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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-14306
INTERCELL CORPORATION
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(Exact name of registrant as specified in its charter)
Colorado 84-0928627
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(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
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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
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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-KSB or any amendment to
this Form 10-KSB. [ ]
As of the close of trading on December 20, 1999, there were 79,657,856 common
shares outstanding, 78,238,516 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 December 20, 1999, was approximately
$2,347,155.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Transitional Small Business Disclosure Yes No X
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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.
At the present time, the Company is engaged in only one line of business
through its subsidiary Nanopierce Technologies, Inc. (See PI Technology, page 6)
ACQUISITION AND DISPOSITION OF CALIFORNIA TUBE LABORATORY, INC. ("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"). 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"). The Company recognized a
loss of approximately $832,000 from the disposition of CTL and income from
discontinued CTL operations of approximately $215,000, in 1998.
ACQUISITION AND DISPOSITION OF PARTICLE INTERCONNECT TECHNOLOGY -
PARTICLE INTERCONNECT CORPORATION ("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."). 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 73% equity
interest in Nanopierce, based on the then issued and outstanding common shares.
Because of the issuance of additional securities by Nanopierce Technologies,
Inc. through September 30, 1999, the Company's ownership interest was reduced
below 50% at September 30, 1999. The Company has continued to consolidate
Nanopierce through September 30, 1999, based on several factors which management
believes constitute a controlling financial interest in Nanopierce by Intercell,
including common ownership by the President, Director, and CEO of the Company,
who is also President, Director, and CEO of Nanopierce.
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ACQUISITION OF CELLULAR MAGNETICS, INC. AND SUBSEQUENT DISPOSITION OF IT
AND THE ANTENNA TECHNOLOGY TO INTERCELL TECHNOLOGIES CORPORATION
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.
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.
On July 18, 1997, the Company sold all of its rights, title and interest in
the Antenna Technology, Cellular Magnetics and Intercell Wireless Corporation
(the "Antenna Transaction") to Intercell Technologies Corporation ("ITC"), a
Colorado corporation.
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 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 peaceable repossession of Cellular
Magnetics. On April 9, 1998, the Company sold Cellular Magnetics to its former
owners for $700,000. This amount was used to reduce certain obligations owed to
the Augustine Fund, LLC.
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. 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.
This property has been written down to $500,000 to reflect is estimated net
realizable value.
ACQUISITION AND SUBSEQUENT CESSATION OF OPERATIONS 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. As a
result of the transaction, the Company acquired approximately 90% of the
5,000,000 issued and outstanding common shares of Sigma. 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.
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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. During the fiscal year ended September 30, 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, 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. As
of September 30, 1999, the Augustine Fund, LLC is owed approximately $826,000
after giving effect to certain payments and other reductions.
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. In
February 1999, the Company agreed to issue an additional 1,424,864
restricted shares of the Company's common stock to certain remaining
shareholders of M.C. Davis. The Company recognized expense of $85,000
in 1999 in connection with this agreement.
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(b) William Scott Agreement. 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
broker-dealer. A total of approximately $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 shares 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 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 repay 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. On July 12, 1999 the Company pledged an additional
300,000 shares of Nanopierce to secure repayment of $675,000 due by
agreement to certain investors and assignees in the second private
placement.
As a result of these activities, the Company is engaged in only one line of
business through its affiliate Nanopierce.
NANOPIERCE TECHNOLOGIES, INC.
THE PI TECHNOLOGY
The PI Technology begins with metallized, treated diamond or other hard
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 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, oxide penetrating PI Technology is capable of penetrating surface
contamination and oils to create an effective and reliable electrical contact.
The particles concentrate any applied contact force into a very small area
or point. This gives the 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 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.
These particles can be applied to many different substrates-flexible,
rigid, metallic and non-metallic. This wide range of substrates, coupled with
the low contact force, gives the PI Technology the capability to make reliable
connectors out of materials that could collapse if subjected to normal required
contact forces.
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The Company has designated and is commercializing its PI Technology as the
Nanopierce Connection System (NCS).
SALES AND MARKETING STRATEGY
The market strategy of the Company is to offer NCS in products, services
and technology packages into market segments and commercial application in which
NCS either has a significant cost advantage or is enabling.
The Company intends to adopt and implement a three-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 companies in
the markets in which the Company plans to compete. The Company 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.
The second part of the Company's strategy involves the establishment of
joint ventures with established industry participants. This strategy is
designed to tap into existing markets and/or manufacturing leadership in markets
requiring special skills or high capital investment. An example of this type of
joint venture would be the proposed joint venture with Cirexx Corporation to
meet industry demand for NCS on printing circuit boards and industry with high
capital investment requirements.
The third part of the Company's strategy is to organize operating
subsidiaries that produce components and/or systems utilizing NCS. This
strategy is designed to permit the Company to become a first mover within the
merging market segments, which it can dominate with its technology. Also, the
Company can capture additional value by controlling production in segments with
low capital requirements. An example of this type of operating subsidiary would
be a subsidiary organized to produce smart labels, which requires low capital
and at the current time has no entrenched competitors. Further, the Company has
considered the application of its technology to semiconductor wafers. The
capital requirements on the Company would be very low and the technology is
completely new to this world-wide industry.
Implementation Plan
The Company intends to implement its sales and marketing strategy through
various proposed divisions and subsidiaries.
Technology Division
The Application Development Team, based in the Technology Division, will
play a role analogous to Corporate R&D or Engineering, developing new
applications for internal and external customers. This team will also allocate
a portion of its resources for technology enhancement
Business Development Division
Business Development will support all profit centers with Sales and
Marketing initially. Later, the proposed Smart Label and Wafer Pierce
Subsidiaries will assume responsibility for their own marketing, while Business
Development will continue to represent Technology Transfer to the industry.
Business Development will also monitor the industry for acquisition and other
strategic growth opportunities.
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Technology Transfer Division
The Technology Transfer Division represents the "virtual" profit center
based on commercial use of NCS outside the Company through licensees and other
strategic partners. This unit will support the Company's licensees and partners
with installation of NCS and related training and support. Personnel for these
activities will be drawn from the Technology Division, but costs directly
associated with Technology Transfer activities will be charged to the profit
center.
Proposed Operating Subsidiaries
The Proposed Operating Subsidiaries will act as independent profit centers.
Both subsidiaries will support only a minimal level of technology and/or
engineering effort, instead relying on the Technology Division. This way the
Company will minimize redundant technology development efforts. The proposed
operating subsidiaries will focus on the smart card/smart label markets and in
the new market of application of NCS at the wafer level.
Commencing in January 1999 the Company successfully introduced it
technology to applications in the manufacturing of smart cards and smart labels.
Of particular significance to manufacturers of contactless smart cards and smart
labels is their desire to obtain a secure, efficient connection between the
microprocessor chip and the radio antenna in what are known as combicards or
dual interface smart cards, contactless smart cards and contactless smart
labels.
Smart Cards are plastic, flexible credit card size devices embedded with a
powerful microchip, designed to store and process information. The microchip is
connected to the circuits, which make the card function. Reliable connections
in flexible applications are crucial to the card's operation. Smart Cards, which
are "Electronic Purses", are used as: Phone Cards, Health Cards, ID Cards, Pay
TV Cards, Meter Cards, GSM Cards, Bank Cards, Transport Tickets, Access Control
Cards and Automatic Dispenser Cards.
