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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF
SECURITIES OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
SUPERCONDUCTIVE COMPONENTS, INC.
(Name of Small Business Issuer in its charter)
Ohio 31-121318
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1145 Chesapeake Avenue
Columbus, Ohio 43212
(Address, including zip code, of principal executive offices)
(614) 486-0261
(Issuer's telephone number)
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act: common stock,
without par value
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TABLE OF CONTENTS
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Part I
Forward Looking Statements..................................................................................I-1
Item 1. Description of Business...................................................................I-1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...............................................................I-16
Item 3. Description of Property...................................................................I-20
Item 4. Security Ownership of Beneficial Owners and Management....................................I-20
Item 5. Directors and Executive Officers, Promoters and Control Persons...........................I-23
Item 6. Executive Compensation....................................................................I-25
Item 7. Certain Relationships and Related Transactions............................................I-27
Item 8. Description of Securities.................................................................I-27
Part II
Item 1. Market Price of and Dividends on the Registrant's Common
Equity and Related Shareholder Matters..................................................II-1
Item 2. Legal Proceedings.........................................................................II-2
Item 3. Changes in and Disagreements with Accountants.............................................II-2
Item 4. Recent Sales of Unregistered Securities...................................................II-2
Item 5. Indemnification of Officers and Directors.................................................II-2
Part F/S
Financial Statements........................................................................................F-1
Part III
Item 1. Index to Exhibits.........................................................................III-1
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PART I
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements that reflect the
views of management with respect to future events and financial performance.
These forward-looking statements are subject to certain uncertainties and other
factors that could cause actual results to differ materially from such
statements. These uncertainties and other factors include, but are not limited
to, the words "anticipates", "believes", "estimates", "expects", "plans",
"projects", "targets" and similar expressions which identify forward-looking
statements. You should not place undue reliance on these forward-looking
statements, which speak only as of the date the statements were made.
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
Superconductive Components, Inc. ("SCI" or the "Company"), an Ohio
Corporation, was incorporated on May 29, 1987 to develop, manufacture and market
products based on or incorporating high temperature superconductor ("HTS")
materials. HTS materials are complex metal oxides - ceramics - of certain
stoichiometries (mixture ratios) which exhibit the superconducting phenomena
under certain conditions. These complex metal oxides are identified as members
of the Perskovite family of ceramic materials.
The strategy of the Company has been to find commercially viable
applications for HTS materials and, subsequently, other ceramic and metal
materials. The Company's objective has been to stay intellectually current with
the advancing technology in HTS materials, and search out commercially viable
applications by being in the market place. This objective has been widened to
include other Perskovites, as well as other metals and alloys, in materials
other than HTS materials.
Until 1998, the Company relied primarily on its own resources for the
research and development necessary to stay current with HTS technology and also
to develop products for other applications. In 1998, the Company engaged in
sponsored research for Nanophase Technology Corporation, Inc. and also received
several awards for research from two United States Government Agencies, NASA and
the National Science Foundation. The Company intends to continue to seek such
funding because this funding maintains and expands the technical understanding
within the Company.
The Company believes that it is a leader in these technologies and that
a foundation has been built for commercialization of these technologies in its
chosen markets.
BACKGROUND OF SUPERCONDUCTIVITY AND ADVANTAGES OF HIGH TEMPERATURE
SUPERCONDUCTIVITY
A superconductor is an element, inert-metallic alloy, or compound that
will conduct electricity without resistance when cooled below a certain critical
temperature. This phenomenon was discovered in 1911 in the metal Mercury when it
was cooled with liquid Helium to -273DEG. Centigrade. This cooling enables the
material to carry electrical currents without loss of energy and, due to the
increased current the metals can carry, be used to generate very large magnetic
fields. Scientists realized that the phenomenon of superconductivity raised the
possibility of less expensive electrical generation and transmission, powerful
magnets and levitation. In the past, the only way to achieve this phenomenon was
to submerge the metals in liquid Helium. Because of the Helium's inherent
instability in liquid form and cost issues, the wide spread use of
superconductors in commercial applications was impractical. These metals, now
known as Low Temperature Superconductors ("LTS"), are superconductive at
temperatures from absolute 0 up to as high as +23DEG. K.
With the discovery of new ceramic compounds in 1986, superconductivity
can now be accomplished at higher temperatures by using liquid Nitrogen to
cooling. The boiling point of Liquid Nitrogen is 77 K or -196DEG.C. These new
ceramics bring superconductivity into the realm of the practical since liquid
Nitrogen is inexpensive, stable, long-lasting, and the largest component in our
atmosphere and environmentally friendly. These materials are known as HTS.
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HTS provide the potential for significant increases in performance of
electrical systems. Every electrical application delivers electricity from its
source to a user through the use of "conductors". However, conventional
conductors, such as Copper, exhibit some performance disadvantages. These
performance disadvantages include resistance to electric current, causing power
loss, heat generation, interference and noise, each of which can significantly
decrease the performance of electrical systems.
Superconductors have the ability to conduct electrical current with
zero resistance, no power loss, and no generation of heat below some critical
current. The performance advantages of HTS materials in electronics applications
include reduced component size and weight, and increased operating speeds, and
in transmission applications include lower on-line losses. HTS materials exhibit
these properties when cooled to 77DEG. K, a process easily obtainable with
inexpensive liquid Nitrogen. LTS require cooling to as cold as 4DEG. K or
-273DEG. C, with the use of the more expensive liquid Helium.
The required use of liquid Helium has made wide spread applications of
LTS superconductors impractical in many applications. The higher operating
temperatures of HTS superconductors have reduced the operating costs for HTS
products since the required liquid Nitrogen is inexpensive and readily
available. However, the HTS material itself, as a ceramic, is more difficult to
form into products than the metallic LTS materials. Therefore, it has been
necessary to develop a number of new or modified processes to achieve
satisfactory results with the HTS material. In its product lines, the Company
believes that it has been a leader in the development of these processes.
HISTORY OF THE COMPANY
The Company was founded in 1987 by Dr. Edward R. Funk and his wife
Ingeborg Funk to develop, manufacture, and market HTS materials for commercial
applications of the newly-discovered superconducting ceramics. The Company's
initial efforts were directed toward mastering the manufacturing process for
making high temperature superconducting ceramic powders, as discussed in further
detail below. During this period, the market for high temperature
superconductors was very small, estimated at $1 million a year or less,
consisting primarily of demonstration kits and small amounts of HTS powder for
research purposes. Sales, though relatively small, covered a wide range of
superconducting products, including powder, pressed "pills", and solid shapes
for research applications.
Subsequently, the Company began to develop other forms of HTS
materials. A broad commercial market for products using HTS superconducting
materials has not yet developed, although small niche markets have emerged for
some products. In the second half of 1989, the Company began to focus on the
market for superconducting thin-film materials, made from the Company's
sputtering targets. These HTS sputtering targets are used by customers of the
Company in a vapor deposition process to make thin films of the target material.
This process operates in vacuum, hence, the frequently heard term, vacuum
disposition or Physical Vapor Deposition, ("PVD"). HTS thin films are then
patterned, using techniques similar to those in the semiconductor industry, to
manufacture sensors, circuits and other devices; which in turn can be used in
medical diagnostics, geological exploration, advanced radar, wireless
communication and other niche applications.
The Company's HTS products are produced and marketed by its SCI
Division. A second division of the Company is marketing some of the
non-superconducting products that the Company has developed. For a discussion of
these products, see "The SCI Division - Non-Superconducting Products."
In 1992 the Company established the Target Materials, Inc. division
("TMI") and began to market sputtering targets of materials other than
superconductors for thin film deposition. This division is located within the
headquarters of the Company in Columbus, Ohio and shares facilities and staff
with the SCI division.
ORIGINAL COMPANY FOCUS IN HTS PRODUCTS
The Company's original focus was to offer HTS powders in various
stoichiometries and bulk solid state forms of HTS materials, including
sputtering targets, Levitators, Magnetic Shields, and also various kits and
support equipment and materials. These products will be described in more detail
in the section entitled "Expansion of Company Product
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Line" below.
The market for all HTS products, although small, has historically been
represented by groups seeking to establish a fundamental understanding of the
properties, principals and theory of these materials and also groups focused on
applications of high temperature superconductivity. The ratio of fundamental to
applications research continues to shift toward commercialization of the
technology as demonstrated by the increasing number of beta prototype programs
in the industry.
The Company provides the basic building blocks for many of these
products, since nearly all applications of HTS start with powder, which is
subsequently processed into products such as wire, sputtering targets, or large
single crystals, which then can be used to manufacture transmission cables,
superconductive magnets, sensors, Rf filters for wireless communications, and
frictionless bearing systems for linear or rotating system applications.
The Company has a suite of proprietary processes that are utilized in
the production of its products. As discussed later, the Company also has
licenses of patents, and its own patent and patent applications in this field.
See the section of this document entitled "Intellectual Property" for additional
information.
The Company's proprietary ceramic powder and powder densification
processes have been successfully adapted to other electronic ceramics that
exhibit unique, non-superconductive, characteristics. Some of these materials
are also in transition from fundamental to applications oriented development and
may be the source of significant revenues in the Company's future. These
materials can be categorized as ionic or electronic conductors and materials
with unique magnetic properties such as the ceramics used in non-volatile
computer memories.
EXPANSION INTO OTHER MATERIALS AND THE CREATION OF THE TARGET MATERIALS (TMI)
DIVISION
By early 1990, it was clear to the Company that the market for HTS
superconducting powder, targets and other HTS products was still too small
(about $1 to $2 million annually) to assure survival and growth of the Company.
Accordingly, the Company expanded its product line to include sputtering targets
made of non-superconducting ceramics, metals and metal alloys. As the demand for
these products grew it became evident that this new product line could expand
more rapidly if it were managed as a focused, non-superconductive, effort. The
metal, metals alloy and simple ceramic sputtering targets were then packaged
into a new division named Target Materials, Inc. (TMI). TMI is not a
corporation, but is used to identify Company products in the market place.
The total market for non-superconducting metal, metal alloy and simple
ceramic targets for the thin film industry is estimated at $720 million
globally. The Company, through its TMI Division, also embarked on a program to
move selected products developed for research and development applications into
production applications. The market for these more conventional materials is
characterized by intense price competition. However, there are new materials
being continuously investigated, and these new ceramics or metal alloys
sometimes develop rapidly into significant markets. The Company believes that
its position as a supplier of research and development targets has positioned,
and will continue to position the Company as a supplier for these materials as
they grow into production usage. In 1999, approximately 60.0% of the Company's
target shipments were classified by the Company as production, and 40.0% were
classified as research and development. This is a marked change from 100.0%
classification as research and development shipments in 1995. The Company's
objective is to achieve an 80.0% to 20.0% ratio of production to research and
development shipments.
The Company has continually added production processes and testing
equipment for the many product compositions that can be used as sputtering
targets. The TMI Division standard products, as listed in its catalogue, now
include nearly 200 items of ceramic materials and metals and alloys available in
various sizes and shapes. TMI shipments were 67.0% of total Company shipments in
1999.
THE SCI DIVISION
The SCI Division primarily produces and markets the Company's various
HTS products, which include both superconducting and non-superconducting
products. The most significant of the Company's HTS products are discussed
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below.
SUPERCONDUCTING PRODUCTS
HIGH TEMPERATURE SUPERCONDUCTIVE POWDERS. HTS powders are the building
blocks for most applications of high temperature superconductivity. The Company
offers a wide variety of HTS powders. Powders are manufactured using
conventional solid state and wet chemistry, as well as proprietary processes
developed or licensed by the Company. Superconducting powders represented
approximately 4.0% of Company revenues in 1999, 3.2% in 1998, and 5.8% in 1997.
The Company's HTS powder production is also used internally to make
Levitators-TM-, HTS sputtering targets and other ceramic components.
Customers in the SCI Division have included several manufacturers of
superconducting wire, wherein the powder is put into a tube and drawn and
redrawn to very fine size. Such wire is now available from our customers and
others in lengths sufficient to make superconducting magnets, motors, and power
transmission lines. This market for the Company's HTS powder is expected to grow
as these applications transition from research to prototype to production use.
Some of these applications are now in the engineering-prototype stage, and are
being evaluated with respect to their conventional counter parts.
The purpose of the engineering prototypes now in evaluation is to
determine the technical and economic feasibility of the specific applications.
It should be noted that, although it is unlikely that all of the initially
configured prototypes now in test will be economically viable, there are a
number of applications being tested, and the Company believes that some of these
will certainly move into production in the next several years. The Company is
particularly optimistic about cables, where the use of superconductors may
reduce power transmission losses. In addition, because much higher currents can
be carried in HTS cables for a given volume, there may be savings realized
through the minimization of the disruption to dense cityscapes as the
transmission and distribution grid is refitted to accommodate the unprecedented
increase in demand for electric power.
Encouraging results are also being shown by companies other than SCI
that make superconductive Rf filters for the distributed base stations which
support the national wireless communication network.. Such applications of HTS
promise to reduce noise level, decrease signal interference, and reduce the
number of dropped calls. Additionally, some HTS equipped cellular base stations
extend the range of the station.
Another promising application of HTS is fast response fuses, sometimes
called fault current limiters. In this case, the very short (fraction of a
cycle) response time of HTS material to voltage surges on electric transmission
and distribution networks may reduce downtime and capital expenditures for
utilities. HTS fault current limiters are self-resetting and, unlike
conventional fuses, are not destroyed by a voltage surge. The Company currently
has an alliance with Argonne National Laboratory in the development of this
device. This product has not yet reached the prototype test stage.
It is well-known that the major market for LTS superconducting wire is
in magnets for medical Magnetic Resonance Imaging ("MRI") systems. Recent tests
show that HTS wire may have an economic and technical advantage for this
application. Cost advantages may be achieved in new systems by the elimination
of liquid Helium cooling. Technical advantages may be achieved through the
higher fields obtainable by using HTS materials at very low temperatures.
The Company makes the raw materials that are used by the manufacturers
of the above mentioned products, and actively solicits the business of those
making such products.
SUPERCONDUCTING SPUTTERING TARGETS. The Company converts its powders
into dense, precisely machined ceramic components which are used as sputtering
targets by its customers for the manufacture of superconductive thin films.
