UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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, 1997
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OR
[ ] TRANSACTION 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 (I.R.S. employer
incorporation or organization) identification number)
370 Seventeenth Street, Suite 3290
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:
Common Stock, No Par Value
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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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-K or any amendment to this
Form 10-K. [ ]
As of the close of trading on January 30, 1998, there were 32,612,075
common shares outstanding, 31,921,534 of which were held by non-affiliates. The
aggregate market value of the non-affiliated common shares, based on the average
closing bid and asked prices on January 30, 1998, was approximately $3,192,153.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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 ending 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.
On July 7, 1995, the Company purchased all of the assets and liabilities of
Energy. Energy's principal asset was its wholly owned subsidiary California
Tube Laboratory, Inc. ("CTL"). This transaction was accounted for as an
acquisition of the Company by Energy and, as such, the historical financial
statements contained herein reflect the financial statements of Energy. The
Company is currently negotiating the sale of CTL to an unaffiliated party on
terms and conditions to be determined. See "-Recent Acquisitions, Dispositions
and Transactions-Disposition of CTL." The results of operations of the Company
have been included only since the date of such acquisition. See "INDEX TO
FINANCIAL STATEMENTS."
As a result of the acquisition of Energy and additional acquisitions and
dispositions made during the 1996 and 1997 fiscal years (see "-Recent
Acquisitions, Dispositions and Transactions"), the Company is currently engaged
in three lines of business: (i) the testing and assembly of memory modules; (ii)
the manufacture and rebuilding of specialty electron power tubes; and (iii) the
proposed design, development, validation and qualification of the manufacturing
process specific to a proposed product that will use the Company's patented
particle interconnect technology (the "PI Technology") and a proprietary trade
secret electroplating process (the "Proprietary Electroplating Process").
The Company's operations are or will be conducted by and through its wholly
owned subsidiaries or majority owned subsidiaries, Sigma 7 Corporation ("Sigma
7"), CTL and Particle Interconnect Corporation ("PI Corp.").
The Company's officers and directors are responsible for the oversight of
the Company and its subsidiaries (i.e., Sigma 7, CTL and PI Corp.), and for
resolving any conflicts of interest
that may arise between the Company and its subsidiaries or among the
subsidiaries. The officers and directors of each subsidiary are responsible for
the day to day operations of that subsidiary and, in turn, are accountable to
the Company, as the sole or majority controlling shareholder of each subsidiary.
Major decisions relating to the scope of each subsidiary's operations or a
subsidiary's capital needs are reviewed and approved by the Company's board of
directors in accordance with relevant law. However, notwithstanding the
foregoing, in view of the affiliations among the Company and its affiliates, no
assurance can be given that any such conflicts can be resolved to the
satisfaction of all parties involved.
The statements contained in this Form 10-K, 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."
RECENT ACQUISITIONS,
DISPOSITIONS AND TRANSACTIONS
DISPOSITION OF CTL.
The Company is currently negotiating the sale of CTL to an unaffiliated
party on terms and conditions to be determined. Presently, such terms and
conditions provide for the purchase of all of the issued and outstanding stock
of CTL in exchange for a cash payment to the Company in the amount of
approximately $2,100,000 and the cancellation of certain indebtedness. The
carrying amount of the net assets of CTL, excluding intercompany accounts, was
approximately $2,500,000 as of September 30, 1997. Such sale is expected to be
consummated in the near future.
DISPOSITION OF INTERCELL WIRELESS CORP. AND CELLULAR MAGNETICS, INC.
Until recently, the Company had anticipated pursuing a new line of business
involving the development and manufacture of shielded cellular phone antennas.
The Company had obtained the rights to certain patent applications relating to
the Antenna Technology that the Company jointly developed with the
Telecommunications Research Center at Arizona State University ("ASU"). The
Antenna Technology was designed to reduce actual or perceived potential health
hazards that may be associated with exposure to electromagnetic signals by using
a "shielded" antenna.
Based on subsequent evaluations of the Antenna Technology by the Company
and the review of the Antenna Technology by an independent investment banking
company, the Company determined that it was in the Company's best interest to
divest itself of the proposed design, development and production of the Antenna
Systems conducted by its wholly owned
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subsidiary Intercell Wireless Corp. ("Intercell Wireless"), as well as the
manufacture of miniature and non-miniature coils, transformers and other
electronic assemblies conducted by its wholly owned subsidiary Cellular
Magnetics, Inc. ("Cellular Magnetics"). On July 18, 1997, the Company sold all
of its right, title and interest in the Antenna Technology and its wholly owned
subsidiaries (the "Antenna Transaction") to Intercell Technologies Corporation
("ITC"), a Colorado corporation, of which Terry W. Neild and Lou L. Ross own a
controlling interest. At the time the transaction was proposed, Mr. Neild was a
director and Executive Vice President of the Company and Mr. Ross was a
consultant to the Company. As consideration for the sale, the Company received
shares of ITC common stock, shares of the Company's common stock and certain
promissory notes. The total consideration received was recorded at the net book
value of assets sold, transferred or assigned due to uncertainties with respect
to realization of the consideration received.
ACQUISITION OF SIGMA 7
On June 6, 1997, the Company acquired 4,500,000 shares of Sigma 7's common
stock in exchange for the payment of $550,000 for the shares and for providing
approximately $1,985,000 in additional financing, consisting primarily of
secured loans and standby letters of credit. The funds were used for inventory
purchases, standby letters of credit to a major memory manufacturer, payment of
obligations, the settlement of litigation, working capital and the redemption of
preferred stock from two individuals holding such preferred stock. As a result
of the transaction, the Company acquired approximately 90% of the 5,000,000
issued and outstanding common shares of Sigma 7. In addition, the Company has
issued 1,000 shares of a new class of its Series D Preferred Stock (the
"Preferred Series"), to the holders of certain preferred shares of BMI, to
eliminate such preferred shares of BMI. For the purposes of this exchange, the
Series D Preferred Stock was valued at $2,500 per share. The transaction was
accounted for by the purchase. As a result, the cash purchase price for Sigma 7
was allocated to assets acquired based on their estimated fair values at the
date of the transaction.
ACQUISITION AND DISPOSITION OF M.C. DAVIS
Effective September 30, 1996, the Company, through its wholly owned
subsidiary Cellular Magnetics, an Arizona corporation, acquired AC Magnetics,
Inc., an Arizona corporation doing business as M.C. Davis Company ("M.C.
Davis"), for an aggregate purchase price of $1,800,000, comprised of a cash
payment equal to $800,000 and the issuance of 277,778 shares of the Company's
restricted Common Stock at a fair value of approximately $1,000,000. The
transaction was accounted for by the purchase method. M.C. Davis was acquired
by the Company to provide industrial engineering and production capabilities for
the Antenna Technology. M.C. Davis has production facilities located in Arizona
City, Arizona and Sonora, Mexico and has been engaged in the production of
miniature and subminiature electronic components since 1968. The Company sold
Cellular Magnetics to ITC effective July 18, 1997.
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PARTICLE INTERCONNECT TRANSACTION
On September 3, 1996, the Company completed the merger (the "PI Merger") of
Particle Interconnect Inc., a California corporation ("Particle California"),
with and into the Company's wholly owned Colorado subsidiary, Particle
Interconnect Corporation ("PI Corp."). The PI Merger resulted in PI Corp.
obtaining all of the properties, assets, liabilities and business operations of
Particle California, including, the entire right, title and interest in and to
the improvements of seven United States patents and six patent applications
involving the PI Technology and the Proprietary Electroplating Process. In
exchange for the PI Technology and the Proprietary Electroplating Process, the
Company issued 1,400,000 shares of Common Stock to the shareholders of Particle
California in a transaction not involving a public offering. The PI Merger was
accounted for as an immaterial pooling-of-interest.
In connection with the realization of a change in business strategy and
objective which occurred in September 1997, PI Corp. determined that certain
leasehold improvements, manufacturing equipment, raw materials and office
furniture and equipment were no longer necessary to achieve its objectives and,
accordingly, such leasehold improvements, manufacturing equipment, raw materials
and office furniture and equipment were sold between September 19, 1997 and
October 3, 1997 to non-affiliated parties for approximately $50,000 which
resulted in a loss of approximately $370,000.
Effective October 14, 1997, the Company entered into an agreement with Dr.
Herbert J. Neuhaus, Managing Director of PI Corp., and Mr. Ronald A. Morley, an
employee of the Company, to form a new entity to increase the likelihood of
obtaining additional funding for the development of the PI Technology and to
increase the probability of engaging an industry partner, with sufficient
personnel and financial resources to successfully commercialize the PI
Technology. PI Corp. will transfer all of its intellectual property, which has
a book value of zero, to the new entity for the Company's 72.5% interest and
ownership in the new entity. The remaining 27.5% will be owned by Dr. Herbert
J. Neuhaus and Ronald A. Morley who will become executive officers and directors
of the new entity. The Company deemed it an important part of its new policy of
making each subsidiary a self-financed operation to provide such ownership to
Dr. Herbert J. Neuhaus and Ronald A. Morley to provide them an incentive to
devote their time, expertise and industry contacts to obtain an industry partner
and financing for the commercialization of the PI Technology and PI Corp.'s
proprietary electroplating technology. The Company has not calculated the
amount of compensation expense related to this transaction as the fair value of
the net assets being transferred to the new entity has not been determined.
KENNETH S. BAHL SETTLEMENT
The company recently reached a resolution to the purported assignment of a
one-half interest in certain patents underlying the PI Technology from Mr.
Difrancesco to Mr. Kenneth S. Bahl in February 1991. Mr. Bahl received $172,500
and 250,000 shares of Common Stock. The Company now owns the full and
unconditional rights to the PI Technology.
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RIGHT TO DUAL RESONANCE CELLULAR PHONE ANTENNA
On November 15, 1995, the Company entered into an agreement with Arizona
State University ("ASU") in connection with the development of a new form of
cellular phone antenna with certain features designed to reduce potential health
hazards that may be associated with electromagnetic signals and to increase
transmittal reception and range of cellular telephones. The Agreement required
the Company to pay to ASU a total amount of approximately $78,000. On June 5,
1996, Dr. El-Badawy El-Sharawy ("Dr. Sharawy"), a tenured professor of ASU,
assigned to the Company, on a royalty-free basis, his entire right, title and
interest in, and to improvements on his U.S. Patent application entitled "Dual
Resonance Antenna with Portable Telephone Therewith" (the "Dual Resonance
Application"), and any and all patent applications thereon for nominal
consideration. The Company subsequently sold the rights to the Antenna
Technology to ITC effective July 18, 1997.
MISCELLANEOUS TRANSACTIONS
Arizcan Properties, Ltd. On March 13, 1996, Arizcan Properties, Ltd., a
wholly owned subsidiary of the Company ("Arizcan"), entered into an agreement
with a group, including certain minority shareholders of the Company, to acquire
a 94-acre development property located in Pinal County, Arizona for a total
purchase price of $1,424,362. This transaction was completed on June 18, 1996.
As consideration, the Company issued 400,000 shares of restricted Common Stock
at a fair value of $2.50 per share, and made cash payments of $57,000. In
addition, Arizcan assumed first and second mortgages on the property totaling
$367,000. The Company acquired this property for the purpose of constructing a
manufacturing facility for the products developed under the Antenna Technology.
Due the Company's acquisition of M.C. Davis in 1996, this property was no longer
required for manufacturing purposes and it is currently being held for sale.
Asia Skylink Corp. On December 29, 1994, the Company executed an Asset
Purchase Agreement with Asia Skylink Corp., to acquire certain microwave
transmission and associated support equipment, in exchange for 210,000 shares of
the Company's Series A Preferred Stock (the "Series A Preferred Stock"). On
August 30, 1996, in return for the cancellation of all of the Series A Preferred
Stock outstanding, the Company re-assigned the microwave transmission and
associated support equipment to the original seller and paid the holders of the
Series A Preferred Stock an aggregate of $40,000 as storage charges for the
period July 7, 1995 through August 30, 1996.
MEMORY MODULE PRODUCTS
OVERVIEW
The Company, through Sigma 7, is primarily engaged in the testing and
assembly of standard semi-conductor memory module products. Through its
development of proprietary testing technologies, the Company can purchase memory
integrated circuits (also referred to as
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"die" or "chips") at the wafer level, before they are tested and sorted and use
these memory chips to produce standard SIMMs (Single Inline Memory Modules), as
well as other products. The Company does not manufacture memory chips or, at
this time, package such memory chips; rather, the Company has entered into
various wafer program agreements with certain major semiconductor manufacturers,
wherein such manufacturers have agreed to sell to the Company, at a discount,
packaged, untested memory chips at the wafer level. The Company believes that
this gives it a cost advantage over competitors in the same marketplace. The
Company is also in the engineering phase for production of DIMMs (Dual Inline
Memory Modules) with respect to future products, and has entered the final
engineering phase for production of chip on board ("COB") memory modules.
The Company has submitted a patent application for new technology that
enables it to use faulty memory products, typically the cause of yield and
margin problems for conventional manufacturers, in producing fully functional
memory modules (the "Patch Technology"). If successful in production, this
Patch Technology is expected to provide significant competitive advantages to
the Company by driving down material costs and, when used to "patch" COB will,
it is believed, represent a significant segment of business for the Company,
since it allows COB to be readily salvaged without damaging the printed circuit
board. This new technology, coupled with the wafer program, could potentially
lower the Company's cost of goods sold compared to traditional memory module
manufacturers, resulting in larger gross profit margins upon the sale of its
products.
THE SEMICONDUCTOR MEMORY INDUSTRY
Overview
The demand for semiconductor memory devices in digital electronic systems
has substantially increased over the last several years as a result of the
increasing importance of memory in determining system performance. Memory
integrated circuits encompass several types of devices designed to perform
specific functions within computer and other electronic systems. The three most
significant categories of semiconductor memory are Dynamic Random Access Memory
("DRAM"), Static Random Access Memory ("SRAM") and nonvolatile memory, including
Flash memory. DRAM provides large capacity "main" memory; SRAM provides
specialized high-speed memory; and Flash and other nonvolatile memory provide
low-power memory which retains data after a system is turned off. In addition,
within each of these broad categories of memory products, semiconductor
manufacturers are offering an increasing variety of memory devices which are
designed for application-specific uses.
Memory Module Market
Memory modules are compact circuit board assemblies consisting of DRAM,
SRAM, Flash or other semiconductor memory devices and related circuitry. The
use of memory modules enables original equipment manufacturers ("OEMs") to offer
a relatively easy path for upgradeability of a personal computer or work
station, a feature of system design which is
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increasingly required by end users. To achieve this upgradeability and
flexibility, both personal computer ("PC") and communications OEMs frequently
design their systems to use memory modules as a "daughter card," reducing the
need to include memory devices on the motherboard.
The market for memory modules includes both standard and specialty modules.
The high-volume standard memory module market includes modules that can be
sourced from many module suppliers, and are designed to be incorporated into a
wide variety of equipment. These modules employ designs meeting widely used
industry specifications primarily utilizing DRAM memory and are available with a
variety of options to address the needs of multiple OEMs. Standard memory
modules are typically used in desktop personal computers and printers and are
sold both to OEMs and through computer resellers directly to end users.
Specialty memory modules include both custom and application specific
modules. These modules are usually based on either DRAM, SRAM or Flash
technologies and may include additional control circuitry. Specialty memory
modules are typically sourced (purchased) from a limited number of suppliers and
are generally used in mobile computers, work stations and telecommunications
devices such as routers and switches, and are primarily sold to OEMs.
As the variety of memory devices available to address specific applications
has expanded, the design and manufacture of memory modules has increasingly
become an area in which electronics OEMs employ outsourcing strategies. The
suppliers of memory modules include semiconductor manufacturers which maintain
captive memory module production capabilities and independent memory module
manufacturers which source memory devices from a wide variety of suppliers.
Because independent manufacturers, such as the Company, do not produce
their own semiconductor devices, they have the ability to mix and match devices
from a variety of semiconductor suppliers in a single memory module.
Independent manufacturers of memory modules currently address two primary market
segments: the OEM channel and the reseller channel. Suppliers to the OEM
channel typically offer custom and application-specific modules to the work
station and telecommunications industries, as well as standard memory modules
for use by computer and peripheral OEMs. Suppliers to the reseller channel
typically offer standard DRAM memory modules as an upgrade product sold through
computer distributors and retail channels.
Industry Technology
It is common practice in the industry to use an excess number of partially
good chips, packages or modules to assemble a complete memory unit that normally
would require a lesser number of parts. For example, a 1 megabyte ("M" or
"MByte") x9 SIMM can be made with three partially good 1Mx3 DRAM chips in lieu
of two flawless 1Mx4 chips and one flawless 1Mx1 chip. The identification,
isolation and combination of operating segments of partially defective chips,
packages or modules often requires complex procedures and bulky circuits due
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to the great number of possible combinations. The new higher density memory
modules have compounded the complexity of such combinations.
Due to economies of scale, the production of flawed memory chips by
semiconductor manufacturers is an integral part of their wafer manufacturing and
packaging process. Approximately 7-8% of all computer chips are defective at
the wafer level, with an additional 7-8% of memory chips being found defective
after packaging. Despite semiconductor manufacturers use of increasingly
sophisticated or refined techniques to improve the quality of their chips,
defects are still detected in chips before or after they are encapsulated into
packages or assembled on chip on board ("COB") modules (i.e., where the
packaging step is avoided and the bare die are attached directly to the PC
board).
The high cost of high-density chips makes the use of less-than-perfect
chips economically desirable. The Company is aware of three companies that
manufacture memory modules using partial memory chips. The Company believes the
Patch Technology as well as its extensive design and manufacturing expertise
provides it with a competitive advantage over other memory module manufacturers
that use partial memory chips.
THE COMPANY'S PATCH TECHNOLOGY
The Company's Patch Technology is predicated upon the fact that the
combination or re-routing of input/output ("I/O") lines between chips, packages
or modules is subject to mechanical limitations both in terms of circuit size
and the number of cross-over leads that can be crowded upon a printed circuit
("PC board"). These limitations require some trade-offs between the types,
sizes and distribution of chips and packages that can be used to assemble a
particular memory unit. The Patch Technology provides a logical approach to the
combination of chips and/or packages using decision-guiding programs as well as
versatile I/O line combining hardware.
Upon receiving a shipment of packaged memory chips, the Company retests the
chips, using industry standard testers, to identify non-flawed chips and
operating segments of flawed memory chips, and then sorts and classifies the
flawed chips as to type, number and concentration of working quadrants within
the chips. The Company attaches a computer generated bar code, disclosing all
relevant characteristics, to all tested memory chips and assembled memory
modules in order to ensure accurate tracking, inventory control and product
quality. For flawed chips, the Company uses its proprietary Patch Technology.
The Patch Technology uses a systematic, logical process to design and assemble
the memory modules by combining their working segments in the most effective
manner in a cohesive memory assembly in order to make the module fully
functional.
An integral part of this process is the use of proprietary PC boards that
provide the Company with a large number of alternative patching connections.
The PC boards are designed by the Company's engineers and manufactured by third
parties.
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Testing
In order to ensure the highest quality of memory modules, the Company has
developed an intensive burn-in and multi-level memory module testing program
which it believes is more extensive than common industry practice. After
initial sort and classification testing, the Company tests completed memory
modules on industry standard testers. The Company then conducts high
temperature and voltage burn-in to eliminate early field failures. The memory
modules are then tested on Pentium/TM//133 boards that run a pattern test
program using proprietary software developed by the Company for up to 16 hours.
This process is constantly updated as new mother boards and central processing
units become available. The Company also conducts more than a one hour local
area network based test under Windows 95/TM/ at 60 nano seconds, a Windows
95/TM/ screen test and a final test screen with the Company's Xincom testers.
THE COMPANY'S PRODUCTS
Current Products and Markets
Currently, the Company offers custom and application-specific memory
modules, as well as standard memory modules that comply with industry standards
established by the Joint Electronic Development Engineering Council. The custom
and application-specific memory modules and standard memory modules accounted
for approximately 7% and 13%, respectively of the Company's net revenues in
fiscal year 1997. The Company's PC boards comply with industry standards
established by the Personal Computer Memory Card International Association.
Although the Company currently uses the Patch Technology on a limited basis,
currently its primary focus is on assembling modules composed on 4X4 memory
chips using non-flawed chips. The bulk of these memory modules are 4X32 memory
modules, with certain limited variations to use old inventory.
The Company's memory modules include DRAM and Flash memory. The Company
offers a comprehensive line of DRAM memory modules, including a wide range of
SIMMs. The Company's DRAM modules are available in various configurations of up
to 72 pins and densities of up to 16 MBytes. Many of these products are offered
in both 5.0 volt and 3.3 volt versions, with fast page mode ("Fast Page") and
extended data output ("EDO") architectures. The majority of the Company's
products are standard SIMM memory modules. The Company also produces a limited
amount of standard VGA memory modules using partial memory chips.
The Company sells the completed memory modules under the Company name and
with full service support and industry standard product warranties (e.g., if a
memory module is determined to be defective within one year, it will be
replaced, upon return, at no cost). Until recently, the Company sold the
majority of its memory modules to independent memory resellers. The Company has
recently ceased this practice and now sells its memory modules to small OEMs and
memory distributors in the computer industry. The Company will continue its
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attempts to expand its distribution network to include additional wholesale and
retail outlets that sell computer equipment as well as small and medium sized
OEMs.
In order to obtain market share, the Company currently sells its memory
modules at a discount, usually $1.00 to $1.50 per module. While the Company
currently intends to continue this practice, it plans to reduce the discount to
$.50 per memory module in the future.
Future Products
The Company is currently engineering DIMMs for production. Tooling and
testing software design are underway. Current plans call for DIMM production to
integrate into the production process by February 1998. The Company intends to
enter the DIMM market because it believes such products offer higher margins and
less intense competition. In addition to the above products, the Company is
currently designing proprietary PC boards for use in assembling memory modules
using static DRAM and SRAM memory chips.
The Company believes the COB memory module market provides the greatest
opportunity for using the Patch Technology. The Company believes the Patch
Technology is the only viable method for using partial memory chips to
manufacture COB memory modules and to correct defective COB memory modules
already manufactured. As noted above, due to the nature of the semiconductor
manufacturing process, between 7-8% of all die manufactured are found to be
defective after initial wafer level testing. On 16 chip 2X32 or 8X32 COB memory
modules, up to 80% of such modules could have a single die fail.
The Patch Technology will enable the Company to repair flawed COB memory
modules without detaching the memory chips currently encapsulated on the module.
If the Patch Technology proves effective, the Company can offer substantial cost
savings to COB memory module OEMs, which savings the Company does not believe
its competitors can match without using the Patch Technology. The Company
believes it can obtain substantial cost savings using the Patch Technology based
on the Company's estimates of basic yields for packaging full wafers and testing
full wafers and bare die at the Company's facilities. Since the Company has not
entered this market to date, the validity and accuracy of the such estimates
cannot be reasonably determined.
To assemble COB memory modules using the Patch Technology, the Company will
be required to obtain a regular source of supply of whole wafers and bare,
unpackaged die from semiconductor manufacturers and obtain additional bare die
burn-in and testing equipment, which it can lease. The Company has entered into
discussions with certain major semiconductor manufacturers to obtain a regular
supply of whole wafers and bare die. The Company will also be required to
design, and currently is in the process of designing, proprietary PC boards for
use in assembling COB memory modules.
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COMPETITION
The memory module industry is intensely competitive, comprised of a large
number of competitive companies, several of which have achieved a substantial
share of their respective markets. Generally, all of the Company's competitors
in this market have substantially greater financial, marketing, technical,
distribution and other resources, greater name recognition, lower cost
structures and larger customer bases than the Company. The Company currently
indirectly competes with numerous, well established foreign and domestic
companies engaged in the fabrication of wafers, some of which maintain captive
memory module production, divisions, subsidiaries or capabilities, including
Fujitsu Ltd., Hitachi, Ltd., Hyundai Electronics, Co., Micron Technologies,
Inc., Motorola, Inc., NEC Corp., Samsung Semiconductors, Inc., LG Semicon,
Siemens, and Texas Instruments Incorporated. In the OEM memory module market,
the Company competes against semiconductor manufacturers that maintain captive
memory module production capabilities, including Integrated Device Technology,
Inc., Micron Electronics, Inc. (a subsidiary of Micron Technology Inc.) and
Multichip Technology, Inc. (a division of Cypress Semiconductor Corporation).
The Company also competes with independent memory module manufacturers,
including Celestica, Inc., PNY Electronics, Inc. and Simple Technology
Incorporated. In the computer systems reseller market for memory modules, the
Company competes with Kingston Technology, Inc., Viking Technology, Inc. and
Vision Tek, Inc. The Company faces competition from current and prospective
customers that evaluate the Company's capabilities against the merits of
manufacturing products internally. In addition, the Company competes and
expects to continue to compete with certain of its suppliers. These suppliers
may have the ability to manufacture competitive products at lower costs than the
Company as a result of their higher levels of integration. The Company also
faces and may face competition from new and emerging companies that have
recently entered or may in the future enter the markets in which the Company
serves.