A smart label is a paper thin identification label with a programmable
integrated circuit inside and an antenna connected to it. It communicates
through radio frequency signals with a fixed position or hand held reader/writer
over distances more than one meter. Smart Labels collect the energy to operate
from a radio frequency field emitted by a fixed or handheld reader device;
therefore they do not need a battery, contactless smart cards operates on the
same principle. Its substrate is paper or plastic yielding a paper-thin
flexible label, which can be self-adhesive and be printed on. Uses for
contactless smart labels include: labels applied to shipping/courier parcels; as
airline baggage tags; as retail labels applied directly by the manufacturer to
the product, identifying the manufacturer, product type, production lot and a
digital signature to prove genuineness, as labels for inventory control; and as
labels for rental services, i.e. libraries, video stores, etc.
The market for smart cards and smart labels is poised for explosive growth.
However, there is a critical bottleneck holding the industry back: the lack of a
cost effective and reliable system for electrical connection of the microchip to
the contacts plate and/or antenna. The industry cannot satisfy the market
demands for cost effective and reliable contactless smart cards and smart labels
with current technologies. The Company believes it has the solution for the
industry, using its PI Technology in the Nanopierce Connection System.
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The Company is strategically positioned to become a major participant in
the large and growing smart card/smart label market. Current technologies
cannot satisfy the cost and reliability demands of this market. NCS can meet
cost and reliability demands because it provides single step low-cost
manufacturing procedures; it provides reliable connection on flexible
substrates; and is thin enough to be used in the manufacturing of smart labels.
RESEARCH AND DEVELOPMENT
To date, Nanopierce has not incurred any significant amount on research and
development and does not intend to incur any material research and development
costs during the next fiscal year. Nanopierce hopes to avoid incurring
substantial research and development cash requirements by entering into joint
ventures for the development of future PI Products.
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 ten U.S. patents (which expire from February 14, 2006 to October
15, 2013) and two patent applications pending and two patent applications in
preparation and other intellectual property 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 and certain non-exclusive rights; (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 (this license has been cancelled because Micromodule Systems,
Inc. ceased doing business because of insolvency); (iii) a non-exclusive license
to Johnson-Matthey Semiconductor Packagings, Inc. for use in the field of
laminate-based base products; (iv) a non-exclusive license to Multiflex, Inc.
for use in the field of the laminate-based bases and metal bases; and (v) 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.
All but two of the foregoing license agreements (Exatron and Johnson-
Matthey) 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, pending the resolution of certain legal issues
(See Item 3).
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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 any 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.
GOVERNMENT REGULATION
The various business operations of the Company, throughout fiscal years
1998 and 1999 were subject to numerous federal, state and local laws and
regulations, including those relating to the use and disposal of hazardous
substances. Specifically, the operations of the Company's former 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.
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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, 1999. The Company
has become aware of certain ground water and soil contamination at the Santa
Cruz facility formerly occupied by CTL. 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, 1999, the Company and its subsidiaries had 4 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
$2,027.
NANOPIERCE TECHNOLOGIES, INC.
Nanopierce currently maintains its executive and administrative office in
space provided by the Company. 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.
ITEM 3. LEGAL PROCEEDINGS
On November 30, 1999, Nanopierce obtained a court order of Declaratory
Judgment that it has incontestable and exclusive ownership of all patents,
patent applications, licenses, trade names, trademarks, trade secrets and other
intellectual properties relating to the PI Technology. In addition, as part of
the court order, a permanent injunction has been entered against Mr. DiFrancesco
prohibiting him from, among other things, directly or indirectly, privately or
publicly, making any statements to any actual or potential customer, licensee or
investor of the Company or its related entities, or that he has any ownership
interest in the Company's intellectual property.
As part of the Settlement Agreement, Mr. DiFrancesco will receive all
accrued and future royalty payments from the licenses, which were outstanding as
of September 3, 1996. The Company is prohibited from materially interfering
with Mr. DiFrancesco's rights to collect such royalties. The Company also
agreed to grant to Mr. DiFrancesco a two-year royalty bearing, non-exclusive
license to use the PI Technology for sockets, except for sockets used in the
automated handling and testing of integrated circuits and limited rights to use
the technology for layer to layer interconnections for one prospective customer.
Renewal of the license is dependent upon Mr. DiFrancesco achieving certain
minimum sales requirements.
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.
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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>
1998 FISCAL YEAR ASK BID
<S> <C> <C> <C>
December 31, 1997. $.125 $.125
March 31, 1998 .078 .063
June 30, 1998. .055 .040
September 30, 1998 .060 .040
1999 FISCAL YEAR
December 31, 1998. $ .01 $ .01
March 31, 1999 .04 .05
June 30, 1999. .04 .04
September 30, 1999 .02 .02
</TABLE>
As of September 30, 1999, 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.
12
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES
The Company made the following unregistered sales of its securities from
October 1, 1997 through September 30, 1999:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
AMOUNT OF
DATE OF SECURITIES
SALE TITLE OF SECURITIES SOLD CONSIDERATION
(1) 11/2/97 Common Stock 240,000 Interest on Loan Repayment
(2) 11/3/97 Common Stock 160,000 Interest on Loan Repayment
(3) 12/3/97 Common Stock 266,000 Public Relation Services
(4) 12/3/97 Series A-1 Convertible Debenture 1 $750,000
(5) 12/3/97 Attached Warrants to Acquire Common Stock 600,000
(6) 12/3/97 Warrant to Acquire Common Stock 200,000 Consulting Services
(7) 12/11/97 Common Stock 100,000 Loan to Sigma
(8) 12/11/97 Common Stock 75,000 Loan to Sigma
(9) 12/11/97 Common Stock 150,000 Loan to Sigma
(10) 12/31/97 Series A-2 Convertible Debenture 1 $750,000
(11) 12/30/97 Common Stock 1,000,000 Augustine Financing
(12) 1/16/98 Common Stock 250,000 Bahl Settlement Shares
(13) 2/3/98 Common Stock 678,761 Series B Conversion
(14) 2/3/98 Common Stock 1,270,810 Series C Conversion
(15) 2/6/98 Option to Purchase Common Stock, at
an exercise price of $0.10 per share 100,000 Service as a Director
(16) 2/9/98 Option to Purchase Common Stock, at
an exercise price of $0.10 per share 150,000 Service as an Officer
(17) 3/3/98 Common Stock 660,100 Series C Conversion
(18) 3/23/98 Common Stock 2,273,888 Series C Conversion
(19) 6/1/98 Options to Purchase Common Stock, at
an exercise price of $$0.05 per share 150,000 Service of Employee
(20) 5/8/98 Common Stock 250,000 Settlement
(21) 8/12/98 Common Stock 25,000 Interest on Loan Repayment
(22) 11/2/98 Common Stock 793,899 Settlement
(23) 11/2/98 Common Stock 500,000 Settlement
(24) 2/8/99 Common Stock 712,432 Settlement
(25) 2/8/99 Common Stock 712,432 Settlement
(26) 2/18/99 Common Stock 1,024,073 Series C Conversion
(27) 3/5/99 Common Stock 906,121 Series C Conversion
(28) 4/8/99 Common Stock 1,420,858 Series C Conversion
(29) 5/13/99 Common Stock 1,404,158 Series C Conversion
(30) 6/4/99 Common Stock 2,859,220 Series C Conversion
(31) 6/4/99 Common Stock 3,013,932 Series C Conversion
(32) 6/4/99 Common Stock 2,152,592 Series C Conversion
(33) 7/27/99 Common Stock 2,284,392 Series C Conversion
(34) 8/11/99 Common Stock 350,000 Services
(35) 8/18/99 Common Stock 8,330,811 Series C Conversion
(36) 8/23/99 Common Stock 1,952,384 Series C Conversion
(37) 9/14/99 Common Stock 1,221,151 Series C Conversion
</TABLE>
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.