These thin films can then be etched in a patterns to produce electrical devices
such as superconductive quantum interference devices ("SQUIDS") that are
extremely sensitive to small electric and magnet fields, such as brain waves, a
passing submarine, or certain electric and magnetic signatures of ore or oil
deposits. This market was 3.2% of Company revenues in 1999, 2.1% in 1998, and
5.3% in 1997.
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HTS materials, as thin and thick films both as sputtering targets and
powder are currently used in Rf filters microwave applications such as in
cellular base stations. At this time, there are several companies whose
superconductive Rf filters are going into limited production. These companies
include: Superconductor Technologies, Inc., Conductus, Inc., and Illinois
Superconductor Corp. Other companies are thought to be developing such products
based on HTS materials. The Company is a potential supplier to these producers
for both HTS powder and sputtering targets.
The 'next generation' of HTS wires and cables is expected to be based
on the deposition of the Ittrium Barium Copper Oxide ("YBCO") superconductor on
textured metals. The deposition of the YBCO conductor is being pursued in the
United States and Japan by use of the Company's sputtering targets. While this
application is expected to take several years to develop, for now it enables the
Company to participate in near term applications of HTS wire through its
Bismuth, Strontium, Calcium, Copper and Oxygen ("BSCCO") materials, and future
requirements through its YBCO ceramic components.
"LEVITATORS-TM-". The Company has a non-exclusive license from Argonne
National Laboratories for producing seeded and melt textured YBCO large single
domains which the Company has been issued the trademark "Levitators-TM-." A
superconducting Levitator-TM- is a compact of the Company's superconductive
powders which have been processed to form a large C-axis oriented grain that
exhibits a high critical current density and considerable diamagnetism. The
Company has advanced its technology well beyond the original Argonne licenses
and expects to be issued a patent for its own proprietary processes to
manufacture Levitators-TM- . At this time, the Company's large domain
Levitators-TM- ("LDL"), made from its superconducting powders, exceed 30 Newtons
of separating force when used with certain magnets. This value is high enough to
make practical several applications including near frictionless bearing systems,
flywheels energy storage devices (so called frictionless flywheels), and linear
transportation devices (i.e. Maglev trains).
In 1996 the Company supplied approximately 1,600 Levitators-TM- to a
major utility for a prototype frictionless flywheel energy storage ("FFES")
device. The FFES device is a flywheel that rotates in an evacuated chamber and
is supported by HTS Levitators-TM- so that there are no mechanical bearings. The
friction factor is more than a 1,000,000 times less than the best mechanical
bearings. Under these conditions, very little energy is lost to friction. Energy
is applied to the flywheel to spin it up, and energy withdrawn at nearly 90.0%
efficiency as needed.
At this time, the major utility company has placed the development of
FFES units on hold pending further funding. The prototype for which the Company
supplied for the Levitators-TM- is said to have demonstrated the feasibility of
HTS levitated frictionless bearings for this application.
The Company has engaged in further research and development on its
Levitators-TM-, with a view toward enhancing their performance capability and
reducing the costs of production. The Company has focused its efforts on
identifying a suitable replacement for one of the most expensive components
of its basic powder mix for Levitators-TM-. If successful, levitator
production costs will be substantially reduced.
The Company continues to collaborate with Argonne National Laboratory
through a Creative Research and Development Agreement in order to advance the
technology and broaden the range of applications for which Levitators-TM- are
applicable. Improvements in performance, combined with a significant reduction
in manufacturing costs, are expected to result from this multi-year, cost
sharing, program.
The United States electric power industry is scheduled for deregulation
in the very near future. This will force competition to occur between power
providers well beyond their current regional boundaries. The public utility that
purchased the Company's large domain levitators in 1996 currently supplies 5.0%
of the electrical power used in the United States. Officials at the utility have
advised the Company that they view the development of the FFE system as a key
component of their competitive strategy. Other utilities may also use these
systems in their competitive strategies. There are also programs to develop
similar energy storage devices in Japan, the United Kingdom, Korea and Germany.
SUPERCONDUCTING ACCESSORIES. The Company provides certain accessory
products that are needed, in addition to the Company's core HTS materials, to
support its customers' research or manufacturing programs. These products
include substrate materials, single and polycrystalline, such as Lanthanum
Aluminate, Spinels and Garnets, and oriented
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Magnesium Oxides. HTS accessories were 1.7% of Company revenues 1999, 1.3% in
1998 and 1.6% in 1997.
DEMONSTRATION KITS, INSTRUMENTATION ACCESSORIES FOR SUPERCONDUCTIVITY
EDUCATION. Demonstration kits were the first products sold by the Company in
significant volume. Packaged for the educational community, the Company
continues to manufacture a family of laboratory demonstration kits designed to
exhibit the key features of perfect conduction, diamagnetism and flux trapping
that are unique to HTS materials. These kits are marketed directly by the
Company and also through a network of educational product distributors which
include Edmund Scientific, Arbor Scientifiy, Beckly Cardy and others. The
instrumentation and accessories offered by the Company include a wide range of
discs, dies, rare earth magnets, vacuum jars, box furnaces, digital volt meters,
dewars and flasks, and related items. These combined categories represented
approximately 0.6% of Company revenues in 1999, 0.9% in 1998 and 1.2% in 1997.
NON-SUPERCONDUCTING PRODUCTS
Beginning in 1996, the SCI Division of the Company manufactured and
sold non-superconducting, as well as HTS products for commercial use which can
be categorized as engineered powders, engineered parts, and engineered
components. Products in these categories are described below.
ENGINEERED CERAMIC POWDERS. The Company has adapted its proprietary
Ceramic Oxide powder production processes for the manufacture of fine,
ultra-fine and nano-crystalline powders of non-superconductive materials to
support a variety of expanding applications requiring electronic ceramics. These
powders are used by customers of the Company in the development or manufacture
of:
- Solid Oxide Fuel Cells ("SOFC");
- Ceramic Membranes for the separation of natural gas from its
contaminants;
- Lithium ion batteries;
- Ceramic electrodes for harsh environments;
- Ceramic electrodes as a replacement for precious metals; and
- Capacitors.
Engineered ceramic powders were 0.01% of Company revenues in 1999, 0.4%
in 1998, and 0.5% in 1997.
CERAMIC SPUTTERING TARGETS. The Company has adapted its proprietary
ceramic powder densification processes to manufacture a variety of sputtering
targets from its line of electronic ceramic powders. Many industries are working
to utilize the unique properties of electronic ceramics to the enhance
performance or reduce cost of their products.
Sputtering targets composed of complex Ceramic Oxides for applications
such as non-volatile memory, thin film capacitors, thin film electrodes, and
transparent electronic conductors are an emerging product line for the SCI
Division, comprising 5.9% of the SCI Division's revenues in 1999, 5.8% in 1998
and 6.6% in 1997. The hope of the Company is that materials developed to supply
customer's research requirements will grow into large scale production orders
with the commercial success of the next generation of thin-film-based electronic
devices. The Company has certain proprietary knowledge and trade secrets related
to the manufacturing of these non-superconductive Ceramic Oxides sputtering
targets.
SENSORS IN DEVELOPMENT BY SCI DIVISION
The SCI Division also has two development contracts involving its
products to make sensors for gases at high temperature and temperature sensors
for very low temperature applications. These two development contracts were 1.2%
of Company revenues in 1999. The Company was not in this field of sensors prior
to 1999.
SENSORS FOR HARSH ENVIRONMENTS- GASEOUS OXIDES OF NITROGEN. For
automobiles, public utilities, and other
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generators of oxides of Nitrogen gas ("NO(x)"), currently no low cost
detection system exists. The harmful effects of NO(x) are well known
component of the green house gases that are damaging to the environment. The
United States and other foreign governments continue to fund the development
of solutions to reduce green house gasses in which sensors are a part of the
detection and correction system. Once developed, these solutions may be
legislated upon the market place. The low-cost NOx sensor market is global
and may be expected to exceed several million dollars in the next decade.
The Company has recently completed Phase I of the design,
development and manufacture of a sensor for NO(x) to be used in harsh
environments, such as the exhaust stream of internal combustion engines. The
goal of the program, funded through a competitive award by the National
Science Foundation, is to build on the Company's strengths in ceramic
fabrication and to devise a device, based on the ionic conductive properties
of certain multi-component oxides, that is both low in cost, and also highly
sensitive to NO(x) in the range required for future automobiles.
The development of a NO(x) sensor, suitable for use in next generation
spark-ignition direct injection engines, or SIDI, has been given the highest
priority by stakeholders in the industry, including major automobile and engine
manufacturers. New, lean-burn engine technologies are nearing commercial
reality, but they lack adequate sensors to monitor and control the quality of
exhaust in order to operate within federally mandated pollution guidelines.
SENSORS FOR CRYOGENIC TEMPERATURES - YBCO BASED. Ultra high precision
temperature sensing in the range of 77DEG. - 92DEG. Kelvin is a small niche
market. The skill set developed to perfect this device will serve the Company in
the manufacture of all of its planned sensors. While temperature sensors for the
broad range of 4.2DEG. K to 300DEG. K are well understood, and available by
reputable commercial enterprises, a greater accuracy over a limited temperature
range may be a competitive advantage for YBCO based sensors in new and dynamic
applications such as magnetic levitation ("MAGLEV") and flywheel energy storage,
where very small temperature excursions may be used as the predictors of system
disruptions or failure. In this effort the Company currently has an alliance
with CRI, Inc. of Cambridge, Massachusetts.
STRATEGIC ALLIANCES, MAJOR CUSTOMERS AND SUPPLIERS
The Company attempts to do most development work in the SCI Division in
cooperation with partners who will ultimately consume, or may serve as a channel
to market, the Company's products and technology. In this way, the Company
remains focused on providing value-added materials solutions for a range of
commercial applications.
Most of the Company's products are manufactured from component
chemicals and metals supplied by various vendors. The SCI Division is dependent
upon ultra high purity Yttrium and other rare earths to manufacture its
superconducting products. Several suppliers currently satisfy the Company's
requirements for these rare earths. If the Company suddenly lost the services of
such suppliers, there could be a disruption in its manufacturing process until
the suppliers were replaced, but the Company has identified several other firms
as potential back-up suppliers who would be capable of supplying rare earths to
the Company as necessary. To date, the Company has not experienced an
interruption of raw material supplies.
The top 5 suppliers to the SCI Division in 1999 were, in descending
order: Argonne National Laboratories, Noah Technology Corp., MTI Corp., Cerac
Corp., and Praxair Corp. In every case, the Company believes that suitable
substitute vendors could be found. Also, as the Company's volume grows, the
Company may make alliances or purchasing contracts with these or other vendors.
No customers in the SCI Division accounted for 10.0% or more of the
total SCI revenue in 1999.
RESEARCH AND DEVELOPMENT
Materials produced by the SCI Division are utilized in markets which
are either emerging (such as the various applications of HTS), or well
established, but requiring the performance or cost advantages that may be
available through the application of electronic ceramics (such as the
semiconductor and functional thin film coatings industries). The Company's
objective is to utilize its expertise in ceramics, metallurgy, materials
science, chemistry and technology
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transfer for the purpose of identifying new materials thought to have commercial
potential and to develop that potential through an internal production division
(as in the case of Target Materials), or by partnering with key industry players
to grow with applications as they evolve from innovative ideas to commercial
success.
The Company's initial focus on HTS was shifted upon the realization
that the market for that technology would take several years to develop, and
that the Company's talents and capital base could also be used to provide
materials solutions in a wide range of other industries. While HTS is expected
to develop into a multi-billion dollar industry in the first decade of this
century, the Company has diversified its efforts to concurrently participate in
other materials markets. The emphasis of SCI's Division's Research has been
broadened to include engineered ceramic oxide materials.
The SCI Division of the Company remains focused on the development of
materials, processes and devices based on its core skills in ceramic powder
fabrication, powder densification, thin film technology, and most recently thick
film technology. These developments are realized through partnerships with its
many customer collaborators. The Company's reliance on a commercial customer
collaborator optimizes its development expenditures by focusing on the projects
where customers have identified markets and agree to provide future revenue
streams based on the successful completion of the project.
COMPANY SPONSORED RESEARCH AND DEVELOPMENT. The Company often
undertakes commitments in the ordinary course of business that require the
Company to develop methods or processes that expand the Company's skill set. In
general, the Company does not initiate a formal development program to
accomplish these tasks, but does absorb any expenses which may exceed the
revenues provided by clients, as part of its internal development costs.
SPONSORED PRODUCT DEVELOPMENT PROGRAMS WITHIN THE SCI DIVISION
The Company has a number of research programs, including two Phase II
SBIR's (Small Business Innovative Research) that are sponsored by government
agencies. These programs are being conducted within the SCI Division. These
programs are all believed to have significant commercial potential if the
respective technologies can be fully developed. SBIRs and sponsored research and
development contracts accounted for 15.9% of Company revenues in 1999, 18.8% in
1998, and 0.2% in 1997.
Several public and privately funded programs currently support
continued product, process and component development within the SCI Division.
Sponsored programs include:
- NASA (National Aeronautics and Space Administration),
beginning on April 1, 1999, funded a Phase II SBIR for a
$580,000 program over 2 years to demonstrate the feasibility
of manufacturing a large, bi-layered superconductive toroid
(ring) and related levitation/rotation system for gravity
modification experiment in cooperation with Argonne National
Laboratories and Wright State University. The Company's share
for in-house work on this project is $310,000 over 2 years.
The contract may be cancelled at any time and the 24 month
duration expires on May, 2001.
- THE NATIONAL SCIENCE FOUNDATION ("NSF"), beginning on
September 1, 1999, funded a Phase II SBIR program over 2 years
for $400,000 for advanced manufacturing of BSCCO
superconductive powders for low cost, continuous HTS wire
fabrication, (with partner Intermagnetics General Corporation,
Advanced Superconductor Division). The Company's share of this
funding is $200,000 over 2 years and the contract may be
cancelled at any time. This program expires on August 31,
2001.
- NSF, beginning on July 1, 1999, funded a Phase I STTR (Small
Business Technology Transfer Program) for $100,000 for the
development and technology transfer of a sensor for oxides of
Nitrogen gas to be used in harsh environments, i.e. an
automobile exhaust stream, (with partner the Center for
Industrial Sensors and Measurement at the Ohio State
University). The Company's in-house share of this funding is
$50,000. This program expired on June 30, 2000 although work
continues on the device in preparation of a Phase II grant
application which will be submitted in January 2001.