The Company expects its competitors to continue to improve the performance
of their current products, to reduce their current product sales prices and to
introduce new products that may offer greater performance and improved pricing,
any of which could cause a decline in sales or loss of market acceptance of the
Company's products and thereby have a material adverse effect on the Company's
business, financial condition and results of operations.
There can be no assurance that enhancements to or future generations of
competitive products will not be developed that offer superior prices and
technical performance features compared to the Company's products. To be
competitive, the Company must continue to provide technologically advanced
products and manufacturing services, maintain quality levels, offer flexible
delivery schedules, deliver finished products on a reliable basis and compete
favorably on the basis of price. In addition, increased competitive pressure
has led in the past and may continue to lead to intensified price competition,
resulting in lower prices and gross margin, which could materially adversely
affect the Company's business, financial condition and results of operations.
There can be no assurance that the Company will be able to compete successfully
in the future.
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THE COMPANY'S ELECTRON TUBE PRODUCTS
OVERVIEW OF COMPANY'S ELECTRON TUBE BUSINESS
The Company manufactures and rebuilds electron power tubes in numerous
forms and models which service the frequency range of 200 KHz to 18,000 MHz.
Currently, the Company provides rebuilt and new electron tubes to a wide variety
of customers who use microwave technology in various types of applications,
including AM and VHF radio, television, linear accelerators, radar, electron
guns and industrial microwave and heating use. This line of business will
continue to be conducted by and through the Company's wholly owned subsidiary,
CTL. The Company is currently negotiating the sale of CTL to an unaffiliated
party on terms and conditions to be determined. See "-Recent Acquisitions,
Dispositions and Transactions, Disposition of CTL." The Company believes that
it is one of the more significant domestic companies engaged in rebuilding
electron power tubes in the United States.
ELECTRON TUBE INDUSTRY BACKGROUND AND TECHNOLOGY
General
Electron power tubes or electron tubes are enclosed tubes, in which
electrons act as the principal conductors of current between at least two
electrodes. Electron tubes fall into two categories, oscillators and
amplifiers. Oscillators are typically magnetrons and power grid tubes (triodes
and tetrodes) and amplifiers are klystrons and traveling wave tubes. Electron
power tubes are commonly identified by reference to the frequency band of the
electromagnetic spectrum (generally the L-band through KU-band) within which
they operate.
Electron tubes are used in a wide variety of products, including induction
heating and AM radio transmission using the 200 KHz to the 500 MHz range; VHF
radio and television and linear accelerators using the 500 MHz to 600 MHz range;
industrial microwave cooking and heating which use the 400 MHz to 2,450 MHz
range; and radar and electron guns using the 3,000 MHz to 18,000 MHz range. See
"-The Company's Electron Tube Products."
Electron and vacuum tubes are generally recognized as the dominant
technology for the generation of high power radio frequency ("RF") and
microwaves. Consequently, these tubes are used by many companies for widely
varying applications. The manufacturing and rebuilding of these units is a
significant industry.
The Company has focused on creating its own "niche" in this large industry.
Discussed below is relevant industry information for that segment of the
microwave technology industry in which the Company is engaged. The Company is
not aware of any industry trade associations or government statistics that
describe the electron tube industry segments in which the Company currently
competes. The information in the tables below is management's estimate of the
world-wide market for the industry segments in which the Company competes based
on its knowledge
12
of industry needs and the activities of other competitors in the industry.
Accordingly, the information below should be considered a rough approximation.
Magnetron Tubes
A "magnetron tube" is a vacuum tube in which the flow of electrons is
controlled by an exterior applied magnetic field to generate power at microwave
frequencies (400 MHz to 18,000 MHz). Magnetrons are generally categorized as
either continuous wave ("CW") or pulsed ("Pulsed") units. CW magnetrons are
used primarily in heating and drying applications. Pulsed magnetrons are used
primarily in measuring devices, such as radar and other applications.
New and rebuilt magnetron tubes are used in both commercial and military
radar units, high power industrial heating equipment and for medical and
industrial x-ray machines. The radar market consists of civilian weather radar
and military airborne and ground-based radar systems, among others. Industrial
heating magnetrons are used in food processing and drying systems at L-band
(between 500 MHz and 2,000 MHz) and S-band (approximately 2,000-4,000 MHz)
frequency levels. Microwave heating is used for food cooking, drying and
processing, wood glue drying, waste management, clothes drying, oil reclamation
and plasma generation for production of diamond films.
Magnetrons used in x-ray equipment typically operate in the S-band or X-
band frequency range, focusing a beam of electrons on a tungsten target, which
produces x-rays.
Annual Market (New and Rebuilt)
-------------------------------
Pulsed Magnetrons (Radar and Medical) $35.5 million
CW Magnetrons (Industrial use) 4.1 million
Klystron Tubes
A "klystron tube" is an electron tube in which bunching of electrons is
produced by electric fields, which are then used for the amplification of
microwave energy. Klystrons tubes (both external cavity and internal cavity)
are commonly used in UHF television transmission, medical and nonmedical
accelerators, and navigational equipment. Klystron tubes are rebuilt for
television broadcasting firms and are used to transmit data from the studio
transmitter to land-based receivers, such as television, and from satellite
uplinks to satellites for further transmission. Some types of clinical x-ray
machines use klystron tubes, which can also be rebuilt.
13
Published
Annual Annual Approximate Company
New Units Units New Price/*/
Produced Rebuilt Price Rebuilt
-------------- ---------- -------------- -----------
Television Broadcasting 2,500 50 $40,000 $16,000
Transmission of Data 2,000 10 13,000 6,000
Medical Use 200 or more 6 40,000 15,000
Navigation 400 or more 25 12,000 4,000
_______________
/*/Subject to change depending on prevailing market and other financial conditions.
Power Grid Tubes
Power grid tubes, also known as triode or tetrode tubes, are used in the
steel industry for radio frequency ("RF") heating and welding of all types of
steel products. They are also used in radio and VHF television transmission,
environmental test equipment and as switch tubes in high voltage pulsers. A
"triode tube" is an electron tube with three electrodes: an anode, a cathode and
a controlling grid; "tetrode tubes" are similar to triode tubes except that they
have four electrodes: an anode, cathode, a control grid and an additional grid.
Annual Rebuilt Market
---------------------
Power Grid $20 million
Other Industry Products
An "electron gun" is an electron-emitting cathode with its surrounding
assembly for directing, controlling and forcing a stream of electrons to a
target. A "linear accelerator" is a device in which charged particles are
accelerated in a straight line by successive impulses from a series of
alternating electric fields. One of the principal uses of linear accelerators
is in the medical field for the generation of high energy x-rays for the
therapeutic treatment of tumors.
THE COMPANY'S ELECTRON TUBE PRODUCTS
The Company, through CTL, manufactures and rebuilds a wide variety of
electron tubes in numerous iterations and models that service the frequency
range of 200 KHz to 18,000 MHz with power levels of up to three million watts.
The Company's product lines operate within the following frequency bands: HF and
UHF bands - 200 KHz to 1,000 MHz, L-band 500 MHz to 2,000 MHz; S-band 2,000 MHz
to 4,000 MHz; C-band 4,000 MHz to 8,000 MHz; X-band 7,000 MHz to 12,000 MHz and
Ku-band 12,000 MHz to 18,000 MHz. The Company primarily manufactures and
rebuilds electron power tubes categorized as follows: CW (continuous waive)
magnetrons, pulsed magnetrons, klystrons, power grid tubes (triodes and
tetrodes), linear accelerators guides and electron guns.
14
The Company offers warranties for its rebuilt electron tubes that meet or
exceed the original manufacturer's warranty. The rebuilt electron tubes can be
purchased for approximately one half the cost of a new tube and are often
technologically superior to a new tube due to the Company's analysis of the
reasons for failure of the original manufacturers technology, which analysis
often results in the usage of components incorporating the latest technological
improvements, designs and performance specifications. The Company also
manufactures new electron power tubes for use in the industry.
The Company rebuilds and manufactures new electron tubes in the following
industry segments:
Magnetrons
General. The Company believes that it is one of the major suppliers of L-
band (operating in the 915 MHz frequency range), CW magnetrons in the world.
The Company services and sells magnetrons with power levels from 5 KW through 75
KW. It has developed its own 30 KW S-band, CW magnetron, which is used
primarily for industrial heating applications. The Company believes that this
product has the highest power rating at this frequency in the industry.
The Company is not considered a major supplier in the medical x-ray market,
since such market is essentially dominated by two major companies, Varian
Medical and Siemens Medical. The electron power tubes utilized by Varian
Medical and Siemens Medical operate in the S-band frequency range and are used
for diagnostic x-ray machines. Because the Company does not manufacture
electron power tubes operating in the S-band frequency range for the medical x-
ray market, it only offers repair services for these electron power tubes.
The Company, however, believes that it can effectively compete in the X-
band industrial and "medical systems" x-ray market (a relatively new, small and
growing market), where new magnetron tubes are being manufactured for use in
therapeutic x-ray systems, which systems are typically used in newer treatment
methods for certain cancer patients. To the knowledge of the Company, it
manufactures the only magnetron operating in the X-band frequency range, which
is used in x-ray machines for therapeutic medical applications. The Company
supplies magnetron tubes, operating in the X-band frequency range, for
therapeutic x-ray applications for companies such as Accuray, Schonberg Research
and Intraop.
Rebuilding Process. The rebuilding of magnetrons includes an incoming cold
test involving a microwave reflectometer, a hot test, disassembly and inspection
of the internal structure. Generally at a minimum, and if required, the cathode
heater assembly is replaced. Other damaged sub-assemblies can be replaced
depending on the cost effectiveness of such a repair. This product line
accounted for approximately 56% of the Company's net revenues in fiscal year
1997. Approximately 29% of these net revenues are generated from the
manufacturing and sale of new magnetrons, with the remaining 27% derived from
rebuilding magnetrons.
15
Klystrons and Linear Accelerators
General. The Company's rebuilding program for klystrons has, until
recently, been limited by a lack of suitable testing equipment. The Company has
recently obtained two test sets for klystron data transmission tubes and has
purchased a surplus television transmitter to test television klystrons. The
Company has entered into an agreement with a manufacturer of x-ray machines to
test the Company's rebuilt klystrons for the medical market. This line of
products accounted for less than 4% of the Company's net revenues in fiscal year
1997.
Rebuilding Process. The rebuilding process includes opening the vacuum
envelopes either by machining in the case of ceramic insulator tubes or by
cutting the glass on those tubes with glass insulators. The grids are removed
and salvaged and the cathodes are replaced. Typically, cathodes are directly
heated tungsten or thoriated tungsten filaments. These are replaced and
processed, the cleaned grids replaced and the envelope resealed. Tubes are then
pumped and baked for 48-hours, at which time they are burned-in and tested. All
klystron tubes are cleaned and finished in bright nickel plate. Workmanship and
material warranties prorated over 3,000 hours are provided with every klystron
tube. In rebuilding linear accelerators, as with klystron tubes, the electron
gun is removed and rebuilt, then the rebuilt unit is pumped, boiled and
processed.
High Power and High Frequency Triodes and Tetrodes
The Company believes that it is one of the major rebuilders of high power
and high frequency triode and tetrode tubes in the world. These units are
available with power output ranging from 10KW up to 300KW. These units
comprised approximately 4% of the net revenues of the Company in fiscal year
1997.
Electron Guns
The Company rebuilds various sizes and powers of electron guns up to 120
KV, 20A gridded electron sources for research application. Rebuilt electron
guns are also used on rebuilt medical accelerators. The rebuilding of electron
guns typically requires the removal of the old cathode and heater structure and
the replacement with a new unit. The electron gun is rebuilt under vacuum
conditions.
COMPANY ELECTRON TUBE STRATEGY
The Company, as one of the largest rebuilders of electron tubes in the
industry, intends to continue to strengthen its reputation for quality, customer
service, warranty and the performance of its rebuilt electron tubes by
continuing to emphasize these business characteristics.
For magnetron tubes, the Company concentrates on markets where the unit
price is high and competition is the least. For power grid tubes (i.e., triode
and tetrode tubes), the Company
16
concentrates on the high power, and more expensive units where new tubes are no
longer manufactured and rebuilding is necessary to avoid replacement of large,
expensive equipment. With the addition of two new test sets for klystron tubes,
the Company also intends to focus more heavily on this segment of the market.
ELECTRON TUBE SALES AND MARKETING
The Company recently hired a full-time, experienced marketing employee to
increase the Company's existing market and to create new markets for its
products and services. The efforts of such employee, to date, have resulted in
an increase in new orders from existing and new customers.
CUSTOMERS
The Company currently has approximately 150 customers in its electron tube
business and has shipped over 25,000 electron tubes to 500 customers. The
Company's client base is comprised of industrial companies, commercial service
firms and government agencies in the United States, Canada, Mexico, Europe, Asia
and Australia. The two largest customers of the Company, Hughes Aircraft, Inc.
and Ferrite Components System, accounted for approximately 14% and 15%,
respectively, of its annual revenues for fiscal year 1997. The loss of any one
such customer could have a materially adverse effect on the business of the
Company.
MANUFACTURING OF THE ELECTRON TUBES
The Company entered into an agreement with the City of Watsonville,
California for the lease of a 21,600 square foot manufacturing facility. The
Company completed its move to this new facility in November 1997. The Company
occupies approximately 12,000 square feet of the building and is subletting the
remainder at an amount equal to its cost per square foot until such time as it
requires the additional space. Upon completion of the Watsonville manufacturing
facility, the Company intends to apply for ISO 9000 certification, which will
enable it to more effectively compete in overseas markets.
Since the Company is engaged in manufacturing and rebuilding of electron
tubes designed by major manufacturers of such tubes, the Company does not
experience and does not contemplate encountering any substantial difficulties
relating to the sources or availability of materials with which to conduct its
principal business operations. The components to remanufacture and rebuild
these tubes are commonly available from numerous sources.
BACKLOG OF ELECTRON TUBES
As of September 30, 1997, the Company's production backlog represented by
customer orders in its electron tube business was approximately $1,900,000. For
the preceding year ended (or equivalent) September 30, 1996, the Company had
approximately $1,500,000 in firm backlog. The Company anticipates completing
all production backlog during its current fiscal
17
year. There is no guarantee, however, that the Company will recognize sales
from any or all of the backlog orders.
ELECTRON TUBE COMPETITION
The Company is engaged in a very narrow segment of the microwave technology
industry, the rebuilding of electron and microwave tubes, and has attempted to
avoid direct competition with the major manufacturers of microwave products.
The manufacturing of new microwave products is dominated by several very large
companies in the United States and internationally. These companies, however,
have not chosen to dedicate their resources to the rebuilding of such products
or the manufacture of the electron tube the Company manufactures.
The principal competitors of the Company are relatively few, but have with
the Company, significant segments of the narrow market area in which the Company
competes. Principal among these competitors are Litton Industries, Varian
Associates, English Electric Valve and Burle Industries, Inc. Although there
are a few small competitors, management believes that, based upon the Company's
latest internal market information, it has the largest market share in certain
product lines, such as the CW magnetrons.
Because of its perceived reputation for quality, customer service, warranty
and the performance of its new and rebuilt units, the Company believes that it
offers a competitive advantage equal to or superior to what is otherwise
provided by its competitors.
PRODUCT DEVELOPMENT OF ELECTRON TUBES
Research and development activities to be conducted for the Company with
respect to electron tubes will be conducted through institutions or other firms
qualified to conduct such research and development activities as independent
contractors to the Company. To the extent that the Company does engage in
business activities which will require research and development, it will seek to
decrease such costs by entering into joint ventures or other types of business
relationships wherein the costs of research and development activities will be
paid for by other parties, who in consideration of such payments will enjoy
partial ownership or other rights relating to any technologies or products which
might develop from such research and development.
THE COMPANY'S PARTICLE INTERCONNECT TECHNOLOGY
OVERVIEW OF PI TECHNOLOGY
The Company proposes to pursue a new line of business involving the
development and licensing of high performance, low-cost interconnect products.
The Company's PI Technology utilizes patents procured and owned by the Company
for the production of electronic interconnect products. The Company's
Proprietary Electroplating Process will be transferred to strategic partners
that will use the PI Technology to mount, package or attach electronic
18
devices and other products utilizing the PI Technology. This new line of
business will be conducted through the Company's wholly owned subsidiary, PI
Corp.
PI TECHNOLOGY INDUSTRY BACKGROUND
Electronics Industry Trends
Over the past decade, consumers and OEMs have demanded electronic products
that provide a significant increase in performance accompanied by reduced size,
weight and cost. These factors have forced manufacturers to produce smaller,
lighter and higher performing components while reducing their costs in order to
remain competitive. New developments in printed circuit boards (including
flexible circuitry), integrated circuits ("ICs"), IC packaging techniques, and
new forms of interconnect assemblies for connecting the various electronic
components, have contributed to the ability of electronic system manufacturers
to accomplish these objectives.
As these products have decreased in size and increased in complexity,
conventional techniques of connecting their components together have begun to
become inadequate. The conventional methods of interconnecting electronic
components in a rematable fashion have limits to the miniaturization the
electronic components can tolerate, while at the same time remaining cost
effective. The interconnect industry that serves the PC, automotive,
communication and work station markets is aggressively pursuing technologies
that will allow it to move to the next level of performance and size.
Integrated Circuits
The Company believes that market trends in IC packaging will lead to
increased demand for emerging high density substrates. ICs have historically
been packaged by connecting the silicon die to a lead frame or by bonding the
silicon die to an interconnect substrate using fine wires. As ICs are becoming
increasingly powerful, they produce more heat and require a significantly
greater number of input/output ("I/O") electrical connections to attach the
silicon die, thus placing substantially greater demands on the IC packaging
materials. For instance, a typical IC six years ago required up to
approximately 80 I/O connections to the silicon die, whereas today typical ICs
require up to approximately 250 I/O connections. The number of high density IC
packages requiring more than the typical 250 I/O connections to the silicon die
increased from an estimated 240 million in 1990 to an estimated 777 million in
1995, based on published industry information. Market demands are currently
forcing certain IC toward 1,000 I/O connections. Further, IC packaging demands
arise when multiple silicon dies are integrated into one powerful package, known
as a "Multi Chip Module" or "MCM."
The international interconnect market in 1995 was estimated by an
independent research organization, to be $26.3 billion. The Company believes
that the typical integrated circuit package is a 40 billion unit per year
market.
19
The Company believes, based on interviews and contact with industry leaders
and experts, that the PI Technology has the potential and the capability to
solve this miniaturization problem and allow electronics manufacturers to move
to the next level of high-performance, low cost interconnect systems.
PI TECHNOLOGY-TECHNOLOGY AND PRODUCTS
General
Interconnect technology has not kept pace with micro-miniaturization in the
electronics industry. Thus, component packages and the connectors used to form
an electrical and/or mechanical interface between various components and
assemblies in electronic products are now the most expensive portion of such
products. Component packages, connectors, sockets, plugs and the like are also
the bulkiest and heaviest portion of such products.
Conventional interconnect technology complicates the electronic equipment
design and manufacturing processes by introducing special considerations into
such processes with regard to component placement, heat generation, power loss,
and signal propagation delay (the time it takes a signal to traverse a given
distance). These considerations have an adverse impact on potential gains in
performance being realized by new and emerging technologies.
Wiping Action Technology
Wiping Action Technology is still the prevailing means for interconnecting
electronic components. Wiping action interconnect technology (for example,
sockets, plugs, and needle pins) forms a temporary electrical interconnect and
thus readily allows the remating of various components and assemblies (for
example, when replacing or upgrading a memory module in a PC). A problem with
using such technology is that it is subject to the persistent formation of
oxides (a non-conductive material) along a contacting surface, which increases
contact resistance. In time, these oxides build up, hastening connection
failure and thus equipment failure.
Wiping action technology is only available in the form of various
connectors and sockets. These devices usually provide a contact surface formed
from a limited range of special metals, alloys, and other expensive materials,
suitable for maintaining a sliding connection. The devices themselves have
interfering electrical properties due to their size and orientation on a circuit
board, among others, and thus degrade signal propagation through the
interconnect (by introducing resistive, capacitive, and inductive components
into the signal path).
Wiping action technology provides high ohmic connections that produce
excessive and unwanted wear and heat, and therefore contribute to equipment
failure while wasting energy. The wiper mechanism, as in the case of a socket,
requires significant space on a circuit board. Thus, potential circuit
operating speeds are degraded due to propagation delays. In addition, sockets,
plugs, and similar interconnect devices are only available in a limited number
of
20
configurations and materials. Thus, the evolution of electronic technology is
constrained by the limitations wiper interconnects impose upon a designer.
Additionally, wiper interconnects are unreliable in punishing environments
such as that in which a laptop computer is used. Wiper connections subject to
shock, intense vibration, temperature extremes, and/or high levels of
contamination tend to induce disruption in the continuity of connections made at
a wiper interconnect. As wiper interconnects are mechanical devices, they
corrode and are subject to wear. Thus, they have a limited useful life.
Identification of Problem
The Company and others in the industry are aware of the physical
constraints imposed upon the development of new products using existing
technologies. The problem is simple to identify and define, but difficult to
solve. As IC packages increase in I/O count and complexity while remaining
constant or decreasing in physical size, a problem arises in accommodating this
complexity in a reliable, technically efficient fashion. Whether the package is
connected to the device via solder, adhesive or socket, the connection process
as I/O counts move ever higher becomes difficult to achieve.
Designers of rematable connections, however, find this issue especially
troubling. As pin counts rise, the amount of force the device to package
interface must support also increases. Using conventional contact technology
like a gold to gold wiping connection, contact force measures around 40 grams
per contact. When IC packages had I/O counts of 100, this force was easy to
accommodate, but as I/O counts move toward 1,000 and beyond, current contact
technologies are inadequate. For example, at 40 grams per contact, a 1,000 I/O
BGA socket must effectively accommodate 40 kg of force, equivalent to half the
weight of an average man.
Requiring a plastic substrate, barely 2 cm on a side to support half the
weight of a man is unreasonable, even with today's excellent plastic
technologies. Such force, concentrated in a small space contained by petroleum
based products that are almost always re-heated is very likely to fail because
of board warp, package warp, or outright physical failure.
This difficulty, when coupled with increasing intolerance from the market
to pay premium prices, presents today's socket manufacturer with an immense
task: create a socket that can:
. Accommodate very high I/O count devices.
. Receive high speed devices without seriously degrading their performance
(have as short a circuit path as possible).
. Be very low cost.
21
The Company's Solution
The Company believes that its PI Technology provides a cost effective
solution to solving this industry-wide problem. As discussed below, the
Company believes the PI Technology can establish reliable, rematable connections
at only 10 grams of force. This means that only 10 kg versus 40 to 80 kg of
force is required to interconnect a 1,000 I/O IC socket with the underlying
substrate. The Company believes this reduction in force may enable
manufacturers to connect complex ICs to products through the next several
generations of electronics.
Additionally, the connection pathway provided by a connection using the PI
Technology is exceptionally short and has very low resistance. These features
allow the connection of very high speed ICs without seriously degrading their
performance as conventional techniques sometimes do. Moreover, the Company
believes that the PI Technology can be applied using its Proprietary
Electroplating Process at a very low cost.
There is no assurance, however, that the market place will accept the PI
Technology or that the Company can successfully complete a testing program
before it can market the PI Technology. Unforeseen technical problems arising
out of such testing could adversely affect the Company's ability to develop a
commercially acceptable version of the PI Technology.
THE COMPANY'S PI TECHNOLOGY
Overview
Background. The PI Technology was conceived in 1986, with the initial
patent thereon issued in 1987. A major aerospace firm took a special evaluation
contract in August 1988 to use the PI Technology for the development of the
Space Defense Initiative ("SDI") "Super Computer Program" and for use in other
portions of the SDI ("Star Wars") Programs. The results of the SDI Programs
demonstrated that the PI Technology could meet and surpass military IC packaging
and interconnect requirements, designated MIL-STD 883C and MIL-STD 38510, which
the Company believes are more stringent than the requirements in the commercial
marketplace.
The Company received the rights to seven patents and six patent
applications and the Proprietary Electroplating Process from Particle
California. See "BUSINESS-Recent Acquisitions, Dispositions and Transactions."
Five companies operate under licenses from the Company to use the PI Technology.
These licensees use the PI Technology to produce products that do not currently
compete with products the Company believes potential licensees of the PI
Technology will produce; however, nothing in the license agreements would
prohibit these companies from doing so in the future, provided the licensees
have a right to use the PI Technology in that field.
General. The PI Technology utilizes patents owned by the Company for
bonding and joining metal surfaces to enhance electrical connectivity. The
Company's core product is similar
22
to "conductive sandpaper" in appearance, and is formed by attaching conductive
diamond particles to a panel. The "conductive sandpaper" creates a socket or
connector for electronic devices, and may replace the use of soldering to create
such connections.
Operation of the Technology
PI Technology begins with metallized, doped diamond particles which have
been closely screened as to size. The particles are tightly classified in sizes
ranging from 10 microns to 125 microns, depending upon the end-product
application. Small particle size, 8 to 12 micron range, are for small pad
sizes, less than 5 mm in diameter, and have a small amount of penetration.