13
<PAGE>
EXEMPTION FROM REGISTRATION CLAIMED. All of the sales by the Company of
its unregistered securities 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. Conversion
shares issued upon conversion of Series Shares were made in reliance upon Rule
144(k).
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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."
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
- Intellectual Property;
- 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;
14
<PAGE>
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 as of September 30, 1999 and for each
of the years in the two-year period then ended. 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.
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. The Company also recognized a loss on the disposition of CTL subsidiary
of approximately $832,000 in 1998.
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 stock. Intercell Corporation owns approximately 30% of
the outstanding common stock of Nanopierce Technologies, Inc. on a diluted
basis.
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
($67,000 in 1999).
On April 9, 1998, the Company entered into a stock purchase agreement to
sell all 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.
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.
15
<PAGE>
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.
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
During the year ended September 30, 1999, the Company adopted SFAS No. 130,
Reporting Comprehensive Income, which establishes new rules for the reporting
and display of comprehensive income and its components. During fiscal 1999 and
1998, the Company did not have any components of comprehensive income to report.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement, as amended by SFAS No. 137,
is effective for fiscal years beginning after June 15, 2000. 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 impact the Company's financial statements.
RESULTS OF OPERATIONS
Revenues
The Company had no revenue from continuing operations for the year ended
September 30, 1999 or 1998.
16
<PAGE>
Research and Development
Research and development expenses were $11,000 in the fiscal year of 1999
compared to $0 in the fiscal year of 1998. This is primarily attributable to a
limited amount of research and development activities in 1999 associated with
the Company's PI Technology. The Company has changed its Focus to licensing its
technology to companies that already have manufacturing facilities in place.
General and Administrative
General and administrative expenses from continuing operations decreased by
21% or $839,000 to $3,107,000 in the 1999 fiscal year compared to $3,946,000 in
the 1998 fiscal year. This decrease was primarily attributable to reductions of
wages, professional fees, consulting fees, and rent, which reductions were
partially offset by an increase in marketing and public relations fees.
Selling, general and administrative expenses of discontinued operations
decreased, from $2,599,000 in 1998 to $0 in 1999.
Other Income/Expense
The Company earned $8,000 in interest and other income in 1999 compared to
$129,000 in 1998, while incurring interest and other expenses of $178,000 in
1999 and $354,000 in 1998 respectively. The Company also recognized a gain on
the sale of subsidiary stock of $62,000 in 1999, compared to $0 in 1998.
Impairment of Investment in Land
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 net
realizable value of $500,000. The net realizable value of $500,000 at
September 30, 1999, is based on management's periodic assessments, negotiations
with a potential third-party buyer, and other factors.
Income Taxes
As of September 30, 1999, 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 the Company's consolidated financial
statements as of September 30, 1999, and for each of the years in the two-year
period ended September 30, 1999 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 (subsequently
assigned in consideration of a release of environmental liabilities) 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.
17
<PAGE>
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 30% ownership of that company on
a diluted basis. Intercell Corporation has reduced its costs and is currently
seeking its own financing.
During the year ended September 30, 1999, the Company's cash and cash
equivalents from continuing operations decreased by $237,000. This decrease was
due to net cash used in continuing operations of $1,009,000, and net cash
provided by financing and investing activities of $772,000.
During the fiscal year ended September 30, 1999, the Company had no capital
expenditures.
The Company believes that if financing of Nanopierce Technologies, Inc. can
be completed, adequate funding will then be 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 joint venture with Cirexx
Corporation and an Application and Development Agreement with Multitape, GmbH &
Co.
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.
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 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 and related financial information
required to be filed are indexed on page F-2 and are incorporated herein.
18
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AND AGE POSITION PERIOD
<S> <C> <C>
Paul H. Metzinger (60) Director, President and May 28, 1997 to present.
Chief Executive Officer
Charles E. Bauer, Ph.D. (47) Director November 22, 1996 to present.
Kristi J. Kampmann (27) Secretary July 1999 to present.
Thomas W. Vander Stel (39) Former Chief Financial Officer February 1998 to
and Secretary December 31, 1998.
Gilbert Olachea (43) Former President & Chief May 6, 1998 to
Executive Officer of December 1, 1998.
Nanopierce Technologies, Inc.
Kevin B. Waide (47 ) Director 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.
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.
19
<PAGE>
KRISTI J. KAMPMANN. Ms. Kampmann has been Secretary of the Company since
July 1999. In addition, she has served as the Secretary of Nanopierce, since
February 1998 and the Chief Financial Officer of Nanopierce since October 15,
1999. Since June 1997, she has been the administrative assistant to the Chief
Executive Officer, Chief Financial Officer and the Executive Vice President of
Technology & Marketing and paralegal for both the Company and Intercell. From
April 1996 to June 1997, she served as a paralegal and administrative assistant
for Paul H. Metzinger, P.C. Ms. Kampmann graduated from the Denver Paralegal
Institute in 1996. Ms. Kampmann received a B.A. from the University of
Minnesota in Morris in 1995, majoring in Political Science with a minor in
Business Management. She currently is attending the University of Colorado at
Denver, where she is completing work on an M.B.A.
KEVIN B. WAIDE. Mr. Waide has been a director of the Company since
January 28, 1998. Mr. Waide's experience includes six 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 because of their importance to the relationship with the Company's
only active affiliate Nanopierce Technologies, Inc.
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 Manager/Team Leader; Project manager - High
Density Interconnect; Product Manager MCM Products and as a research scientist.
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.
DR. MICHAEL E. WERNLE. Dr. Wernle is the Executive Vice President of
Strategic Business Development of Nanopierce, since November 1, 1999. He also
has served as a Director of Nanopierce since November 1, 1999. Dr. Wernle was
formerly Chief Operations Officer for Meinen, Ziegel & Co., GmbH, Munich,
Germany. He has also served as the Director of Production for Mikron, where he
was responsible for the development and production of RFID and Contactless Smart
Card Systems.
Dr. Wernle received his Ph.D. in applied physics from the Technical
University of Vienna in 1990 and his Masters Degree in Industrial Electronics in
1988.
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 10% 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.
20
<PAGE>
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.
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 $100,000 for the
fiscal year ended September 30, 1999 and 1998 (the "Named Executive Officers"):
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------------
<S> <C> <C> <C> <C>
NAME & PRINCIPAL YEAR SALARY BONUS OTHER ANNUAL
POSITION ($) ($) COMPENSATION
($)
Paul H. Metzinger,
Director, 1999 $ 17,500 $ -0- $ -0-
President & CEO(1) 1998 $143,501 $ -0- $ -0-
LONG TERM COMPENSATION
-----------------------------------------------------
AWARDS PAYOUTS
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
NAME & PRINCIPAL YEAR RESTRICTED SECURITIES LTIP ALL OTHER
POSITION STOCK UNDERLYING PAYOUTS COMPENSATION
AWARDS ($) OPTIONS ($) ($)
(#)
Paul H. Metzinger,
Director, 1999 -0- -0- $-0- $-0-
President & CEO(1) 1998 -0- -0- $-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. For the period of October 1, 1998 through
September 30, 1999 Mr. Metzinger was paid $17,500. 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 $0.3750 per share issued September 30, 1997 and expiring
September 30, 2007. Mr. Metzinger should be deemed the beneficial owner of such shares.