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- THE CAMBRIDGE RESEARCH INSTRUMENT CORP., funded by a Phase II
SBIR (Small Business Innovative Research) subcontracted with
the Company for $25,000 for the development of a
superconductive temperature sensor tunable for a specific
2DEG. K region around the boiling point of liquid Nitrogen
(77DEG. K) for use in a unique geological instrument. This
program began on September 1, 1999, and ends on September 30,
2000.
- CERAMPHYSICS, INC., which has a funded Phase II SBIR (Small
Business Innovative Research) subcontracted with the Company
for the development of HTS electrodes to replace Platinum in a
Department of Defense application of cryogenic capacitance
energy storage. This program is for $20,500 and ends on
September 1, 2001. A second phase of the program has been
funded outside the government for a 13 month period beginning
October 1, 2000.
All of the sponsored research and development contracts can be
cancelled at the sponsor's option, with accrued costs being paid. As of August
1, 2000, the Company had $456,432 of funding from government sponsored research
and development programs that could be cancelled at any time. In the event of
cancellation, the SCI Division revenues would drop to half the billing rate of
1999 until or unless other non-governmental revenues or other governmental
programs replaced the short fall.
To date, federal funding has been directly or indirectly responsible
for an estimated 80.0% of the developmental funding of the HTS industry. Such
funding, plummeted in 1992 and 1993 when the Supercollider project was
terminated. Federal funding has rebounded somewhat in recent years. Management
of the Company anticipates that any increase in funding for superconductivity
research may benefit the Company indirectly, since many of its customer's
research and development efforts receive government funding. However, while the
Company continues to submit proposals to federal and private funding
organizations, there is no assurance that the Company will be awarded similar
contracts in the future.
COMPETITION IN THE HTS INDUSTRY
The Company has a number of domestic and international competitors in
the HTS field, many of whom have resources far in excess of the Company's
resources. After more than a decade of intensive development work, commercial
prototypes of various large scale HTS applications are now reaching prototype
test stage. It is anticipated that as commercial devices based on HTS technology
begin to gain wide spread acceptance, and the attractiveness of the industry
improves, new competitors for powders, sputtering targets and large
superconductive single crystals will emerge. A major United States competitor of
the HTS Division is The Surface Science Division of Praxair Corporation. In
Europe, the SCI Division competes principally with a spin-off of Herchst
Chemical Company, now named Adventis, a division of Aliatec Corporation of
France. In Japan, the SCI Division's principal competitor is the DOWA Chemical
Company. Some of the developers of HTS based products, such as American
Superconductor Corporation, have also chosen to internally manufacture the HTS
powders that they require, and therefore compete with the Company in some cases,
or foreclose themselves as potential customers of the Company.
MARKETING AND SALES
The SCI Division markets its products by direct sale in the United
States. Most of the Division's orders are in response to requests for
quotations. The SCI Division distributes a catalogue of its products, exhibits
at the several relevant shows, and engages in direct mailings. The Company also
has an operating website: www.superconductivecomp.com. The Company intends to
intensify its marketing efforts in the future.
The SCI Division also sells its products to distributors in some
foreign markets. In March 2, 2000, the Company announced that Earth Chemicals in
Japan was selected as the exclusive distributor for Japan. The Company has
non-exclusive distributors in Europe, Korea, Taiwan, Israel and Singapore.
The global acceptance of the Internet has greatly increased the SCI
Division's ability to promote itself to the entire scientific community, and
thereby facilitated direct sales, engineering and customer support from the
Company's
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Columbus, Ohio facility. Notwithstanding an increasing number of distributors,
more than 75.0% of the SCI Division's international sales are handled directly
by the Company's in-house sales staff.
In addition to distributors and representatives around the world and
its Internet website, the Company maintains a modest print advertising program,
which includes the magazines PHYSICS TODAY, SUPERCONDUCTOR, CRYO-ELECTRONICS and
the THOMAS REGISTER OF MANUFACTURERS. The Company publishes technical articles
in scientific journals and presents technical papers at technology-based
conferences, workshops and symposia.
The Company has sold HTS products to 42 countries worldwide.
Approximately 25.0% of the Company's sales are foreign sales. The total number
of customers served by the Company was 185 in 1999, 129 in 1998, and 95 in 1997.
Customers that accounted for more than 10.0% of the SCI Division
revenue in 1999 were: NASA, NSF, NJB Pacific Corp., ENEA Corp, and Oxford
Instrument Corp.
PRODUCTION CAPACITY
The SCI Division has a current HTS powder production capacity of
approximately 700 kilograms per year, but is expected to increase to 1,200
kilograms per year in 2000. Increasingly, the customers of the SCI Division are
inquiring about the production capacity of the Company for their future
production requirements. Based on this experience and occasional loss of
customers to larger competitors, management views the expansion of HTS capacity
in the SCI Division as a primary objective in the year 2000.
QUALITY CONTROL
The Company's quality program uses a network of trusted and qualified
suppliers, backed up by the Company's internal and contracted analytical
capabilities. Incoming raw materials are tested, when required, for suitability
using techniques such as X-ray diffraction, Inductivity Coupled Plasma
spectrometry, Particle Size Analysis, and other methods. In addition to these
tests, sample lots of the Company's complex ceramics are often fabricated to
determine if a new supplier and/or new lot of input materials can be used to
make a product to specification.
The quality assurance processes for Company products include Critical
Temperature, carbon content, or packing density. The Company certifies its
products for phase purity by XRD (X-ray Diffraction), for major and trace
elemental composition by ICP (Inductively Couples Plasma), and mechanical
tolerances using certified calipers and micrometers.
The amount of rejected product during internal processing was 4.5% of
revenues in 1999, 3.0% in 1998, and 4.3% in 1997. Customer returns of SCI
Division products were 0.1% of revenues in 1999, 0.5% in 1998, and 0.7% in 1997
The Company owns its quality control equipment and also selectively
contracts with a network of domestic vendors for additional analytical
capabilities. The Company's in-house analytical instruments include:
- Inductively Coupled Plasma Spectrometer (ICP) manufactured by
Leeman Laboratories, Inc.;
- Particle Size Analyzer (PSA) manufactured by Toshiba
Corporation.;
- X-ray diffractometer (XRD) manufactured by Rigaku Corporation;
- Electronic Dispersive X-Ray Spectrometer (EDS) manufactured by
EDAX;
- Differential Thermal Analyzer (DTA) manufactured by Perkin
Elmer Corporation;
- Scanning Electron Microscope (SEM) manufactured by ISI
Corporation;
- Various digital calipers, analog calipers, digital and analog
micrometers, routinely calibrated against NIST (National
Institute of Standards) traceable standards; and
- Various digital weight scales that are routinely calibrated
against NIST traccable standards.
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INTELLECTUAL PROPERTY
The Company has developed or acquired intellectual property in the form
of patents, patent applications, and licenses on patents.
PATENTS. The Company has applied for and received from the United
States Patent and Trademark Office patent # 5,863,867 dated January 26, 1999,
for Fine-Particle Bi-Sr-Ca-Cu-O Having High Phase Purity made by a Chemical
Precipitation and Low-Pressure Calcination method. This material is used to make
HTS powder at this time.
Several other patents have been or will be filed covering all aspects
of the HTS field, including the basic concepts, the powder composition,
processing, and products. Industry wide, it has been reported that over 4,000
applications exist for HTS materials, processes and applications. The Company
does not have a license or patents covering all products that it makes and
markets in the HTS field. The issue of ownership of basic patents for HTS
materials and processes is not yet determined, and is in contention. The Company
anticipates that it will be several years before these patent ownership issues
are settled.
The Company may not be able to obtain licenses for manufacturing from
the patent holders. Furthermore, the Company may have a liability, which cannot
be determined at this time, for products produced prior to the issuance of the
patents. The Company may not have the resources to defend itself in the event of
a patent lawsuit (although the Company knows of no such lawsuits pending at this
time).
The Company's patent attorneys are Hudak and Shunk of Akron, Ohio. Ms.
Laura Shunk, a partner in that firm, is the daughter of Dr. Edward R. Funk,
President of the Company.
PATENT APPLICATIONS. The Company has applied to the United States
Patent and Trademark Office for a patent number covering Large Weld-Connected
Superconducting Monoliths and Process for Making Same. The application date is
July 1, 1998. The patent is assigned to the Company. Notice of allowance for
this patent application has been received and the Company expects a patent to
issue in the near future.
TRADEMARKS. The Company owns a trademark on the word "Levitator-TM-",
which is used to describe the SCI Division's line of large domain YBCO seeded
and melt-textured monoliths.
NON-EXCLUSIVE LICENSES. The Company has the following non-exclusive
licenses:
- Sandia National Laboratories - Sandia Chemical Prep Process
for line YBCO superconductive powders, license #95-000131,
based on U.S. patent #4,839,339, dated June 13, 1989.
- Argonne National Laboratory Low Pressure Calcination process
for low Carbon HTS material. License # ANL-IN-89-030, based on
U.S. patent # 5,086,034.
- Argonne National Laboratory Levitator Package. Licenses #
ANL-IN-93-008, ANL-IN-93-130, ANL-IN-93-134 based on U.S.
patents # 5,504,060 (Method of Harvesting Rare Earth Barium
Copper Oxide Single Crystals), #5,549,748 (Method of
Harvesting Single Crystals from a Peritectic Melt), and #
5776,864 (Large Domain 123 Material Produced by Seeding with
Single Crystal Rare Earth Barium Copper Oxide Single
Crystals).
The Company's license agreements with Argonne and Sandia National
Laboratories form the core of its technology base in HTS powder and device
fabrication. The Company acquired these licenses for less cost than it could
have developed similar technology internally, and was able, based on the speed
at which the Company was able to commercialize the resulting HTS products, to
create a revenue stream within a few months of license acquisition dates.
Subsequently, the Company has built on these licenses to create its own
intellectual property in the form of patents, patent applications, and
industrial knowledge.
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LICENSED POWDER PROCESSING TECHNOLOGIES. The processes used by the
Company to manufacture High Temperature Ceramic (superconductive) Powder were
invented at various national research laboratories operated by the Department
of Energy. The Company has licensed these processes from the Department of
Energy, which gives the Company the legal right to practice the technology in
exchange for a small royalty on sales. The powders are then used to make
pressed shapes which can become sputtering targets or Levitators-TM- or they
can be sold without further processing to customers who will combine them
with other materials to make superconductive wire and cable.
TRADE SECRETS. The Company uses the following trade secrets in the
manufacture of its SCI Division products:
- Powder fabrication in non-SC powders;
- Powder densification in YBCO and Non-SC material;
- Fabrication of BI-layer structure of YBCO for use in Gravity
Modification; and
- Fabrication of nano-materials.
THE TMI DIVISION
The TMI Division manufactures and markets source materials, both
ceramics and metals for the thin film vacuum deposition industry (PVD - Physical
Vacuum Deposition Industry). The TMI Division has served over 900 customers
worldwide, with approximately 30.0% of all business being foreign sales during
1999. The TMI Division has shipped to 40 foreign countries over the past five
years.
While serving as critical raw materials for the fabrication of a
variety of highly engineered thin film products -- from integrated circuits to
window coatings -- sputtering targets are themselves high-value-added advanced
materials.
THE SPUTTERING TARGETS INDUSTRY
A number of technological changes are occurring within the sputtering
industry. For example, higher purity sputtering targets and new target materials
are emerging to improve the performance of thin film products for certain
applications. Also, sputtering target fabrication methods, and cathode designs,
are being refined and optimized to improve target material utilization and
process efficiency.
The CERAMIC BULLETIN, October 1999, summarizes sputtering target
consumption as follows:
<TABLE>
<CAPTION>
SPUTTERED FILMS AND SPUTTERING TARGETS
--------------------------------------------------------------------------------------
AAGR*
WORLD MARKET 1999 2004 (%)
EST'D EST'D EST'D
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total film area (million m2) 363 764 16.0
Target consumption (million kg) 2.9 3.9 6.0
Target consumption (million lb) 6.4 8.5 6.0
Approx. target units consumed (000) 374 510 6.4
Value of material consumed (MM$) 720 1100 8.8
</TABLE>
Source: Business Communications Co. Inc., Norwalk, Connecticut
* Average Annual Growth Rate
An estimated 2.9 million kilograms (6.4 million pounds) of sputtering
target material will be consumed in 1999 to sputter-deposit 363 million square
meters of thin films for microelectronics, data storage, advanced display and
optical coating applications. This projection shows that, worldwide, the
production of sputtered films will increase at an average annual growth rate
("AAGR") of 16.0% from 1999 to 2004, reaching 764 million square meters of
sputter-deposited films in 2004.
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Application of sputtering targets include the following industries:
Optical Filters, Flat Panel Displays; Photovoltaic Cells; Electronic Switches;
Thin Film Resistors; Decorative Coatings; Thin Film Batteries; and Tool Coating
for Wear Resistance, non-glare glass and mirrors and semi-conductors.
TMI DIVISION PRODUCTS
SPUTTERING TARGETS. The Company has chosen to focus on production
applications in industries other than the semi-conductor industry. Thus, the
focus of the Company is on the use of sputtering targets in industrial
applications. Sputtering targets are offered in an extensive line of materials,
including most ceramic materials and various metals and alloys. Customers in the
solar panel, tool coating, decorative coating, electronic, optical and research
industries use these targets. Non-superconducting targets represented
approximately 66.4% of Company revenues during 1999, 66.6% in 1998 and 77.0% in
1997.
BONDING AND BACKING PLATES. Bonding is the process of adhering a
sputtering target to a backing plate to prepare the target for use in the
physical vapor deposition process. The Company offers bonding on its own, or
customer supplied, backing plates with metallic solder or silver epoxy. High
purity copper backing plates can also be used in thicknesses ranging from .125"
to 1" on sizes from 1" to 12" and rectangles to 72" long. Bonding services
generated approximately 5.5% of Company revenues in 1999. In earlier years, TMI
had the bonding done though an outside source.
PROCESS KNOWLEDGE
Since its inception, the TMI Division has invested heavily in practical
in-house research and development. Each item of the nearly 200 items now offered
in the TMI Division's catalogue has required some degree of development,
including finding vendors, developing the manufacturing processes and methods of
control and standardization. The process knowledge is captured in written
specifications, process set cards, logs, operating procedures and other means.