Medium particle size, in the 20 to 30 micron range, are for medium pads sizes, 5
mm to 100 mm in diameter, and have a medium amount of penetration. Large
particle size, 115 to 135 micron range, are for large pads sizes, greater than
100 mm in diameter, and have a large amount of penetration.
These electrically conductive diamond particles are attached onto contact
sites using standard masking and electroplating processes. The embedded
particles create a surface with many points that provide numerous parallel
electrical paths by penetrating though an oxide without requiring the wiping
action of conventional contacts. The Company believes that its non-wiping
action, oxide penetrating PI Technology are capable of penetrating surface
contamination and oils to create a gas-tight electrical contact.
The diamond particles concentrate insertion force transmitted by a contact
into a very small area or point. This gives the diamond particle the force per
square inch required to pierce oxides and other contaminants on most surfaces
without requiring large amounts of force on the contact. Reliable, gas-tight
connections can be made with PI Technology with as little as 10 grams of force
per contact. This low-level of force is sufficient to drive the particles into
the mating surface (for example a I/O pad on a silicon die) and provide low
contact resistance. Moreover, the diamond particles do very little damage to
the mating surface. This provides very long remate life with very little
degradation of the connection. Since there is no wiping action, contact
coatings stay substantially intact.
These particles can be applied to many different substrates; flexible,
rigid, metallic and non-metallic. This ability coupled with the very low
contact force gives the capability to make reliable connectors out of materials
that could collapse if exposed to the normally required contact forces.
COMPANY PI TECHNOLOGY STRATEGY
The PI Technology has application in many different industries where
electrical connections and interconnections are made. The Company initially has
selected the electronic interconnect industry as the primary industry in which
to license the PI Technology and Proprietary Electroplating Process. The PI
Technology has been in use in the connector industry for several years, mainly
in test and burn-in socket applications by licensees of the PI
23
Technology. There is a current demand in the connector industry for reliable
Ball Grid Array (BGA) and Land Grid Array (LGA) production sockets as well as
other forms of Z-axis interconnect such as direct chip attachment and MCMs. The
Company believes the PI Technology offers immediate advantages for these
products. As a result, the Company has developed the following short term and
long term strategies.
Initially, the Company planned to develop full production capacity to
produce panels using the PI Technology. Because of the large capital investment
required to develop full production capacity, however, the Company has decided
to license the PI Technology and Proprietary Electroplating Technology to
interconnect manufacturers and assist such manufacturers in the development,
testing and qualification of the PI Technology for that specific product line.
The Company's primary objective is to provide this service to numerous connector
manufacturers, in competing and non-competing applications.
The Company believes that entering into joint venture relations with a
leading connector manufacturer or a leading electronic technology OEM is the
only practicable method of bringing the PI Technology to market given the
Company's current capital position. The Company believes that such
relationships are necessary to gain worldwide access for the PI Technology
(i.e., the Company believes approximately 60% of its potential market for Z-axis
interconnects exists outside the United States). The Company contemplates that
a licensee or joint venture partner will provide access to its existing
distribution channels and be responsible for marketing and engineering costs for
the relevant Z-axis package. In many cases the Company will attempt to
establish long term strategic alliances with these industry leaders to continue
development and manufacture of new products that will incorporate the PI
Technology. While the Company continues to discuss such relationships and
alliances with industry participants, no agreements or understandings exist
currently, and there can be no assurances given that any such relationships or
alliances will be established or if established that they would be profitable to
the Company.
As these business relationships mature, the Company intends to begin
expansion into other industries in a similar fashion. The Company currently
contemplates that some of these industries will include the printed circuit
board ("PCB") industry with alternative interconnect attachment solutions,
automotive electronics and the utility power industry (splices and switches).
PI Technology Sales and Marketing
Phase I Corporate Image. The Company, as an emerging Company with respect
to the design, marketing and licensing of its PI Technology must become
recognized in the industry. The Company's focus on establishing a solid
corporate image is based on management's belief that OEMs and suppliers to OEMs
will not put their own production schedules and reputations at risk with
companies they feel are unstable regardless of how revolutionary the product or
service may be. This is exceptionally true in the connector industry. The
Company believes that it has had success at projecting an image acceptable to
the industry as evidenced by the willingness of industry leaders to enter
teaming and strategic alliance discussions with the
24
Company. The Company will continue to use conventional methods such as
attending industry conventions, meeting with high-level executives in the
industry's leading companies and contacting key analysts in the industry to
enhance and stabilize the Company's corporate image. In the future the Company
expects to expand its efforts to include:
. Traveling to meet individually with key executives.
. Generating interest through the trade press and presentations at trade
shows.
. Exhibiting with display booths at certain industry trade shows.
. Publishing and publicizing test results as they become available.
The Company believes this approach will provide it with an image that will
enhance the formation of relationships with key industry leaders.
Phase II - Forming Strategic Alliances. The Company believes that
establishment of a sound business image and an appropriate level of exposure for
PI Technology in the market place is only the first step in successfully
penetrating the market through a strategic partner. To succeed with this
approach, the Company must select an appropriate licensee or partner, convince
this partner of the viability and advantages of the PI Technology at its
Proprietary Electroplating Process, negotiate a mutually beneficial agreement,
and perform on the agreement. The Company can provide no guarantee that it can
accomplish these tasks.
In each industry in which the Company decides to compete, the Company will
select market leaders that have key characteristics such as:
. Significant market share and strong distribution channels.
. Manufacturing competencies that compliment that of the Company.
. A corporate culture that allows them to quickly respond to a new
technology.
. Sufficient capital and sales strength.
The Company has entered into preliminary discussions with two industry
leaders that satisfy all of the above criteria, however, the Company can provide
no assurances that any agreements will be consummated or, if consummated, that
such agreements will prove profitable.
Phase III - Penetrate Other Industries and Application Areas. Combinations
of the Company's intended strategies in Phases I and II above will be used in
Phase III to allow access to all the markets where PI Technology is potentially
viable. The steps the Company has taken and will take in the electronics
industry in Phases I and II, will be repeated in other industries in which the
Company may compete.
25
PI TECHNOLOGY COMPETITION
Competition in the electronic connector market is fierce. The principal
competitive factors are product quality, performance, price and service.
Multinational connector manufacturers (such as Berg Electronic, AMP, 3M, Molex
and Yamaichie), and major OEM electronic technology leaders (such as Intel,
Siemens and IBM), each with established manufacturing facilities and tremendous
economies, compete with each other daily on both price and quality. In the
event the Company enters into a license or joint venture relationship with a
major connector manufacturer, its products will directly compete with the
products of the other connector manufacturers. The Company's current approach
of licensing or partnering rather than competing with these large firms means
that it will not directly compete with such well established leaders. The
Company, however, will face competition to its PI Technology primarily through
the development of competing technologies and technologies that currently exist.
There currently exists approximately 28 different sources/technologies for
use in creating Z-axis interconnects. These technologies include: dendrite
crystals, gold dot technology, fuzz button technology, elastromerics, z-axis
conductive adhesives and others. These technologies are currently produced by
materials suppliers, flexible and rigid PCB manufacturers, as well as
electronics manufacturers who produce their own materials and interconnect
systems. Many of these competitors have substantially greater financial and
other resources than the Company. The Company believes that each technology
currently has unacceptable limitations with regard to electrical/mechanical
performance, manufacturability or cost as compared to the PI Technology.
The risk of organizations developing new and competitive technologies also
exists. The Company will continually monitor the technical environment to
identify these risks early and develop strategies to respond to them quickly.
PI TECHNOLOGY PRODUCT DEVELOPMENT
While the Company believes the area of quickest return and greatest initial
growth is in the Z-axis electronic interconnect market, PI Technology has
applications in many other areas. These areas include:
. Manufacture of complex PCB cards at low costs.
. Heat Dissipation Products (Heat Sinks).
. High Voltage Splicing Products.
. High Voltage Contractors and Switches.
26
The Company will consider researching the potential of these markets and
develop appropriate manufacturing and penetration strategies for them, as
discussed in "-Company Strategy" above, whenever the electronic connector market
begins to show signs of maturation with declining profit margins, increased
competition and lack of opportunity.
GOVERNMENT REGULATION
The various business operations of the Company are subject to numerous
federal, state and local laws and regulations, including those relating to the
use and disposal of hazardous substances. Specifically, the operations of CTL,
PI Corp. and Sigma 7 involve the use and handling of environmentally hazardous
substances. The use of hazardous substances is subject to extensive and
frequently changing federal, state and local laws and substantial regulation
under these laws by governmental agencies, including the United States
Environmental Protection Agency, various state agencies and county and local
authorities acting in conjunction with federal and state authorities. Among
other things, these regulatory bodies impose restrictions to control air, soil
and water pollution. Furthermore, amendments to statutes and regulations and
the Company's expansion into new areas could require the Company to continually
modify or alter methods of operations at costs which could be substantial. The
Company believes that it is in substantial compliance with all material federal
and state laws and regulations governing its operations.
The Company believes that its Proprietary Electroplating Process will be
subject to less environmental regulation because the Company's Proprietary
Electroplating Process does not use a lead based interconnect technology and
generates less hazardous waste compared to current industry practices due to
improvements made in the Company's electroplating process.
Compliance with federal and state environmental laws and regulations did
not have a material effect on the Company's capital expenditures, earnings or
competitive position during fiscal year ended September 30, 1997. The Company
has become aware of certain ground water and soil contamination at the Santa
Cruz facility formerly occupied by CTL. The company has engaged a consultant to
determine the extent of the contamination and the cost to remediate. However,
until the buildings at the facility have been removed, further site
characterization and an estimate of the cost to remediate cannot be determined.
INTELLECTUAL PROPERTY
PATCH TECHNOLOGY AND PARTICLE INTERCONNECT TECHNOLOGY
The Company will rely on a combination of patents, patent applications,
trademarks, copyrights and trade secrets to establish and protect its
proprietary rights in the Patch Technology, PI Technology and the Proprietary
Electroplating Process. The electron tube technology utilizes no intellectual
property rights belonging to the Company. The Company currently owns seven U.S.
patents (which expire from February 14, 2006 to October 15, 2013)
27
on the PI Technology and seven patent applications, six related to the PI
Technology and one relating to the Patch Technology.
Prior to the Company's acquisition of Particle California, Mr. Louis
DiFrancesco, the inventor of the PI Technology, or companies he controlled,
granted exclusive and nonexclusive licenses to use the patents and patent
applications on the PI Technology to the following Companies: Exatron Automatic
Test Equipment Inc., with an exclusive license to use the PI Technology in the
field of sockets for use in the automated handling and testing of integrated
circuits and a non-exclusive license to use the PI Technology in the field of
electrically conductive components; a non-exclusive license to Acsist Associates
Inc., now known as Johnson-Matthey Semiconductor Packagings, Inc., to use the PI
Technology in the field of laminate-based substrate products; an exclusive
license to Micro Module Systems, Inc., to use the PI Technology in the field of
MCM-D thin film substrates, except attached or associated products including
integrated circuits, sockets, lids, heat sinks, housings and printed circuit
boards; a non-exclusive license to Multiflex Inc., to use the PI Technology in
the field of laminate-based substrates and metal substrates; and a non-exclusive
license to Myers Consulting Inc., to use the PI Technology in the field of
laminate-based substrates, metal substrates, and wafer or semi-conductor
products. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-Trends and Uncertainties."
Subsequent to date of the Company's acquisition of Particle California, the
Company became aware of a purported assignment on February 14, 1991 of a one-
half interest, title and right to the then patent application, which is now U.S.
Patent No. 5,083,697 (a basic patent underlying the PI Technology) made by Mr.
Louis Difrancesco, the inventor of the PI Technology, to Mr. Kenneth Bahl. The
company recently reached a resolution to the purported assignment of a one-half
interest in certain patents underlying the PI Technology from Mr. Difrancesco to
Mr. Kenneth S. Bahl in February 1991. The Company now owns the full and
unconditional rights to the PI Technology. See "-Recent Acquisitions,
Dispositions and Transactions-Kenneth S. Bahl Settlement."
Consequently, PI retains the right, subject to any interest which Mr. Bahl
may retain, to exclude all other companies from using the patented technology
without a license. Concomitantly the Company may license such other companies
as it chooses, provided the licenses are consistent with the exclusive licenses
previously granted and other licensing restrictions that may appear in such
prior licenses.
As of September 30, 1997, the Company has filed one patent application
titled "Memory Module Assembly Using Partially Defective Chips," relating to the
Patch Technology. The Company can provide no assurance that a patent will be
issued or that, if issued, such patent will provide adequate protection to the
Company with respect to its products.
The Company also owns certain proprietary techniques and trade secrets
relating to a Proprietary Electroplating Process. The Company recognizes the
benefits associated with
28
developing a portfolio of corporate intellectual property, particularly during
the new product development process, and is pursuing patentability searches and
activities on several technologies. There can be no assurance that patents will
be issued from any of the pending applications, or that any claims allowed from
existing or pending patents will be sufficiently broad enough to protect the
Company's technology. While the Company intends to vigorously protect its
intellectual property rights, there can be no assurance that any patents held by
the Company will not be challenged, invalidated or circumvented, or that the
rights granted thereunder will provide competitive advantages to the Company.
Litigation may be necessary to enforce the Company's patents, patent
applications, trade secrets, licenses and other intellectual property rights, to
determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business and results of operations regardless of the
final outcome of the litigation. Despite the Company's efforts to maintain and
safeguard its proprietary rights, there can be no assurances that the Company
will be successful in doing so or that the Company's competitors will not
independently develop or patent technologies that are substantially equivalent
or superior to the Company's technologies.
The semiconductor and interconnect industries are characterized by
uncertain and conflicting intellectual property claims. The Company has in the
past and may in the future become aware of the intellectual property rights of
others that it may be infringing, although it does not believe that it is
infringing any third party proprietary rights at this time. To the extent that
it deems necessary, the Company may license the right to use certain technology
patented by others in certain products that it manufactures. There can be no
assurance that the Company will not in the future be notified that it is
infringing other patent and/or intellectual property rights of third parties.
In the event of such infringement, there can be no assurance that a license to
the technology in question could be obtained on commercially reasonable terms,
if at all, that litigation will not occur or that the outcome of such litigation
will not be adverse to the Company. The failure to obtain necessary licenses or
other rights, the occurrence of litigation arising out of such claims or an
adverse outcome from such litigation could have a material adverse effect on the
Company's business. In any event, patent litigation is expensive, and the
Company's operating results could be materially adversely affected by any such
litigation, regardless of its outcome.
The Company also seeks to protect its trade secrets and proprietary
technology, in part, through confidentiality and non-competition agreements,
among other practices and procedures, with employees, consultants and other
parties. There can be no assurance that these agreements will not be breached,
that the Company will have adequate remedies for any breach, or that the
Company's trade secrets, such as the Proprietary Electroplating Process, will
not otherwise become known to or independently developed by others. In
addition, the laws of some foreign countries do not offer protection of the
Company's proprietary rights to the same extent as do the laws of the United
States.
29
EMPLOYEES
As of September 30, 1997, the Company and its subsidiaries had
approximately 81 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 3290, Denver, Colorado 80202. The monthly lease payments are
$1,834.18.
SIGMA 7
With the exception of its proprietary PC boards manufactured by third
parties, Sigma 7 currently assembles all of its products in a 33,938 square foot
facility located at 6610 Nancy Ridge Dr., San Diego, California. Sigma 7's
executive offices are also located at this facility. The Company estimates the
facility has a capacity to remove and attach from PC boards over 400,000
computer chips per month and the ability to test 196,550 chips per month. The
facility currently operates 24 hours per day, using three eight-hour shifts.
The Company's facility in San Diego is leased from an unaffiliated party,
which lease expires in June of 1999. The monthly lease payments are $17,647.76.
The Company is actively considering possible subleasing of excess space in order
to further reduce overhead cost. The Company believes that the current lease
terms are very favorable to the Company as the lease rate per square foot under
the Company's lease is significantly below the per square foot rental cost being
charged on similar facilities.
CTL
The Company's manufacturing facilities are located at 125 Aviation Way,
Watsonville Municipal Airport, City of Watsonville, California, and consists of
approximately 21,600 square feet. The Company currently leases this facility
pursuant to a lease agreement dated June 16, 1995 with the City of Watsonville,
California. Construction of this facility began in March 1996, and the Company
completed its move to this new facility in January of 1998. The Company
occupies approximately 12,000 square feet at the facility and is subletting the
remainder at an amount equal to its cost per square foot until such time as it
requires additional space. The lease is for a period of 15 years with an option
to renew for three successive five-year terms. The total lease cost is
approximately $15,000 per month, exclusive of any sublease revenues. The
Company is currently negotiating the sale of CTL to an unaffiliated party on
terms and conditions to be determined. See "-Recent Acquisitions, Dispositions
and Transactions -Disposition of CTL."
30
PI CORP.
The Company originally conducted its operations on a 45,000 square feet,
10-acre site located at 3550 South Marksheffel Road, Colorado Springs, Colorado.
In September 1997, the Company prematurely terminated on this lease and the
landlord took possession on October 4, 1997, prior to which the Company removed
all assets and equipment from the building. The research and development
equipment is currently being held in rented storage, and management, financial
and clerical activities are being conducted at temporary facilities. As
discussed in item 1, the Company entered into an agreement to form a new
corporation with Dr. Herbert J. Neuhaus and Ronald A. Morley in order to better
promote the likelihood of obtaining an industry partner and financing to secure
the successful commercialization of the PI Technology. The corporation,
Microlink Technologies Corporation, entered into a lease agreement, which the
Company guaranteed, dated October 14, 1997, to lease approximately 4,000 sq.
feet for a term of three years commencing November 1, 1997 and ending October
31, 2000 at a monthly rental of $1,833.33. The facility is located at 2291-C&D
Waynoka Road, Colorado Springs, Colorado 80915.
ITEM 3. LEGAL PROCEEDINGS
On September 30, 1997, the landlord of the property formerly occupied by PI
Corp. at 3550 S. Marksheffel Road, Colorado Springs, Colorado, filed a complaint
against, among others, Particle Interconnect Corporation and the Company,
seeking damages for premature termination of the lease which includes a rental
payment of $23,823.38 for the month of September 1997, and monthly rental
payments of $23,587.50 for the months of October 1997 through July 1998. The
Company has settled the dispute with the landlord and its remaining liability on
the settlement is approximately $186,000. Further, the Company has reason to
believe, based upon representations made by the landlord, that such liability
may be significantly reduced as a result of the landlord re-leasing the premises
to another party.
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
31
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.
1996 Fiscal Year Ask Bid
------------------------- ------- -------
December 31, 1995 $ 1.625 $ .625
March 31, 1996 1.9375 1.00
June 30, 1996 5.75 2.00
September 30, 1996 5.50 2.75
1997 Fiscal Year
- -------------------------
December 31, 1996 $ 4.00 $ 3.875
March 31, 1997 2.4375 2.0625
June 30, 1997 .50 .375
September 30, 1997 .270 .220
As of January 30, 1998, there were approximately 480 holders of record of
the Company's Common Stock. Based upon information provided to the Company by
persons holding securities for the benefit of others, it is estimated that the
Company has in excess of 4,500 beneficial owners of its Common Stock as of that
date.
DIVIDEND POLICY
While there currently are no restrictions prohibiting the Company from
paying dividends to its shareholders, the Company has not paid any cash
dividends on its Common Stock in the past and does not anticipate paying any
dividends in the foreseeable future. Earnings, if any, are expected to be
retained to fund future operations of the Company. There can be no assurance
that the Company will pay dividends at any time in the future.
RECENT SALES OF UNREGISTERED SECURITIES
The Company made the following unregistered sales of its securities from
October 1, 1994 through September 30, 1997.
32
TITLE OF
DATE OF SALE SECURITIES AMOUNT CONSIDERATION PURCHASER
------------ ---------- ------ ------------- ---------
(1) 7/7/95 Common 5,412,191 Assets & Liabilities of Modern Industries, Inc.
Modern Industries
Recorded at $3,093,000
(2) 7/7/95 Options to Purchase 1,600,000 Agreement to serve as Terry W. Neild
Common Shares directors, officers and Gordon J. Sales
counsel to Registrant Mark S. Pierce
Corporate Advisors, Inc.
(3) 11/9/95 Options to Purchase 700,000 Agreement to serve as Gordon J. Sales
Common Stock, at Officers, Directors & Mark S. Pierce
an exercise price of Counsel to the Company Terry W. Neild
$.50 per share Corporate Advisors, Inc.
(4) 11/9/95 Options to Purchase 265,000 Agreement to Continue 10 Employees of California Tube
Common Stock, at Employment at CTL and to Laboratories, Inc.;
an exercise price of provide consulting services S. Wilde and Alan M. Smith
$.50 per share to the Company
(5) 12/22/95 Options to Purchase 716,180 Agreement to Provide 1. Communique Media Services,
Common Stock, at Consulting Services to the Ltd.
an exercise price of Company 2. Financial Power Network, Inc.
$.50 per share 3. James O. Gray
4. Admiral House
(6) 2/1/96 Options to Purchase 800,000 Agreement to provide James O. Gray
Common Stock, at consulting services to the L.L. Ross
an exercise price of Company and for past Wendy S. Gobbett
$.75 per share for services of consultants
650,000 shares and
$1.25 per share for
150,000 shares
(7) 3/3/96 Common Stock 96,606 Legal Services - valued at Corporate Consultancy Services,
$39,751 Ltd.
(8) 3/28/96 Common Stock 126,761 Contribution to ESOP California Tube Laboratory, Inc.
valued at $1.25 per share Stock Bonus Employee Stock
for $158,451.15 Ownership Plan & Trust
(9) 3/29/96 Options to Purchase 550,000 Agreement to provide Quidquia Management
Common Stock, at consulting services to the Rocha Holdings, Ltd.
an exercise price of Company
$.50 per share for
300,000 shares and
$.75 per share for
250,000 shares
(10) 5/9/96 Common Stock 400,000 Conveyance of Land, Sonora Station, Ltd.
Recorded at $1,000,000 Muriel J. Fulton
Barbara J. Drew
Darren Begley
33
TITLE OF
DATE OF SALE SECURITIES AMOUNT CONSIDERATION PURCHASER
------------ ---------- ------ ------------- ---------
(11) 6/3/96 Options to Purchase 380,000 As consideration for past David Blank
Common Stock, at services as employees of James Martin
an exercise price of CTL Lance Mullins
$.50 per share Tony Wynn
(12) 6/12/96 Options to Purchase 400,000 As consideration for Jeffrey Halbirt
Common Stock, at consulting services and as Alan M. Smith
an exercise price of an incentive to remain an
$.50 per share officer of the Company
(13) 5/17/96 Common Stock 14,780 Legal Services - valued at Charmirathor, Inc.
$16,554
(14) 7/10/96 Series B Preferred 1,000 $10,000,000 Accredited Investors who are Non-
Stock and attached U.S. Persons (23)
Warrants to acquire 761,905
shares of Common
Stock
(15) 7/10/96 Warrants to acquire 330,159 Services as Placement Swartz Investments, LLC
Common Stock, at Agent
a price of $3.9375
per share
(16) 9/3/96 Common Stock 1,400,000 Exchange of shares of Five (5) shareholders of Particle
Particle Interconnect, Inc. Interconnect, Inc.
in a Triangular Merger,
which was accounted for
as an immaterial pooling
of interests.
(17) 9/3/96 Options to Purchase 800,000 Agreement to serve as Alan M. Smith
Common Stock, at Officers, Counsel or Corporate Advisors, Inc.
an exercise price of Consultant to Company 521508 B.C. Ltd.
$4.00 per share
(18) 9/3/96 Options to Purchase 230,000 Agreement to serve as Certain employees of PI Corp.
Common Stock, at officers or employees of
an exercise price of the Company.
$4.00 per share
(19) 10/8/96 Common Stock 277,778 Exchange of shares of Three (3) shareholders of
A.C. Magnetics, Inc. in A.C. Magnetics, Inc.
Triangular Merger, with a
total share value of
$1,000,000.
(20) 12/16/96 Series C Preferred 525 $ 5,250,000 Accredited Investors (11)
Stock and attached 530,771
Warrants to acquire
Common Stock
34
TITLE OF
DATE OF SALE SECURITIES AMOUNT CONSIDERATION PURCHASER
------------ ---------- ------ ------------- ---------
(21) 12/16/96 Warrants to acquire 214,615 Services as Placement Swartz Investments, LLC and
Common Stock Agent Assignees
(22) 7/3/97- Common Stock 7,412,156 Conversion of 231 Shares Accredited Investors (9)
7/14/97 of Series C Preferred
Stock
(23) 9/11/97 Series D Preferred 1,080 Preferred Shares of BMI Robert J. Macri
Stock Burford B. Wiley
_______________
/(1)/ During the period commencing September, 1996 through January 31, 1997,
certain holders of the Series B Preferred Stock, pursuant to the Certificate of
Designation, converted a total of 810 shares of Series B Preferred Stock into
2,636,530 shares of Common Stock which were issued without registration pursuant
to the exemption provided by Regulation S.