</TABLE>
The foregoing compensation table does not include certain fringe benefits
made available on a nondiscriminatory basis to all Company employees such as
group health insurance, dental insurance, long-term disability insurance,
vacation and sick leave. In addition, the Company makes available certain
non-monetary benefits to its executive officers with a view to acquiring and
retaining qualified personnel and facilitating job performance. The Company
considers such benefits to be ordinary and incidental business costs and
expenses. The aggregate value of such benefits in the case of each executive
officer listed in the above table, which cannot be precisely ascertained but
which is less than 10% of the cash compensation paid to each such executive
officer, is not included in such table.
21
<PAGE>
OPTION/SAR GRANTS TABLE
The following table provides information relating to the grant of stock
options to the Company's executive officers during the fiscal year ended
September 30, 1999. No options were granted during the fiscal year ended
September 30, 1999.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION/SAR VALUES
The following table provides information relating to the exercise of stock
options during the fiscal year ended September 30, 1999 by the Company's
executive officers and the 1999 fiscal year-end value of unexercised options.
No options were exercised during the fiscal year ended September 30, 1999.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR,
AND FISCAL YEAR-END OPTION/SAR VALUES
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS/SARS
OPTIONS/SARS AT FY - END
AT FISCAL YEAR(1) ($) (1)
---------------------------------------
<S> <C> <C> <C> <C>
SHARES
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED UNEXERCISABLE UNEXERCISABLE
---- ------------ -------- ------------- -------------
Paul H. Metzinger 0 0 2,350,000/0 47,000/0
Charles E. Bauer 0 0 100,000/0 2,000/0
Kristi J. Kampmann 0 0 200,000/0 4,000/0
Kevin B. Waide 0 0 150,000/0 3,000/0
<FN>
_______________
1 The average of the closing bid and asked price of the Common Stock on
September 30, 1999 ($0.02) was used to calculate the option value.
</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.
22
<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, 1999, the
Company did not grant any options to purchase shares of common stock to
directors, officers, employees and consultants of the Company and its
subsidiaries. As of September 30, 1999, 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.
23
<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, 1999, 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 (1/6) 5.80%
Cheri L. Perry
3236 Jellison Street
Wheat Ridge, CO 80033 3,852,541 (1/6) 5.80%
Charles E. Bauer, Chief Operating
Officer and Director
313121 Island Drive
Evergreen, CO 80439 100,000 (3) 0.15%
Kristi J. Kampmann, Secretary
370 17th Street, Suite 3580
Denver, CO 80202. 200,000 (4) 0.30%
Kevin B. Waide, Director
5790 Yukon Street
Arvada, CO 80002. 100,000 (5) 0.15%
All officers and directors as a group
(4 persons) 4,252,541 (6) 6.40%
<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.
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 Includes 50,000 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. Includes 150,000 shares of common stock subject to a
presently exercisable option, exercisable at $0.05 per share, issued June 1,
1998 and expiring June 1, 2008.
5 Shares underlying a presently exercisable option, at $0.10 per share, issued
February 6, 1998, expiring February 6, 2008.
6 Based on 66,409,089 shares of common stock issued and outstanding on September
30, 1999.
</TABLE>
24
<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 with monthly rental payments of $3,000. This lease was
terminated in February, 1998 upon payment of a lease termination fee of
$129,000. The Company also paid Mr. Smith $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 on April 9, 1998. Jerry W. Tooley was
formerly an officer of this former subsidiary of the Company. See
"BUSINESS-Recent Acquisitions, Dispositions and Transactions."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report.
(i) Financial Statements. See Index to Financial Statements
on page F-2 of this Report.
(ii) 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
2.1(7) Agreement and Plan of Reorganization, dated July 7, 1995,
between the Company and Modern Industries, Inc.
2.2(3) Plan and Agreement of Merger dated September 3, 1996, by and
between Particle Interconnect, Inc., Particle Interconnect
Corporation and the Company.
2.3(4) Agreement and Plan of Merger dated October 14, 1996, by and
between AC Magnetics, Inc., doing business as M.C. Davis
Company, Cellular Magnetics, Inc. and the Company.
2.4(5) Stock Purchase Agreement dated July 18, 1997 between Intercell
Corporation and Intercell Technologies Corporation and Addendum
2.5(6) Stock Sale and Purchase Agreement dated June 6, 1997 between
Intercell Corporation and Sigma Corporation.
2.6(11) Offer for Development Agreement of Microlink Technologies
Corporation.
25
<PAGE>
2.7(9) Stock Purchase Agreement dated February 6, 1998 by and among
Intercell Corporation, California Tube Laboratory and Jaymark,
Inc.
2.8(10) Agreement dated February 26, 1998 by and among Intercell
Corporation, Particle Interconnect Corporation and Sunlight
Systems, Ltd.
2.9(12) Securities Purchase Agreement between the Company and the
Augustine Fund, LLC, dated December 3, 1998.
3.1(7) Articles of Incorporation of the Company, and all amendments
thereto, as amended.
3.2(7) Bylaws of the Company.
4.1(7) Form of Common Stock Certificate.
4.2(11) Certificate of Designation for Series B Preferred Stock is
included in the Company's Articles of Incorporation filed as
Exhibit 3.1 and incorporated herein by reference.
4.3(1) Specimen of Warrant attached to Series B Preferred Stock.
4.4(11) Certificate of Designation for Series C Preferred Stock is
included in the Company's Articles of Incorporation filed as
Exhibit 3.1 and is incorporated herein by reference.
4.5(7) Form of Warrant attached to Series C Preferred Stock.
4.6(11) Certificate of Designation for Series D Preferred Stock
4.7(7) Specimen of Registration Rights Agreement for Series B Preferred
Stock.
4.8(7) Specimen of Registration Rights Agreement for Series C Preferred
Stock.
4.9(7) Plan of Liquidating Dissolution of Energy Corporation dated
July 8, 1996.
10.1(2) 1995 Compensatory Stock Option Plan.
10.2(7) Assignment Agreement dated September 3, 1996, assigning certain
Patents and Patent Applications and trade secrets relating to
the PI Technology to the Company, as assignee, and Particle
Interconnect, Inc. as assignor.
10.3(7) 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(13) Employment and Non-Disclosure Non-Competition Agreement, dated
June 1, 1998, between Paul H. Metzinger and the Company.
10.5(9) Side Letter Agreement and Security Agreement dated as of
January 30, 1998 between Intercell Corporation and Jaymark, Inc.
10.6(9) Environmental Remediation and Indemnity Agreement dated as of
February 6, 1998 by and among Intercell Corporation, California
Tube Laboratory, and Jaymark, Inc.
26
<PAGE>
10.7(9) Promissory Note, dated as of February 6, 1998 between Intercell
Corporation and Jaymark, Inc.
10.8(9) Indemnity escrow agreement dated as of February 6, 1998 by and
among Intercell Corporation, Jaymark, Inc. and Chicago Title
Company.
10.9(5) Warrant Agreement dated as of July 18, 1997 between Intercell
Corporation and Intercell Technologies Corporation.
10.10(5) Royalty Agreement dated as of July 18, 1997 between Intercell
Corporation and Intercell Technologies Corporation.