COMPETITION
The market for sputtering targets is very competitive. The Company has
numerous competitors, most of which are larger and have greater financial
resources than the Company. Domestically, the Company views Puretech, Inc., a
division of Williams Advanced Materials, itself a division of Wellman
Corporation, and Cerac Corporation as their primary competitors over the entire
line of manufactured products, although as many as 30 competitors exist and
compete for different portions of the sputtering target market. Further, some
primary metal suppliers also produce sputtering targets.
Additionally, there are a number of foreign competitors producing
sputtering targets and thin-film deposition materials throughout the world.
Management believes that Tosoh Corp. has the largest worldwide market share,
followed by MRC Corporation (a division of Praxair Corp.), VMC Corporation,
Johnson Mathey Corporation, Nippon Mining Corporation, Puretech Inc., and Cerac
Inc. All enjoy vastly superior resources than those possessed by the Company.
However, few of these competitors focus their marketing efforts on the research
segment of the market, due to the low volumes that characterize this market
niche. Management estimates that the TMI Division has achieved a 15.0-20.0%
market share of the research and development market segment.
The Company believes that the principal competitive factors in this
market are price, service, quality, reliability, reproductability, availability
of technical information, and timely deliveries.
The Company strives to differentiate itself from its competitors by
providing a full line of manufacturing capabilities, maintaining an excellent
quality rating by achieving quick turnaround on manufactured orders, and by
providing personalized customer service.
Although TMI's objective is to achieve an 80.0% to 20% ratio of
shipments for production to research and development, at this time, the ratio is
approximately 60.0% production to 40.0% research and development. Obtaining
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production business requires submitting samples, meeting the customer
specifications, and developing the confidence of the customer for reliability
and reproductability. Management believes that the needs of its customers
generally progress from research and development quantities to pilot production
to full scale production. The length of time this cycle requires varies widely.
The TMI Division now has the capacity to supply production quantities to
customers who have moved out of the development phase to the production of any
new product. Management believes that it will be able to capture a proportion of
larger production type orders in the future.
MARKETING AND SALES
The Company markets and sells its products worldwide, concentrating on
the Research & Development and Industrial Production markets. Domestic sales
account for approximately 70.0% of the Company's sales, compared to 30.0% export
sales.
In the United States, the Company markets and sells through its
internal sales staff, and through independent manufacturer's representative
groups located strategically around the country. Either party may terminate the
Company's contracts with its representatives within 60 days. Commission rates
vary according to materials and other factors. A typical commission rate is 8.0%
of gross sales dollars.
In Asia, the Company markets and sells through several non-exclusive
distributors. Sales in this region consist primarily of research & development
accounts. TMI currently is seeking representation in the European market.
PRODUCTION CAPACITY
In the TMI Division, the production equipment now on hand will
accommodate a throughput of $4.0 million or greater per year, depending on
product mix. For the TMI Division, the Company intends to acquire a larger
rolling mill and a machining center by 2001. With those measures taken, the
production capability of the TMI Division is expected to be approximately $6.0
million per year revenue.
MAJOR SUPPLIERS AND CUSTOMERS
The TMI Division buys raw materials, components and chemicals used in
the manufacture and assembly of the Company's products. If these materials are
not received in a timely manner, it may seriously affect the Company's
production schedule. The Company, however, has designed its products using
widely-available standard items and components, and has identified alternative
vendors it may use in order to avoid production delays. The Company is not
experiencing difficulty in maintaining its inventory of such components,
although purchase commitments are, at times, limited by cash flow.
The TMI Division purchases various types of ceramic powder as well as
metal for the production of ceramic or metal sputtering targets. These materials
are purchased to Company specifications. In such cases, the price per unit of
weight of the material depends strongly on the amount purchased. In some cases,
the materials are very costly. The quantities purchased and price per unit
weight paid by the Company varies widely, based upon cash flow considerations
and inventory levels.
The Company has established supplier relations with a number of
companies, some of which are importers of metals from other countries, including
China and Russia. Delivery schedules are often unpredictable for these supplies,
requiring the Company to maintain considerable inventory levels to avoid
shortages.
The Company does not manufacture gold or platinum (precious metals)
sputtering targets, but buys the finished item in these and other precious
metals from one of several suppliers and resells them at a markup. In 1999,
approximately 7.9% of the Company's sales were precious metals. The Company
maintains a letter of credit with one precious metal supplier to cover the
purchases. The Company sells precious metals on a net-10 day basis, while all
other sales are net-30 days.
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The Company also purchases finished targets, sometimes from
competitors, or from other sources, for its own sale at a markup. This
"buy/re-sell" business was approximately 15.0% of the TMI Division's sales
volume in 1998 and 11.2% in 1999. The Company has appropriate purchase
specifications, and performs its own receiving inspection and quality control on
these products prior to shipment to its customers.
The top 5 suppliers to the TMI Division in 1999 were, in descending
order: Williams Advanced Materials, Inc., Standard Resources, Inc., ACI Alloys
Inc., Noah, Inc. and Alta, Inc. In every case, the Company believes that
suitable substitute vendors could be found. The Company buys primarily based on
quality, price and delivery to its specifications factors.
No customers in the TMI Division accounted for 10.0% or more of the
total TMI revenue in 1999.
RESEARCH AND DEVELOPMENT
The TMI Division has no government support, preferring to invest in and
control its research and development program in a commercial market-oriented
customer-driven manner.
QUALITY CONTROL
The Company strives for world class quality in its products. The
Company has experienced quality control problems in the past. Consequently, the
Company in recent years has invested funds in the development and implementation
of a quality assurance program to insure that each process in the manufacturing,
materials purchasing and order-entry functions are more tightly controlled.
The Company has also invested in quality control equipment. The Company
is currently able to perform in-house testing of its ceramic products and metals
and alloys via Scanning Electron Microscopy, Edax, Differential Thermal
Analysis, Electrical Resistivity, and Particle Size Analysis, Inductively
Coupled Plasma, Spectagraph Equipment and X-ray Diffraction.
The quality control efforts have included preparation for certification
for ISO 9000, the international standard of quality performance, as well as
investment in training of personnel, preparation of specifications, purchasing
and installation of equipment, purchasing of software, on-going calibration and
maintenance of advanced measuring and composition analysis equipment. These
efforts have produced a significant improvement in the product produced by the
Company, as shown by customer returns, which were under 1.7% over-all in 1999,
2.0% in 1998 and 2.3% in 1997.
EMPLOYEES
The Company currently has 21 full-time and 2 part-time employees. Three
of the Company's employees have a Ph.D. in Chemistry or Materials Science. Ten
employees work primarily for the TMI Division of the Company, while the
remainder work primarily for the SCI Division. In the case of shared employees,
the charges are assigned in accordance with the ratio of shipped dollars.
The Company has never experienced work stoppage and considers its
relations with employees to be good. The employees do not have a bargaining
unit.
ENVIRONMENTAL MATTERS
The Company generates small quantities of ceramic dust from grinding or
machining and has approval from the Ohio EPA to cover the exhaustion of these
materials, which are primarily Zinc Oxide. The Company maintains filters and
dust collectors that it believes are in accordance with all EPA regulations. The
Company has been inspected from time to time by local EPA authorities and the
few noted deficiencies have been corrected. As of August 1, 2000, the Company
was not under any EPA strictures.
The Company does not handle "hazardous materials" as defined on the
Materials Safety and Data Sheets
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("MSDS"). The Company supplies MSDS sheets to its customers with all shipments
as a routine procedure. The TMI Division also does not offer products made from
"hazardous materials" (as defined by the MSDS, Materials Safety Data Sheets, for
the materials).
COLLECTIONS AND WRITE-OFFS
The Company collected its receivables in an average of 55 days in 1999.
The Company has occasionally been forced to write-off a few small invoices as
uncollectible. The Company considers credit management critical to its success.
SEASONAL TRENDS
The Company has not experienced and does not in the future expect to
experience seasonal trends in its business operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
To date, the Company has received revenue predominantly from commercial
sales and also government research contracts and non-government research
contracts. The Company has incurred cumulative losses of $5,526,168 from
inception to December 31, 1999.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Revenue for the six months ended June 30, 2000 was $1,499,715, an
increase of $305,061 or 25.5% from the year earlier period when sales totaled
$1,194,654. The increase is primarily attributable to additional research
contracts in 2000 versus 1999.
The gross margin on sales of products was $212,689 or 18.5% for the six
months ended June 30, 2000 compared to $235,000 or 22.1% for the earlier period.
Gross margins on the Company's various products vary widely and the gross margin
are impacted from period to period by sales mix and utilization of production
capacity. The gross margin on the contract research is generally lower than on
other products. The Company expects that gross margins will improve as sales
grow.
General and administrative expenses were $231,839 or 15.5% of total
revenue for the six months ended June 30, 2000 and $134,345 or 11.2% of total
revenue for the earlier period. The increase in these costs relates to the
expansion of the Company's infrastructure, including the addition of
executive management.
Sales expense of $136,061 or 9.1% in the six months ended June 30,2000
was up from the $118,612 or 9.9% for the six months ended June 30,1999. The
increase includes expenditures for the development of foreign market
opportunities.
The increase of interest expense from $20,616 or 1.7% in 1999 to
$33,633 or 2.2% for the six months ended June 30,2000 relates to interest on
both the subordinated notes payable and on the bank borrowings. The related
party waived interest on the subordinated notes in 1999.
The Company's net loss for the six months ended June 30, 2000 totaled
$(94,147), or $(.07) per share, compare to a loss of $(13,192), or $(.01) per
share for the previous year. The 2000 period was significantly impacted by an
increase in reserves for obsolete inventory.
FISCAL YEAR 1999 AS COMPARED TO FISCAL YEAR 1998
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REVENUES.
Revenues in fiscal 1999 increased by 7.2% to $2,678,362 from the fiscal
1998 level of $2,498,162. Contract research revenue in fiscal 1999 was $425,153
compared to $470,552 in fiscal 1998, a decrease of 9.6%.
Commercial sales of the Company's HTS products increased to $219,769 in
fiscal 1999 from $169,683 in fiscal 1998, an increase of 29.5%. These products
include HTS powder, Levitators and accessories for research and development
purposes, prototypes and components. The additional increase of $175,513 is
primarily related to both increased business from existing customers and the
continuing addition of new customers.
In 1999, total contract research revenues were $425,153 as compared to
$470,552 in 1998. Government development contract revenue was $392,617, or 14.7%
of total revenues in 1999 and $167,252 or 6.7% of total revenues in 1998. NASA
has been, and is expected in the near term to continue to be, the Company's
largest customer, accounting for 8.9% of the Company's revenues in fiscal 1999.
The Department of Defense's budget for HTS research and development is
expected to decline. Significant loss of government funding would have a
material adverse effect on the Company's financial condition and results of
operations.
GROSS MARGIN
Total gross margin in 1999 was $477,179 or 17.8% of total revenue as
compared to $438,223 or 17.5% in 1998. Total gross margin between years remains
essentially stable.
Gross margin on sales revenue for product sales was 18.6% for 1999
compared to 15.1% in 1998. The increase in gross margin on product sales of 3.5%
is due primarily to increased sales as the gross margin on product sales is
impacted by utilization of production capacity.
Gross margin on contract research revenue was 13.9% for 1999 compared
to 28.2%. The decrease in gross margin on contract research revenue of 14.3% is
due primarily to a $300,000 non-government contract obtained in 1998 which
resulted in higher margins.
SELLING EXPENSE
Selling expense in fiscal 1999 decreased to $265,631 from $301,618 in
fiscal 1998, a decrease of $35,987, or 11.9%. This decrease is primarily a
result of a reduction in the sales staff of the SCI Division at the end of
fiscal 1998.
GENERAL AND ADMINISTRATIVE EXPENSE
General and Administrative expense in fiscal 1999 decreased to
$332,709, from $359,751 in fiscal 1998, a decrease of $27,042, or 7.5%,
primarily due to decreased legal expenses.
RESEARCH AND DEVELOPMENT EXPENSES.
Internal research and development costs are expensed as incurred.
Research and development costs, including testing, for 1999 was $15,392 compared
to $41,421 in 1998. Internal research and development costs decrease when
government funded projects are available.
INTEREST EXPENSE.
Interest expense was $44,473, or 1.7% of Company revenues in fiscal
1999, up 54.2% from $28,847, or 1.5% in fiscal 1998.
I-17
<PAGE>
The increase in interest expense is attributable to the increase
capital lease obligations during 1998 and 1999. Subordinated notes payable to
shareholders' increased by $205,125 during 1999; however, interest was waived
during 1998 and 1999 by the shareholders.
LIQUIDITY AND WORKING CAPITAL
The working capital of the Company at June 30,2000 was $173,401
compared to $119,646 at June 30,1999, an increase of $53,755, or 44.9%. The
increase is working capital is due to payment of the note payable to bank by
increasing long-term subordinated notes payable to the shareholders. The Company
provided cash from operations for the six months ended June 30, 2000 and 1999 of
$32,009 and $10,875, respectively. Significant non-cash expenses including
depreciation and an inventory reserve on excess and obsolete inventory
approximate $214,000 and $145,000, respectively, for the six months ended June
30, 2000 and 1999. Overall, accounts receivable, inventory and prepaids
increased in excess of increases in accounts payable and accrued expenses by
approximately $88,000 and $121,000, respectively, as a result of timing of
receipt of inventory versus required scheduled payments on this inventory.
For the year ended December 31, 1999, working capital was $57,991
compared to $13,055 at December 31, 1998. The increase in working capital of
$44,936 is due mainly to accounts payable paid by a shareholder which increased
long-term subordinated notes payable. The Company provided cash from operations
for the years ended December 31, 1999 and 1998 of $107,633 and $42,520,
respectively. Significant non-cash expenses including depreciation and inventory
reserve on excess and obsolete inventory approximate $281,000 and $292,000,
respectively, for the years ended December 31, 1999 and 1998. Overall, accounts
receivable, inventory and prepaids increased in excess of increases in accounts
payable and accrued expenses by approximately $29,000 and $9,000, respectively,
or insignificant amounts.
For investing activities, the Company used cash of approximately
$66,000, $207,000, $38,000 and $21,000 for the years ended December 31, 1999 and
1998 and six months ended June 30, 2000 and 1999, respectively. The amount
invested in 1998 was used to purchase machinery and equipment for increased
production capacity.
