSHIP OF PROPRIETARY INFORMATION. Executive agrees that all
Proprietary Information shall be the sole property of the Corporation and its
assigns, and the Corporation and its assigns shall be the sole owner of all
licenses and other rights in connection with such proprietary Information. At
all times during the Term of this Agreement and after Executive is no longer
employed by the Corporation, Executive will keep the strictest confidence and
trust all Proprietary Information and will not use or disclose such Proprietary
Information, or anything relating to such information, without the prior written
consent of the Corporation, except as many be necessary in the ordinary course
of performing his duties under this Agreement.
13. DOCUMENTS AND OTHER PROPERTY. All materials or articles of
information of any kind furnished to Executive in the course of his employment
hereunder are and shall remain the sole property of the Corporation; and if the
Corporation requests the return of such information at any time during, upon or
after the termination of Executive's employment hereunder, Executive shall
immediately deliver the same to the Corporation. Executive will not, without
the prior written consent of the Corporation, retain any documents, data or
property, or any reproduction thereof of any description, belonging to the
Corporation or pertaining to any Proprietary Information.
14. THIRD-PARTY INFORMATION. The Corporation from time to time receives
from third parties confidential or proprietary information subject to a duty on
the Corporation's part to maintain the confidentiality of such information and
to use it only for certain limited purposes ("Third-party Information"). At all
times, until after the later of (a) the Expiration Date, (b) the fifth
anniversary of the Date of Termination or (c) the period of time the Corporation
must maintain the Third-Party Information as confidential, Executive will hold
Third-Party Information in the strictest confidence and will not disclose or use
Third-Party Information except as permitted by the agreement between the
Corporation and such third party.
15. INTELLECTUAL PROPERTY. Any and all improvements, inventions,
designs, ideas, works of authorship, copyrightable works, discoveries,
trademarks, copyrights, trade secrets, formulae, processes, techniques,
know-how, and data, whether or not patentable (collectively "Products"),
made or conceived or reduced to practice or learned by Executive, either
along or jointly with others, during the period of Executive's employment
(whether or not during normal working hours) that are related to or useful
in the actual or anticipated business of the Corporation, or result from tasks
assigned Executive by the Corporation or result from Executive's use of
premises or equipment owned, leased, or contracted for by the Corporation (a)
during the period of this Agreement, or (b) within a period of one year after
the Date of Termination, which may be directly or indirectly useful in, or
relate to, the business of the Corporation, shall be promptly and fully
disclosed by Executive to the Board and, if such intellectual property was
<PAGE>
made, developed or created pursuant to Executive's employment hereunder, such
intellectual property shall be the Corporation's exclusive property as against
Executive, and Executive shall promptly deliver to an appropriate representative
of the Corporation as designated by the Board all papers, drawings, models, data
and other material relating to any invention made, developed or created by him
as aforesaid. Executive shall, at the request of the Corporation and without
any payment therefor, execute any documents necessary or advisable in the
opinion of the Corporation's counsel or direct issuance of patents or copyrights
to the Corporation with respect to such Products as are to be the Corporation's
exclusive property as against Executive or to vest in the Corporation title to
such Products as against executive. The expense of securing any such patent or
copyright shall be borne by the Corporation. Executive shall be compensated, in
accordance with the Corporation's "Creative Awards" standard policy, for all
Products created or developed by the Executive either prior to his employment
(if delivered to the Corporation) or during the term of his Employment.
16. EQUITABLE RELIEF. Executive acknowledges that, in view of the
nature of the business in which the Corporation is engaged, the restrictions
contained in paragraphs 10 through 15, inclusive (the "Restrictions") are
reasonable and necessary in order to protect the legitimate interest of the
Corporation, and that any violation thereof would result in irreparable injuries
to the Corporation, and Executive therefor further acknowledges that, if
Executive violates, or threatens to violate, any of the Restrictions, the
Corporation shall be entitled to obtain from any court of competent
jurisdiction, without the posting of any bond or other security, preliminary
and permanent injunctive relief as well as damages and an equitable accounting
of all earnings, profits and other benefits arising from such violation, which
rights shall be cumulative and in addition to any other rights or remedies in
law or equity to which the Corporation may be entitled.