10.11(5) $2,200,000 Promissory Note dated as of July 18, 1997 between
Intercell Technologies Corporation and Intercell Corporation.
10.12(5) Stock Pledge and Security Agreement dated July 18, 1997 between
Intercell Corporation and Intercell Technologies Corporation.
10.13(11) Microlink Technologies Corporation Standard Industrial Lease.
10.14(11) Sigma Corporation Lease.
10.15(11) CTL Lease
11* Statement regarding Computation of Per Share Earnings.
21(7) 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 10-QSB for the quarter ended
December 31, 1997, filed September 17, 1998.
13 Incorporated by reference to the Company Annual Report on Form 10-KSB for the
year ended September 30, 1998.
(b) Reports on Form 8-K:
None
27
<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: December 22, 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: December 22, 1999 By /s/ Paul H. Metzinger
-----------------------------------
Paul H. Metzinger, Director, Chief
Executive Officer, President & Chief
Financial Officer
Date: December 22, 1999 By /s/ Kevin B. Waide
-----------------------------------
Kevin B. Waide, Director
28
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
September 30, 1999 and 1998
(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, 1999 F-4
Consolidated Statements of Operations - Years ended
September 30, 1999 and 1998 F-5
Consolidated Statements of Changes in Stockholders'
Equity (Deficit) - Years
ended September 30, 1999 and 1998 F-6
Consolidated Statements of Cash Flows - Years ended
September 30, 1999 and 1998 F-10
Notes to Consolidated Financial Statements F-12
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, 1999, 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,
1999. 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, 1999, and the results of their
operations and their cash flows for each of the years in the two-year period
ended September 30, 1999, 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 working capital deficiency and a stockholders' deficit at September 30,
1999, 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, P.C.
Denver, Colorado
November 30, 1999, except for Note 13,
as to which the date is December 13, 1999
F-3
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
September 30, 1999
<TABLE>
<CAPTION>
Assets
------
<S> <C>
Current assets:
Cash $ 14,000
-------------
Total current assets 14,000
Notes receivable, net of allowance of $38,000 (Note 4) 10,000
Investment in land held for sale (Note 5) 500,000
Restricted cash 21,000
Other assets 18,000
-------------
Total assets $ 563,000
=============
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Accounts payable $ 766,000
Accrued liabilities 322,000
Notes payable - related parties (Note 6) 221,000
Notes payable - other (Note 6) 183,000
Convertible debentures (Note 6) 826,000
Deferred gain on sale of subsidiary stock (Note 8) 423,000
Liabilities of discontinued operations (Note 7) 3,347,000
-------------
Total liabilities (all current) 6,088,000
-------------
Commitments and contingencies (Notes 8 and 12)
Stockholders' deficit (Note 10)
Convertible preferred stock; 10,000,000 shares authorized:
Series C; 70 shares issued and outstanding
(liquidation preference of $868,000) 745,000
Series D; 1,080 shares issued and outstanding
(liquidation preference of $2,984,000) 2,537,000
Warrants to acquire common stock. 3,075,000
Common stock; no par value; 100,000,000 shares authorized
66,309,089 shares issued and outstanding 22,231,000
Additional paid-in capital 6,885,000
Accumulated deficit (40,604,000)
Receivable from sale of subsidiary stock (Note 8) ( 394,000)
-------------
Total stockholders' deficit ( 5,525,000)
-------------
Total liabilities and stockholders' deficit $ 563,000
=============
<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,
----------------------
1999 1998
---- ----
<S> <C> <C>
General and administrative expense $ 3,107,000 $ 3,946,000
Research and development expense 11,000 -
--------------- -------------
Loss from operations ( 3,118,000) ( 3,946,000)
--------------- -------------
Interest income 6,000 118,000
Interest expense ( 178,000) ( 354,000)
Impairment of investment in land (Note 5) - ( 924,000)
Gain on sale of investment in subsidiary (Note 9) 62,000 -
Other income 2,000 11,000
--------------- -------------
( 108,000) ( 1,149,000)
--------------- -------------
Loss from continuing operations ( 3,226,000) ( 5,095,000)
--------------- -------------
Discontinued operations (Note 7):
Loss from operations to be disposed of ( 67,000) ( 4,110,000)
Loss on sale of subsidiaries - ( 288,000)
--------------- -------------
Loss from discontinued operations ( 67,000) ( 4,398,000)
--------------- -------------
Net loss ( 3,293,000) ( 9,493,000)
Deemed dividend on Series C and D preferred stock
relating to in-the-money conversion terms (Note 10) ( 57,000) ( 57,000)
Accrued dividends on Series D preferred stock (Note 10) ( 150,000) ( 113,000)
Accretion on Series B and C preferred stock (Note 10) ( 101,000) ( 123,000)
--------------- -------------
Net loss applicable to common stockholders $ ( 3,601,000) $( 9,786,000)
=============== =============
Net loss per share, basic and diluted, applicable
to common stockholders:
Loss from continuing operations $ ( 0.08) $( 0.16)
Loss from discontinued operations ( 0.00) ( 0.13)
--------------- -------------
Net loss $ ( 0.08) $( 0.29)
=============== =============
Weighted average number of common shares outstanding 45,274,227 33,992,163
=============== =============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
Years Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Convertible Warrants to
Preferred Stock Acquire Common Stock
--------------- Common Stock ------------
Shares Amount ------------ Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balances,
September 30, 1997 1,252 $3,658,000 $3,050,000 30,371,075 $21,285,000
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 - - - - -
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 - - - - -
Net loss - - - - -
------- --------- --------- ---------- ----------
Balances,
September 30, 1998 1,227 3,749,000 3,075,000 36,670,634 21,329,000
(Continued)
F-6
<PAGE>
Receivable
Additional From Total
Paid-In Deferred Subsidiary Treasury Accumulated Stockholders'
Capital Compensation Stock Sale Stock Deficit Equity (Deficit)
---------- ------------ ---------- -------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balances,
September 30, 1997 $2,996,000 $(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 - - - - 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 - - - - 225,000
Net loss - - - - ( 9,493,000) (9,493,000)
--------- ----- ------- ------- ---------- ---------
Balances,
September 30, 1998 4,098,000 - - - (37,003,000) (4,752,000)
</TABLE>
(Continued)
F-7
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Deficit)(Continued)
Years Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Convertible Warrants to
Preferred Stock Acquire Common Stock
--------------- Common Stock ------------
Shares Amount ------------ Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Conversion of Series C
preferred stock
to common stock ( 77) ( 775,000) - 26,569,692 775,000
Shares issued in
exchange for services - - - 350,000 9,000
Shares issued for
settlements - - - 2,718,763 118,000
Common stock issued
by subsidiary - - - - -
Amortization of
deemed dividend - 57,000 - - -
Accrual of preferred
stock dividend - 150,000 - - -
Accretion on preferred
stock - 101,000 - - -
Note receivable from
sale of subsidiary
stock (Note 8) - - - - -
Cash received on
note receivable - - - - -
Net loss - - - - -
------- --------- --------- ---------- ----------
Balances,
September 30, 1999 1,150 $3,282,000 $3,075,000 66,309,089 $22,231,000
======= ========= ========= ========== ==========
(Continued)
F-8
<PAGE>
Receivable
Additional From Total
Paid-In Deferred Subsidiary Treasury Accumulated Stockholders'
Capital Compensation Stock Sale Stock Deficit Equity (Deficit)
---------- ------------ ---------- -------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Conversion of Series C
preferred stock
to common stock - - - - - -
Shares issued in
exchange for services - - - - - 9,000
Shares issued for
settlements - - - - - 118,000
Common stock issued
by subsidiary 2,787,000 - - - - 2,787,000
Amortization of
deemed dividend - - - - ( 57,000) -
Accrual of preferred
stock dividend - - - - ( 150,000) -
Accretion on preferred
stock - - - - ( 101,000) -
Note receivable from
sale of subsidiary
stock (Note 8) - - (423,000) - - ( 423,000)
Cash received on
note receivable - - 29,000 - - 29,000
Net loss - - - - ( 3,293,000) (3,293,000)
--------- ----- ------- ------- ---------- ---------