For financing activities for the year ended December 31, 1999, the
Company used cash of approximately $46,000. Due to tight cash flow, cash was
overdrawn by approximately $31,000. Cash payments to third parties for debt and
capital lease obligations approximated $73,000. Proceeds from subordinated note
payable were used to pay accrued cumulative dividends on Series A and B
preferred stock.
For financing activities for the year ended December 31, 1998, the
Company provided cash of approximately $163,000. Proceeds from the sale of
common stock and common stock options totaled $61,500 which was used to fund
operations. Proceeds from subordinated notes payable by a shareholder totaled
$155,000 and was used to reduce accounts payable and fund operations.
For financing activities for the year ended June 30, 2000, the Company
provided cash of approximately $6,000. Due to continued tight cash flow, an
additional $31,000 was overdrawn. Principle repayments on a bank note payable
approximating $95,000 was paid with funds obtained from subordinated notes
payable by a shareholder. Additional payments on capital lease obligations
approximated $43,000. Proceeds from exercise of common stock options totaled
$94,800. Proceeds were used to fund operations.
If the Company has to repay some of the short term maturing debt, it
will lose a substantial portion of its financial resources to pursue its current
plans. Whereas there is every reason to believe that the Company can refinance
its maturing debt, there is no guarantee that it will be able to do so.
The Company will continue to manage within its financial resources and
attempt to balance its working capital needs with cash flow generated from
operations and available current financing. The Company will continue to seek
new financing if such circumstances present more attractive alternatives to the
current financing arrangements. The Company cannot be certain that it will be
successful in efforts to raise new funds.
I-18
<PAGE>
INFLATION
The Company believes that there has not been a significant impact from
inflation on the Company's operations during the past three fiscal years.
FUTURE OPERATING RESULTS
The Company anticipates that operations in the coming year of 2000 will
result in improving cash position. An expansion to the Company's production
facility is essentially complete, and the inventory expenditures can be
controlled by improved purchasing practices, and also by negotiated terms of
payment.
Dr. and Mrs. Funk have purchased the 99 Series A Preferred Shares
outstanding from the former owners. The cash dividend requirement on the Series
B Preferred Shares of about $27,000 due in November 2000 has been reduced by
conversion into common stock of many of those shares. Only 27,542 Series B
Preferred shares are outstanding as of August 1, 2000.
Management believes that the Company will continue in a very cash tight
condition during the year 2000 and beyond. If internal sales and expense
projections are achieved, capital expenditures are limited to $50,000, and
inventory growth is limited to $50,000, the Company will be able to fund payoff
of principal and interest of its Series A & B Preferred Shares maturing in 2000.
The Company believes the measures to control these two components of the balance
sheet are in place through increased management attention. Internal sources of
liquidity are primarily liquidation of inventory and operating cash flow.
The Company is posting excess inventory on its web site in an effort to
sell slow moving items. Better inventory control will decrease obsolesce in the
future. None of the Company's inventories degenerates with storage. However, the
trends of the customer buying may increase or decrease the need, and therefore
the market value, for certain materials in inventory. Changes in customer buying
patterns may affect the movement of inventory.
The Company must maintain sufficient inventory to be able to ship a
wide variety of products on short notice. This has been one of the principal
competitive advantages of the Company. Additionally, on expensive metals such as
tantalum, the price per pound is dependent on the purchasing commitment: the
larger volume commitment, the lower the price. Thus the Company attempts to
purchase large quantities for projected requirements, but in many cases must
work out extended terms of payment.
The Company anticipates that it will require additional professional,
technical and manufacturing labor in the future. This personnel addition may
range from replacement of any existing employees who leave the Company, to the
addition of as many as ten employees per year for the years 2000 and 2001.
The Company plans to make purchase commitments on an annualized basis
for raw materials which can be purchased in larger quantities at reduced prices.
In general, the Company attempts to limit inventory increase by making an annual
commitment, but drawing material either as required, or on a monthly or
quarterly basis. Such annual commitments may reach $500,000 in 2000 and greater
in 2001. The terms of payment for such commitments are worked out with the
vendor on a case-by-case basis.
Bank One has expressed a willingness to extend an open line of credit
to the Company provided that Dr. and Mrs. Funk guarantee the line of credit and
pledge three times this value as collateral. The Company currently has a line of
credit of $100,000 with Bank One, $75,000 of which has been drawn down to date.
The availability of additional cash from Dr. and Mrs. Funk could be
influenced by the death of either Dr. or Mrs. Funk. The future of the business
could also be severely depressed by the incapacitation of either Dr. or Mrs.
Funk. Successor management is being sought at this time.
DEVELOPMENT STAGE OF THE COMPANY'S PRODUCTS AND UNCERTAINTY REGARDING
DEVELOPMENT OF MARKETS
I-19
<PAGE>
Some of the Company's products are in the early stages of
commercialization and the Company believes that it will be several years before
products will have significant commercial end-use applications, and that
significant additional development work may be necessary to improve the
commercial feasibility and acceptance of its products. There can be no assurance
that the Company will be able to commercialize any of the products currently
under development.
To date, there has been no widespread commercial use of HTS products.
YEAR 2000 ISSUE
The Company has studied the "Year 2000" issues affecting its operations
and has implemented all required modifications to its systems. The underlying
issues are not expected to have a materially adverse affect on the Company's
operations or financial position. The cost of addressing the "Year 2000" issues
have not been material to the Company.
ITEM 3. DESCRIPTION OF PROPERTY
The Company's office and manufacturing facilities are located at 1145
Chesapeake Avenue, Columbus, Ohio, where it occupies about 20,000 square feet.
Additional space of 10,000 square feet is currently sub-leased by the Company
and can be reclaimed on three months notice. The Company has a lease on the
property at $3.15 per square foot until March 1, 2001, with an option to renew.
Management anticipates that relocation of the SCI Division to new quarters may
be required in the next few years, as the maturing of its production processes
and the need for a "clean room" image for it customers dictates relocation.
However, specific plans to relocate the SCI Division have not been developed.
There is adequate power running to several locations in the building
and other utilities are adequate for the projected growth.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
COMMON STOCK
The following tables set forth certain information as of August 1,
2000, with respect to the beneficial ownership of the Company's common stock by
the following individuals and groups:
- each of the Company's directors;
- each of the Company's executive officers;
- each person known by the Company to beneficially own five
percent (5%) or more of our outstanding common stock; and
- all of the Company's directors and executive officers as a
group.
Unless otherwise indicated, we believe that each person listed below has sole
voting and investment power over his or her shares.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES
OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) PERCENTAGE OF CLASS (2)
------------------- ------------------ --------------------
<S> <C> <C>
Edward R. Funk
1145 Chesapeake Avenue 842,327(3) 46.1%
Columbus, OH 43212
Ingeborg V. Funk
1145 Chesapeake Avenue 842,327(3) 46.1%
Columbus, OH 43212
I-20
<PAGE>
Curtis A. Loveland
41 South High Street 153,198(4) 11.0%
Columbus, OH 43215
Edward W. Ungar
929 Harrison Avenue 6,760(5) *
Columbus, OH 43215
Robert J. Baker
1145 Chesapeake Avenue 4,350(6) *
Columbus, OH 43212
Lloyd E. Hackman
15508 Fiddlesticks Blvd., S.E. 79,507(7) 5.7%
Ft. Myers, FL 33912
Charles E. Washbush
1233 Langeston Dr. 3,750 *
Columbus, OH 43220
Don Raifsnider
1145 Chesapeake Avenue 8,000(8) *
Columbus, OH 43212
J.R. Gaines
1145 Chesapeake Avenue 32,722(9) 2.3%
Columbus, OH 43212
Robert H. Peitz
43 Little St. 1,000(10) *
Matawan, NJ 07747
Dr. Suvankar Sengupta
5692 Hillcrest Dr. 25,000(11) 1.8%
Hilliard, OH 43026
All executive officers and
directors as a group (11 persons)(12) 1,156,614 61.6%
</TABLE>
------------------
* Less than 1%
(1) For purposes of the above table, a person is considered to
"beneficially own" any common shares with respect to which he or she
exercises sole or shared voting or investment power, or of which he or
she has the right to acquire the beneficial ownership within 60 days of
August 1, 2000. Unless otherwise indicated, voting power and investment
power are exercised solely by the person named above, or shared with
members of his or her household.
(2) "Percentage of Class" is calculated on the basis of the number of
outstanding shares, plus the number of common shares a person has the
right to acquire within 60 days of August 1, 2000. As of August 1,
2000, the Company had 1,397,576 shares of common stock outstanding.
I-21
<PAGE>
(3) Edward R. Funk and Ingeborg V. Funk are husband and wife. Under the
rules of the Securities and Exchange Commission, they are deemed to
beneficially own the shares of the other. Consequently the number
reported above for each includes 99,702 and 185,145 common shares held
of record by Dr. Funk and Mrs. Funk, respectively, 31,926 held of
record by Dr. and Mrs. Funk as tenants in common; options, warrants and
convertible notes for 427,950 common shares, which can be acquired by
Dr. Funk and Mrs. Funk, respectively, under stock options and warrants
and convertible rates exercisable within 60 days of August 1, 2000.
This number also includes 96,904 common shares which are owned by Funk
Metallurgical Corporation, a corporation wholly owned by Dr. and Mrs.
Funk (FMC).
(4) Includes 2000, 200 shares held by Mr. Loveland in a Keough account, and
152,998 common shares held of record by Mr. Loveland for various
irrevocable trusts for the benefit of Dr. and Mrs. Funk's children and
grandchildren.
(5) Includes 4,260 common shares, owned by Taratec Corp., a company
controlled by Mr. Unger, and 2,500 common shares, which can be acquired
by Mr. Ungar under stock options exercisable within 60 days of August
1, 2000.
(6) Includes 1,000 shares which can be acquired by Mr. Baker under stock
options exercisable within 60 days of August 1, 2000.
(7) Includes 3,250 shares which can be acquired by Mr. Hackman under stock
options exercisable within 60 days of August 1, 2000, and 76,257 shares
owned by Mr. Hackman and his family.
(8) Includes 8,000 common shares which can be acquired by Mr. Raifsnider
under stock options exercisable within 60 days of August 1, 2000.
(9) Includes 20,500 common shares which can be acquired by Mr. Gaines under
stock options exercisable within 60 days of August 1, 2000.
(10) Includes 1,000 common shares which can be acquired by Mr. Peitz under
stock options exercisable within 60 days of August 1, 2000.
(11) Includes 15,000 common shares which can be acquired by Dr. Sengupta
under stock options exercisable within 60 days of August 1, 2000.
(12) Includes 479,200 vested options, warrants, subordinated debt, and
Series A preferred stock which are exercisable within 60 days of August
1, 2000, for all directors and executive officers listed.
SERIES A 10% PREFERRED SHARES
The following tables set forth certain information as of August 1, 2000
with respect to the beneficial ownership of the Company's Series A 10% Preferred
Shares by the following individuals and groups:
- each of the Company's directors;
- each of the Company's executive officers;
- each person known by the Company to beneficially own five
percent (5%) or more of our outstanding common stock; and
- all of the Company's directors and executive officers as a
group.
Unless otherwise indicated, we believe that each person listed below
has sole voting and investment power over his or her shares.
I-22
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES
OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) PERCENTAGE OF CLASS (2)
------------------- ------------------ --------------------
<S> <C> <C>
Edward R. Funk
1145 Chesapeake Avenue 99 100%
Columbus, OH 43212
</TABLE>
---------
(1) For purposes of the above table, a person is considered to
"beneficially own" any Series A 10% Preferred Shares with respect to
which he or she exercises sole or shared voting or investment power.
Unless otherwise indicated, voting power and investment power are
exercised solely by the person named above, or shared with members of
his or her household.
(2) "Percentage of Class" is calculated on the basis of the number of
outstanding Series A 10% Preferred Shares as of June 30, 2000, which
was 99 shares.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Company has a Board of Directors that is currently comprised of
eight members. Each director holds office until the next annual meeting of
shareholders or until a successor is elected or appointed. The members of the
Board of Directors and the executive officers of the Company and their
respective age and position are as follows:
<TABLE>
<CAPTION>
Officer or
Name Age Position with the Company Director Since
----------------------------------------- ------ ------------------------------------
<S> <C> <C> <C>
Edward R. Funk 75 President, Chief Executive 1987
Officer, Treasurer and Director
Ingeborg V. Funk 76 Vice President 1987
Donald D. Raifsnider 52 Vice President and General Manager 1997
of the TMI Division
Suvankar Sengupta 36 Chief Scientist 1994
Curtis A. Loveland 53 Secretary and Director 1987
Edward W. Ungar 63 Director 1990
Robert J. Baker, Jr. 60 Director 1992
Lloyd E. Hackman 70 Director 1993
Charles E. Washbush 69 Director 1994
I-23
<PAGE>
James R. Gaines, Jr. 44 Director 1997
Robert H. Peitz 42 Director 1997
</TABLE>
EDWARD R. FUNK, SC.D., is a founder of the Company and has served as
President, Chief Executive Officer, Treasurer, and a Director of the Company
since its inception in 1987. Dr. Funk was the founder and was Chairman of the
Board of Interpore/Cross International (f.k.a. Cross Medical Products, Inc.)
("Interpore"), a Columbus, Ohio publicly held company which manufactures
electromechanical orthopedic devices and related medical products. Dr. Funk
resigned as Chairman in May, 1998. In 1970, Dr. Funk also founded Funk
Metallurgical Corporation, a Columbus, Ohio corporation, and served as that
company's President from its inception until June 1986 and as Chairman of the
Board from its inception until the business was sold in September 1988. Dr. Funk
also was a founder of Astro Metallurgical Corp. of Wooster, Ohio. Dr. Funk is
the husband of Ingeborg V. Funk, a Vice President of the Company.
INGEBORG V. FUNK is a founder of the Company and has served as Vice
President of the Company since its inception in 1987. Mrs. Funk was also a
Director of the Company from its inception until December 1, 1993. In addition,
Mrs. Funk co-founded Interpore. Mrs. Funk also co-founded Funk Metallurgical
Corporation, and served as that company's Vice President from its inception
until June 1986, and thereafter as its President until the business was sold in
September 1988.