17. BINDING EFFECT. This Agreement shall be binding upon and inure to
the benefit of the heirs and representatives of Executive and the successors
and assigns of the Corporation. The Corporation shall require any successor
(whether direct or indirect, by purchase, merger, reorganization, consolidation,
acquisition of property or stock, liquidation or otherwise) to all or a
significant portion of its assets, by agreement in form and substance
satisfactory to Executive, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Corporation would
be required to perform this Agreement if no such succession had taken place.
Regardless whether such agreement is executed, this Agreement shall be binding
upon any successor of the Corporation in accordance with the operation of law
and such successor shall be deemed the "Corporation," for purposes of this
Agreement.
18. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand or mailed within the continental United States by first-class
certified mail, return receipt requested, postage prepaid, addressed as follows:
(a) if to the Board or the Corporation, to:
Intercell Corporation
370 Seventeenth Street, Suite 3290
Denver, Colorado 80202
Attention: President
(b) if to Executive:
Paul H. Metzinger
370 Seventeenth Street, Suite 3290
Denver, Colorado 80202
Such addresses may be changed by written notice sent to the other party at the
last recorded address of that party.
<PAGE>
19. ARBITRATION OF ALL DISPUTES.
(a) Any controversy or claim arising out of or relating to
this Agreement or the breach thereof (including the arbitrability of any
controversy or claim), shall be settled by arbitration in the City of Denver
in accordance with the laws of the State of Colorado by three arbitrators, one
of whom shall be appointed by the Corporation, one by Executive and the third
of whom shall be appointed by the first two arbitrators. If the first two
arbitrators cannot agree on the appointment of a third arbitrator, then the
third arbitrator shall be appointed by the American Arbitration Association.
The arbitration shall be conducted in accordance with the rules of the American
Arbitration Association, except with respect to the selection of arbitrators
which shall be as provided in this paragraph 19. The cost of any arbitration
proceeding hereunder shall be borne equally by the Corporation and Executive.
The award of the arbitrators shall be binding upon the parties. Judgment upon
the award rendered by the arbitrators may be entered in any court having
jurisdiction thereof.
(b) If it shall be necessary or desirable for Executive to
retain legal counsel and incur other costs and expenses in connection with the
enforcement of any or all of his rights under this Agreement, and provided that
Executive substantially prevails in the enforcement of such rights, the
Corporation shall pay (or Executive shall be entitled to recover from the
Corporation, as the case may be) Executive's reasonable attorneys' fees and
costs and expenses in connection with the enforcement of his rights including
the enforcement of any arbitration award.
20. NO ASSIGNMENT. Except as otherwise expressly provided herein, this
Agreement is not assignable by any party and no payment to be made hereunder
shall be subject to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance or other charge.
21. EXECUTION IN COUNTERPARTS. This Agreement may be executed by
parties hereto in two or more counterparts, each of which shall be deemed to be
an original, but all such counterparts shall constitute one and the same
instrument. The facsimile signature of any party to this Agreement shall be
considered an original signature of such person.
22. JURISDICTION AND GOVERNING LAW. Jurisdiction over disputes with
regard to this Agreement shall be exclusively in the courts of the State of
Colorado, and this Agreement shall be construed and interpreted in accordance
with and governed by the laws of the State of Colorado, other than the conflict
of laws provisions of such laws.
23. SEVERABILITY. If any provision of this Agreement shall be adjudged
by any court of competent jurisdiction to be invalid or unenforceable for any
reason, such judgment shall not affect, impair or invalidate the remainder of
this Agreement.
24. ENTIRE AGREEMENT. This Agreement embodies the entire agreement of
the parties hereof, and supersedes all other oral or written agreements or
understandings between them regarding the subject matter hereof. No change,
alteration or modification hereof may be made except in a writing, signed by
each of the parties hereto.