UNDERWRITERS
Other than Swartz Investments, LLC ("Swartz"), no underwriter or selling or
placement agent was involved in any of the transactions described above. Swartz
was engaged as selling agent in connection with the sale of the Series B
Preferred Stock and Series C Preferred Stock and was paid compensation
equivalent to 11% of the aggregate funds raised in such placements. In
addition, it received warrants to purchase shares of Common Stock equal to 10%
of the aggregate securities sold, assuming that the holders of the Series B
Preferred Stock and Series C Preferred Stock and related warrants, converted
their Series B and Series C Preferred Stock or exercised their warrants at the
Fixed Conversion Price.
EXEMPTION FROM REGISTRATION CLAIMED
All of the sales by the Company of its unregistered securities (except for
those described in Item 14, which were made pursuant to Regulation S and those
described in Item 20, which were made pursuant to Rule 506 of Regulation D
adopted under the Securities Act of 1933, as amended) were made by Registrant in
reliance upon Section 4(2) of the Securities Act of 1933, as amended. All of
the individuals who purchased the unregistered securities were all known to the
Company and its management, through pre-existing business relationships, as long
standing business associates, friends, employees, relatives or members of the
immediate family of management. All purchasers were provided access to all
material information which they requested and all information necessary to
verify such information and were afforded access to management of the Company in
connection with their purchases. All purchasers of the unregistered securities
acquired such securities for investment and not with a view toward distribution,
acknowledging such intent to the Company. All certificates or agreements
representing such securities that were issued contained restrictive legends,
prohibiting further transfer of the certificates or agreements representing such
securities, without such securities either being first registered or otherwise
exempt from registration in any further resale or disposition.
35
The sale of 1,000 shares of convertible Class B Preferred Stock was made
pursuant to and in compliance with Regulation S. The offering was restricted to
and entirely purchased by twenty-three (23) institutional accredited investors.
Extensive documentation was prepared and utilized to insure compliance with the
terms, conditions and provisions of Regulation S. All purchasers and the
Registrant were represented by their own independent counsel, tax advisors,
accounting firms and other advisors. The Company undertook and implemented
control procedures to assure compliance with the terms and conditions of
Regulation S.
The sale of 525 shares of Convertible Class C Preferred Stock was made
pursuant to and in compliance with Rule 506 of Regulation D. The offering was
restricted to and entirely purchased by 11 institutional accredited investors.
Extensive documentation was prepared and utilized to insure compliance with the
terms, conditions and provisions of Regulation D. All purchasers, including the
Company, were represented by their own independent counsel, tax advisors,
accounting firms and other advisors. The Company and its transfer agent
undertook and implemented control procedures to assure compliance with the terms
and conditions of Regulation D.
ITEM 6. SELECTED FINANCIAL DATA
On December 4, 1995, the Company changed its fiscal year end from December
31, 1995 to September 30, 1995 due to the acquisition of the assets and
liabilities of Energy on July 7, 1995 for 5,412,191 shares of Common Stock,
which represented 52% of the Common Stock outstanding at that time. As a
result, for accounting purposes, Energy was considered the acquiring corporation
and the comparative information presented herein represents that of Energy prior
to July 7, 1995 and Energy and the Company subsequent to such date. See
"BUSINESS-Recent Acquisitions, Dispositions and Transactions," and "INDEX TO
FINANCIAL STATEMENTS."
The following selected consolidated financial data should be read in
conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" and the Company's Consolidated Financial Statements
and Notes thereto included elsewhere in this Form 10-K. The Consolidated
Statements of Operations data presented below for the fiscal year ended
September 30, 1997 and September 30, 1996 and the eleven months ended September
30, 1995 and the Consolidated Balance Sheet data as of September 30, 1997 and
1996 have been derived from the Company's Consolidated Financial Statements
included in this Form 10-K. The Consolidated Financial Statements as of and for
the fiscal year ended September 30, 1997, and 1996 and the eleven months ended
September 30, 1995 were audited by KPMG Peat Marwick LLP, independent certified
public accountants. The Consolidated Financial Statements, as of and for the
fiscal year ended October 31, 1994 were audited by Mark Shelley, CPA,
independent public accountant. The Statements of Operations data set forth
below for the years ended October 31, 1994 and 1993 and the Balance Sheet data
set forth below at September 30, 1995 and October 31, 1994 and 1993 are derived
from audited financial statements not included in this Form 10-K.
36
Year Year Eleven Year Year
Ended Ended Months Ended Ended Ended
9/30/97 9/30/96 9/30/95/(1)/ 10/31/94 10/31/93
------------ ----------- ------------- ---------- ----------
Total net sales $ 7,729,000 $ 3,405,000 $ 3,768,000 $2,066,000 $ 60,000
Costs & expenses 24,210,000 8,688,000 5,089,000 2,428,000 142,000
Net loss (16,481,000) (5,283,000) (1,321,000) (362,000) (82,000)
Deemed preferred stock
dividend relating to
in-the-money conversion 1,072,000 1,625,000 -- -- --
Accretion on Preferred Stock 460,000 -- -- -- --
Net loss applicable to common
Stockholders (18,013,000) (6,908,000) -- -- --
Net loss per common share $(0.99) $(0.54) $(0.18) $(0.08) $(0.04)
Weighted average
Number of common
shares outstanding 18,114,038 13,072,683 7,391,275 4,828,007 2,066,979
At period end:
Current assets 3,541,000 $10,625,000 $ 1,796,000 $1,499,000 $ 4,000
Current liabilities 3,655,000 2,060,000 1,799,000 1,621,000 82,000
Working capital (deficit) (114,000) 8,565,000 (3,000) (122,000) (78,000)
Total assets 7,055,000 13,826,000 3,069,000 3,141,000 51,000
Long-term debt 16,000 86,000 48,000 48,000 175,000
Stockholders' equity (deficit) $ 3,384,000 $11,680,000 $ 1,222,000 $1,472,000 $ (206,000)
Cash dividends per
common share -- -- -- -- --
_______________
See also "BUSINESS-Recent Acquisitions, Dispositions and Transactions."
/(1)/ On December 4, 1995, the Company changed its fiscal year end from December 31 to September 30. The comparative
information presented herein represents that of Energy which was deemed to be the acquiring company in the July 7, 1995
transaction. Energy's fiscal year end was previously October 31.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the "SELECTED
CONSOLIDATED FINANCIAL DATA" and "INDEX TO FINANCIAL STATEMENTS."
The statements contained in this Form 10-K, if not historical, are forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995, and involve risks and uncertainties that could cause actual
results to differ materially from the results, financial or otherwise, or other
expectations described in such forward-looking statements. The risks and
uncertainties that may affect the operations, performance, development and
results of the Company's business include those, among others, discussed under
"-Trends and Uncertainties" below. Any forward-looking statement or statements
speak only
37
as of the date on which such statement was made, and the Company undertakes no
obligation to update any forward-looking statement or statements to reflect
events or circumstances after the date on which such statement is made or to
reflect the occurrence of unanticipated events. Therefore, forward-looking
statements should not be relied upon as a prediction of actual future results.
From 1991 through the fiscal year ended December 31, 1994, the Company was
generally inactive and reported no operating revenues. In July 1995, the
Company completed the acquisition of Energy and its wholly owned subsidiary CTL.
See "Business-Overview." The Company substantially expanded the scope of its
business and revised its business strategy subsequent to the Energy transaction
through the acquisition of certain patents, patent applications, proprietary
technology and operations relating to the Antenna Technology, the PI Technology
and the Patch Technology. During this time, the Company has been engaged
primarily in directing, supervising and coordinating the Company's activities in
the continuing developments of its new lines of business, in addition to the
recruitment of management and technical personnel and raising new capital to
fund its operations.
The primary asset acquired in the Energy transaction, its wholly owned
subsidiary CTL, continued to generate positive cash flows in the 1997 fiscal
year. Sales increased 36.7% over the 1996 fiscal year. This increase in sales
was primarily attributable to new defense-related contracts entered into in the
final quarter of the 1996 fiscal year for which production commenced in the
first quarter of the 1997 fiscal year and continued through the second and third
quarters. Production capacity constraints continued throughout the year at the
Company's Santa Cruz, California manufacturing facility. The Company completed
its move to new the production facility in January of 1998, and anticipates that
such move should eliminate the production capacity constraints.
On November 15, 1995, the Company entered into a research and development
agreement with ASU for the development of the Antenna Technology. The Company
had obtained the rights to certain patent applications relating to the Antenna
Technology and had developed several working prototypes of the External Antenna.
The Company had anticipated commencing commercial production of both an External
Antenna and Internal Antenna in the 1997 fiscal year.
On September 30, 1996, the Company formed a wholly owned subsidiary,
Cellular Magnetics, Inc. which acquired all the assets and liabilities of M.C.
Davis in exchange for 277,778 shares of Common Stock valued at $1,000,000 and
$800,000 in cash. While the Company had initially considered constructing its
own manufacturing facility for the manufacture of antenna products, this
acquisition, accounted for by the purchase method of accounting provided the
Company with both a facility for the immediate production of products using its
Antenna Technology and an established manufacturing facility. The Company
intended to continue to produce the miniature and subminiature electronic
components previously produced by M.C. Davis and did not anticipate that the
production of the Antenna Technology would significantly impact its ability to
manufacture these electronic assemblies.
38
Based on subsequent evaluations of the Antenna Technology by the Company
and an independent investment banking company, the Company determined that it
was in its best interest to divest itself of the proposed design, development
and production of the Antenna Systems conducted by its wholly owned subsidiary
Intercell Wireless Corp., as well as the manufacture of miniature and non-
miniature coils, transformers and other electronic assemblies conducted by its
wholly owned subsidiary Cellular Magnetics, Inc. On July 18, 1997, the Company
sold all of its right, title and interest in the Antenna Technology and its
wholly owned subsidiaries Intercell Wireless Corp. and Cellular Magnetics, Inc.
to Intercell Technologies Corporation ("ITC"). As consideration for the sale,
the Company received 6,269,226 shares of ITC stock, 1,100,111 shares of the
Company's Common Stock and two Promissory Notes in the amounts of $2,200,000 and
$375,000, respectively. As a result of uncertainties with respect to the
realization of the consideration received, no gain was recognized on the
transaction. In the event of default by ITC on the promissory notes, the
ownership of Cellular Magnetics, Inc. will revert back to the Company.
Subsequent to the transaction with ITC, the Company evaluated the recoverability
of its investment in and advances to and concluded that an impairment charge of
$835,000 was necessary to reflect continued uncertainties regarding realization
of its investments in and advances to ITC.
To diversify the Company's operations and to capitalize on a new and
emerging technology, the Company formed a wholly owned subsidiary, PI Corp. in
September 1996, which merged with Particle Interconnect, Inc., a California
corporation ("Particle California"). The Company exchanged 1,400,000 shares of
Common Stock for all of the outstanding stock of Particle California. The
transaction was accounted for as an immaterial pooling-of-interest as the prior
operations of Particle California are not material to the Company's consolidated
financial position, results of operations or cash flows. Accordingly, the
consolidated financial statements for the periods prior to the date of
acquisition have not been restated, except for loss per common share
information. From the date of the merger, PI Corp. has been engaged primarily
in the construction of production capabilities at its plant and the continuing
development of the technology. PI Corp. originally expected to commence
commercial production in 1997. Due to high costs associated with continuing
product development and testing, construction of production capabilities and of
market penetration, the Company realigned its operations in September of 1997 to
focus solely on the testing, validation and refinement of the PI Technology.
Accordingly, the Company has discontinued its efforts to establish production
capabilities and has recorded a loss on the abandonment of the related
production assets of $801,000 in 1997. The Company believes that a significant
requirement for introducing products utilizing the PI Technology into the market
will be entering into joint venture, co-manufacturing, licensing or other
similar arrangements with existing manufacturers or distributors in this field.
Effective June 6, 1997, the Company acquired a controlling interest in
Sigma 7 Corporation. Sigma 7 conducts its business through its subsidiary BMI
Acquisition Group, Inc. BMI has developed and currently utilizes a proprietary
patch technology to produce fully functional computer memory modules from
defective memory chips. The Company acquired control of Sigma 7 through the
acquisition of 90% of the 5,000,000 issued and outstanding
39
shares of Sigma 7's common stock in exchange for the payment of $550,000 and by
providing approximately $1,985,000 in additional financing, consisting primarily
of secured loans and standby letters of credit. In addition, the Company issued
1,000 shares of Series D Preferred Stock at $2,500 per share to holders of
certain preferred shares of BMI to eliminate such preferred shares. The
transaction was accounted for by the purchase method of accounting. The cash
purchase price for Sigma 7 was allocated to the net assets acquired based on
their estimated fair values. The purchase price for Sigma 7 was allocated to
the net assets acquired based on their estimated fair values. In connection
with the Acquisition, a portion of the purchase price was allocated to the value
of its in-process research and development projects. From the date of its
acquisition through September 30, 1997, Sigma 7 experienced operating losses of
approximately $7,100,000. As a result of such losses and uncertainties as to
when the subsidiary will generate operating profits and cash flows, as of
September 30, 1997, the Company determined that the goodwill recorded on the
acquisition of Sigma 7 may not be recoverable. Accordingly the balance of
goodwill remaining, $2,300,000 was written off.
On July 7, 1996, the Company completed an offering pursuant to Regulation S
under the Securities Act (the "Regulation S Offering") of 1,000 shares of its
Series B Preferred Stock, with attached warrants, pursuant to which it received
net proceeds of $8,900,000. The Series B Preferred Stock is convertible into
Common Stock at the exchange rate in effect at the date of conversion, as
described in the preferred stock agreements. At the date of issuance, the
exchange rate was equal to 85% of the then prevailing market rate, resulting in
a deemed dividend of $1,765,704. The Company recognized $140,000 and $1,625,000
of the dividend in its fiscal 1997 and 1996 net loss per common share
calculation, respectively. The amount recognized was calculated on a pro rata
basis over the period beginning with the issuance of the security to the first
date conversion could occur. In addition, the conversion terms include a
beneficial adjustment to the exchange rate equal to the original issue price
plus 10% of the original issue price per annum since July 10, 1996. The
beneficial adjustment is treated as an accretion on the Series B preferred
stock. For the year ended September 30, 1997, the amount of the accretion was
$193,000. The amount of the accretion on the Series B preferred for the year
ended September 30, 1996 was not significant.
On December 15, 1996, the Company completed an offering pursuant to
Regulation D to institutional investors of 525 shares of its Series C Preferred
Stock, with attached warrants, pursuant to which it received net proceeds of
$4,672,500. The Series C Preferred Stock is convertible into Common Stock at
the exchange rate in effect at the date of conversion, as described in the
preferred stock agreements. At the date of issuance, the exchange rate was
equal to 85% of the prevailing market rate, resulting in a deemed dividend of
$932,064 which the Company recognized in its fiscal 1997 net loss per common
share calculation. In addition, the conversion terms include a beneficial
adjustment to the exchange rate equal to the original issue price plus 8% of the
original issue price per annum since December 16, 1996. The beneficial
adjustment is treated as an accretion on the Series C preferred stock. For the
year ended September 30, 1997, the amount of the accretion was $267,000.
40
To further improve the Company's working capital position, the Company
issued $1,500,000 in convertible debt and warrants in December 1997. The debt
requires quarterly interest payments at 9% per annum. $750,000 of this
convertible debt matures on December 1, 1999 and 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
other $750,000 of convertible debt matures on April 1, 1999 and may be converted
at the option of the holder any time after the sixth business day following the
maturity date at a conversion price for each share of common stock at 85% of the
market price as defined. At the date of issuance, there was a discount related
to the beneficial conversion feature. The discount will increase the effective
interest rate of the security causing an additional charge to interest expense.
See "-Liquidity and Capital Resources" below.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1996.
Net Sales. Net sales, derived from the Company's subsidiary operations CTL,
Cellular Magnetics, Inc. ("CMI") and Sigma 7, increased 127% to $7,729,000 from
$3,405,000. This increase was due to new defense-related contracts for electron
power tubes entered into in the final quarter of the 1996 fiscal year for which
production commenced in the first quarter of the 1997 fiscal year and continued
through the second and third quarters and the inclusion of sales of electronic
assemblies ($1,480,000) and sales of computer memory modules ($1,594,000) in the
1997 fiscal year.
In the 1997 fiscal year, net sales of new magnetrons totaled $2,055,000,
accounting for 44% of electron tube sales, compared with $1,436,000 or 42% of
electron tube sales in 1996. Net sales from rebuilding of magnetrons increased
from $1,403,000 or 41% of electron tube sales in 1996 to $2,005,000 or 43% in
1997. The maintenance of the sales mix from 1996 to 1997 indicates the
continuity of the Company's focus on new and more complex tube types such as
certain pulse magnetrons initiated in the 1996 fiscal year. The increases in
sale reflects the Company's success in obtaining new contracts in 1997 for the
production of both new and rebuilt pulse magnetrons.
The Company experienced an increase in gross margins in the electron tube
business to 20% in the 1997 fiscal year from 17% in 1996. This increase was due
primarily to improved efficiencies in the production of new tube types in 1997
as direct labor costs decreased to 23% of net sales in 1997 compared to 30% in
1996, while direct material costs decreased to 25% in 1997 compared to 29% in
1996. The Company continued to experience capacity constraints in its Santa
Cruz, California manufacturing facility and incurred additional costs related to
moving production facilities in Watsonville, California.
In December 1997, the Company signed a letter of intent to sell its
electron tube manufacturing subsidiary, CTL, and negotiations regarding this
sale are ongoing. The Company
41
intends to use the proceeds from this sale to further the development of the PI
Technology and to provide working capital for the Company's other operations.
See "-Recent Acquisitions, Dispositions and Transactions, Disposition of CTL."
The Company recorded sales of electronic assemblies of $1,480,000 and gross
profit of $441,000 or 30% of sales in 1997. The Company acquired the electronic
assemblies business on September 30, 1996 and accordingly recorded no sales from
this business in the 1996 fiscal year. In July 1997, the Company sold its
electronic assemblies manufacturing subsidiary to Intercell Technologies
Corporation in conjunction with the sale of the Antenna Technology.
Sales of computer memory modules in the period from June 6, 1997, the date
of acquisition of Sigma 7, to the fiscal year end totaled $1,594,000. The cost
of goods sold was $3,251,000. This negative gross margin of $1,657,000 or 104%
of sales resulted from the high costs of developing ongoing improvements to the
testing and production processes, training of new employees as the Company moved
from one shift to three shifts per day, and an industry wide decline in the
price of computer memory modules. The Company anticipates that the
inefficiencies experienced in the production process will be eliminated by the
second quarter of 1998. In addition, the Company intends to focus on higher
value-added components such as DRAM and COB memory modules in the future. The
Company acquired the memory module business in June of 1997 and accordingly, did
not record sales from this business in the 1996 fiscal year.
In July, the Company entered into a stock purchase agreement to sell,
transfer, assign, and deliver certain assets, liabilities, rights and
obligations of the Company related to its antenna technology, including its
wholly owned subsidiaries CMI and Intercell Wireless Corp., to Intercell
Technologies Corporation ("ITC") a Colorado corporation, in exchange for
6,269,226 shares and warrants of ITC common stock, 1,100,000 shares of the
Company's common stock, and two notes receivable of $2.2 million and $375,000,
respectively. The $2.2 million note is accrued by all of the outstanding shares
of CMI and accrues interest at 10% per annum. Principal and interest payments
of $69,000 are due quarterly with a final payment of $1.2 million due in May
2007. The $375,000 note accrues interest at 10% and is due in full on November
30, 1997. Payment of this note was subsequently extended by the Company to
January 15, 1998. As a result of the uncertainties with respect to realization
of the consideration received, no gain was recognized on the transaction. The
Company will account for its investment in and advance to ITC by the cost
recovery method. Subsequent to the transaction with ITC, the Company evaluated
the recoverability of its investments in and advances to and concluded that an
impairment charge of $835,000 was necessary to reflect continued uncertainties
regarding realization of its investment in and advances to ITC.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SGA") expenses increased 60% to $9,077,000 in 1997 compared to
$5,683,000 in 1996. This increase was primarily attributable to the inclusion
of general, selling and administrative expenses for the Company's new electronic
components, cellular antenna, particle interconnect and memory module operations
for the first time in the 1997 fiscal year, the buy out of four
42
management contracts ($920,000), the acquisition of Sigma 7 and sale of
Intercell Wireless and Cellular Magnetics, additional legal and accounting costs
in the 1997 fiscal year related to the filing of a Registration Statement on
Form S-1 in January 1997, and the inclusion of compensation recognized on the
transfer of stock options from three principal shareholders to an officer and
director of the Company ($530,000) in the first quarter of the 1997 fiscal year.
In fiscal year 1996, the principal component of general, selling and
administrative expenses related to compensation expenses of $3,686,000 resulting
from vesting stock options granted to the Company's officers, directors,
employees and consultants in 1996 at the exercise prices below the fair market
value of the Common Stock on the date of grant.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
1,398% to $1,318,000 in 1997 from $88,000 in 1996. This increase was due to
continuing development of the Antenna Technology to the date of disposition of
this technology on July 18, 1997 ($213,000) and the PI Technology ($1,105,000).
In the 1996 fiscal year, research and development expenses related to the
Antenna Technology only.
In addition to direct expenditures on research and development, the Company
wrote off in-process research and development costs of $2,022,000. In
connection with the acquisition of Sigma 7, a portion of the purchase price was
allocated to the value of in-process research and development projects. These
projects involved the research and development of new products and significant
extensions and improvements to existing products which had not demonstrated
their technological feasibility as of the acquisition date and did not have an
alternative future use. Accordingly, immediately upon consummation of the
transaction, the value associated with these projects was charged to expense.
GOODWILL. On the acquisition of Sigma 7, the total purchase price was
allocated to the net assets acquired based on estimated fair values. $2,495,000
in goodwill was recorded on this date. From the date of its acquisition through
September 30, 1997, Sigma 7 experienced operating losses of approximately
$7,100,000. As a result of such losses and uncertainties as to when the
subsidiary will generate operating profits and cash flows, as of September 30,
1997, the Company determined that the goodwill recorded on the acquisition of
Sigma 7 may not be recoverable. Accordingly the balance of goodwill remaining,
$2,300,000 was written off.
ABANDONMENT OF ASSETS ON REALIGNMENT OF OPERATIONS. In September 1997,
the Company announced a plan to realign the operations and activities of PI
Corp. in order to reduce the amount of funding required to complete development
activities and market PI Corp. products. In connection with this plan, the
Company recorded a charge of $801,000 related to the write-off of manufacturing
equipment ($599,000) and a lease abandonment ($202,000). PI Corp. commenced
implementation of the plan during September 1997.
IMPAIRMENT CHARGE ON INVESTMENT AND ADVANCES TO INTERCELL TECHNOLOGIES
CORPORATION. In July, the Company entered into a stock purchase agreement to
sell, transfer, assign, and deliver certain assets, liabilities, rights and
obligations of the Company related to its antenna technology, including its
wholly owned subsidiaries CMI and Intercell Wireless Corp., to
43
Intercell Technologies Corporation ("ITC") a Colorado corporation, in exchange
for 6,269,226 shares and warrants of ITC common stock, 1,100,000 shares of the
Company's common stock, and two notes receivable of $2.2 million and $375,000,
respectively.
Subsequent to the transaction with ITC the Company evaluated the
recoverability of its investment in and advances to ITC and concluded that an
impairment charge of $ 35,000 was necessary to reflect continued uncertainties
regarding realization of its investment in and advances to ITC. The $835,000
charge represents the difference between the carrying amount of the investment
in and advances to ITC and the estimated fair value of assets collaterlizing
such advances.
INTEREST INCOME AND EXPENSE. Interest income of $258,000 was earned on cash
and short-term investments in the 1997 fiscal year, compared to $36,000 in the
1996 fiscal year. This increase was due to the investment of undeployed cash
resources realized through the sale of its Series B and C Preferred Stock in
low-risk, interest-bearing securities. Interest expense of $179,000 was recorded
in fiscal 1997 compared to $90,000 in 1996. This increase in expense related
primarily to liabilities incurred by Sigma 7 in the continuing development and
manufacture of computer memory modules.
INCOME TAXES. As of September 30, 1997, the Company had a net operating
loss carryover for federal and state income tax purposes of approximately
$20,346,000 and $13,525,000, respectively. The federal net operating losses
expire from 2007 to 2011. The benefit of these net operating loss carryforwards
has not been recorded by the Company as it is uncertain that the Company will
generate sufficient income in future periods to utilize the loss carryforwards.
FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1995 (ELEVEN MONTHS).
Net Sales. Net sales, derived solely from the operations of CTL, decreased
9.6% in 1996 to $3,405,000 from $3,768,000 in 1995. This decrease in sales was
generally due to a combination of a change in the Company's product mix and the
delayed timing of sufficient orders which were originally planned for the fourth
quarter of 1996, but were not placed until the end of the 1996 calendar year.
In the 1996 fiscal year, net sales of new magnetrons totaled $1,436,000,
accounting for 42% of sales, compared with $1,455,000 or 39% of net sales in
1995. Net revenues from rebuilding of magnetrons decreased from $1,849,000 or
49% of net sales in 1995 to $1,403,000 or 41% of net sales in 1996. This shift
in sales mix was due primarily to the Company's focus on new and more complex
tube types such as certain Pulse magnetrons in an attempt to broaden the
Company's product line and a slow down in orders for rebuilt magnetrons for the
food processing industry in the last two quarters of 1996.