Balances,
September 30, 1999 $6,885,000 $ - $(394,000) $ - $(40,604,000) $(5,525,000)
========= ===== ======= ======= ========== =========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
F-9
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended
September 30,
--------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $( 3,293,000) $( 9,493,000)
Less loss from discontinued operations 67,000 4,398,000
---------- ----------
Loss from continuing operations ( 3,226,000) ( 5,095,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization of intangible assets - 3,000
Loss on abandonment/sale of property, plant and equipment - 900,000
Loss from asset impairment - 924,000
Common stock issued for expenses 127,000 252,000
Common stock of subsidiary issued for services 1,844,000 877,000
Gain on sale of investment in subsidiary ( 62,000) -
Provision for loss on note receivable 38,000 -
Loss from assignment of note - 500,000
Amortization of deferred compensation - 3,000
Changes in operating assets and liabilities:
Increase in restricted cash ( 5,000) ( 16,000)
Increase in prepaid expenses and other current assets - ( 180,000)
Increase in accounts payable and
accrued liabilities 275,000 121,000
Increase in notes payable to related parties - 86,000
---------- ----------
Net cash used in continuing operations ( 1,009,000) ( 1,625,000)
---------- ----------
Net cash used in discontinued operations - ( 1,690,000)
---------- ----------
Cash flows from investing activities:
Other assets 20,000 ( 77,000)
Proceeds from sale of investment in subsidiary stock 62,000 -
Proceeds from disposition of business and sales
of property and equipment - 2,200,000
Payments received on notes receivable - 1,000
Increase in note receivable ( 10,000) -
---------- ----------
Net cash provided by investing activities 72,000 2,124,000
---------- ----------
Cash flows from financing activities:
Proceeds from notes payable to related parties 135,000 -
Proceeds from notes payable, other 183,000 1,500,000
Repayments of notes payable, other - ( 659,000)
Payment received on note receivable from subsidiary stock sale 29,000 -
Proceeds from issuance of common and preferred
stock by subsidiary 353,000 590,000
---------- ----------
Net cash provided by financing activities 700,000 1,431,000
---------- ----------
Net increase (decrease) in cash and cash equivalents ( 237,000) 240,000
Cash, beginning of year 251,000 11,000
---------- ----------
Cash, end of year $ 14,000 $ 251,000
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 26,000 $ 81,000
========== ==========
</TABLE>
(CONTINUED)
F-10
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Continued)
Supplemental disclosure of noncash investing and financing activities:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Conversion of Series B and C preferred stock to common stock $775,000 $202,000
Additional paid-in capital from conversion
feature of debentures - 225,000
Accretion on preferred stock 150,000 123,000
Amortization of deemed dividend on preferred stock 57,000 57,000
Accrual of preferred stock dividend 101,000 113,000
Note receivable from subsidiary stock sale 423,000 -
Additional paid-in capital from conversion of
subsidiary preferred stock to common stock 590,000 -
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
F-11
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
(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), and its
significant subsidiaries: California Tube Laboratory, Inc. through
February 6, 1998, Cellular Magnetics, Inc. 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
Prior to 1998, 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, due to continuing operating losses,
management implemented a plan 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
(in September, 1998, the buyer received a distribution from escrow
of approximately $184,000; at September 30, 1999, the escrow balance
is approximately $21,000) and a $500,000 promissory note receivable
(Note 4).
b. Acquisition of Nanopierce Technologies, Inc.
The Company's wholly owned subsidiary Particle Interconnect Corp.
(PI Corp.), was engaged in the design and development 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 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) for common and
preferred shares of Nanopierce resulting in a controlling ownership
interest of approximately 73% at the date of acquisition. During the
year ended September 30, 1999, the Company's ownership interest in
Nanopierce's outstanding common stock decreased from approximately
60% at September 30, 1998, to approximately 35% at September 30,
1999. The decrease in ownership interest was due to the Company's
sale of certain Nanopierce shares owned by the Company and various
subsidiary stock transactions (Notes 8 and 9). Although the
Company's ownership interest has been reduced below 50%,
the Company has continued to consolidate Nanopierce through
September 30, 1999, based on several factors which management
believes constitute a controlling financial interest in Nanopierce
by Intercell, including common ownership by the President, Director,
and CEO of the Company, who is also President, Director, and CEO of
Nanopierce.
F-12
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
c. Disposition of Cellular Magnetics, Inc.
In July 1997, the Company entered into a stock purchase agreement to
sell its 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) to Intercell Technologies Corporation (ITC) in exchange for
ITC common stock, notes, and 1,100,000 shares of the Company's
common stock owned by ITC.
In January 1998, ITC advised the Company that it would default on
all obligations owed to the Company. The Company undertook steps to
protect its interest including the repossession and foreclosure of
the primary assets of CMI. The Company recognized a loss of
$900,000 in fiscal 1998 due to impairment concerns associated with
ITC's inability to repay the Company, and on April 9, 1998, the
Company sold CMI to its former owners for $700,000.
d. Liquidation of Sigma 7 Corporation
Through June 1998, Sigma 7 Corporation (Sigma), through its
subsidiary BMI Acquisition Group, Inc. (BMI), developed and utilized
a proprietary patch technology to produce fully functional computer
memory modules from defective memory chips. In June 1998, Sigma
operations were discontinued, and on December 31, 1998, Sigma filed
for voluntary liquidation under Chapter 7 of the U.S. Bankruptcy
Code.
As of September 30, 1998 and through September 30, 1999, the Company's
remaining operating subsidiary is Nanopierce, which is engaged in the
design, development and licensing of products using its intellectual
property, the PI Technology. The PI Technology consists of patents,
pending patent applications, patent applications in preparation, trade
secrets, trade names, and trade marks. The PI Technology improves
electrical, thermal and mechanical characteristics of electronic products.
The Company has designated and is commercializing its PI Technology as the
Nanopierce Connection System (NCS) and markets the PI Technology to
companies in various industries for a wide range of applications. The
Company has not realized any royalty revenue through September 30, 1999
(Note 12).
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 1999 and 1998, and has a
working capital deficiency and a stockholders' deficit at September 30,
1999. 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 classification of liabilities
that might result from the outcome of this uncertainty.
F-13
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
To address its current cash flow concerns, the Company has been in
discussions with investment bankers and financial institutions attempting
to raise funds to support current and future operations. This includes
attempting to raise working capital through the sale of additional capital
stock or through the issuance of debt(Note 13). In addition, the Company,
through Nanopierce, is actively marketing the 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.
(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.
Restricted Cash
Restricted cash consists of cash held in an escrow account in connection
with the Company's sale of CTL.
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, 1999, there are no remaining inventories.
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.
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 off, and the charge was included in the
loss from discontinued operations.
F-14
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, restricted cash, the notes 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 transactions.
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.