DONALD D. RAIFSNIDER, has been with the Company since 1997, and serves
as Vice President and General Manager of the TMI Division of the Company. Prior
to joining the Company, Mr. Raifsnider's career encompassed Production and
Material Management with Anchor Swan Corporation, along with Sales and Marketing
management at Mirro Corporation and his own manufacturers representative
organization.
SUVANKAR SENGUPTA, PH.D.,has served as Chief Scientist of the Company
since April, 1994. Prior to joining the Company, Dr. Sengupta was a Guest
Graduate Student at the Argonne National Laboratory (1991-1994) and served as a
Research Assistant at the Center of Materials Science and Engineering at the
University of Notre Dame (1991-1994). Dr. Sengupta is the holder of three
patents in the field of high temperature superconductor technology.
CURTIS A. LOVELAND serves as Secretary and as a Director of the Company
since 1987. Mr. Loveland has been a practicing attorney for 27 years and has
been a partner in the law firm of Porter, Wright, Morris and Arthur LLP since
1979. Mr. Loveland's practice is concentrated in the areas of corporate law and
finance. Mr. Loveland also serves on the Board of Directors of several other
central Ohio companies, including Applied Innovation Inc. and Rocky Shoes &
Boots, Inc. The law firm of Porter, Wright, Morris & Arthur LLP serves as legal
counsel for the Company.
EDWARD W. UNGAR has been a Director of the Company since 1990. Mr.
Ungar is the President and founder of Taratec Corporation, a technological
consulting firm in Columbus, Ohio. Prior to forming Taratec Corporation in 1986,
Mr. Ungar was an executive with Battelle Memorial Institute.
ROBERT J. BAKER, JR., PH.D. has served as a Director of the Company
since 1992. Dr. Baker is the founder of Venture Resources International and the
co-founder of Business Owners Consulting Group, which assist companies in the
development of growth strategies, including marketing position and competitive
strategies. Dr. Baker is currently a visiting member of the Capital University
faculty serving the MBA program.
LLOYD E. HACKMAN has been a Director of the Company since 1993. Mr.
Hackman is the former President and Chairman of Ribbon Technology, Inc., a
company he founded. Ribbon Technology, Inc. produces wire products directly from
molten metal for use in concrete reinforcement.
CHARLES E. WASHBUSH has been a director of the Company since 1994 and
is a founding partner, owner, and board member of Corporate Finance Associates
Worldwide ("CFAW"), the successor company to Corporate Finance Associates, and
President of Corporate Finance Associates of Columbus, Inc. CFAW is an
investment banking firm, founded in 1956, with 40 offices in the United States
and Canada and 10 affiliate offices in Europe.
I-24
<PAGE>
JAMES R. GAINES, JR. has served in various capacities with the Company
since 1987 and now serves as Vice President and General Manager of the SCI
Division of the Company. Mr. Gaines became a Director of the Company in June
1997. Prior to joining the Company, Mr. Gaines was in management at several
small companies in cryogenics and other related fields for over ten years.
ROBERT H. PEITZ became a Director of the Company in June 1997 and is
Managing Director and Head of Financial Markets for BHF-Capital Corporation in
New York. Mr. Peitz is on the Board of BHF Structured Finance and BHF Realty.
Previously, Mr. Peitz held positions as Chief Dealer and Vice President in
charge of Interest Rate Risk Management. Mr. Peitz has been with BHF since 1988.
Prior to joining BHF, Mr. Peitz was in the Management Training program at Morgan
Stanley in 1987 and 1988.
FAMILY RELATIONSHIPS
Dr. Funk, who is President, Chief Executive Officer, Treasurer and a
director of the Company, and Mrs. Funk, who is Vice President of the Company,
are husband and wife. Mr. Peitz, who is a director of the Company, is the
stepson of Dr. Funk. There are no other family relationships among the directors
and executive officers of the Company.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
None.
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding
compensation paid during our fiscal years ended December 31, 1997, 1998 and 1999
to our Chief Executive Officer and each of our three other highest compensated
executive officers (collectively, the "Named Executive Officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------- -----------------------------
AWARDS
--------------------------
RESTRICTED SECURITIES
STOCK UNDERLYING ALL OTHER
SALARY BONUS AWARD OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($)
---------------------------------- ------------- ------------- ----------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
EDWARD R. FUNK 1999 $5,538 $0 $0 10,000 $0
President and Chief Executive 1998 $ 0 $0 $0 0 $0
Officer 1997 $ 0 $0 $0 0 $0
JAMES R. GAINES 1999 $75,385 $0 $0 15,000 $0
Vice President and General 1998 $76,716 $0 $0 0 $0
Manager of the SCI Division 1997 $58,701 $0 $0 28,000 $0
DON RAIFSNIDER 1999 $56,000 $0 $0 15,000 $0
Vice President and General 1998 $54,738 $0 $0 0 $0
Manager of the TMI Division 1997 $0 $0 20,000 $0
SUVANKAR SENGUPTA 1999 $70,000 $0 $0 15,000 $0
Chief Scientist 1998 $74,985 $0 $0 0 $0
1997 $58,781 $0 $0 12,400 $0
</TABLE>
I-25
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning the grant
of stock options to the Named Executive Officers for the fiscal year ended
December 31, 1999. The Company did not grant any stock appreciation rights for
the fiscal year 1999.
<TABLE>
<CAPTION>
% OF TOTAL OPTIONS
NUMBER OF SECURITIES GRANTED TO
UNDERLYING OPTIONS EMPLOYEES IN EXERCISE PRICE
NAME GRANTED (#) FISCAL YEAR(2) ($/SHARE) EXPIRATION DATE
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Edward R. Funk 10,000 11.8% $2.00 1/13/05
James R. Gaines 15,000 17.6% $2.00 1/13/05
Don Raifsnider 15,000 17.6% $2.00 1/13/05
Suvankar Sengupta 15,000 17.6% $2.00 1/13/05
</TABLE>
----------------------
(1) This table covers the period from January 1, 1999 to December 31, 1999.
(2) Percentage is based upon 85,000 options granted to employees in fiscal
year 1999.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1999
AND FISCAL YEAR-END OPTION/SAR VALUES
The following table provides certain information regarding the number
and value of stock options held by our Named Executive Officers at December 31,
1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
YEAR-END (#) FISCAL YEAR-END ($)(2)
----------------------------- ------------------------------
SHARES
ACQUIRED
ON VALUE
EXERCISE REALIZED
NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------------------- ---------- ----------- ------------ -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Edward R. Funk 0 $0 3,000 10,000 $0 $1,250
James R. Gaines 0 $0 13,200 31,800 $0 $1,875
Don Raifsnider 0 $0 8,000 27,000 $0 $1,875
Suvankar Sengupta 0 $0 9,960 22,400 $0 $1,875
</TABLE>
I-26
<PAGE>
----------------------
(1) Value realized represents the difference between the exercise price of
the option shares and the market price of the option shares on the date
the option was exercised. The value realized was determined without
consideration for any taxes or brokerage expenses that may have been
owed.
(2) Represents the total gain which would be realized if all in-the-money
options held at year end were exercised, determined by multiplying the
number of shares underlying the options by the difference between the
per share option exercise price and the per share fair market value at
year end ($2.125 at December 31, 1999). An option is in-the-money if
the fair market value of the underlying shares exceeds the exercise
price of the option.
COMPENSATION OF DIRECTORS
The Company has no standard arrangement for the compensation of members
of its Board of Directors. During fiscal 1999, however, each director received
an non-statutory option to purchase 500 shares of the Company's common stock at
an exercise price of $2.00 per share for services performed as a director of the
Company. The options are exercisable one year from the grant date and expire on
the sixth anniversary of the grant date.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RIBBON TECHNOLOGY, INC.
On July 20, 1993, the Company entered into an agreement with Ribbon
Technology Corporation, an Ohio corporation ("Ribtec") to sell to Ribtec 50,000
common shares for $300,000 ($6.00 per share) and a convertible subordinated
debenture for $200,000 (the "Debenture"). Lloyd Hackman, a director of the
Company, is the President and majority shareholder of Ribtec. In June 1995, the
Company issued 119,003 unregistered common shares to Ribtec in exchange for the
cancellation of the Debenture. Ribtec obtained piggyback registration rights in
the event of the registration and sale of the Company's common shares under the
1933 Act on a form permitting registration of primary or secondary offerings,
for the common shares received pursuant to the Debenture.
FOURTH QUARTER 1999 ISSUANCE OF SUBORDINATED NOTES AND WARRANTS
Through December 31, 1999, Dr. Funk had advanced the Company $256,125
and Mrs. Funk had advanced the Company $161,000. Effective December 31, 1999,
the Company documented these loans through the issuance of Subordinated
Promissory Notes to Dr. and Mrs. Funk in the amounts of $256,125 and $161,000
respectively. These notes bear interest at an annual rate of 10% and interest is
payable monthly. The notes mature on December 31, 2009 and are convertible into
common stock at $2.50 per share. In addition, the Company issued Dr. and Mrs.
Funk each warrants for the purchase of 75,000 shares of common stock at a per
share exercise price of $2.50.
LEGAL SERVICES
Curtis A. Loveland is an officer, director and shareholder of the
Company. Mr. Loveland is also a partner with Porter, Wright, Morris & Arthur
LLP, the Company's legal counsel.
ITEM 8. DESCRIPTION OF SECURITIES
The Company's authorized capital stock is 15,260,000, consisting of
15,000,000 shares of common stock, without par value, 125,000 shares of Voting
Preferred Shares, without par value and 125,000 shares of Non-Voting Preferred
Shares, without par value (collectively, the "Preferred Shares"), of which 700
shares are designated Series A Preferred Shares and 100,000 shares are
designated as Series B Preferred Shares and 10,000 shares of 10% Cumulative
Convertible Preferred Shares, without par value (the "10% Preferred Shares").
I-27
<PAGE>
COMMON STOCK
Holders of the common shares have no redemption or conversion rights,
participate ratably in any distribution of assets to shareholders in liquidation
and have no preemptive or other subscription rights. Holders of common shares
are entitled to receive such dividends as may be declared by the board of
directors. Holders of common shares are entitled to one vote for each share held
on all members on which shareholders are entitled to vote, and are not entitled
to vote cumulatively for the election of directors. The outstanding common
shares are fully paid and non-assessable. As of August 1, 2000, the Company had
1,397,576 shares of common stock outstanding.
PREFERRED STOCK
The Articles of Incorporation of the Company authorize the Board of
Directors to adopt amendments to the Articles of Incorporation to provide for
the issuance of one or more series of Non-Voting Preferred Stock or Voting
Preferred Stock, and to establish from time to time the number of shares to be
included in each such series, to fix the designation, powers, preferences and
rights of the shares of each such series and any qualifications, limitations or
restrictions thereof (the "Blank Check Preferred Stock"). The Company currently
has authorized, issued an outstanding Series A and Series B Preferred Shares.
The issuance of Preferred Stock could be used, under certain
circumstances, as a method of delaying or preventing a change in control of the
Company and could permit the Board of Directors, without any action by holders
of the Series A or Series B Preferred Shares, or the common shares, to issue
Preferred Stock which could have a detrimental effect on the rights of holders
of Series A or Series B Preferred Shares, or the common shares. In certain
circumstances, this could have the effect of decreasing the market price for the
common shares.
SERIES A PREFERRED SHARES
The Series A Preferred Shares were authorized under the Blank-Check
Preferred stock provisions of the Company's Articles of Incorporation. Each
Series A Preferred Share has a stated value of $1,000.00 and is entitled to
receive dividends at the rate of ten (10%) percent per annum of the stated value
per share thereof. Dividends are cumulative and payable annually on the
anniversary of the date of issuance of the Series A Preferred Shares (the
"Series A Issue Dates"). Dividends on the first three anniversaries of the
Series A Issue Date were payable either in additional Series A Preferred Shares
or cash, at the Company's discretion. Thereafter, dividends are payable in cash
to the extent that funds are legally available therefor. If at any time, the
aggregate amount of cash dividends to be paid by the Company on the Series A
Preferred Shares is insufficient to permit the payment of the full amount of
cash dividend, then accrued on all issued and outstanding Series A Preferred
Shares, then such cash dividends, to the extent payable, will be distributed to
the holders of all outstanding Series A Preferred Shares ratably in proportion
to the respective amounts of cash dividends then accrued and unpaid on such
Series A Preferred Shares. So long as any Series A Preferred Shares remains
outstanding, no cash dividends can be declared or paid on any junior stock or
parity stock until all accrued and unpaid cash dividends on the Series A
Preferred Shares have been paid to the holders thereof. In the event that any of
the Series A Preferred Shares is converted to common shares, prior to a dividend
payment date, no payment of, or adjustment for, dividends yet due will be made
on the Series A Preferred Shares converted.
In the event of any liquidation, dissolution, or winding up of the
Company, the holders of the Series A Preferred Shares then outstanding will be
entitled to receive out of the assets of the Company, before any distribution or
payment is made to the holders of any junior stock, including the common shares,
an amount equal to the stated value per share plus any accrued and unpaid
cumulative dividends thereon. If upon any liquidation, dissolution, or winding
up, amounts distributable to the holders of all Series A Preferred Shares and
any parity stock is insufficient to permit the payment of the full liquidation
amounts on all issued and outstanding Series A Preferred Shares and parity
stock, then the entire assets of the Company available for distribution to the
holders of Series A Preferred Shares and parity stock will be distributed to
holders of all Series A Preferred Shares and parity stock ratably in proportion
to the full preferential amounts to which such holders are respectively
entitled.
I-28
<PAGE>
Except as otherwise provided by Ohio law, the holders of the Series A
Preferred Shares have no voting rights.
The Company may redeem all or part of the Series A Preferred Shares at
any time after the third anniversary of the Series A Issue Date at a price of
103% of the Stated Value, plus accrued and unpaid dividends through the
redemption date. The Company must redeem 25% of the Series A Preferred Shares on
each of the fourth, fifth, sixth and seventh anniversaries of the Series A Issue
Date at a price equal to the stated value, plus accrued and unpaid dividends,
through the redemption date.
The Series A Preferred Shares are convertible at any time into shares
of the Company's common stock, without par value, at a rate of $6.00 per share,
subject to adjustment for certain events. As of August 1, 2000, all 99 of the
outstanding Series A Shares were acquired for cash by Dr. Funk.