44
The Company obtained a significant contract for the manufacture of new and
rebuilt Pulse magnetrons in June of 1996. However, the initial order under this
contract was not placed until September 1996. As a result, sales were not
recorded under this contract until the first quarter of fiscal 1997, resulting
in a significant increase in sales in the first quarter of 1997 over the final
quarter of 1996.
In conjunction with the changes in sales mix noted above, the Company
experienced a decrease in gross margins to 17% in the 1996 fiscal year from 23%
in 1995. This decrease was due to the increased development time and costs
associated with the new and more complex tube types now being constructed by the
Company. In particular, direct labor costs increased to 34% of net sales in
1996 compared to 30% in 1995, while direct materials costs increased to 26% in
1996 from 25% in 1995.
Allowance for Doubtful Accounts. The Company's allowance for doubtful
accounts increased from $81,000 in 1995 to $255,000 in 1996. This increase was
primarily a result of the return of certain Pulse magnetrons, a new product of
the Company, for which rework was requested by the purchasers.
Selling, General and Administrative Expense. Selling, general and
administrative ("SGA") expenses increased 331.5% from $1,317,000 in 1995 to
$5,683,000 in 1996. This increase is primarily attributable to an increase in
compensation expense of $3,686,000 resulting from the vesting of stock options
to purchase an aggregate of 4,841,000 shares of Common Stock granted to the
Company's officers, directors, employees and consultants in 1996 at exercise
prices below the fair value of the Common Stock on the date of grant. The
Company recorded deferred compensation expense of $4,017,000 based on these
grants. The options were granted as an incentive to such persons at a time when
the Company did not have sufficient funds to otherwise compensate such persons.
In addition to the above, SGA expenses increased in 1996 due to higher
legal and audit costs ($387,000 in 1996 compared to $102,000 in 1995) associated
with the Company's acquisitions, financings and compensation arrangements, and
increased compensation paid to management and administrative personnel.
Research and Development. Research and development expenses increased from
$0 in 1995 to $88,000 in 1996. This increase was attributable entirely to costs
associated with research and development of the Company's Antenna Systems.
Interest Income and Expense. The Company earned interest income of $36,000
in 1996 compared to $0 in 1995. This increase was due to the investment in
Treasury Bills of undeployed cash resources realized through the sale of its
Series B Preferred Stock.
Interest expense increased to $90,000 in 1996 compared to $88,000 in 1995
due to continued bank financing and outstanding notes payable to related
parties. The Company repaid these financings and notes with the proceeds
received from the Series B Preferred Stock.
45
Net Operating Loss Carryforwards for Tax Purposes. As of September 30,
1996, the Company had a net operating loss carryover for federal and California
income tax purposes of approximately $7,376,000 and $3,463,000, respectively.
The federal net operating losses expire from 2007 to 2011. The California net
operating losses expire from 2000 to 2001. The benefit of these net operating
loss carryforwards was not recorded by the Company as it was uncertain that the
Company would generate sufficient income in future periods to utilize the loss
carryforwards.
ELEVEN MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO FISCAL YEAR ENDED
OCTOBER 31, 1994.
On July 7, 1995, the Company acquired all of the assets and assumed all of
the liabilities of Energy through the issuance of 5,412,191 shares of Common
Stock. The principal asset acquired in this transaction was all of the issued
and outstanding common stock of CTL. Energy had acquired its investment in CTL
on May 1, 1994. In accordance with generally accepted accounting principles,
the results of operations disclosed in the Company's audited consolidated
financial statements include CTL's operations for the 11-month period ended
September 30, 1995 for the 1995 fiscal year and for the six-month period ended
October 31, 1994 for the comparative 1994 fiscal year.
Net Sales and Gross Margins. The Company's net sales of $3,768,000, which
are attributable entirely to the operations of CTL, increased 82% in the 1995
fiscal year compared to net sales of $2,066,000 in 1994. This increase was due
primarily to the inclusion in the financial statements of 11 months of CTL's
operations in 1995 compared to only six months in fiscal 1994 as described
above. Monthly sales in both the 1995 and 1994 fiscal years average
approximately $340,000 due to capacity limitations at CTL's manufacturing
facilities.
Although CTL's average monthly sales remained constant in the 1995 and 1994
fiscal years, the Company experienced a decline in gross margins on sales of
electron tubes to 23% of net sales in 1995 from 42% in 1994. This decrease was
due primarily to increased costs associated with the development and manufacture
of new types of tubes. In addition, the Company sold a greater percentage of
new tubes relative to rebuilt tubes in the 1995 fiscal year compared to 1994.
As new tubes carry a lower gross margin than rebuilt tubes, an overall decline
in gross margins was experienced.
Selling, General and Administrative Expenses. SGA expenses increased by
11% in the 1995 fiscal year due to increased consulting, legal and audit costs
associated with the Energy transaction and the Company's financing activities.
Interest Expense. Interest expense increased to $88,000 in 1995 from
$3,000 in 1994 primarily due to an increase in notes payable to former owners of
CTL and other third parties. Loss on Investments. During fiscal 1995, the
Company purchased approximately 15% of the outstanding stock of American
Microcell for 712,571 shares of common stock at a deemed price of approximately
$0.70 per share, or $500,000. American Microcell was engaged in the
46
research and development of improved technologies for cellular phones. However,
American Microcell proved unsuccessful in its efforts to finance continuing
development of the technologies acquired, and the rights to these technologies
reverted to the original developers. Accordingly, the Company wrote off its
investment in American Microcell in fiscal 1995.
In addition, the Company sold certain microwave technology rights to a
related party for a note in the face amount of $1,250,000. Due to concerns
about collectibility, the Company reserved the remaining carrying value in
fiscal 1995. In addition, related deferred development costs totalling $44,631
were written off in fiscal 1995. Losses on investment in fiscal 1994 were not
significant.
Net Operating Loss Carryforwards for Tax Purposes. As of September 30,
1995 the Company had a net operating loss carryover for federal and California
income tax purposes of approximately $1,083,000 and $317,000, respectively. The
federal net operating losses expire from 2007 to 2010. The California net
operating losses expire in 2000. The benefit of these net operating loss
carryforwards has not been recorded by the company as it is uncertain that the
Company will generate sufficient income in future periods to utilize the loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had cash and cash equivalents on hand
of $107,000 as compared to $4,224,000 at September 30, 1996. This decrease in
working capital was primarily due to costs associated with the acquisition of
Sigma 7, the continuing development of the Antenna, PI and Patch technologies
and legal and accounting costs related to the filing of a Registration Statement
on Form S-1 in January 1997. In addition, the Company bought out four
management contracts ($920,000) and incurred general, selling and administrative
expenses for the Company's new electronic components, cellular antenna, particle
interconnect and memory module operations in the 1997 fiscal year. To offset
these cash disbursements, the Company received net proceeds of $4,672,000 from
the issuance of Series C Preferred Stock and warrants and $150,000 from sales of
Common Stock.
The Company acquired net assets comprised of working capital and property,
plant and equipment, and recorded related goodwill and other intangibles,
totalling $550,000 in 1997 as a result of the acquisition of Sigma 7.
In the 1998 fiscal year, the Company intends to dispose of surplus and
nonperforming assets in order to generate working capital for the continuing
development of the PI Technology and Patch Technology. In December 1997, the
Company signed a letter of intent to sell its electron tube manufacturing
subsidiary, CTL. See "-Recent Acquisitions, Dispositions and Transactions,
Disposition of CTL." Negotiations regarding this sale are continuing. The
Company also intends to dispose of its investment land held for sale at the
earliest opportunity.
The Company believes that current and known future capital resources,
including those derived from the transactions described above, will be adequate
to fund its operations over the
47
next 12 months. The Company also believes that sales of its PI Corp. products,
currently anticipated to commence in the 1998 fiscal year, in combination with
the sales of memory modules of Sigma 7 will provide sufficient funds to meet the
Company's capital requirements for the next two years. This assumption is based
on the Company's belief that it will be successful in entering into a joint
venture, co-manufacturing, licensing or other similar arrangement with existing
connector manufacturers with respect to the manufacture of PI Corp. products.
The failure to enter into such relationships could result in the Company
requiring substantial additional capital and resources to bring the PI Corp.
products to market.
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.
In the 1998 fiscal year, the Company expects to make capital expenditures
of approximately $2,000,000. These expenditures will be made to complete CTL's
new manufacturing facility in Watsonville, California, and to purchase new
equipment for the Company's manufacturing plant in San Diego, in connection with
the manufacture of the memory modules.
TRENDS AND UNCERTAINTIES
As of result of its activities in 1997, the Company believes that it has
positioned itself for long-term success through the acquisition of Sigma 7, by
restructuring the business utilizing the PI Technology and the Proprietary
Electroplating Process and by initiating a program to dispose of nonperforming
business segments. The Company's activities in fiscal 1998 will focus on
bringing the PI Technology to market and on expanding the existing markets for
its memory module products. However, the future operating results of the
Company are subject to certain trends and uncertainties within the industries in
which the Company is operating and within the Company itself.
OVERVIEW
In general, the Company has a limited operating history that is relevant to
its current business. The Company does not anticipate producing significant
operating revenues until such time, if ever, as products developed using the PI
and Patch Technologies are completely developed, manufactured in commercial
quantities and available for commercial delivery, and accepted in the
marketplace. There can be no assurance that the Company's technologies and
products, if developed and manufactured, will be able to compete successfully in
the marketplace and/or generate significant revenue. The Company anticipates
incurring significant costs in connection with the development of its
technologies and proposed products and there is no
48
assurance that the Company will achieve significant revenues to offset
anticipated operating costs. Included in such costs are research and
development expenses, marketing costs, increased capital expenditures for the
expansion of its manufacturing facilities and the research and development of
its products, and general and administrative expenses.
Inasmuch as the Company will continue to have high levels of operating
expenses and will be required to make significant expenditures in connection
with its continued research and development activities, the Company anticipates
that such losses will continue until such time, if ever, as the Company is able
to generate sufficient revenues to exceed its total costs of operation.
SPECIFIC TRENDS AND/OR UNCERTAINTIES
The Company's PI Technology is currently in the development stage and the
marketability of the PI Corp. products has not yet been tested. The PI
Technology is currently being utilized by third parties in limited applications
under licenses granted from Louis DiFrancesco, the developer of the PI
Technology, or from companies he previously controlled such as Particle
California. The widespread acceptance of the PI Technology and the PI Corp.
products by the market has yet to be tested by the Company. In addition, no
prediction can be made as to competitive responses in the marketplace should the
PI Technology and the PI Corp. products prove successful. Moreover, the
licensees of the PI Technology could compete directly with the Company in the
markets it intends to enter. If such licensees desire to do so, the Company,
and not Mr. Difrancesco, would receive any increase in royalty payments due to
such success.
The semiconductor memory market is subject to rapid technological change,
frequent new product introductions and enhancements, product obsolescence and
changes in end-user requirements. This market may be eroded or replaced with
other forms of technology. The Company's ability to be competitive in this
market will depend in significant part upon its ability to successfully
manufacture, market and sell its semiconductor products on timely and cost-
efficient basis that responds to changing customer requirements. Any success of
the Company in developing new or enhanced products will depend upon a variety of
factors, including new product selection, integration of various elements of its
complex technology, timely and efficient completion of designs, timely and
efficient implementation of manufacturing and assembly processes, and
development of competitive products by competitors. The Company may experience
delays from time to time in the development and introduction of its DIMM and COB
memory module product lines. Moreover, there can be no assurance that the
Company will be successful in selecting, developing, manufacturing and marketing
new products or that errors will not be found in the Company's new products
after commencement of commercial shipments, if any, which could result in the
loss of or delay in market acceptance. The inability of the Company to
introduce in a timely manner products that satisfy market demands could have a
material adverse effect on the Company's business, financial condition and
results of operations.
49
The Company is currently operating in three diverse businesses with
different operating and management requirements. As the operations of the
Company expands there will be a requirement for increased management expertise.
The Company is currently seeking to expand its management complement,
particularly in the marketing field, to cope with the anticipated growth in the
Company's operations.
PENDING ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share" (SFAS
No. 128). SFAS No. 128 establishes a different method of computing net income
per share than is currently required under the provisions of Accounting
Principles Board Opinion No. 15. Under SFAS No. 128, the Company will be
required to present both basic net loss per share and diluted net loss per
share. Basic and diluted net loss per share is expected to be comparable to net
loss per share as presented in the accompanying consolidated financial
statements. The Company plans to adopt SFAS No. 128 in its fiscal quarter
ending December 31, 1997 and at that time all historical net loss per share data
presented will be restated to conform to the provisions of SFAS No. 128.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and displaying
comprehensive income and its components in the financial statements. It does
not, however, require a specific format for the statement, but requires the
Company to display an amount representing total comprehensive income for the
period in that financial statement. The Company is in the process of
determining its preferred format. This Statement is effective for fiscal years
beginning after December 15, 1997.
Also, in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Statement establishes
standards for the manner in which public business enterprises report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to stockholders. This Statement is effective for
financial statements for periods beginning after December 15, 1997, and the
Company is currently evaluating the impact of the Statement on the reporting of
its segment information.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and related financial information
required to be filed are indexed on page F-2 and are incorporated herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
50
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, directors and significant employees of the Company
are as follows:
Name and Age Position Period of Service
- ------------------------------ ---------------------------------- -----------------------------
Paul H. Metzinger (58) Director, President and Chief May 28, 1997 to Present
Executive Officer
Charles E. Bauer, Ph.D. (46) Director Chief Operations Officer
from
May 28, 1997 to October 1,
1997 and Director from
November 22, 1996 to Present
Alan M. Smith (46) Director, Secretary, Treasurer July 7, 1995 to Present and
and Director since June 1996 to
Chief Financial Officer Present
Gilbert Olachea (42) Executive Director of Product September 2, 1997 to Present
Development
Herbert J. Neuhaus (38) Managing Director of Particle August 18, 1997 to Present
Interconnect Corporation
James D. Martin (40) Vice President, CTL February 1977 to Present
Anthony P. Wynn (53) Vice President, CTL January 1979 to Present
David E. Blank (62) Vice President, CTL July 1989 to Present
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 has
been a director of Sigma 7 since June 6, 1997 and has served as President and
Chief Executive Officer and a director of Sigma 7 since August 21, 1997. Mr.
Metzinger is currently serving as Chief Executive Officer of Sigma 7 on an
interim basis
51
until Sigma 7 can locate a permanent qualified CEO. Prior to becoming a
director and officer of the Company, Mr. Metzinger served as Intercell's General
Counsel and has practiced securities law and represented large and small public
companies for over 25 years.
CHARLES E. BAUER, PH.D. Dr. Bauer has served as Chief Operating Officer of
the Company since May 28, 1997 to October 1, 1997 when he resigned. He has
served as a director of the Company since November 22, 1996 to the present. Dr.
Bauer served as a director and Chief Executive Officer of Sigma 7 from June 6,
1997 to August 21, 1997. Dr. Bauer has been the Managing Director of TechLead
Corporation, an international consulting firm, since 1990. During his career,
Dr. Bauer has served as Director, Research and Technology of MicroLithics
Corporation, Golden, Colorado. At MicroLithics Corporation, Dr. Bauer was
responsible for a variety of technology programs with the Coors Advanced
Electronics Group, including, MicroLithics Coors Electronic Packaging Company,
two internal research groups of the Coors Ceramic Company and a joint venture
with W. R. Grace & Company. From 1978 through 1989 he was employed by
Tektronix, Incorporated, Beaverton, Oregon, in various capacities as a Material
Scientist/Engineer, Materials Science/Engineering Manager, Engineering
Scientific Manager, Bipolar Products Packaging Unit Manager and Integrated
Circuit Packaging Operations Manager.
Dr. Bauer received his BS in Materials Science and Engineering from
Stanford University in 1972, his MS in Metallurgical Engineering from Ohio State
University in 1975, his PhD in Materials Science and Engineering from Oregon
Graduate Center, Beaverton, Oregon in 1980 and his MBA from the University of
Portland in 1988.
Dr. Bauer has served as Assistant Adjunct Professor in Mechanical
Engineering and Business Administration with the University of Portland, as an
Associate Professor (visiting) in Mechanical Engineering with Florida
International University, Miami, Florida and is currently associated as
Assistant Adjunct Professor, with dual appointment in Mechanical Engineering and
Electrical and Computing Engineering with the University of Colorado. He is
currently Director, Industrial Relations for the Center for Advance
Manufacturing and Packaging of Microwave, Optical and Digital Electronics for
the University of Colorado.
Dr. Bauer served as the President of the Rocky Mountain Chapter of ISHM,
The Microelectronic Society (ISHM) (1995-96). He has received the Fellow of
Society Award of ISHM (1993) and served as National Technical Vice President
(1988-90). Dr. Bauer is a Director and the Secretary of the Surface Mount
Technology Association (SMTA) and served as President of the Rocky Mountain
Chapter (1995-96). Dr. Bauer has been a member of the following professional
societies: ASM International (ASM) since 1971, International Electronics
Packaging Society (IEPS) since 1983.
Dr. Bauer holds one U.S. Patent on Multilayer Interconnect Circuitry and
has five Patent Applications pending, relating to interconnect circuitry and
packaging. Dr. Bauer has published over 50 technical papers and presentations
in journals and conferences around the world. He founded and is currently
General Chair of Pan Pacific Microelectronics Symposium and Chip Scale Packaging
Advanced Technology Workshop.
52
ALAN M. SMITH. Mr. Smith has been Secretary, Treasurer and Chief Financial
Officer of the Company since July 7, 1995 and a director since June 12, 1996.
Mr. Smith is a Chartered Accountant practicing in Vancouver, British Columbia,
Canada. Mr. Smith established a financial consulting practice in Vancouver,
Canada in 1985 and in 1990 obtained his license to practice as an independent
accountant. He has been a member of the Institute of Chartered Accountants of
Ontario since 1978 and of the Institute of Chartered Accountants of British
Columbia since 1981. Mr. Smith devotes substantially all of his professional
time to the business affairs of the Company.
SIGNIFICANT EMPLOYEES
The Company considers the following individuals as significant employees of
the Company.
GILBERT OLACHEA. Executive Director of Product Development of Intercell
Corporation since September 2, 1997. Although currently employed by Intercell
Corporation, Mr. Olachea will be devoting substantially all of his time in the
next few months as the Operating Executive of Sigma 7. From July 1993 to
September 1, 1997, Mr. Olachea served as Vice President Corporate Marketing and
Communications of Amkor Electronics, the world's largest service and product IC
package provider in the semiconductor industry. At Amkor, Mr. Olachea had
management responsibility for company market positioning, new product
implementation and training, public relations and authoring technical articles.
Mr. Olachea coordinated sales, customer service and technical teams to effect a
successful promotion and communication of products, service and value to
customers. His efforts contributed to a marked increase in brand equity, market
awareness and revenue of Amkor. From August 1988 to July 1993 Mr. Olachea
served as Regional Account Manager for Amkor.
HERBERT J. NEUHAUS. Dr. Neuhaus has been Managing Director of Particle
Interconnect Corporation since August 18, 1997. From August 1989 to August
1997, he was associated with the 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.
During his tenure with Amoco, his professional efforts and responsibilities
were directed towards the identification, analysis and development of new market
opportunities for Amoco's electronic materials products, the development of new
applications for such products, including multichip module products, polymide
coatings and processes for multichip module applications.
Dr. Neuhaus received his Ph.D. degree in Physics from 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 or the technical
chair for conferences. Dr. Neuhaus will devote substantially all of his
professional efforts to the business affairs of Particle Interconnect
Corporation.
53
JAMES D. MARTIN, VICE PRESIDENT, CTL. Mr. Martin has been employed by CTL
since February, 1977 and has served as Vice President of CTL since 1993. He has
worked in every department of CTL from production and sales to customer service.
Mr. Martin provides technical support to customers in this highly technical
business and organizes and runs production lines for rebuilding triodes,
cyclotrons and medical linear accelerators.
ANTHONY P. WYNN, VICE PRESIDENT, CTL. Mr. Wynn has served as Vice
President of CTL since January, 1979. Mr. Wynn is a design engineer responsible
for developing a 50KW L-band magnetron and rebuilds high power magnetrons,
cyclotrons, triodes, medical linear accelerators, electron guns and ion pumps.
He has worked with English Electric Valve Co. (U.K.) and Litton Industries
(U.S.) as a professional microwave engineer in the magnetron tube divisions.
DAVID E. BLANK, VICE-PRESIDENT, CTL. Mr. Blank has been Vice-President of
Engineering at CTL since July, 1989. A graduate of Brunel College, London
University, England and a member of the Institute of Mechanical Engineers, he
has worked in senior engineering positions with Varian Associates, EEV Inc.'s
Relmag Division of Litton Industries. He has designed and developed numerous
magnetrons at various power levels during his career.
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.
Based solely on its review of the copies of the Section 16(a) forms
received by it, or written representations from certain reporting persons, the
Company believes that, during the last fiscal year, all Section 16(a) filing
requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with, with the exception of Dr. Charles E.
Bauer's Form 5 for the last fiscal year. Dr. Charles E. Bauer failed to report
two transactions on a timely basis. Dr. Charles E. Bauer's failure to timely
file a report was a failure known by the Company.
54
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning compensation
paid by the Company to the Chief Executive Officer ("CEO") and any other
executive officer whose total annual salary and bonus exceeded $100,000 for the
fiscal year ended September 30, 1997 (the "Named Executive Officers"):
Long-Term
Annual Compensation Compensation
------------------------------------- --------------------
Securities
Fiscal Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Options (#) Compensation($)
- ------------------------------------ ------------ ------------------- -------------- --------------------- --------------------
Paul H. Metzinger, 1997 $70,000/(1)/ -0- 2,350,000/(1)/ -0-
Director, President and
Chief Executive Officer
Gordon J. Sales, Former 1997 50,000 -0- -0- $400,000
Director, President 1996 105,917 -0- 200,000/(3)/ -0-
and Chief Executive 1995 -0- -0- 500,000/(3)/ $ 82,265/(2)/
Officer/(6)/
Alan M. Smith, Director, 1997 146,667 -0- 1,850,000 -0-
Secretary, Treasurer and 1996 93,371 -0- 500,000/(4)/ -0-
Chief Financial Officer 1995 15,000 -0- -0- 40,000/(5)/
Dr. Charles E. Bauer/(7)/ 1997 66,666 -0- 1,600,000 -0-
Director, former Chief
Operating Officer
Terry W. Neild, former 1997 80,000 -0- -0- -0-
Director and Executive Vice 1996 40,000 -0- 200,000/(3)/ -0-
President/(6)/ 1995 -0- -0- 500,000/(3)/ -0-
55
________________
/(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, 1997 at an annual salary of $210,000.00. For the period June 1, 1997 to
September 30, 1997, Mr. Metzinger was paid $70,000. The wife of Mr. Metzinger is
the holder of presently exercisable options to acquire 650,000 shares at $0.50
per share and 1,700,000 shares at $0.3750 per share issued September 30, 1997
and expiring September 30, 2007. Mr. Metzinger should be deemed the beneficial
owner of such shares.
/(2)/ Received as compensation as an officer of CTL.
/(3)/ An option to purchase 500,000 shares of Common Stock was originally
granted to Messrs. Sales and Neild on July 7, 1995 at an exercise price of $.625
per share. On November 9, 1995 these options were repriced at an exercise price
of $.50 per share. Concurrently, an option to purchase an additional 200,000
shares of Common Stock was granted by the Company to Messrs. Sales and Neild at
the same exercise price. Messrs. Sales and Neild each subsequently transferred
options to purchase 50,000, of the 200,000 shares originally granted to them to
Alan M. Smith as a gift on October 21, 1996.
/(4)/ Mr. Smith is the holder of presently exercisable options to acquire
150,000 shares at $0.50 per share and 1,700,000 at $0.3750 per share, issued
September 30, 1997 and expiring September 30, 2007. Of the 500,000 options
issued to him by the Company in the fiscal year ended September 30, 1996, Mr.
Smith exercised 150,000 of such options in the fiscal year ended September 30,
1996 leaving a balance of 350,000 shares subject to option. These 350,000 shares
subject to option were canceled and re-issued as a new option on September 30,
1997, expiring September 30, 2007 and are included in the 1,850,000 shares shown
as issued by the Company in 1997. Mr. Smith owns an additional, presently
exercisable option to acquire 150,000 shares at $0.50 per share, issued with a
new term commencing September 30, 1997, expiring September 30, 2007, which he
received from three other individuals on October 21, 1996. This 150,000 option
has not been included in this table as the option was not granted by the
Company.
/(5)/ Received as compensation as a consultant to Energy Corporation and CTL.
/(6)/ Messrs. Sales and Neild resigned as directors and officers of the Company
effective May 28, 1997.
/(7)/ Dr. Bauer served as Chief Operations Officer from June 1, 1997 until he
resigned on October 1, 1997. The compensation shown was paid pursuant to his
Employment Agreement which was terminated effective September 30, 1997.