25. HEADINGS DESCRIPTIVE. The headings of the several paragraphs of
this Agreement are inserted for convenience only and shall not in any way affect
the meaning or construction of any of this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
INTERCELL CORPORATION
By: /s/ Thomas W. Vander Stel
________________________________
Thomas W. Vander Stel, Chief
Financial Officer
EXECUTIVE
By: /s/ Paul H. Metzinger
__________________________
Paul H. Metzinger
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
INTERCELL CORPORATION AND SUBSIDIRIES
COMPUTATION OF NET LOSS PER SHARE
Years ended September 30,
1998 1997
---------------------------
<S> <C> <C>
Net loss $(9,493,000) $(16,481,000)
Deemed dividends on Series B,C, and D preferred stock
relating to in-the-money conversion terms ( 57,000) ( 1,072,000)
Accrued dividends on Series D preferred stock. ( 113,000) --
Accretion on Series B and C preferred stock. ( 123,000) ( 460,000)
----------- ------------
Net loss applicable to common shareholders $(9,786,000) $(18,013,000)
=========== ============
Weighted average number of common shares outstanding 33,992,163 18,114,038
Common equivalent shares representing shares issuable
upon exercise of outstanding options and warrants -- --
----------- ------------
33,992,163 18,114,038
=========== ============
Basic and diluted loss per share applicable
to common shareholders:
Loss from continuing operations $( 0.16) $( 0.38)
Loss from discontinued operations ( 0.13) ( 0.31)
----------- ------------
Basic and diluted loss per common share $( 0.29) $( 0.99)
=========== ============
<FN>
* No impact to weighted average number of shares as the inclusion of additional
shares assuming the exercise of outstanding options and warrants would have been
antidilutive.
Full diluted and supplementary net loss per share is not presented as the amounts are
not dilutively or incrementally different from primary net loss per share amounts.
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INTERCELL
CORPORATION'S FINANCIAL STATEMENT AS OF SEPTEMBER 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<PAGE>
<CAPTION>
<S> <C>
<PERIOD-TYPE>. . . . . . . . FISCAL YEAR END
<FISCAL-YEAR-END>. . . . . . SEP-30-1998
<PERIOD-START> . . . . . . . OCT-01-1997
<PERIOD-END> . . . . . . . . SEP-30-1998
<CASH> . . . . . . . . . . . 267,000
<SECURITIES> . . . . . . . . 0
<RECEIVABLES>. . . . . . . . 12,000
<ALLOWANCES> . . . . . . . . 0
<INVENTORY>. . . . . . . . . 0
<CURRENT-ASSETS> . . . . . . 279,000
<PP&E> . . . . . . . . . . . 0
<DEPRECIATION> . . . . . . . 0
<TOTAL-ASSETS> . . . . . . . 843,000
<CURRENT-LIABILITIES>. . . . 5,005,000
<BONDS>. . . . . . . . . . . 0
. . . . 0
. . . . . . . . . 3,749,000
<COMMON> . . . . . . . . . . 21,329,000
<OTHER-SE> . . . . . . . . . (29,830,000)
<TOTAL-LIABILITY-AND-EQUITY> 843,000
<SALES>. . . . . . . . . . . 0
<TOTAL-REVENUES> . . . . . . 0
<CGS>. . . . . . . . . . . . 0
<TOTAL-COSTS>. . . . . . . . 0
<OTHER-EXPENSES> . . . . . . 3,946,000
<LOSS-PROVISION> . . . . . . 0
<INTEREST-EXPENSE> . . . . . 354,000
<INCOME-PRETAX>. . . . . . . (9,493,000)
<INCOME-TAX> . . . . . . . . 0
<INCOME-CONTINUING>. . . . . (5,095,000)
<DISCONTINUED> . . . . . . . (4,398,000)
<EXTRAORDINARY>. . . . . . . 0
<CHANGES>. . . . . . . . . . 0
<NET-INCOME> . . . . . . . . (9,493,000)
<EPS-BASIC>. . . . . . . . (0.29)
<EPS-DILUTED>. . . . . . . . (0.29)
</TABLE>