Research and Development
The Company charges research and development costs to operations as
incurred.
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.
Loss Per Share
Statement of Financial Accounting Standards (SFAS) No. 128 Earnings Per
Share, 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.
F-15
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
Subsidiary Equity Transactions
The Company recognizes in its consolidated financial statements, gains and
losses resulting from the sales of previously unissued stock by its
subsidiaries, which have the effect of reducing the parent's percentage
equity holding. There were no gains or losses in connection with these
transactions in 1999 or 1998.
Recently Issued Accounting Standards
During the year ended September 30, 1999, the Company adopted SFAS
No. 130, Reporting Comprehensive Income, which establishes new rules for
the reporting and display of comprehensive income and its components.
During fiscal 1999 and 1998, the Company did not have any components of
comprehensive income to report.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities.
This Statement, as amended by SFAS No. 137, is effective for fiscal years
beginning after June 15, 2000. 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
impact the Company's financial statements.
Reclassifications
Certain amounts reported in the 1998 financial statements have been
reclassified to conform with the 1999 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.
F-16
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
At September 30, 1999, the Company has a $10,000, 8% note receivable from
a third party. The note is unsecured and is due on demand.
In connection with a sale of assets in 1996, the Company received a
$60,000 non-interest bearing note receivable, in which interest was
imputed on the note at 10%. At September 30, 1998, the outstanding
balance of the note and the unamortized balance of the discount was
$45,000 and $7,000, respectively. During the year ended September 30,
1999, no scheduled payments were received, and collection efforts were
unsuccessful. Therefore, at September 30, 1999, the Company has fully
reserved the net outstanding balance of the note and recorded a loss of
$38,000 in the 1999 fiscal year.
In connection with the Company's 1998 sale of CTL, the Company received a
$500,000, 3% unsecured promissory note from the buyer, payable upon the
completion of an environmental cleanup of the property formerly leased by
CTL. 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. 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 1998 in connection with the note assignment.
(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, 1999, is
based on management's periodic assessments, negotiations with a potential
third-party buyer, and other factors.
(6) NOTES PAYABLE AND CONVERTIBLE DEBENTURES
Notes Payable - Related Parties
At September 30, 1999, notes payable to related parties consist of three
unsecured promissory notes. One note, bearing interest at 8%, was due on
demand to an officer of the Company in exchange for $131,000 advanced to
Nanopierce. In October 1999, Nanopierce issued 358,420 shares of its
common stock at the quoted market price of the stock on the date of the
transaction, in satisfaction of this note and related accrued interest
totaling approximately $133,000. The second note for $67,000 is due to an
affiliate of an officer of the Company, bears interest at 10%, and is due
on demand. The third note for $23,000 is due to an officer of the Company
for funds advanced to the Company. This note is non-interest bearing and
is due on demand.
F-17
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 1999, accrued liabilities include $5,000 of accrued
interest expense due on the notes payable to related parties.
Notes Payable - Other
Notes payable - other, consists of four notes. Two of the notes bear
interest at 10% and are collateralized by 300,000 shares of Nanopierce
stock pledged by the Company. One of the two notes for $50,000 was
originally due November 20, 1999, and is now, along with the second note
for $15,000, due on demand. A third note for $68,000 is unsecured, bears
interest at 8%, and is also due on demand. The fourth note for $50,000 is
due March 3, 2000, and is collateralized by 500,000 shares of Nanopierce
stock pledged by the Company.
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 and administrative expense.
The Series A-1 debentures require quarterly interest payments at 9% per
annum, beginning March 1, 1998 with the balance originally 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 convertible 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, 1999, $826,000,
plus accrued interest of $110,000 is due on demand.
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.
F-18
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) DISCONTINUED OPERATIONS
The Company sold its wholly-owned subsidiary CTL on February 6, 1998; the
Company effectively terminated the 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 sales and income
(losses) from discontinued operations for 1998 are as follows:
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)
Loss on
Disposal ( 832,000) 544,000 - - - ( 288,000)
Loss from discontinued operations for fiscal 1999 represents $67,000 of
accrued interest on the notes payable of Sigma prior to Sigma filing for
voluntary liquidation under the U.S. Bankruptcy Code, which resulted in an
increase of $67,000 to liabilities of discontinued operations during the
year ended September 30, 1999.
Liabilities of discontinued operations at September 30, 1999, consists of
Sigma liabilities as follows:
Accounts payable and accrued liabilities $ 1,053,000
Notes payable 2,173,000
Other liabilities 121,000
----------
$ 3,347,000
==========
Notes payable of discontinued operations include $1,700,000, 10%,
unsecured notes payable issued in a 1997 private placement, originally
due in October 1998 (Note 12).
(8) AGREEMENT TO SELL NANOPIERCE STOCK
On July 7, 1999, the Company entered into an agreement to sell 845,000
shares of Nanopierce common stock held by the Company in exchange for a
$423,000 note receivable. The note bears interest at 10% and is due
July 7, 2000. The shares were sold at $0.50 per share representing a
premium of 38.9% over the closing bid price per share on the date of the
agreement. The purchaser of the stock has the option of putting back to
the Company the 845,000 shares of common stock on the due date of the note
in full satisfaction of the note.
Due to the uncertainty regarding the ultimate realization of the gain on
the transaction, the note receivable balance is classified as a reduction
to stockholders' equity (deficit) at September 30, 1999, and a liability
has been recorded for the unrealized gain. A payment of $28,500 was
received in September 1999, and was recorded as a reduction to the note
receivable.
F-19
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) SUBSIDIARY STOCK TRANSACTIONS
In July 1998, Nanopierce executed a securities purchase agreement (which
was amended in September 1998) with a third party pursuant to which
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) through September 30, 1998.
In September 1998, 8,000 shares of the Series B Preferred Stock were
converted into common shares of Nanopierce, and during the year ended
September 30, 1999, the remaining 67,000 shares of Nanopierce Series B
Preferred Stock were converted into common shares of Nanopierce, resulting
in an increase of $590,000 to additional paid-in capital.
During 1999, Nanopierce issued 5,199,000 shares of its common stock in
exchange for services valued at approximately $1,844,000, and 1,585,000
shares of its common stock in exchange for $353,000 cash. During 1998,
Nanopierce issued 1,265,093 shares of its common stock in exchange for
services valued at approximately $877,000. The value of the services was
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 in 1998.
During 1999, the Company sold 225,000 shares of Nanopierce common stock
held by the Company for $62,000 cash. The carrying value of the
Nanopierce shares was $0, resulting in a $62,000 gain on the transactions.
(10) 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.
Through September 30, 1997, 995 shares of Series B Preferred Stock were
converted into shares of common stock, and during the year ended
September 30, 1998, the remaining 5 shares of Series B Preferred Stock
outstanding were converted into 678,761 shares of common stock. At
September 30, 1998, all shares of the Series B Preferred Stock have been
converted to common stock.
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,
1999, 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).
F-20
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The Series C Preferred Stock is subject to automatic conversion in
December 1999.
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, 1999 and 1998, the amount of accretion was $101,000 and
$123,000, 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, 1999, warrants to acquire 745,386 shares of
common stock were outstanding. The warrants will expire if not exercised
by November 30, 2001.
For the year ended September 30, 1999, 77 shares of Series C Preferred
Stock were converted into 26,569,692 shares of common stock. For the year
ended September 30, 1998, 20 shares of Series C Preferred Stock were
converted into 4,204,798 shares of common stock. A total of 70 shares of
Series C Preferred Stock are outstanding at September 30, 1999.