The foregoing compensation table does not include certain fringe benefits
made available on a nondiscriminatory basis to all Company employees such as
group health insurance, dental insurance, long-term disability insurance,
vacation and sick leave. In addition, the Company makes available certain non-
monetary benefits to its executive officers with a view to acquiring and
retaining qualified personnel and facilitating job performance. The Company
considers such benefits to be ordinary and incidental business costs and
expenses. The aggregate value of such benefits in the case of each executive
officer listed in the above table, which cannot be precisely ascertained but
which is less than 10% of the cash compensation paid to each such executive
officer, is not included in such table.
OPTION 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, 1997.
56
OPTION GRANTS IN THE LAST FISCAL YEAR
Potential Realizable Value at Assumed
Annual Rates of Stock Price
Individual Grants Appreciation for Option Term/(1)/
- -------------------------------------------------------------------------------------------- --------------------------------------
Percent of
Total/(7)/
Number of Options Fair
Securities Granted to Market
Underlying Employees Value on
Options in Fiscal Exercise Grant Expiration
Name Granted(#) Year/(3)/ Price($/sh) Date/(2)/ Date 0% ($)/(8)/ 5% ($)/(8)/ 10% ($)
- --------------------------- -------------- ---------- ---------- --------- ---------- ----------- ---------- -----------
Paul H. Metzinger 650,000 9.80 0.50 0.2450 9/30/07 (165,750.00) (65,599.00) 88,503.00
1,700,000/(6)/ 25.64 0.3750 0.2450 9/30/07 (221,000.00) 40,935.00 442,794.00
Alan M. Smith/(4)/ 150,000 2.26 0.50 0.2450 9/30/07 (38,250.00) (15,138.00) 20,320.00
1,700,000/(6)/ 25.64 0.3750 0.2450 9/30/07 (221,000.00) 40,935.00 442,794.00
Charles E. Bauer/(5)/ 100,000 1.51 0.3750 0.2450 9/30/07 (13,000.00) 2,408.00 26,047.00
1,500,000/(6)/ 22.62 0.3750 0.2450 9/30/07 (195,000.00) 36,119.00 390,700.00
_______________
/(1)/ Potential realizable value is based on an assumption that the stock price of the Common Stock appreciates at the annual rate
shown (compounded annually) from the date of grant until the end of the ten-year option term. These numbers are calculated based
on the requirements promulgated by the Securities and Exchange Commission and do not reflect the Company's estimate of future
stock price growth which may or may not occur.
/(2)/ Computed based on the average closing bid and asked prices on the date the options were granted.
/(3)/ All options granted were immediately exercisable on the date of grant, September 30, 1997.
/(4)/ Mr. Smith owns an additional, presently exercisable option to acquire 150,000 shares at $0.50 per share, issued with a new
term commencing September 30, 1997, expiring September 30, 2007, which he received from three other individuals on October 21,
1996. This 150,000 option has not been included in this table as the option was not granted by the Company.
/(5)/ Charles Bauer resigned as an Officer of the Company on October 1, 1997.
/(6)/ Unless exercised within 90 days of resignation or termination, as an officer, these options are forfeited by the holders
unless specifically provided otherwise in writing by the parties.
/(7)/ Based on a total of 6,831,000 options granted in the fiscal year ended September 30, 1997.
/(8)/ Numbers in parentheses are negative numbers.
AGGREGATED OPTION EXERCISE AND FISCAL YEAR-END OPTION TABLE
The following table provides information relating to the exercise of stock
options during the fiscal year ended September 30, 1997 by the Company's
executive officers and the 1997 fiscal year-end value of unexercised options.
57
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR,
AND FISCAL YEAR-END OPTION VALUES
Value of
Number of Unexercised
Unexercised In-the-Money
Options Options
at FY-End/(1)/ at FY-End($)/(1)/
---------------- -----------------
Shares
Acquired onValue Exercisable/ Exercisable/
Name Exercise(#)Realized( )$Unexercisable Unexercisable
---------------- -------------------- ---------------- -----------------
Paul H. Metzinger -0- -0- 2,350,000/0 $ 575,750/0
Gordon J. Sales/(2)/ -0- -0- 650,000/0 159,250/0
Alan M. Smith -0- -0- 1,850,000/0/(3)/ 453,250/0/(3)/
Terry W. Neild/(2)/ -0- -0- 650,000/0 159,250/0
Charles E. Bauer/(4)/ -0- -0- 1,600,000/0 392,000/0/(4)/
_______________
/(1)/ The average of the closing bid and asked price of the Common Stock on
September 30, 1997 ($.245) was used to calculate the option value.
/(2)/ Messrs. Sales and Neild resigned as Directors and officers of the Company
effective May 28, 1997.
/(3)/ Does not include 150,000 unexercised presently exercisable options held by
Alan Smith, which he received from three individuals and not the Company.
/(4)/ Charles E. Bauer resigned as officer of the Company effective October 1,
1997.
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.
EMPLOYMENT AGREEMENTS
On May 28, 1997, the Company entered into certain employment agreements
(the "Employment Agreements") with Paul H. Metzinger to serve as President and
Chief Executive Officer of the Company, Alan M. Smith to serve as Chief
Financial Officer of the Company, and Charles E. Bauer to serve as Chief
Operating Officer of the Company (collectively, the "Employees" and individually
an "Employee"). The Employment Agreements are for a period of one year
beginning June 1, 1997. Any extension or renewal of the Employment Agreements
must occur at least three months prior to the end of the initial term or any
renewal term and absent mutual agreement of the parties, the failure to conclude
such extension or renewal by
58
such date shall be deemed notice to the Company and the Employee, that the
relevant Employment Agreement shall not be extended. Under each Employment
Agreement, Messrs. Smith and Bauer will receive an annual salary of $200,000 and
Mr. Metzinger will receive an annual salary of $210,000 (each referred to as an
"Annual Salary") for the first year. If an Employment Agreement is subsequently
extended by the Board, each Employee's Annual Salary will increase by the
amount, if any, in which the Consumer Price Index increased during the previous
year. Each Employee also is entitled to participate in the Company's bonus and
stock option plans and participate in the customary employee benefits programs
maintained by the Company, including health, life and disability insurance to
the extent provided to other senior executives of the Company.
The Company or an Employee may terminate the applicable Employment
Agreement at any time with or without cause. In the event the Company
terminates an Employment Agreement for cause or an Employee terminates his
Employee Agreement without cause, all of such Employee's rights to compensation
would cease upon the date of his termination. If the Company terminates an
Employment Agreement without cause, 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 Agreements also include a non-
compete and non-disclosure provisions in which each Employee agrees not to
compete with or disclose confidential information regarding the Company and its
business during the term of the Employment Agreement and for a period of one
year thereafter.
ADDITIONAL EMPLOYMENT AGREEMENTS. The Company, through its wholly owned
subsidiaries, has also entered into employment agreements with the following
individuals, among others, Dr. Herbert J. Neuhaus and Gilbert Olachea.
COMPENSATION PURSUANT TO PLANS
STOCK OPTION PLANS
During the fiscal year ended September 30, 1997, the Company granted
options to purchase 6,831,000 shares of common stock to directors, officers,
employees and consultants of the Company and its subsidiaries. As of September
30, 1997, 8,952,000 options are exercisable.
59
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. Sales, Neild, Smith and Metzinger.
60
ITEM 12. 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 November 30, 1997, by (i)
each person known by the Company to own beneficially 5% or more of the
outstanding shares of Common Stock, (ii) the Company's directors, Chief
Executive Officer and executive officers whose total compensation exceeded
$100,000 for the last fiscal year, and (iii) all directors and executive
officers of the Company as a group.
Name and Address of Percentage of
Beneficial Owner Number of Shares Class/(5)/
- ---------------- ----------------- -----------
Paul H. Metzinger, President,
Chief Executive Officer and Director
370 Seventeenth Street, Suite 3290
Denver, CO 80202 2,852,541/(1)/ 8.72%
Alan M. Smith, Chief Financial Officer and Director
999 West Hastings St., Suite 1750
Vancouver, B.C., V6C 2W2 2,188,000/(2)/ 6.76
Cheri L. Perry
3236 Jellison Street
Wheat Ridge, CO 80033 2,852,541/(1)/ 8.72
Charles E. Bauer, Chief Operating Officer and Director
31321 Island Drive
Evergreen, CO 80439 1,600,000/(3)(4)/ 5.00
All officers and directors as a group (3 persons) 6,640,541/(5)/ 18.28
_______________
/(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: 419,340 shares owned of record and beneficially; 650,000 shares
of common stock subject to a presently exercisable option, exercisable at $.050
per share, issued September 30, 1997, expiring September 30, 2007; and 1,700,000
shares of common stock subject to a presently exercisable option, exercisable at
$0.3750 per share, issued September 30, 1997, expiring September 30, 2007. Mr.
Metzinger owns directly, of record and beneficially, 83,201 shares of common
stock. His wife should be deemed the beneficial owner of such shares. Mr.
Metzinger's and his wife's stock ownership are not duplicated in this
computation.
/(2)/ Includes 300,000 shares of common stock subject to a presently exercisable
option, exercisable at $0.50 per share, issued September 30, 1997, expiring
September 30, 2007 and 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.
/(3)/ Includes 1,600,000 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)/ Charles E. Bauer resigned as an Officer on October 1, 1997.
/(5)/ Based on 30,371,075 shares of common stock issued and outstanding on
September 30, 1997. The total number of shares outstanding is increased to
reflect the number of shares underlying individual options in computing that
individual or group percentage ownership interest in the Company. Mr.
Metzinger's and his wife's stock ownership are not duplicated in this
computation.
61
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of September 30, 1996, the Company had an outstanding promissory note
due to Jerry W. Tooley, the Chief Financial Officer of Cellular Magnetics in the
amount of $80,000 with an interest rate of 8%, due annually. The promissory
note was issued as part of the consideration paid for the purchase of M.C. Davis
consummated on September 30, 1996. This note was repaid in October 1996.
The Company had noninterest bearing notes payable totaling $800,000 due to
the former owners of M.C. Davis in consideration for the purchase of M.C. Davis
consummated on September 30, 1996. These notes were repaid in October 1996.
The Company leases an office from Alan M. Smith, Ltd., a company controlled
by Alan M. Smith, an executive officer and director of the Company. The Company
leases this office space pursuant to a lease that expires on July 31, 2001. The
monthly lease payments are $3,000. The Company believes that the lease payments
are on terms at least as favorable as could be obtained from an independent
lessor.
On July 8, 1996, Energy, which does not currently conduct any operations
and whose only assets consist of the Company's Common Stock, and the Company
entered into a certain Plan of Liquidating Dissolution (the "Plan"). The Plan
was approved by a majority of the shareholders of Energy on October 21, 1996 in
accordance with the provisions of the Delaware General Corporation Law. Under
the Plan, the Company agreed to distribute the shares of Common Stock issued to
the shareholders of Energy over a period of three years. The Company, with the
concurrence of Energy, decided to change the timing of the distribution due to
the substantial decline in the market price of the Company's common stock.
Accordingly, the 5,412,191 shares of Common Stock owned by Energy were
distributed to the beneficial owners of the shares of common stock of Energy as
of July 8, 1996, pro-rata as follows: 902,032 on or about May 5, 1997 and the
remainder on August 19, 1997.
521508 B.C. Ltd. (the beneficiaries of which are the adult children of Mr.
Gordon J. Sales and the father-in-law of Mr. Terry W. Neild), the Blonde Bear
Trust, the beneficiary of which is the spouse of Alan M. Smith and Messrs. James
D. Martin, Anthony P. Wynn and David E. Blank, significant employees of the
Company, own shares of Energy and will receive approximately 247,632, 119,000,
20,000, 20,000 and 20,000 shares of Common Stock, respectively, in the
distribution. The Blonde Bear Trust has an independent trustee and Mr. Smith
does not have the authority to revoke the trust or direct the trustee in the
voting or disposition of the trust proceeds. Accordingly, Mr. Smith disclaims
any beneficial ownership interest in the shares of Common Stock the trust will
receive from Energy.
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
62
Louis L. Ross, a former consultant to the Company, owns a controlling interest
in Intercell Technologies Corporation. See "BUSINESS-Recent Acquisitions,
Dispositions and Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report.
1. FINANCIAL STATEMENTS. See Index to Financial Statements and
Schedule on page F-2 of this Report.
2. FINANCIAL STATEMENT SCHEDULES. See Index to Financial Statements
and Schedule on page F-2 of this Report. All other schedules are
omitted since they are not required, are inapplicable, or the
required information is included in the financial statements or
notes thereto.
3. EXHIBITS. The following is a complete list of exhibits filed as
part of this Form 10-K. Exhibit numbers correspond to the
numbers in the Exhibit Table of Item 601 of Regulation S-K.
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
to Stock Purchase Agreement.
2.5/(6)/ Stock Sale and Purchase Agreement dated June 6, 1997 between
Intercell Corporation and Sigma 7 Corporation.
2.6* Offer for Development Agreement of Microlink Technologies
Corporation.
63
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 Certificate of Designation for Series B Preferred Stock is
included in the Company's Articles of Incorporation filed as
Exhibit 3.1 and incorporated herein by reference.
4.3/(1)/ Specimen of Warrant attached to Series B Preferred Stock.
4.4 Certificate of Designation for Series C Preferred Stock is
included in the Company's Articles of Incorporation filed as
Exhibit 3.1 and is incorporated herein by reference.
4.5/(7)/ Form of Warrant attached to Series C Preferred Stock.
4.6/*/ 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/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996, between Gordon J. Sales and the Company.
10.5/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996, between Alan M. Smith and the Company.
64
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.6/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996 between Terry W. Neild and the Company.
10.7/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 22, 1996 between Steven D. Clark and PI Corp.
10.8/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996 between Lawrence DiFrancesco and PI Corp.
10.9/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996 between Patricia H. Grihalva and PI Corp.
10.10/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 8, 1996 between Jerry W. Tooley and Cellular Magnetics.
10.11/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 8, 1996 between David Putnam and Cellular Magnetics.
10.12/(5)/ Warrant Agreement dated as of July 18, 1997 between Intercell
Corporation and Intercell Technologies Corporation.
10.13/(5)/ Royalty Agreement dated as of July 18, 1997 between Intercell
Corporation and Intercell Technologies Corporation.
10.14/(5)/ $2,200,000 Promissory Note dated as of July 18, 1997 between
Intercell Technologies Corporation and Intercell Corporation.
10.15/(5)/ Stock Pledge and Security Agreement dated July 18, 1997 between
Intercell Corporation and Intercell Technologies Corporation.
10.16* Microlink Technologies Corporation Standard Industrial Lease.
10.17* Sigma 7 Corporation Lease.
10.18* CTL Lease
11* Statement regarding Computation of Per Share Earnings.
21/(7)/ Subsidiaries of the Company.
23* Consent of KPMG Peat Marwick LLP
65
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 the Company Current Report on Form 8-K dated
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.
(b) Reports on Form 8-K:
1. Form 8-K dated August 4, 1997 regarding the disposition of Intercell
Wireless Corp. and Cellular Magnetics, Inc., doing business as M.C.
Davis Company.
2. Form 8-K/A-1 dated September 23, 1997 regarding the acquisition of
Sigma 7 Corporation.
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERCELL CORPORATION, (a Colorado corporation)
Date: February 3, 1998 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: February 3, 1998 By /s/ Paul H. Metzinger
------------------------------------------------
Paul H. Metzinger, Director, Chief Executive
Officer and President
Date: February 3, 1998 By /s/ Alan M. Smith
------------------------------------------------
Alan M. Smith, Director, Chief Financial
Officer, Secretary and Treasurer
Date: February 3, 1998 By
------------------------------------------------
Charles E. Bauer, Director
67
INTERCELL CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
September 30, 1997 and 1996 and 1995
(With Independent Auditors' Reports Thereon)
F-1
FINANCIAL STATEMENTS AND SCHEDULE
INTERCELL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
----
Independent Auditors' Reports.......................................................... F-3
Consolidated Balance Sheets - September 30, 1997 and September 30, 1996................ F-4
Consolidated Statements of Operations - Year ended September 30, 1997, Year ended
September 30, 1996 and Eleven-month period ended September 30, 1995................... F-5
Consolidated Statements of Stockholders' Equity - Year ended September 30, 1997, Year
ended September 30 1996 and Eleven-month period ended September 30, 1995.............. F-6
Consolidated Statements of Cash Flows - Year ended September 30, 1997, Year ended
September 30, 1996 and Eleven-month period ended September 30, 1995................... F-7
Notes to Consolidated Financial Statements............................................. F-8
Schedule II - Valuation and Qualifying Accounts........................................ F-31
The remaining schedules for which provision is made in Regulation S-X are
not required under the instructions contained therein, are inapplicable, or
the information required is included in the financial statements or
footnotes.
F-2
Independent Auditors' Report
- ----------------------------
The Stockholders and Board of Directors
Intercell Corporation:
We have audited the accompanying consolidated balance sheets of Intercell
Corporation and subsidiaries (the Company), formerly Modern Industries, Inc.
and subsidiaries, as of September 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended and for the eleven-month period ended September 30, 1995.
In connection with our audits of the aforementioned consolidated financial
statements, we have also audited the financial statement schedule as listed in
the accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our 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, 1997 and 1996, and the results
of their operations and their cash flows for the years then ended and for the
eleven-month period ended September 30, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to
the consolidated financial statements, the Company has suffered recurring losses
from operations and has a deficiency in working capital that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 3. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
January 16, 1998
F-3
INTERCELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30,
---------------------------
Assets 1997 1996
------ ------------- ------------
Current assets:
Cash and cash equivalents $ 107,000 $ 4,224,000
Short-term investments -- 3,063,000
Accounts receivable, less allowance for returns and
doubtful accounts of $262,000 and $255,000 in 1997
and 1996, respectively 734,000 746,000
Inventories 982,000 1,066,000
Prepaid expenses and other current assets 294,000 102,000
Investment land held for sale 1,424,000 1,424,000
------------ -----------
Total current assets 3,541,000 10,625,000
Property, plant and equipment, net 2,364,000 1,418,000
Investment in and advances to ITC 1,000,000 --
Goodwill and other intangible assets, net 122,000 1,583,000
Other assets 28,000 200,000
------------ -----------
$ 7,055,000 $13,826,000
============ ===========
Liabilities and Stockholders' Equity
------------------------------------a
Current liabilities:
Notes payable $ 542,000 $ 266,000
Notes payable to related parties 260,000 932,000
Current portion of long-term debt 17,000 120,000
Accounts payable and accrued liabilities 2,765,000 742,000
Accounts payable to related parties 71,000 --
------------ -----------
Total current liabilities 3,655,000 2,060,000
Long-term debt, less current portion 16,000 86,000
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock; 10,000,000 shares authorized:
Series B; 5 and 787 shares issued and outstanding as
of September 30, 1997 and 1996, respectively
(liquidation preference of $11,250 per share) 40,000 5,393,000
Series C; 167 shares issued and outstanding as of
September 30, 1997 (liquidation preference of
$10,667 per share) 1,217,000 --
Series D; 1,080 shares issued and outstanding as of
September 30, 1997 (liquidation preference of
$2,500 per share) 2,401,000 --
Warrants to acquire common stock 3,050,000 1,870,000
Common stock; no par value; 100,000,000 shares authorized;
30,371,075 and 15,734,229 shares outstanding as of
September 30, 1997 and 1996, respectively 21,285,000 12,187,000
Additional paid-in capital 2,996,000 1,765,000
Deferred compensation (3,000) (331,000)
Treasury stock, at cost; 1,100,000 shares as of
September 30, 1997 (385,000) --
Accumulated deficit (27,217,000) (9,204,000)
------------ -----------
Total stockholders' equity 3,384,000 11,680,000
------------ -----------
$ 7,055,000 $13,826,000
============ ===========
See accompanying notes to consolidated financial statements.
F-4
INTERCELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
September 30, Eleven-Month Period
---------------------------- Ended September 30,
1997 1996 1995
------------- ------------- --------------------
Net sales $ 7,729,000 $ 3,405,000 $ 3,768,000
Cost of goods sold 8,029,000 2,830,000 2,884,000
------------ ------------ -----------
Gross profit (loss) (300,000) 575,000 884,000
Operating expenses:
Selling, general, and 9,077,000 5,683,000 1,317,000
administrative expenses
Research and development 1,318,000 88,000 --
Charge relating to acquisition of
in-process 2,022,000 -- --
research and development
Impairment charge relating to
write off 2,300,000 -- --
of goodwill and other intangible
assets
Impairment charge on investment in
and 835,000 -- --
advances to ITC
Loss on abandonment of assets 801,000 -- --
------------ ------------ -----------
Operating loss (16,653,000) (5,196,000) (433,000)
Other income (expense):
Interest income 258,000 36,000 --
Interest expense (179,000) (90,000) (88,000)
Loss on investments -- -- (795,000)
Other (71,000) (33,000) (3,000)
------------ ------------ -----------
8,000 (87,000) (886,000)
------------ ------------ -----------
Loss before income taxes (16,645,000) (5,283,000) (1,319,000)
Income taxes -- -- 2,000
------------ ------------ -----------
(16,645,000) (5,283,000) (1,321,000)
Minority interest's share of loss in
consolidated subsidiary 164,000 -- --
------------ ------------ -----------
Net loss (16,481,000) (5,283,000) (1,321,000)
Deemed preferred stock dividend
relating 1,072,000 1,625,000 --
to in-the-money conversion terms
Accretion on preferred stock 460,000 -- --
------------ ------------ -----------
Net loss applicable to common $(18,013,000) $ (6,908,000) $(1,321,000)
stockholders ============ ============ ===========
Net loss per common share $(0.99) $(0.54) $(0.18)
============ ============ ===========
Weighted-average number of shares of
common stock outstanding 18,114,038 13,072,683 7,391,275
============ ============ ===========
See accompanying notes to consolidated financial statements.