As of August 1, 2000, $109,147 in principal and accrued dividends for
shares of Series A remains to be converted to equity, or retired by the Company.
SERIES B PREFERRED SHARES
The Series B Preferred Shares were authorized under the Blank-Check
Preferred Stock provisions of the Company's Articles of Incorporation. Each
Series B Preferred Share has a stated value of $10. Except as otherwise provided
by Ohio law, the holders of the Series B Preferred Shares have no voting rights.
The Series B Preferred Shares are convertible into common shares at the rate of
$5.00 per each common share, subject to adjustment for stock splits, stock
dividends or any other stock divisions. The Company will pay cash in lieu of
fractional shares.
Holders of the Series B Preferred Shares are entitled to receive
dividends at the rate of 10% of the stated value per annum per share. Dividends
will be payable on each anniversary of the issue date, defined as the date on
which the Series B Preferred Shares are first issued by the Company. Dividends
could be paid in either shares of Series B Preferred Shares or cash, at the
Company's option, for the initial three years that the Series B Preferred Shares
were outstanding, and thereafter in cash to the extent funds are then legally
available for the payment of such cash dividends. The right of the holders of
the Series B Preferred Shares to receive such dividends is cumulative, and
accrues from the date of issuance of the Series B Preferred Shares.
If at any time, the aggregate amount of cash dividends to be paid by
the Company on the Series B Preferred Shares is insufficient to permit the
payment of the full amount of cash dividend, then accrued on all issued and
outstanding Series B Preferred Shares, then such cash dividends, to the extent
payable, will be distributed to the holders of all outstanding Series B
Preferred Shares ratably in proportion to the respective amounts of cash
dividends then accrued and unpaid on such Series B Preferred Shares. So long as
any Series B Preferred Shares will remain outstanding, no cash dividends can be
declared or paid on any junior stock or parity stock until all accrued and
unpaid cash dividends on the Series B Preferred Shares have been paid to the
holders thereof. In the event that any of the Series B Preferred Shares were
converted to common shares, prior to a dividend payment date, no payment of or
adjustment for dividends yet due will be made on the Series B Preferred Shares
converted.
In the event of any liquidation, dissolution, or winding up of the
Company, the holders of the Series B Preferred Shares then outstanding will be
entitled to receive out of the assets of the Company, before any distribution or
payment is made to the holders of any junior stock, including the common shares,
an amount equal to the stated value per share plus any accrued and unpaid
cumulative dividends thereon. If upon any liquidation, dissolution, or winding
up, amounts distributable to the holders of all Series B Preferred Shares and
any parity stock is insufficient to permit the payment of the full liquidation
amounts on all issued and outstanding Series B Preferred Shares and parity
stock, then the entire assets of the Company available for distribution to the
holders of Series B Preferred Shares and parity stock will be distributed to
holders of all Series B Preferred Shares and parity stock ratably in proportion
to the full preferential amounts to which such holders are respectively
entitled. A consolidation merger of the Company with or into any other company
or companies, or a sale or transfer of all, or substantially all, of its
property shall not be deemed to be a liquidation, dissolution, or winding up of
the Company.
After the third anniversary of the issue date, the Company is entitled,
at its option, to redeem the Series B
I-29
<PAGE>
Preferred Shares, in whole or in part, at a redemption price equal to 103% of
the stated value, plus the amount of any accrued and unpaid cash dividends
thereon, to the date of such redemption. In case of the redemption of only a
part of the Series B Preferred Shares, the Series B Preferred Shares to be
redeemed will be selected by whatever means the Board of Directors, in its sole
discretion, determines.
The Company is not obligated to pay to any holder of the Series B
Preferred Shares the redemption price for any Series B Preferred Shares to be
redeemed until such holder has surrendered to the Company certificates
representing such Series B Preferred Shares.
The holders of the Series B Preferred Shares have the right and option
to convert all or part of the Series B Preferred Shares then owned by them, at
any time, into Common Shares.
If the Series B Preferred Shares, in whole or in part, are called for
redemption, the right to convert such Series B Preferred Shares into common
shares shall cease at the close of business on the day prior to the Redemption
Date set forth in the notice of redemption.
As of August 1, 2000, 27,542 Series B Preferred Shares remained
outstanding and had not been converted to equity.
I-30
<PAGE>
PART II
ITEM 1. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET FOR COMMON STOCK
The Company's common stock traded on the OTC Bulletin Board under the
symbol "SCCI" until April 2000, at which time it began to trade on the "pink
sheets." The following table sets forth for the periods indicated the high and
low bid quotations for the Company's common stock as reported on the OTC
Bulleting Board, except for the Quarter ended June 30, 2000, which sets forth
the high and low bid quotations for the Company's common stock on the "pink
sheets."
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1998
Quarter ended April 2, 1998 2 1/2 1 1/4
Quarter ended July 3, 1998 5 3/4 2
Quarter ended October 2, 1998 4 3/4 2
Quarter ended December 31, 1998 3 5/8 1 1/4
FISCAL 1999
Quarter ended March 30, 1999 4 1/4 3/4
Quarter ended June 30, 1999 3 1/4 1 1/2
Quarter ended September 30, 1999 2 1/2 1 1/4
Quarter ended December 31, 1999 2 3/4 1 1/2
FISCAL 2000
Quarter Ended March 31, 2000 4 1/2 2 3/4
Quarter Ended June 30, 2000 3 2 1/2
</TABLE>
The quotation provided herein may reflect inter-dealer prices without
retail mark-up, markdown, or commissions, and may not represent actual
transactions.
HOLDERS OF RECORD
As of August 1, 2000, there were approximately 635 holders of the
common stock of the Company and 1,397,576 shares outstanding, and approximately
325 holders of Series B Preferred and 1 holder of Series A Preferred stock.
There is no market for the Series A and B preferred shares. As of August 1,
2000, there were 99 shares of Series A Preferred outstanding and 27,542 Series B
Preferred Shares outstanding.
DIVIDENDS
The Company has never paid cash dividends on its capital stock and does
not expect to pay any dividends in the foreseeable future. Furthermore, the
Company's bank loan prohibits it from paying cash dividends. The Company intends
to retain future earnings, if any, for use in the business.
II-1
<PAGE>
ITEM 2. LEGAL PROCEEDINGS
There are no known legal proceedings against the Company.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
ITEM 4. RECENT SALE OF UNREGISTERED SECURITIES
In March 1997, the Company issued 90,522 shares of common stock of
the Company to Dr. and Mrs. Funk in exchange for certain accounts payable to
Dr. and Mrs. Funk and to Funk Metallergical, Inc. The Company issued the
shares in reliance on an exemption from registration under Section 4(2) of
the Securities Act of 1933 (the "Act").
On January 31, 1999, the Company issued 2,450 shares of common stock
to Taratec Corporation, for consulting services in lieu of making a cash
payment to Taratec Corporation for services rendered. The Company issued the
shares in reliance on an exemption from registration under Section 4(2) of
the Act.
On February 28, 2000, directors and executive officers of the
Company purchased an aggregate of 300,000 shares of common stock of the
Company upon the exercise of certain vested options. The total proceeds of
the sale were $750,000, which the Company used for general working capital.
The Company issued the shares in reliance on an exemption from registration
under Rule 504 of Regulation D under the Act. The Company filed a
Registration by Description in connection with the issuance of the shares
with the Ohio Division of Securities pursuant to Section 1707.06(A)(1) of the
Ohio Revised Code.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 5 of the Company's Articles of Incorporation contains extensive
provisions related to indemnification of officers, directors, employees and
agents. The Company is required to indemnify its directors against expenses,
including attorney fees, judgments, fines and amounts paid in settlement of
civil, criminal, administrative, and investigative proceedings, if the director
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Company. When criminal proceedings are
involved, indemnification is further conditional upon the director having no
reasonable cause to believe that his conduct was unlawful.
Entitlement of a director to indemnification shall be made by vote of
the disinterested directors of the Company. If there are an insufficient number
of such directors to constitute a quorum, the determination to indemnify
directors shall be made by one of the following methods: (1) a written opinion
of independent legal counsel, (2) vote by the shareholders, or (3) by the Court
in which the action, suit or proceeding was brought.
The Company may pay the expenses, including attorney fees of any
director, as incurred, in advance of a final disposition of such action, suit or
proceeding, upon receipt by the Company of an undertaking by the affected
director(s) in which he (they) agree to cooperate with the Company concerning
the action, suit or proceeding, and agree(s) to repay the Company in the event
that a Court determines that the director(s) action, or failure to act, involved
an act, or omission, undertaken with reckless disregard for the best interests
of the Company.
The indemnification provisions of the Articles of Incorporation
relating to officers, employees and agents of the Company are similar to those
relating to directors, but are not mandatory in nature. On a case-by-case basis,
the Company may elect to indemnify them, and may elect to pay their expenses,
including attorney fees, in advance of a final disposition of the action, suit,
or proceeding, upon the same conditions and subject to legal standards as relate
to directors. These indemnification provisions are also applicable to actions
brought against directors, officers, employees and agents in the right of the
Company ("derivative actions"). However, no indemnification shall be made to any
person adjudged to be liable for negligence or misconduct in the performance of
his duty to the Company unless, and only to the extent that a Court determines,
that despite the adjudication of liability, but in view of all of the
circumstances of the case, such persons reasonably entitled to indemnify for
such expenses as the Court shall deem proper.
II-2
<PAGE>
The Company has applied for but currently does not carry directors and
officers insurance.
II-3
<PAGE>
PART F/S
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.............................................................................. F-2
Balance Sheets, December 31, 1999 and June 30, 2000 (unaudited)........................................... F-3
Statements of Operations for the years ended December 31, 1998 and 1999, and for
the six months ended June 30, 1999 and 2000 (unaudited)................................................ F-5
Statements of Shareholders' Equity for the years ended December 31, 1998 and 1999,
and for the six months ended June 30, 2000 (unaudited)................................................. F-6
Statements of Cash Flows for the years ended December 31, 1998 and 1999, and for
the six months ended June 30, 1999 and 2000 (unaudited)................................................ F-7
Notes to Financial Statements............................................................................. F-9
</TABLE>
F-1
<PAGE>
To the Board of Directors
Superconductive Components, Inc.