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 on
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 shall convert into that
number of 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 will recognize 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 years ended September 30, 1999 and 1998 was $57,000 for each year.
F-21
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the event the total number of shares issuable upon conversion exceeds
10% of the then issued and outstanding shares, the Company shall, within
90 days of such event, redeem those Series D Preferred Stock, which, if
converted, would exceed the 10% limitation, at their face value, plus all
accrued dividends.
The Series D Preferred stock contained 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. Such 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 shares in connection
with any registered, firm commitment to underwrite the Company's common
stock after December 31, 1998. For the years ended September 30, 1999 and
1998, accrued dividends on the Series D Preferred Stock approximated
$150,000 and $113,000, respectively.
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.
A summary of the status of the Option Plan is as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at
beginning of year 6,927,000 $ 0.87 8,952,000 $ 0.77
Granted - - 400,000 0.08
Forfeited - - (2,425,000) 0.37
--------- ----- --------- -----
Outstanding at
end of year 6,927,000 0.87 6,927,000 0.87
========= ===== ========= =====
Options exercisable
at end of year 6,927,000 0.87 6,927,000 0.87
F-22
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Weighted-average fair value
of options granted during
the year at market - 0.10
Weighted-average fair value
of options granted during
the year at less than market - 0.05
</TABLE>
The following table summarizes information about stock options outstanding
as of September 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ----------------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
0.05-0.50 5,670,000 7.66 years $0.40 5,670,000 $0.40
0.75-1.50 296,000 6.54 0.93 296,000 0.93
2.00-4.00 961,000 6.89 3.60 961,000 3.60
--------- ---------
6,927,000 7.30 0.87 6,927,000 0.87
========= =========
</TABLE>
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.
Accounting for Stock-Based Compensation Under SFAS No. 123
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations 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, Accounting for Stock-Based
Compensation, the Company's net loss and net loss per share would have
changed to the pro forma amounts indicated below (in thousands, except per
share amounts):
1999 1998
---- ----
Net loss, as reported $( 3,293,000) $( 9,493,000)
Net loss, pro forma ( 3,293,000) ( 9,514,000)
Net loss per share, as reported (0.08) (0.26)
Net loss per share, pro forma (0.08) (0.26)
F-23
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
No options were granted during 1999. The fair value of each option
granted during 1998 is estimated on the date of grant using the Black-
Scholes option-pricing model with the following weighted-average
assumptions:
Expected dividend yield 0%
Expected stock price votality 79.5%
Risk-free interest rate 6.00%
Expected life of options 6.5 years
Warrants
At September 30, 1999, 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
745,387 (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 Series A-1 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.
(11) INCOME TAXES
The Company did not incur income tax expense for the years ended
September 30, 1999 and 1998. 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,
-----------------------------
1999 1998
---- ----
Expected income tax benefit $(1,089,000) $(3,235,000)
State income taxes ( 160,000) ( 665,000)
Change in valuation allowances 1,249,000 3,686,000
Net operating loss carryforwards
for state purposes not available
for future utilization - 214,000
--------- ---------
$ - $ -
========= =========
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, 1999 are as follows:
Deferred tax assets:
Net operating loss carryovers $11,700,000
Basis in land held for sale 360,000
----------
12,060,000
Less valuation allowance (12,060,000)
----------
Net deferred tax assets $ -
==========
As of September 30, 1999, the Company had net operating loss carryforwards
for federal and state income tax purposes of approximately $30,000,000 and
$20,000,000, respectively. The federal net operating losses expire from
2007 to 2019. The state net operating losses expire from 2000 to 2019.
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 as
a result of an ownership change as defined in section 382 of the Internal
Revenue Code. The Company's net operating loss carryforwards may be
further reduced as a result of the liquidation of certain subsidiaries.
(12) 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 property tax, maintenance, insurance, and certain other operating
costs of the leased property.
Rent expense under this lease was $24,000 in 1999 and 1998.
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 in 1998.
F-25
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Guarantee Agreement
In connection with the acquisition of 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. On February 8, 1999, the
Company agreed to issue an additional 1,424,864 restricted shares of the
Company's common stock to certain additional former shareholders of M.C.
Davis. The Company recognized expense of $85,000 in fiscal year 1999 in
connection this agreement.
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 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. No shares were sold in 1999. In July 1999,
the Company pledged an additional 300,000 shares of Nanopierce common
stock to collateralize repayment of $675,000 due under an agreement to
certain investors and assignees in the second private placement.
License Agreements and Litigation
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 two license agreements are
idle. Royalties and maintenance payments from the two license agreements
have been held in an escrow account (approximately $90,000 at
September 30, 1999), outside of Nanopierce's control, pending the
resolution of certain legal issues.
F-26
<PAGE>
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On November 30, 1999, Nanopierce obtained a Court Order of Declaratory
Judgment that it has exclusive ownership of all rights relating to the
PI Technology. As part of the Court Order, the original inventor of the
technology is to receive all royalty payments from the licenses which were
outstanding as of September 3, 1996. The Company also granted to the
original inventor of the technology a two-year, royalty bearing,
non-exclusive license to use the PI Technology for certain specified
applications.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the financial statements of the Company.
(13) SUBSEQUENT EVENT
In December 1999, a third party agreed to purchase from Nanopierce, up
to $1,000,000 of previously unissued, restricted common shares of
Nanopierce, in $50,000 increments, at the lesser of $1.00 per share or
77.5% of the lowest closing bid price of the common stock during the five
trading days immediately preceding the conversion date. On December 13,
1999, Nanopierce issued 100,000 shares of its common stock for $50,000
under this agreement.
F-27
<PAGE>
EXHIBIT 11
INTERCELL CORPORATION AND SUBSIDIRIES
COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
Years ended September 30,
1999 1998
------ ------
<S> <C> <C>
Net loss $(3,293,000) $(9,493,000)
Deemed dividends on Series B,C, and D preferred stock
relating to in-the-money conversion terms ( 57,000) ( 57,000)
Accrued dividends on Series D preferred stock ( 150,000) ( 113,000)
Accretion on Series B and C preferred stock ( 101,000) ( 123,000)
--------- ---------
Net loss applicable to common shareholders $(3,601,000) $(9,786,000)
========= =========
Weighted average number of common shares outstanding. 45,274,227 33,992,163
Common equivalent shares representing shares issuable
upon exercise of outstanding options and warrants - -
---------- ----------
45,274,227 33,992,163
========== ==========
Basic and diluted loss per share applicable
to common shareholders:
Loss from continuing operations $( 0.08) $( 0.16)
Loss from discontinued operations ( 0.00) ( 0.13)
--------- ----------
Basic and diluted loss per common share $( 0.08) $( 0.29)
========= ==========
</TABLE>
* 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.
Diluted and supplemental net loss per share is not presented as the amounts are
not dilutively or incrementally different from basic net loss per share amounts.
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 STATEMENTS AS OF SEPTEMBER 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CAPTION>
<S> <C>
<PERIOD-TYPE> FISCAL YEAR END
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 14,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 563,000
<CURRENT-LIABILITIES> 6,088,000
<BONDS> 0
0
3,282,000
<COMMON> 22,231,000
<OTHER-SE> (31,038,000)
<TOTAL-LIABILITY-AND-EQUITY> 563,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,118,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 178,000
<INCOME-PRETAX> (3,293,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,226,000)
<DISCONTINUED> (67,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,293,000)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