F-5
INTERCELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997 AND 1996,
AND ELEVEN-MONTH PERIOD ENDED SEPTEMBER 30, 1995
Convertible
Preferred Stock Warrants to Common Stock
---------------------- Acquire -------------------------
Shares Amount Common Stock Shares Amount
-------- ----------- ------------ ---------- -----------
Balances as of October 31, 1994 - $ - - 4,419,729 $ 13,000
Shares issued in lieu of interest
payment to related party - - - 17,819 -
Shares issued in exchange for
investment in American Microcell - - - 712,751 2,000
Shares issued in private placement - - - 85,530 -
Contribution to ESOP - - - 176,362 1,000
Conversion of additional paid-in
capital to common stock - - - - 3,093,000
Acquisition of Intercell 210,000 250,000 - 4,997,053 -
Net loss - - - - -
-------- ----------- ------------- ---------- -----------
Balances as of September 30, 1995 210,000 250,000 - 10,409,244 3,109,000
Repurchase of shares of Series A
preferred stock (210,000) (250,000) - - -
Shares of Series B preferred stock
and warrants issued in private
placement, net of issuance costs
of $1,100,000 1,000 5,265,000 1,870,000 - -
Shares issued in exchange for land - - - 400,000 1,000,000
Contribution to ESOP - - - 126,761 158,000
Shares issued to effect business
combination with Particle
Interconnect, Inc. treated as an
immaterial pooling - - - 1,400,000 8,000
Deferred compensation related to
stock option grants - - - - 4,017,000
Amortization of deferred
compensation - - - - -
Exercise of stock options - - - 2,295,180 1,342,000
Conversion of Series B preferred
stock to common stock (213) (1,497,000) - 588,880 1,497,000
Shares issued in exchange for
services - - - 236,386 56,000
Shares issued for acquisition of
M.C. Davis - - - 277,778 1,000,000
Amortization of deemed dividend - 1,625,000 - - -
Net loss - - - - -
-------- ----------- ------------- ---------- -----------
Balances as of September 30, 1996 787 5,393,000 1,870,000 15,734,229 12,187,000
Shares of Series C preferred stock
and warrants issued in private
placement, net of issuance costs
of $577,500 525 2,560,000 1,180,000 - -
Deferred compensation related to
stock option grants - - - - 148,000
Compensation recorded on transfer
of stockholder options - - - - 530,000
Amortization of deferred
compensation - - - - -
Exercise of stock options - - - 200,000 150,000
Conversion of Series B preferred
stock to common stock (782) (5,686,000) - 4,962,271 5,686,000
Conversion of Series C preferred
stock to common stock (358) (2,542,000) - 9,449,575 2,542,000
Shares issued in exchange for
services - - - 25,000 42,000
Shares of Series D preferred
stock issued in connection with
acquisition of Sigma 7 1,000 2,223,000 - - -
Shares of Series D preferred
stock issued as payment for
covenant not to compete 80 178,000 - - -
Treasury shares received as
consideration for asset sale - - - - -
Accretion of preferred stock - 460,000 - - -
Amortization of deemed dividend - 1,072,000 - - -
Net loss - - - - -
-------- ----------- ------------- ---------- -----------
Balances as of September 30, 1997 1,252 $ 3,658,000 3,050,000 30,371,075 $21,285,000
======== =========== ============= ========== ===========
Additional Total
Paid-In Deferred Treasury Accumulated Stockholders'
Capital Compensation Stock Deficit Equity
---------- ------------ ------------ ----------- -----------
Balances as of October 31, 1994 2,276,000 - - (816,000) 1,473,000
Shares issued in lieu of interest
payment to related party 13,000 - - - 13,000
Shares issued in exchange for
investment in American Microcell 498,000 - - - 500,000
Shares issued in private placement 60,000 - - - 60,000
Contribution to ESOP 246,000 - - - 247,000
Conversion of additional paid-in
capital to common stock (3,093,000) - - - -
Acquisition of Intercell - - - - 250,000
Net loss - - - (1,321,000) (1,321,000)
--------- ----------- ------------- ----------- -----------
Balances as of September 30, 1995 - - - (2,137,000) 1,222,000
Repurchase of shares of Series A
preferred stock - - - - (250,000)
Shares of Series B preferred stock
and warrants issued in private
placement, net of issuance costs
of $1,100,000 1,765,000 - - - 8,900,000
Shares issued in exchange for land - - - - 1,000,000
Contribution to ESOP - - - - 158,000
Shares issued to effect business
combination with Particle
Interconnect, Inc. treated as an
immaterial pooling - - - (159,000) (151,000)
Deferred compensation related to
stock option grants - (4,017,000) - - -
Amortization of deferred
compensation - 3,686,000 - - 3,686,000
Exercise of stock options - - - - 1,342,000
Conversion of Series B preferred
stock to common stock - - - - -
Shares issued in exchange for
services - - - - 56,000
Shares issued for acquisition of
M.C. Davis - - - - 1,000,000
Amortization of deemed dividend - - - (1,625,000) -
Net loss - - - (5,283,000) (5,283,000)
--------- ----------- ------------- ----------- -----------
Balances as of September 30, 1996 1,765,000 (331,000) - (9,204,000) 11,680,000
Shares of Series C preferred stock
and warrants issued in private
placement, net of issuance costs
of $577,500 932,000 - - - 4,672,000
Deferred compensation related to
stock option grants - (148,000) - - -
Compensation recorded on transfer
of stockholder options - (530,000) - - -
Amortization of deferred
compensation - 1,006,000 - - 1,006,000
Exercise of stock options - - - - 150,000
Conversion of Series B preferred
stock to common stock - - - - -
Conversion of Series C preferred
stock to common stock - - - - -
Shares issued in exchange for
services - - - - 42,000
Shares of Series D preferred
stock issued in connection with
acquisition of Sigma 7 277,000 - - - 2,500,000
Shares of Series D preferred
stock issued as payment for
covenant not to compete 22,000 - - - 200,000
Treasury shares received as
consideration for asset sale - - (385,000) - (385,000)
Accretion of preferred stock - - - (460,000) -
Amortization of deemed dividend - - - (1,072,000) -
Net loss - - - (16,481,000) (16,481,000)
--------- ----------- ------------- ----------- -----------
Balances as of September 30, 1997 2,996,000 (3,000) (385,000) (27,217,000) 3,384,000
========= =========== ============= =========== ===========
F-6
INTERCELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
September 30, 11-Month
----------------------------- Period Ended
1997 1996 September 30, 1995
------------ ------------ ------------------
Cash flows from operating activities:
Net loss $(16,481,000) $(5,283,000) $(1,321,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization on property and equipment 408,000 31,000 97,000
Amortization of intangible assets 380,000 28,000 --
Impairment of goodwill 4,572,000 -- --
Impairment of investment in and advances to ITC 835,000 -- --
Loss on abandonment/sale of property, plant and equipment 990,000 -- --
Minority interest (164,000) -- --
Loss on investments -- -- 795,000
Loss on sale of property -- 36,000 --
Common stock issued for interest/services 42,000 56,000 13,000
Shares of subsidiary issued for services 139,000 -- --
Accrual of ESOP contributions -- -- 158,000
Amortization of deferred compensation 1,006,000 3,686,000 --
Changes in operating assets and liabilities:
Accounts receivable (79,000) 47,000 (167,000)
Inventories 57,000 (28,000) (275,000)
Prepaid expenses and other current assets (152,000) 21,000 32,000
Accounts payable and accrued liabilities 1,071,000 (79,000) 344,000
Accounts payable to related parties -- (212,000) 123,000
------------ ----------- -----------
Net cash used in operating activities (7,376,000) (1,697,000) (201,000)
------------ ----------- -----------
Cash flows from investing activities:
Acquisition of property, plant and equipment (1,671,000) (330,000) (31,000)
Other assets 193,000 (142,000) 9,000
Cash (paid) acquired in connection with acquisitions (486,000) 167,000 --
Proceeds from maturity of short-term investments 3,063,000 -- --
Purchase of short-term investments -- (3,063,000) --
Cash transferred/loaned to acquireror in disposition of subsidiary (562,000) -- --
Loans extended to subsidiary prior to acquisition (1,345,000) --- ---
Proceeds from sale of property, plant and equipment 50,000 174,000 --
------------ ----------- -----------
Net cash used in investing activities (758,000) (3,194,000) (22,000)
------------ ----------- -----------
Cash flows from financing activities:
Proceeds from (repayments of) loan payable to bank -- (190,000) 190,000
Repayments of notes payable to related parties (932,000) (495,000) (460,000)
Proceeds from notes payable 720,000 -- 110,000
Repayments of notes payable (339,000) (71,000) (40,000)
Payment of debt issuance costs (42,000) -- --
Repayments of long-term debt (212,000) (428,000) --
Proceeds from issuance of preferred stock and warrants 4,672,000 8,900,000 --
Proceeds from sale of common stock 150,000 1,342,000 60,000
------------ ----------- -----------
Net cash provided by (used in) financing activities 4,017,000 9,058,000 (140,000)
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents (4,117,000) 4,167,000 (363,000)
Cash and cash equivalents beginning of year/period 4,224,000 57,000 420,000
------------ ----------- -----------
Cash and cash equivalents end of year/period $ 107,000 $ 4,224,000 $ 57,000
============ =========== ===========
See accompanying notes to consolidated financial statements.
F-7
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996, AND
ELEVEN-MONTH PERIOD ENDED SEPTEMBER 30, 1995
(1) DESCRIPTION OF BUSINESS
General
Intercell Corporation (the Company or Intercell) is a Colorado corporation
that invests in companies in the technology industry.
Acquisition of Energy Corporation (formerly known as Modern Industries,
Inc.)
In July 1995, Intercell entered into an Agreement and Plan of
Reorganization with Modern Industries, Inc., a Delaware corporation, which
subsequently changed its name to Energy Corporation (Energy). The Company
issued 5,412,191 shares of common stock to Energy in exchange for all of
the assets and liabilities of Energy and its wholly owned subsidiary,
California Tube Laboratory, Inc. (CTL).
The 5,412,191 shares issued to Energy represented approximately 52% of the
Company's outstanding common stock upon completion of the transaction. As
such, the transaction was treated for financial reporting purposes as a
purchase of Intercell by Energy. The assets of Intercell have been
recorded at their estimated fair value at the date of acquisition, and
Intercell's consolidated results of operations have been included in the
consolidated statements of operations subsequent to the date of the
acquisition. Energy's historical share amounts have been adjusted on a
retroactive basis in a manner similar to a reverse stock split.
Distribution of Common Stock
On July 8, 1996, Energy and the Company entered into a certain Plan of
Liquidating Dissolution (the Plan). The Plan was approved by a majority of
the stockholders of Energy on October 21, 1996. The 5,412,191 shares of
common stock owned by Energy were distributed in May and August 1997 to the
beneficial owners of the shares of common stock of Energy as of July 8,
1996. Energy was dissolved on November 21, 1996.
Acquisition of Particle Interconnect, Inc.
In September 1996, Intercell formed a wholly owned subsidiary, Particle
Interconnect Corp. (PI Corp.), a Colorado corporation, which merged with
Particle Interconnect, Inc. (Particle), a California corporation.
Particle, located in Colorado Springs, Colorado, is engaged in the
development and manufacturing of particle-coated substrates for integrated
circuits using patented particle interconnect technology (the PI
Technology) and a proprietary trade secret electroplating process (the
Proprietary Electroplating Process). At the time of the acquisition,
Particle owned rights to the PI Technology and the Proprietary
Electroplating Process, and was developing an initial production line for
the manufacture of particle-coated substrates at its manufacturing
facility. The Company exchanged 1,400,000 shares of Intercell common stock
for all of the outstanding stock of Particle. The transaction was
accounted for by the
F-8
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
pooling-of-interest method of accounting. At the date of acquisition, the
results of operations of Particle were not material to the Company's
consolidated financial position, results of operations, and cash flows.
Accordingly, the consolidated financial statements for periods prior to the
date of acquisition have not been restated, except for loss per common
share information. The weighted-average number of shares of common stock
outstanding and loss per common share has been restated for all periods
presented to reflect the 1,400,000 shares of common stock issued in the
transaction.
The book value of Particle at the date of acquisition was as follows:
Assets acquired $ 273,000
Liabilities assumed (424,000)
---------
Stockholders' deficit $(151,000)
=========
At the date of acquisition, stockholders' deficit was comprised of $8,000
common stock and $(159,000) accumulated deficit.
As described in Note 13, the Company realigned the operations of P.I. Corp.
in September 1997, and recorded a loss on the abandonment of assets of
$801,000.
Acquisition and Disposition of Cellular Magnetics, Inc.
In September 1996, Intercell formed a wholly owned subsidiary, Cellular
Magnetics Inc. (CMI), an Arizona corporation, which acquired all the assets
and liabilities of A.C. Magnetics, Inc. dba M.C. Davis Co. Inc. (M.C.
Davis) in exchange for 277,778 shares of Intercell common stock (valued at
$1,000,000) and an $800,000 note. M.C. Davis is a manufacturer and
distributor of electrical devices and equipment with manufacturing
facilities near Phoenix, Arizona, and in the province of Sonora, Mexico.
The transaction was accounted for by the purchase method of accounting.
The results of operations for M.C. Davis have been included in the
Company's consolidated results of operations for the period from October 1,
1996 to July 17, 1997.
In July 1997, the Company entered into a stock purchase agreement to sell,
transfer, assign, and deliver certain assets, liabilities, rights, and
obligations of the Company related to its antenna technology, including its
wholly owned subsidiaries CMI and Intercell Wireless Corp., to Intercell
Technologies Corporation (ITC), a Colorado corporation, in exchange for
6,269,226 shares and warrants of ITC common stock, 1,100,000 shares of the
Company's common stock, and two notes receivable of $2.2 million and
$375,000, respectively. The $2.2 million note is secured by all of the
outstanding shares of CMI and accrues interest at 10% per annum. Principal
and interest payments of $69,000 are due quarterly with a final payment of
$1.2 million due in May 2007. The $375,000 note accrues interest at 10%,
is unsecured, and is due in full on November 30, 1997. Payment of this
note was subsequently extended by the Company to January 15, 1998. As a
result of uncertainties with respect to realization of the consideration
received, no gain was recognized on the transaction. The Company will
account for its investment in and advances to ITC by the cost recovery
method.
F-9
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a list of assets sold, including cash loaned and
liabilities transferred to ITC:
Cash $ 217,000
Accounts receivable 137,000
Inventories 239,000
Prepaid expenses and other current assets 7,000
Property, plant and equipment 349,000
Goodwill and other intangibles 1,026,000
Accounts payable (175,000)
----------
Net assets sold 1,800,000
Cash loaned to ITC 345,000
Sale of corporate office furniture 75,000
----------
Total assets sold, including cash loaned, and
liabilities transferred $2,220,000
==========
Consideration recieved by the Company in connection with this sale was as
follows:
Intercell stock $ 385,000
ITC stock and notes receivable 1,835,000
----------
$2,220,000
==========
In September 1997, the Company evaluated the recoverability of its
investment in ITC and concluded that an impairment charge of $835,000 was
necessary to reflect continued uncertainties regarding realization of its
investment in and advances to ITC. The $835,000 charge represents the
difference between the carrying amount of the investment in and advances to
ITC and the estimated fair value of assets collateralizing the advances.
Acquisition of Sigma 7 Corporation
In June 1997, the Company acquired a controlling interest in Sigma 7
Corporation (Sigma 7). Sigma 7 conducts its business through its
subsidiary BMI Acquisition Group, Inc. (BMI). BMI has developed and
currently utilizes a proprietary patch technology to produce fully
functional computer memory modules from defective memory chips. The
Company acquired control of Sigma 7 through the acquisition of 4,500,000
shares or 90% of Sigma 7's common stock in exchange for $550,000, and by
providing approximately $1,985,000 in additional financing, which consisted
primarily of secured loans and standby letters of credit. The transaction
was accounted for by the purchase method of accounting. The results of
Sigma 7 have been included in the Company's consolidated results of
operations from June 1, 1997 to September 30, 1997.
F-10
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total cash purchase price for Sigma 7 of $550,000 has been allocated to
the net assets acquired based on estimated fair values as follows:
Cash $ 64,000
Other current assets 264,000
Property, plant and equipment 1,145,000
Other assets 21,000
In-process research and development 2,022,000
Goodwill and other intangibles 2,495,000
Current liabilities assumed (1,199,000)
Other liabilities assumed (37,000)
Notes payable to Intercell (1,345,000)
Notes payable (355,000)
Minority interest of preferred and
common stock stockholders (2,525,000)
-----------
Cash paid for common stock $ 550,000
===========
In connection with the Acquisition, a portion of the purchase price was
allocated to the value of in-process research and development projects.
These projects involved the research and development of new products and
significant extensions and improvements to existing products which had not
demonstrated their technological feasibility as of the acquisition date and
did not have an alternative future use. Accordingly, immediately upon
consummation of the transaction, the value associated with these projects
was charged to expense in accordance with Statement of Financial Accounting
Standards (SFAS) No. 2.
The following table presents unaudited pro forma results of operations as
if the acquisition of Sigma 7 had occurred on October 1, 1995. These pro
forma results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the acquisition
been made at the beginning of fiscal 1996 or of results which may occur in
the future. Prior to the acquisition, Sigma 7's year-end had been based on
a calendar year. The 1996 column represents Intercell for the year ended
September 30, 1996, and BMI for the period from January 1, 1996 to December
18, 1996, and Sigma 7 for the period from December 19, 1996 to December 31,
1996. The 1997 column represents Intercell for the year ended September
30, 1997, and Sigma 7 for the period from January 1, 1997 to June 1, 1997
(date of acquisition).
1997 1996
----------- -----------
Net sales $ 8,511,000 $21,433,000
Operating loss 20,832,000 13,245,000
Net loss 21,097,000 13,091,000
Net loss per common share 1.25 1.13
The Company subsequently exchanged 1,000 shares of Series D preferred stock
with a liquidation preference of $2,500 per share to holders of certain
preferred stock of BMI to eliminate such BMI preferred stock. The exchange
was recorded at the carrying amount of the minority interest of preferred
stockholders, which approximated the fair value of the Series D preferred
issued in the exchange.
F-11
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition the Company issued 80 shares of Series D preferred as partial
payment for a covenant not-to-compete between BMI shareholders and former
owners of Sigma 7. This liability was included in notes payable at the date
Intercell purchased Sigma 7. (See Note 7)
As of September 30, 1997, the Company determined that the goodwill recorded
in the Sigma 7 transaction is not recoverable based on the uncertainties
surrounding the subsidiary's future cash flows and wrote off the remaining
balance of approximately $2.3 million.
Change in Fiscal Year-End
During the 11-month period ended September 30, 1995, Intercell changed its
fiscal year-end to September 30. Previously, Intercell had an October 31
year-end. The accompanying consolidated financial statements include the
results of operations and cash flows of Intercell for the years ended
September 30, 1997 and 1996, and the 11-month period ended September 30,
1995.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly or majority owned subsidiaries. All significant
intercompany transactions and accounts have been eliminated in
consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Cash Equivalents and Short-Term Investments
Cash equivalents are highly liquid investments with a maturity of less than
three months at the date of purchase. Short-term investments generally
consist of certificates of deposit and short-term debt securities with
maturities greater than three months and less than one year. As of
September 30, 1997, there were no cash equivalents or short-term
investments. As of September 30, 1996, the Company's investments consisted
of U.S. government treasury bills of $3,925,000 and certificates of deposit
of $126,000. As of September 30, 1996, investment securities of $988,000
and $3,063,000 were classified as cash equivalents and short-term
investment, respectively.
Investments in debt securities are classified as "available for sale."
Such investments are recorded at fair value which approximated carrying
value, and the cost of securities sold is determined based on the specific
identification method. Unrealized gains and losses, if any, are reported
as a component of stockholders' equity. Unrealized gains and losses were
not significant for any period presented.
F-12
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition
Revenues are recognized when earned, generally upon product shipment.
Provision is made for estimated customer returns at the time of sale.
Inventories
Inventories generally are stated at the lower of cost (first in, first
out), or market. Costs incurred in the manufacture of new electron tubes
are recorded on a standard cost basis, which approximates the first-in,
first-out method, with the costs of raw materials, labor, and overheads
adjusted periodically when actual costs change. Each tube repair is unique
and is costed out on a specific item basis with costs accumulated as
incurred. Tubes rebuilt for the U.S. government follow governmental cost
allocation guidelines.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation expense is
provided by use of the accelerated and straight-line methods over the
estimated useful lives of the assets, generally 5 to 12 years for
furniture, equipment, software, and vehicles, and the shorter of the useful
life of the asset or the remaining lease term for leasehold improvements.
Accounting for Long-Lived Assets
The Company reviews long-lived 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 by which the carrying amount of the long-lived
assets, including the allocated goodwill, exceeds its fair value. The
Company assesses the recoverability of the carrying amount of goodwill by
determining whether the carrying amount of goodwill can be recovered
through undiscounted future operating results of the acquired operation.
The amount of impairment, if any, is measured based on projected discounted
future operating results using a discount rate reflecting the Company's
average borrowing cost of funds.
As described in Note 1, the Company recorded goodwill and other intangibles
of $2,495,000 in connection with its acquisition of Sigma 7. The Company
subsequently has determined that the goodwill is not recoverable based on
the uncertainties surrounding future cash flows of Sigma 7. Accordingly,
the Company has written off the remaining goodwill balance as of September
30, 1997, of approximately $2.3 million. There were no adjustments to the
carrying value of long-lived assets in 1996 or 1995. Accumulated
amortization was $210,000 and $61,000 as of September 30, 1997 and 1996,
respectively.
Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, short-term investments,
accounts receivable, accounts payable, accrued liabilities, and notes
payable approximate fair values due to the short maturity of such
F-13
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
instruments. The fair value of the Company's advances to ITC cannot be
estimated as there is no public market for the notes and there are
uncertainties regarding future cash flows of the borrower.
Income Taxes
Income taxes are accounted for by the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. Valuation allowances are established
when necessary to reduce deferred tax assets to amounts expected to be
realized.
Net Loss Per Common Share
Net loss per common share is computed by dividing the sum of net loss,
deemed preferred stock dividend and accretion of preferred stock by the
weighted-average number of common stock shares and dilutive common stock
equivalent shares outstanding during each period presented. Common stock
equivalent shares consist of stock options that are computed using the
treasury stock method.
Warranty
Intercell's products are generally warranted for a period of no longer than
one year. Estimated future costs of repair or replacement are reflected in
the accompanying consolidated financial statements.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, Earnings Per Share. SFAS No. 128 establishes a different
method of computing net income per share than is currently required under
the provisions of Accounting Principles Board (APB) Opinion No. 15. Under
SFAS No. 128, the Company will be required to present both basic net loss
per share and diluted net loss per share. Basic and diluted net loss per
share is expected to be comparable to net loss per share as presented in
the accompanying consolidated financial statements. The Company plans to
adopt SFAS No. 128 in its fiscal quarter ending December 31, 1997, and at
that time, all historical net loss per share data presented will be
restated to conform to the provisions of SFAS No. 128.
Reclassifications
Certain amounts in the accompanying 1996 and 1995 consolidated financial
statements have been reclassified in order to conform with the 1997
consolidated financial statement presentation.
F-14
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) BASIS OF PRESENTATION
The Company has suffered recurring losses from operations and has a
deficiency in working capital that raise substantial doubt about its
ability to continue as a going concern. Management has been working to
improve its results from operations and to obtain additional capital in
order to provide the funding necessary to complete research and development
activities on acquired technologies and bring products using such
technologies to market. Management is actively pursuing strategic
alliances, equity financing, and sales of nonstrategic assets to address
this issue, although there can be no assurance that these efforts will be
successful. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
(4) BALANCE SHEET COMPONENTS
Inventories
A summary of inventories follows:
September 30,
--------------------
1997 1996
-------- ----------
Raw materials $811,000 $ 711,000
Work in process 128,000 164,000
Finished goods 43,000 191,000
-------- ----------
$982,000 $1,066,000
======== ==========
Property, Plant, and Equipment
A summary of property, plant, and equipment follows:
September 30,
----------------------
1997 1996
---------- ----------
Furniture and fixtures $ 169,000 $ 339,000
Equipment and machinery 1,692,000 845,000
Land and buildings -- 282,000
Leasehold improvements 904,000 71,000
Software 18,000 --
Vehicles -- 23,000
---------- ----------
2,783,000 1,560,000
Less accumulated depreciation 419,000 142,000
---------- ----------
$2,364,000 $1,418,000
========== ==========
F-15
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts Payable and Accrued Liabilities
A summary of accounts payable and accrued liabilities follows:
September 30,
--------------------
1997 1996
---------- --------
Accounts payable $1,162,000 $376,000
Litigation reserves 244,000 --
Professional services 250,000 --
Accrued employee compensation 205,000 191,000
Accrued restructuring costs 202,000 --
Warranty reserves 173,000 130,000
Other liabilities 529,000 45,000
---------- --------
$2,765,000 $742,000
========== ========
(5) SUPPLEMENTAL CASH FLOW INFORMATION
For the years ended September 30, 1997 and 1996, and for the 11-month
period ended September 30, 1995, cash paid by the Company for interest was
$ 16,000, $87,000, and $15,000, respectively.
F-16
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of noncash investing and financing activities follows:
Years Ended 11-Month
September 30, Period Ended
---------------------- September 30,
1997 1996 1995
---------- ---------- ---------------
Shares issued in acquisition of Intercell $ -- $ -- $250,000
Shares issued in exchange for investment in American Microcell -- -- 500,000
Shares issued in exchange for microwave technology -- -- 250,000
Contribution to ESOP -- 158,000 247,000
Shares issued in lieu of interest payment to related party 42,000 -- 13,000
Shares issued in exchange for services -- 56,000 --
Shares issued in exchange for land -- 1,000,000 --
Debt assumed in land acquisition -- 367,000 --
Shares issues in acquisition of M.C. Davis -- 1,000,000 --
Debt incurred in acquisition of M.C. Davis -- 800,000 --
Shares issued in acquisition of Particle common stock and net
liabilities assumed, accounted for as an immaterial pooling -- 151,000 --
Repurchase of shares of Series A preferred stock -- 250,000 --
Deferred compensation related to stock option grants 678,000 4,017,000 --
Conversion of Series B preferred stock to common stock 5,686,000 1,497,000 --
Conversion of Series C preferred stock to common stock 2,542,000 -- --
Treasury shares received in disposition of CMI 385,000 -- --
Noncash consideration received on sale of CMI and Intercell
Wireless Corp. 1,273,000 -- --
Series D preferred stock issued in exchange for BMI preferred stock 2,500,000 -- --
Series D preferred stock issued as payment on noncompete agreements 200,000 -- --
Accretion on preferred stock 460,000 -- --
Amortization of deemed dividend on preferred stock 1,072,000 -- --
Shares of Sigma 7 issued for services 139,000 -- --
(6) EQUIPMENT HELD FOR SALE
On December 29, 1994, Intercell executed an Asset Purchase Agreement with
Asia Skylink Corp. to acquire microwave transmission and associated support
equipment in exchange for 210,000 shares of Series A redeemable convertible
preferred stock. In August 1996, the shares were returned to the Company,
and the equipment was returned to Asia Skylink, Corp. No gain or loss was
recognized by the Company in connection with the reversal of this
transaction.
F-17
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) BORROWINGS
Notes Payable
Notes payable as of September 30, 1997 and 1996, are as follows:
1997 1996
-------- --------
Demand note payable $135,000 $
--
Interest bearing term notes 325,000 266,000
Noninterest bearing term notes 82,000 --
-------- --------
$542,000 $266,000
======== ========
The demand note payable of $135,000 is unsecured and noninterest bearing.
Interest bearing term notes in the amount of $325,000 are outstanding as of
September 30, 1997. The notes are denominated in increments of $25,000,
are unsecured, accrue interest at 10% annually, and are due within one year
of issuance or upon an initial public offering (IPO) by Sigma 7, whichever
occurs first. In consideration for each $25,000 note, Sigma 7 has issued
4,000 shares of common stock in Sigma 7 and issued 4,000 warrants with the
right to purchase 4,000 shares of stock in Sigma 7 in the event of an IPO.
The exercise price shall equal 120% of the IPO price. The warrants expire
on November 5, 1999.
As of September 30, 1997, the Company also had two noninterest bearing term
notes payable of $41,000 each are due to the former owners of BMI in
exchange for a two-year covenant not to compete. Under the terms of the
original notes, principal of $144,000 each was due in payments of $6,000
per month through December 1998. As of September 30, 1997, only one
payment on the notes had been paid. As such, the notes were in default and
were due and payable. During September 1997, an agreement was signed with
the note holders whereby $200,000 of the notes were converted into Series D
preferred stock, and the remaining amount is due upon completion of an IPO
by Sigma 7. See further information on the Series D preferred stock at
Note 8.
As of September 30, 1996, the Company had a note payable of $266,000. The
note was unsecured, with principal and interest of 12% per annum due on
June 24, 1997. The note and accrued interest were paid in full in October
1996.
F-18
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-Term Debt
Long-term debt is summarized as follows:
September 30,
-----------------
1997 1996
------- --------
Note payable to bank; interest at prime plus 2%;
collateralized by various assets; repaid in October 1996 $ -- $100,000
Note payable; noninterest bearing; collateralized
by building; assumed by purchasers of CMI -- 47,000
Note payable to bank; interest at 9.75%; collateralized
by a vehicle; repaid in October 1996 -- 15,000
Other 33,000 44,000
------- --------
33,000 206,000
Less current portion 17,000 120,000
------- --------
Long-term debt, net $16,000 $ 86,000
======= ========
(8) STOCKHOLDERS' EQUITY
Preferred Stock
As of September 30, 1997 and 1996, the Company is authorized to issue
10,000,000 shares of preferred stock.
Series B Preferred
In July 1996, the Company issued 1,000 shares of Series B redeemable
convertible preferred stock (Series B preferred) and detachable warrants
for proceeds of $8,900,000 (net of issuance costs of $1,100,000). Each
share of Series B preferred is convertible into common stock at the
exchange rate in effect at the time of the conversion, as described in the
preferred stock agreements, and is subject to appropriate adjustment for
common stock splits, stock dividends, and other similar transactions.
Conversion of the Series B preferred is automatic after three years from
the original date of issuance. At the date of issuance, the exchange rate
was equal to 85% of the then prevailing market rate, resulting in a deemed
dividend of $1,764,704. The Company recognized $140,056 and $1,624,648 of
the dividend in its fiscal 1997 and 1996 net loss per common share
calculation, respectively. The amount recognized was calculated on a pro
rata basis over the period beginning with the issuance of the security to
the first date conversion could occur.
In addition, the conversion terms include a beneficial adjustment to the
exchange rate equal to the original issue price plus 10% of the original
issue price per annum since July 10, 1996. The beneficial adjustment is
treated as an accretion on the Series B preferred stock. For the year ended
September 30, 1997 the amount of accretion was $193,000. The amount of the
accretion on the Series B preferred for the year ended September 30, 1996,
was not significant.
F-19
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has the right to redeem the Series B preferred on or after July
11, 1997, at a price equal to 130% of the original issue price plus any
accrued and unpaid premium.
The Series B preferred contains a liquidation preference equal to the
original issue price plus 10% of the original issue price per annum to the
date of liquidation. Shares of Series B preferred are not entitled to
voting rights.
Each share of Series B preferred is accompanied by a detachable warrant to
purchase a number of shares of common stock of the Company equal to 30% of
the original aggregate purchase price of the shares of Series B preferred
divided by a fixed conversion rate of $3.9375 per share, exercisable 105
days after original issuance. 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 offering as determined using the Black-Scholes pricing
model. As of September 30, 1997, 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
In December 1996, the Company issued 525 shares of no par value Series C
preferred stock (Series C preferred) and detachable warrants in a private
placement for $4,672,500 (net of issuance costs of $577,500).
Each share of Series C preferred is convertible into common stock at the
exchange rate in effect at the time of the conversion, as described in the
preferred stock agreements, and is subject to appropriate adjustment for
common stock splits, stock dividends, and other similar transactions.
Conversion of the Series C preferred is automatic upon the expiration of
three years from the original date of issuance. The Series C preferred is
convertible into common stock at the exchange rate in effect at the date of
conversion, as described in the preferred stock agreements. At the date of
issuance, the exchange rate was equal to 85% of the then prevailing market
rate, resulting in a deemed dividend of $932,000 that was recognized by the
Company in fiscal 1997. In addition, the conversion terms include a
beneficial adjustment to the exchange rate equal to the original issue
price plus 8% of the original issue price per annum since December 16,
1996. The beneficial adjustment is treated as an accretion on the Series C
preferred. For the year ended September 30, 1997 the amount of accretion
was $267,000. The Series C preferred are junior to the Company's shares of
Series B preferred and contain a liquidation preference equal to the
original issue price plus 8% of the original issue price per annum to the
date of liquidation. Shares of Series C preferred are not entitled to
voting rights.
Shares of Series C preferred, purchased in excess of certain quantities as
described in the preferred stock agreements, or purchased in addition to
previous purchases of shares of Series B preferred, 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 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 offering as determined
using the Black-Scholes pricing model.
F-20
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Series D Preferred
In September 1997, the Company issued 1,000 shares of Series D redeemable
convertible preferred stock (Series D preferred) in exchange for 1,000
shares of BMI preferred stock. Each share of Series D preferred is
convertible into common stock of Intercell 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. Each share of Series
D preferred shall convert into that number of shares of Intercell which
would be acquired at the then current market price multiplied by the
conversion factor as described in the preferred stock agreements.
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
period ended September 30, 1997, was not significant.
In the event the total number of shares issuable upon conversion exceeds
10% of the then issued and outstanding shares, Intercell shall, within 90
days of such event, redeem those Series D preferred, which, if converted,
would exceed the 10% limitation, at their face value, plus all accrued
dividends.
The Series D preferred shares 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 shares are
not entitled to voting rights. Such shares are entitled to receive a
cumulative 6% dividend commencing January 1, 1998, are redeemable by
Intercell, 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 Intercell
common stock after December 31, 1998.
Stock Options
In July 1995, Intercell established a Compensatory Stock Option Plan (the
Option Plan) and reserved 5,000,000 shares of common stock for issuance
under the Option Plan. In June 1996 and September 1997, an additional
2,000,000 and 7,000,000 shares, respectively, were reserved for issuance
under the Option Plan. Incentive stock options can be granted under the
Option Plan, at prices not less than 110% of the fair market value of the
stock at the date of grant, and nonqualified options can be granted at not
less than 50% of the stock's fair market value at the date of grant or the
date the exercise price of any such option is modified. Vesting provisions
are determined by the Board of Directors. All stock options expire 10
years from the date of grant.
F-21
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's fixed stock option plan is as
follows:
December 31,
-------------------------------------------------------- September 30,
1997 1996 1995
--------------------------- --------------------------- -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
----------- -------------- ----------- -------------- --------- --------------
Outstanding at beginning of year/period 3,996,000 $ 1.56 1,600,000 $ 0.50 -- $ --
Granted 6,831,000 0.61 4,841,180 1.43 1,600,000 0.50
Forfeited (1,675,000) 2.01 (150,000) 1.00 -- --
Exercised (200,000) 0.75 (2,295,180) 0.58 -- --
---------- ---------- ---------
Outstanding at end of year/period 8,952,000 0.77 3,996,000 1.56 1,600,000 0.50
========== ========== =========
Options exercisable at end of
year/period 8,896,000 0.77 3,436,000 1.54 1,600,000 0.50
Weighted-average fair value of options
granted during the year/period at
market 0.098 1.03
Weighted-average fair value of options
granted during the year/period at less
than market -- 1.33
The following table summarizes information about stock options outstanding
as of September 30, 1997:
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
- ----------------- ----------- ---------------- -------------- ----------- --------------
$0.38-0.50 7,710,000 9.64 years $ 0.41 7,660,000 $ 0.41
0.75-1.25 275,000 8.35 0.89 275,000 0.89
2.00-4.00 967,000 8.90 3.55 961,000 3.55
----------- -----------
8,952,000 9.52 0.77 8,896,000 0.77
=========== ===========
Options granted during 1997 include 100,000 granted to a nonemployee for
consulting services. The options were granted at the market value on the
grant date, vested 1/12 per month and expire 10 years from the date of
grant. The Company recorded an expense of $148,000 related to the grant
based on the fair value of the option as determined using the Black-Scholes
pricing model.
Options granted during 1996 include 2,791,180 granted to nonemployees for
legal services, placement agent services, consulting services, and product
promotion services. Nonemployee stock options were generally granted at
discounts ranging from 15% to 90% of the quoted market value of the stock
on the date of grant, with prices ranging between $0.50 per share and $4.75
per share, and expire 10 years from the date of the
F-22
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
grant. Options to acquire 2,391,180 shares that were granted to
nonemployees were exercisable immediately upon grant. The remaining
options to acquire 400,000 shares vested in 1997.
The Company recorded deferred compensation of $678,000 and $4,017,000 in
1997 and 1996, respectively, for the difference between the exercise price
and the fair value of the common stock related to stock options granted.
Compensation expense of $1,006,000 in 1997 and $3,686,000 in 1996 has been
included in selling, general, and administrative expenses in the
accompanying consolidated statements of operations.
Accounting for Stock-Based Compensation Under SFAS No. 123
The Company applies APB 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):
1997 1996
------------ -----------
Net loss, as reported $16,481,000 $5,283,000
Net loss, pro forma 17,472,000 6,831,000
Net loss per share, as reported (0.99) (0.54)
Net loss per share, pro forma (1.05) (0.65)
The fair value of each option grant issuable during 1997 and 1996 is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions:
1997 1996
----------- -----------
Expected dividend yield 0% 0%
Expected stock price votality 60% 60%
Risk-free interest rate 5.74% 5.62%
Expected life of options 1.50 years 1.50 years
Pro forma net income reflects only options granted in 1997 and 1996.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation costs is reflected over the
options' vesting period and compensation cost for options granted prior to
October 1, 1995 is not considered.
F-23
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) EMPLOYEE STOCK OWNERSHIP PLAN
CTL established an Employee Stock Ownership Plan (the Employee Plan) and a
related trust for substantially all of its eligible employees. To
participate in the Employee Plan, employees must have worked at least 1,000
hours during the year and must be employed at the end of the plan year.
Participants do not vest until their third year of employment and then vest
20% per year during the next five years. Employer contributions are
discretionary and generally are based on a percentage of eligible payroll,
up to 15%. In 1996, the Company elected to contribute 126,761 shares of
the Company's common stock to the Employee Plan and recognized a charge to
income of $158,000. The Employee Plan was terminated at the end of fiscal
1996, and, as such, the Company did not make any contributions in 1997.
(10) INVESTMENT IN AMERICAN MICROCELL
During fiscal 1996, the Company acquired approximately 15% of the
outstanding stock of American Microcell in exchange for 712,751 shares of
common stock at a deemed value of approximately $0.70 per share. American
Microcell was engaged in the research and development of improved
technologies for cellular phones. However, American Microcell proved
unsuccessful in its efforts to finance continuing development of
technologies acquired, and the rights to these technologies reverted to the
original developers. Accordingly, the Company's investment in American
Microcell has been written off as a charge to income in the accompanying
1996 consolidated statement of operations.
(11) RELATED PARTY TRANSACTIONS
Notes Payable
As of September 30, 1997, the Company has outstanding promissory notes to
three current employees totaling $135,000. The notes do not accrue interest
and are payable on demand. Approximately $50,000 was repaid on the notes
during the first quarter of 1998.
The Company has two unsecured notes payable in the amount of $75,000 and
$50,000 due to a significant stockholder and a company controlled by the
significant stockholder, respectively. The notes bear interest at 10% per
annum and are due on October 3, 1997. The notes were repaid in full on the
due date.
As of September 30, 1996, the Company had an outstanding promissory note
due to a former owner and current president of M.C. Davis in the amount of
$80,000, bearing interest at 8%, due December 15, 1996. The note was
repaid in October 1996.
As of September 30, 1996, the Company had an outstanding promissory note
due to a former owner of Particle in the amount of $52,000, bearing
interest at 8%, due on demand. The note was paid in January 1997.
The Company had noninterest bearing notes payable totaling $800,000 due to
the former owners of M.C. Davis in consideration for the purchase of M.C.
Davis consummated on September 30, 1996 (see Note 1). The notes were
repaid in October 1996.
F-24
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts Payable
As of September 30, 1997, approximately $71,000 was payable on account to a
company owned by the former owners of BMI.
Purchase of Land
During April 1996, the Company entered into an agreement with a related
party whereby in exchange for 400,000 shares of the Company's common stock
(valued at $1,000,000) and the assumption of mortgages of $367,000, the
Company acquired development land located in Arizona. In connection with
the exchange, the Company incurred acquisition costs of $57,000. The land,
including acquisition costs, is recorded on the accompanying 1997
consolidated balance sheet as investment land held for sale.
Purchase and Sale of Microwave Technology
In June 1994, the Company purchased one-half of the rights to a technology
that utilizes microwaves to enhance the production of oil wells for 178,188
shares of its common stock. The Company already owned the other one-half
interest in the technology. In January 1995, the Company sold these rights
to Reland International, Inc. (Reland) for certain royalty payouts and a
note receivable with a face amount of $1,250,000, bearing interest at 6%,
with accrued interest payable annually on or before January 15 of each
year, and principal payable on or before January 16, 2000. Due to concerns
about collectibility, this note and related accrued interest was written
off as a charge to income in the accompanying 1995 consolidated statement
of operations.
Operating Leases
CTL leases its principal facility on a month-to-month basis from a
significant stockholder. Monthly rental payments for the facility lease
are $10,000, and the lease expired in August 1999. The Company paid rent
related to this lease of $120,000, $118,000, and $106,000, during 1997,
1996, and 1995, respectively. Subsequent to year-end, the Company
terminated this lease and moved to a new building in Watsonville,
California.
The Company leases a facility in Vancouver, Canada, from a executive and
director of the Company with monthly rental payments of $3,000. The lease
expires in August 2001.
Grants of Stock and Stock Options to Related Party
In September 1997, the Company issued 80 shares of Series D preferred
shares as partial payment on noncompete agreements with two related
parties.
In September 1996, the Company granted options to purchase 400,000 shares
of common stock, with an exercise price of $4.00 per share, to a related
party in return for which the related party agreed to promote the sale of
the Company's products and services in Canada. The options vested
immediately and expire 10 years from the date of grant.
F-25
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space, manufacturing facilities, and certain
equipment under various operating lease agreements. Future minimum lease
payments and related sublease rentals receivable with respect to
noncancelable operating leases as of September 30, 1997, are as follows:
Year Ending Rentals Receivable
September 30, Rental Payments Under Subleases
- ------------------ --------------- ------------------
1998 $ 486,000 $ 67,000
1999 472,000 67,000
2000 469,000 50,000
2001 374,000 --
2002 206,000 --
Thereafter 1,763,000 --
---------- --------
Total $3,770,000 $184,000
========== ========
Rent expense under operating leases was approximately $715,000, $277,000,
and $145,000 during 1997, 1996, and 1995, respectively.
Litigation
The Company is subject to various legal proceedings and claims. In the
opinion of management, the ultimate liability with respect to these actions
will not materially affect the Company's consolidated financial position or
results of operations.
Environmental Liabilities
The Company has become aware of certain soil contamination at the Santa
Cruz facility formerly occupied by its electron tube manufacturing
subsidiary. The Company has engaged a consultant to determine the extent
of the contamination and the costs to remediate. However, until the
buildings at the facility have been removed, further site characterization
and an estimate of the cost to remediate cannot be determined. As such, no
amounts have been accrued for in the Consolidated Statement of Operations
for the year ended September 30, 1997.
(13) LOSS ON ABANDONMENT
In September 1997, the Company announced a plan to realign the operations
and activities of P.I. Corp. in order to reduce the amount of funding
required to complete development activities and market P.I. Corp. products.
In connection with the plan, the Company recorded a charge of $801,000
related to the write-off of manufacturing equipment ($599,000) and a lease
abandonment ($202,000). P.I. Corp. commenced implementation of the plan
during September 1997. As of September 30, 1997, the Company has
F-26
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
established a restructuring reserve of approximately $202,000 to accrue for
remaining P.I. Corp. lease payments.
(14) INCOME TAXES
The Company did not incur an expense for income taxes in 1997 and 1996. In
1995, income tax expense was $2,000.
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,
-------------------------- 11-Month Period
Ended September 30,
1997 1996 1995
------------ ------------ ---------------------
Computed "expected" tax benefit $(5,659,000) $(1,616,000) $(448,000)
State income taxes (1,495,000) (442,000) (81,000)
Change in valuation allowance 6,526,000 1,790,000 569,000
Net operating loss carryforwards for state
purposes note available for future utilization 628,000 268,000 --
Other -- -- (38,000)
----------- ----------- ---------
$ -- $ -- $ 2,000
=========== =========== =========
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets are as follows:
1997 1996
------------- ----------
Deferred tax assets:
Net operating loss carryovers 9,490,000 3,678,000
Allowance for returns and doubtful accounts 47,000 47,000
Goodwill and other intanglbles 869,000 --
------------ ----------
10,406,000 3,725,000
Less valuation allowance (10,406,000) 3,725,000
------------ ----------
Net deferred tax assets $ -- $ --
============ ==========
The change in the valuation allowance was an increase of $6,681,000 and
$3,156,000 in fiscal 1997 and 1996, respectively. Of this decrease in the
total valuation allowance for deferred tax assets, approximately $155,000
and $1,366,000 for 1997 and 1996, respectively, is related to net operating
loss carryforwards which are attributable to stock options. Since the
Company is entitled to a deduction for federal and state tax purposes
resulting from the exercise of nonqualified stock options and employees'
early dispositions of stock acquired through incentive stock options, a
portion of the deferred tax asset, when recognized by a reduction of the
valuation allowance, will be credited to additional paid-in capital. As of
September 30,
F-27
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1997, approximately $1,521,000 of the deferred asset will be credited to
additional paid-in capital when recognized. The balance of the valuation
allowance applies primarily to those temporary differences that are
expected to be deductible at a point in the future when taxable income is
uncertain.
As of September 30, 1997, the Company had a net operating loss carryover
for federal and state income tax purpose of approximately $20,346,000 and
$13,525,000, respectively. The federal net operating losses expire from
2007 to 2011. The state net operating losses expire from 2000 to 2011.
The difference between the federal and state loss carryforwards results
primarily from a 50% limitation on California net operating losses.
The Tax Reform Act of 1986 and the California Conformity Act of 1987 impose
substantial restrictions on the utilization of net operating loss
carryforwards in the event of an ownership change, as defined by Internal
Revenue Code, Section 382. Any unused annual limitation can be carried
forward and added to the succeeding years annual limitation, subject to the
expiration dates discussed above.
(15) SIGNIFICANT CUSTOMER AND INDUSTRY SEGMENT INFORMATION
Two customers individually accounted for 10% or more of consolidated net
sales in 1996 and 1995. No customer individually accounted for 10% or more
of consolidated net sales in 1997. Sales and the related receivable
percentages to these customers as of September 30, 1996 and 1995, are
summarized as follows:
Percentage of Percentage of
Net Sales Accounts Receivable
--------------- ---------------------
1996 1995 1996 1995
---- ---- ---- ----
Customer A 14% 15% 6% 9%
Customer B 12% 12% 11% 12%
During 1997, the Company manufactured products that fell into three major
industry segments. The first involves the production of fully functional
computer memory modules from defective memory chips. The second involves
the manufacture and rebuild of electron power tubes in various forms and
models. The third involves the production of electronic components. As
discussed in Note 1 to the consolidated financial statements, the Company
exited its electronics component business during 1997 through the sale of
its subsidiary, CMI. There were no sales between segments during any of
the years presented.
F-28
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Semiconductor Electronic Electronic
Memory Power Tubes Assemblies Other Total
-------------- ----------- ----------- ------------ -------------
1997:
Net sales $ 1,594,000 $4,655,000 $1,480,000 $ -- $ 7,729,000
Operating income (loss) (6,975,000) 126,000 (6,000) (9,798,000) (16,653,000)
Identifiable assets 1,487,000 2,943,000 -- 2,625,000 7,055,000
Depreciation and amortization 157,000 131,000 60,000 60,000 408,000
Capital expenditures 49,000 771,000 32,000 819,000 1,671,000
1996:
Net sales -- 3,405,000 -- -- 3,405,000
Operating income (loss) -- 72,000 -- (5,268,000) (5,196,000)
Identifiable assets -- 2,923,000 2,150,000 8,753,000 13,826,000
Depreciation and amortization -- 41,000 -- 18,000 59,000
Capital expenditures -- 54,000 -- 219,000 273,000
1995:
Net sales -- 3,768,000 -- -- 3,768,000
Operating income (loss) -- 197,000 -- (630,000) (433,000)
Identifiable assets -- 2,646,000 -- 423,000 3,069,000
Depreciation and amortization -- 97,000 -- -- 97,000
Capital expenditures -- 31,000 -- -- 31,000
(16) SUBSEQUENT EVENT
Formation of New
Entity
In October 1997, the Company entered into an agreement with the Managing
Director of PI Corporation, an employee of the Company, to form a new
entity to increase the likelihood of obtaining additional funding for
the development of the PI Technology, and to increase the probability of
engaging an industry partner with sufficient personnel and financial
resources to successfully commercialize the PI Technology. The Company
will transfer all of its intellectual property, which has a book value
of zero, to the new entity in exchange for an ownership interest of
72.5%. The remaining 27.5% will be owned by the Managing Director of
P.I. Corp. and the employee who will become executive officers and
directors of the new entity. The Company has not calculated the amount
of compensation expense related to this transaction as the fair value of
the net assets being transferred to the new entity has not yet been
determined.
Financing
In December 1997, the Company issued convertible debentures and attached
warrants for $1,500,000. The convertible debentures were, at the time of
issue, unsecured obligations of the Company.
F-29
INTERCELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Company has allocated debt proceeds to the warrants based on the fair
value of the warrants at the date of the debt offering as determined using
the Black-Scholes pricing model.
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 day following the maturity date, at a conversion price for each
share of common stock at 85% of the market price as defined pursuant to the
financing agreement. The Series A-2 debenture was to be funded on January
1, 1998.
The Series A-2 debenture funding was accelerated to December 31, 1997, at
the request of the Company. As consideration for such acceleration, the
Company provided security to the debenture holders for the entire
$1,500,000. The security consisted of an assignment of the Company's first
priority secured lien on the asset of Sigma 7, a first deed of trust on
property held for resale in Arizona 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.
Sale of Subsidiary
In December 1997, the Company signed a letter of intent to sell its
electron tube manufacturing subsidiary. Negotiations regarding this sale
are ongoing.
F-30
INTERCELL CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Balance Charged
at to
Beginning Costs and Balance at
Classification of Year Expenses Deductions End of Year
- -------------- --------- --------- ---------- -----------
Allowance for returns and doubtful
accounts
Eleven months ended September 30, 1995 $ 15 $ 81 $(15) $ 81
Year ended September 30, 1996 $ 81 $174 $ -- $255
Year ended September 30, 1997 $255 $ 7 $ -- $262
F-31
INDEX TO EXHIBITS
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
to Stock Purchase Agreement.
2.5/(6)/ Stock Sale and Purchase Agreement dated June 6, 1997 between
Intercell Corporation and Sigma 7 Corporation.
2.6* Offer for Development Agreement of Microlink Technologies
Corporation.
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 Certificate of Designation for Series B Preferred Stock is
included in the Company's Articles of Incorporation filed as
Exhibit 3.1 and incorporated herein by reference.
4.3/(1)/ Specimen of Warrant attached to Series B Preferred Stock.
4.4 Certificate of Designation for Series C Preferred Stock is
included in the Company's Articles of Incorporation filed as
Exhibit 3.1 and is incorporated herein by reference.
4.5/(7)/ Form of Warrant attached to Series C Preferred Stock.
4.6/*/ Certificate of Designation for Series D Preferred Stock
4.7/(7)/ Specimen of Registration Rights Agreement for Series B Preferred
Stock.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
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/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996, between Gordon J. Sales and the Company.
10.5/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996, between Alan M. Smith and the Company.
10.6/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996 between Terry W. Neild and the Company.
10.7/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 22, 1996 between Steven D. Clark and PI Corp.
10.8/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996 between Lawrence DiFrancesco and PI Corp.
10.9/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
September 1, 1996 between Patricia H. Grihalva and PI Corp.
10.10/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 8, 1996 between Jerry W. Tooley and Cellular Magnetics.
10.11/(7)/ Employment and Non-Disclosure Non-Competition Agreement, dated
October 8, 1996 between David Putnam and Cellular Magnetics.
10.12/(5)/ Warrant Agreement dated as of July 18, 1997 between Intercell
Corporation and Intercell Technologies Corporation.
10.13/(5)/ Royalty Agreement dated as of July 18, 1997 between Intercell
Corporation and Intercell Technologies Corporation.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.14/(5)/ $2,200,000 Promissory Note dated as of July 18, 1997 between
Intercell Technologies Corporation and Intercell Corporation.
10.15/(5)/ Stock Pledge and Security Agreement dated July 18, 1997 between
Intercell Corporation and Intercell Technologies Corporation.
10.16* Microlink Technologies Corporation Standard Industrial Lease.
10.17* Sigma 7 Corporation Lease.
10.18* CTL Lease
11* Statement regarding Computation of Per Share Earnings.
21/(7)/ Subsidiaries of the Company.
23* Consent of KPMG Peat Marwick LLP
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 the Company Current Report on Form 8-K dated
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.