Columbus, Ohio
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheet of Superconductive
Components, Inc. as of December 31, 1999, and the related statements of
operations, shareholders' equity and cash flows for the two years ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Superconductive Components,
Inc. as of December 31, 1999, and the results of its operations and its cash
flows for the two years then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 13 to the
financial statements, the Company's recurring losses from operations and lack of
sufficient cash flow to fund these deficits raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 13. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ HAUSSER + TAYLOR LLP
Columbus, Ohio
July 26, 2000
F-2
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, JUNE 30,
1999 2000
---------- ----------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash (Note 2) $ -- $ --
Accounts and notes receivable (Note 2):
Trade, less allowance for doubtful accounts of $24,000 321,801 385,128
Related party receivables, less allowance for doubtful accounts
of $0 and $23,000, respectively 4,283 4,283
Inventories (Notes 2 and 3): 531,682 584,421
Prepaid expenses 20,804 67,000
----------- -----------
Total current assets 878,570 1,040,832
----------- -----------
PROPERTY AND EQUIPMENT, AT COST (Notes 2, 4 and 5)
Machinery and equipment 1,868,965 1,898,250
Furniture and fixtures 10,393 11,246
Leasehold improvements 293,491 301,467
----------- -----------
2,172,849 2,210,963
Less accumulated depreciation (1,440,331) (1,589,133)
----------- -----------
732,518 621,830
----------- -----------
OTHER ASSETS (Note 2)
Deferred stock offering costs 14,744 17,289
Other 41,151 43,321
----------- -----------
55,895 60,610
----------- -----------
$ 1,666,983 $ 1,723,272
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, JUNE 30,
1999 2000
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Bank overdraft $ 30,735 $ 61,765
Note payable, bank (Note 4) 95,025 --
Capital lease obligation, current portion (Note 5) 74,359 40,905
Accounts payable 305,544 324,093
Accounts payable, shareholder 45,994 137,731
Accrued expenses 268,922 302,939
----------- -----------
Total current liabilities 820,579 867,433
----------- -----------
CAPITAL LEASE OBLIGATION, NET OF
CURRENT PORTION (Note 5) 79,686 69,186
----------- -----------
SUBORDINATED NOTES PAYABLE (Note 6) 417,125 506,533
----------- -----------
REDEEMABLE CONVERTIBLE PREFERRED
STOCK (Series A)
10% cumulative, nonvoting, no par value, $1,000 stated
value, liquidation and mandatory redemption at
stated value per share plus unpaid and accumulated
dividends ($47,091 and $36,012, respectively) (Note 7) 180,841 107,037
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 4, 5, 6, and 14)
SHAREHOLDERS' EQUITY (Notes 7, 8, and 9)
Convertible preferred stock, Series B, 10% cumulative,
nonvoting, no par value, $10 stated value, optional
redemption at 103% 691,672 360,032
Common stock, no par value, authorized 15,000,000
shares; 1,244,859 and 1,397,576 shares issued and outstanding,
respectively 4,854,248 5,336,038
Additional paid-in capital 149,000 149,000
Accumulated deficit (5,526,168) (5,671,987)
----------- -----------
168,752 173,083
----------- -----------
$ 1,666,983 $ 1,723,272
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED)
YEARS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1999 1998 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SALES REVENUE $ 2,253,209 $ 2,027,610 $ 1,151,507 $ 1,062,989
CONTRACT RESEARCH REVENUE 425,153 470,552 348,208 131,665
----------- ----------- ----------- -----------
2,678,362 2,498,162 1,499,715 1,194,654
----------- ----------- ----------- -----------
COST OF SALES REVENUE 1,835,027 1,721,986 938,818 827,989
COST OF CONTRACT RESEARCH 366,156 337,953 259,215 108,603
----------- ----------- ----------- -----------
2,201,183 2,059,939 1,198,033 936,592
----------- ----------- ----------- -----------
GROSS MARGIN 477,179 438,223 301,682 258,062
GENERAL AND ADMINISTRATIVE EXPENSES 332,709 359,751 231,839 134,345
SALES AND PROMOTIONAL EXPENSES 265,631 301,618 136,061 118,672
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (121,161) (223,146) (66,218) 5,045
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest (44,473) (28,847) (33,633) (20,616)
Miscellaneous, net 19,700 10,190 5,704 2,379
----------- ----------- ----------- -----------
(24,773) (18,657) (27,929) (18,237)
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAX (145,934) (241,803) (94,147) (13,192)
INCOME TAX EXPENSE (Note 10) -- -- -- --
----------- ----------- ----------- -----------
NET LOSS $ (145,934) $ (241,803) $ (94,147) $ (13,192)
=========== =========== =========== ===========
EARNINGS PER SHARE - BASIC
AND DILUTIVE (NOTE 2)
NET LOSS PER COMMON SHARE $ (0.12) $ (0.20) $ (0.07) $ (0.01)
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 1,226,138 1,188,136 1,344,030 1,183,205
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1999 AND SIX MONTHS ENDED
JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED ADDITIONAL
STOCK, COMMON PAID-IN ACCUMULATED
SERIES B STOCK CAPITAL DEFICIT TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1997 $ 799,545 $ 4,612,738 $ 149,000 $(4,952,941) $ 608,342
Accretion of cumulative dividends 76,637 -- -- (94,137) (17,500)
Exercise of options (4600 shares @ $2.50/share) -- 11,500 -- -- 11,500
Sale of Shares (20,000 @ $2.50/share) -- 50,000 -- -- 50,000
Net loss -- -- -- (241,803) (241,803)
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1998 876,182 4,674,238 149,000 (5,288,881) 410,539
Accretion of cumulative dividends 76,637 -- -- (91,353) (14,716)
Conversion of preferred stock to common stock
(35,522 shares) (177,610) 177,610 -- -- --
Common stock issued in exchange for services received
(1,920 shares @ $1.25/share) -- 2,400 -- -- 2,400
Payment of cumulative dividends (83,537) -- -- -- (83,537)
Net loss -- -- -- (145,934) (145,934)
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1999 691,672 4,854,248 149,000 (5,526,168) 168,752
Accretion of cumulative dividends 47,075 -- -- (51,672) (4,597)
Exercise of options (37,920 shares @ $2.50/share) -- 94,800 -- -- 94,800
Conversion of Series A preferred (1,379 shares) -- 8,275 -- -- 8,275
Conversion of Series B preferred (113,418 shares) (378,715) 378,715 -- -- --
Net loss (unaudited) -- -- -- (94,147) (94,147)
----------- ----------- ----------- ----------- -----------
Balance - June 30, 2000 (unaudited) $ 360,032 $ 5,336,038 $ 149,000 $(5,671,987) $ 173,083
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
YEARS ENDED SIX MONTHS ENDED
------------------------ ----------------------
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1999 1998 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(145,934) $(241,803) $ (94,147) $ (13,192)
--------- --------- --------- ---------
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 255,180 246,727 148,802 126,818
Amortization 10,119 10,116 6,599 6,599
Inventory reserve 9,220 28,605 40,074 12,253
Provision for doubtful accounts 6,643 6,653 19,947 (608)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (75,054) 81,216 (83,274) (125,774)
Inventories (61,674) (12,105) (92,813) (85,243)
Prepaid expenses 8,861 (9,413) (46,196) 7,792
Other assets 1,302 (7,501) 667 472
Increase (decrease) in liabilities:
Accounts payable (34,615) (19,066) 101,775 19,478
Accrued expenses 133,585 (37,445) 30,575 62,280
Deferred revenue -- (3,464) -- --
--------- --------- --------- ---------
Total adjustments 253,567 284,323 126,156 24,067
--------- --------- --------- ---------
Net cash provided by operating activities 107,633 42,520 32,009 10,875
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (66,322) (207,444) (38,144) (21,101)
--------- --------- --------- ---------
Net cash used in investing activities (66,322) (207,444) (38,144) (21,101)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft 30,735 -- 31,030 25,657
Principal repayments on notes payable, bank (3,330) -- (95,025) (1,665)
Principal repayments on long-term debt (12,677) (11,057) -- (7,106)
Proceeds from subordinated notes payable 80,000 155,000 89,408 --
Principal payments on capital lease obligation (57,083) (42,758) (43,953) (11,240)
Proceeds from exercise of common stock options -- 11,500 94,800
Proceeds from the sale of common stock -- 50,000 --
Payment of cummulative dividends (83,536) -- --
Redemption of Series A preferred stock (70,125)
--------- --------- --------- ---------
Net cash provided by (used in) financing activities (45,891) 162,685 6,135 5,646
--------- --------- --------- ---------
NET DECREASE IN CASH (4,580) (2,239) -- (4,580)
CASH - Beginning of year 4,580 6,819 -- 4,580
--------- --------- --------- ---------
CASH - End of year $ -- $ 4,580 $ -- $ --
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
(UNAUDITED)
YEARS ENDED SIX MONTHS ENDED
-------------------------- ----------------------
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1999 1998 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the years for:
Interest $44,473 $28,847 $33,633 $20,616
Income taxes $ -- $ -- $ -- $ --
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Property and equipment was purchased by capital lease $63,344 $86,076 -- --
Subordinated debt was issued to a shareholder as reimbursement
for the shareholder paying accounts payable of the Company 55,000 -- -- --
Common stock was issued as partial payment for accounts payable 2,400 -- -- --
Preferred stock, Series A was redeemed by issuing additional
subordinated notes payable 70,125 -- -- $70,125
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. BUSINESS ORGANIZATION AND PURPOSE
Superconductive Components, Inc. (the Company) is an Ohio corporation
that was incorporated in May 1987. The Company was formed to develop,
manufacture and sell materials using superconductive principles.
Operations have since been expanded to include the manufacture and
sale of non-superconductive materials. The Company's domestic and
international customer base is primarily in the research, education,
electronics and computer industries.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Interim Financial Data (Unaudited) - The unaudited financial
information as of June 30, 2000 and for the six months ended June 30,
2000 and 1999 has been prepared on the same basis as the audited
financial statements and, in the opinion of the Company's management,
reflects all adjustments necessary for a fair presentation of the
financial position and the results of operations for such interim
periods in accordance with generally accepted accounting principles.
B. Inventories - Inventories are stated at the lower of cost or market on
an acquired or internally produced lot basis, and consist of raw
materials, work-in-process and finished goods. Cost includes material,
labor and applied overhead.
C. Property and Equipment - Property and equipment are carried at cost.
Depreciation is provided on the straight-line method based on the
estimated useful lives of the assets for financial reporting purposes
and allowable accelerated methods for tax purposes. Useful lives range
from ten years on certain furniture and fixtures to three years on
leasehold improvements and computer software. Expenditures for
renewals and betterments are capitalized and expenditures for repairs
and maintenance are charged to operations as incurred.
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If the fair value is less than the carrying amount of the
asset, a loss is recognized for the difference. There have been no
such impairment adjustments.
D. Research and Development - Internal research and development costs are
expensed as incurred. Research and development expenses, including
testing, for the years ended December 31, 1999 and 1998 and six months
ended June 30, 2000 and 1999 were $15,392, $41,421, $11,024 and
$29,414, respectively.
Third-party research and development costs are expensed when the
contracted work has been performed or as milestone results have been
achieved. Research revenue and expenses associated to third parties
are separately identified in the Statements of Operations.
F-9
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. Licenses - The Company has secured licenses to produce various
Superconductive materials for periods up to the expiration of the
applicable patents. The license fees, included in "Other Assets" on
the balance sheet, are being amortized over the expected life of the
agreement or applicable patent which is seventeen years. Cost and
accumulated amortization of licenses at December 31, 1999 and June 30,
2000 are $24,500 and $8,661; $24,500 and $9,361, respectively.
F. Patent - The Company has secured a patent for a manufacturing process
used in its operations. Costs incurred to secure the patent have been
capitalized, included in "Other Assets" on the balance sheet, and are
being amortized over the life of the patent. Cost and accumulated
amortization of the patent at December 31, 1999 and June 30, 2000 are
$26,318 and $1,206; $28,535 and $1,866, respectively.
G. Income Taxes - Income taxes are provided for by utilizing the asset
and liability method which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases
of assets and liabilities using presently enacted tax rates. Deferred
tax assets are recognized for net operating loss carryforwards,
reduced by a valuation allowance which is established when "it is more
likely than not" that some portion or all of the deferred tax assets
will not be recognized.
H. Stock Based Compensation -The Company utilizes the provisions of
Accounting Principles Board ("APB") No. 25, "Accounting for Stock
Issued to Employees" which utilized a fair value based method. The
Financial Accounting Standards Board ("FASB") Statement No. 123,
"Accounting for Stock-Based Compensation", utilized a fair value based
method. The FASB requires disclosure for new employee stock options of
the impact to the financial statements of utilizing the intrinsic
value versus the fair value based method (see Note 8).
I. Loss Per Common Share - Loss per common share amounts are based on the
weighted average number of shares outstanding. The assumed conversion
of preferred stock and exercise of stock options and warrants are
anti-dilutive and have not been considered in the calculation of per
share amounts.
J. Statements of Cash Flows - For purposes of the statements of cash
flows, the Company considers all highly liquid investments purchased
with a maturity of three months or less to be cash. No such
investments were purchased.
K. Concentrations of Credit Risk - The Company's cash balances, which are
at times in excess of federally insured levels, are maintained at a
large regional bank, and are continually monitored to minimize the
risk of loss. The Company grants credit to its customers, who are
varied in terms of size, geographic location and financial strength.
Customer balances are continually monitored to minimize the risk of
loss.
F-10
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
L. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
M. Fair Value - The estimated fair value of amounts reported in the
financial statements have been determined using available market
information and valuation methodologies, as applicable (see Note 12).
N. Revenue Recognition - Revenue from product sales is recognized upon
shipment to customers. Provisions for discounts, returns and others
adjustments are provided for in the same period as the related sales
are recorded.
Revenue from contract research provided for third parties is
recognized when the contracted work has been performed or as milestone
results have been achieved.
O. Effects of Recent Accounting Pronouncements - In December 1999, the
Securities and Exchange Commission issued Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements." The
guidance in SAB 101 must be adopted during the fourth quarter of
fiscal 2000 and the effects, if any, are required to be recorded
through a retroactive, cumulative-effect adjustment as of the
beginning of the fiscal year, with a restatement of all prior interim
quarters in the year. Management has not completed its evaluation of
the effects, if any, that SAB 101 will have on its income statement
presentation, operating results, or financial position.
NOTE 3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, JUNE 30,
1999 2000
--------- ---------
<S> <C> <C>
Raw materials $ 365,688 $ 422,556
Work-in-process 90,841 121,511
Finished goods 223,797 229,072
--------- ---------
680,326 773,139
Less reserve for obsolete inventory (148,644) (188,718)
--------- ---------
$ 531,682 $ 584,421
========= =========
</TABLE>
F-11
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4. NOTES PAYABLE - BANK
The Company has a note payable to a bank in the amount of $95,025 at
December 31, 1999, due June 30, 2000 interest only payable monthly at
prime (8.5% at December 31, 1999) plus .75% until maturity. In
addition, the Company is contingently liable under a standby letter of
credit issued in favor of a vendor at $20,000 until June 30, 2000. No
collateral, other than the personal guarantee by an officer and major
shareholder of the Company, collateralizes the note or letter of
credit. On February 28, 2000, an officer and major shareholder of the
Company paid the bank note payable totaling $89,408 in full. The
Company increased the subordinated note payable to Dr. Funk as
reimbursement for payment on the bank note payable.
On June 30, 2000, the Company obtained a bank line of credit in the
amount of $100,000, interest at prime, maturing June 30, 2001. As of
July 26, 2000, no amounts have been drawn on this line of credit. No
collateral, other than the personal guarantee by an officer and major
shareholder of the Company, collateralizes the bank line of credit.
NOTE 5. LEASE OBLIGATIONS
OPERATING
The Company leases certain office equipment and a building under
agreements classified as operating leases. Minimum future rental
payments under these non-cancellable operating leases having remaining
terms in excess of one year at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
2000 $69,438
2001 17,360
-------
$86,798
=======
</TABLE>
Rent expense which includes various monthly rentals for the years
ended December 31, 1999 and 1998 and June 30, 2000 and 1999 were
$56,022 and $64,253, $27,928 and $22,047, respectively.
F-12
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 5. LEASE OBLIGATIONS (CONTINUED)
CAPITAL
The Company also leases certain equipment under capital leases. The
future minimum lease payments by year with the present value of such
payments, as of December 31, 1999 is as follows:
<TABLE>
<S> <C>
2000 $ 85,058
2001 28,660
2002 28,660
2003 24,459
2004 12,042
--------
Total minimum lease payments 178,879
Less amount representing interest 24,834
--------
Present value of minimum lease payments 154,045
Less current portion 74,359
--------
Long-term capital lease obligations $ 79,686
========
</TABLE>
The equipment under capital lease at December 31, 1999 is included in
the accompanying balance sheet under the following captions:
<TABLE>
<S> <C>
Machinery and equipment $288,154
Less accumulated depreciation 77,657
--------
Net book value $210,497
========
</TABLE>
These assets are amortized over seven years using the straight-line
method and amortization is included in depreciation expense.
NOTE 6. SUBORDINATED NOTES PAYABLE
Subordinated notes payable consists of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER JUNE 30,
1999 2000
-------- --------
<S> <C> <C>
Dr. Edward Funk $256,125 $345,533
Ingeborg Funk 161,000 161,000
-------- --------
$417,125 $506,533
======== ========
</TABLE>
F-13
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6. SUBORDINATED NOTES PAYABLE (CONTINUED)
1993 SUBORDINATED DEBENTURE AGREEMENT
Dr. Edward and Ingeborg Funk have loaned funds net of conversion to
equity of $256,125 and $161,000 to the Company, respectively, from
September 30, 1991 through December 31, 1999. The long term
subordinated debenture agreements dated March 1, 1993 (the 1993
agreements) provides for conversion to shares of common stock at $2.50
per share. These subordinated notes payable are due on December 31,
2009. The debentures bear interest at 10% per annum. Dr. Edward and
Ingeborg Funk have waived accrual of interest on outstanding amounts
during 1999 and 1998. The debentures are subordinate to other senior
indebtedness, as defined in the agreements. Dr. Edward Funk is the
founder, Chief Executive Officer, and majority shareholder of the
Company.
The Company has issued common stock purchase warrants at $2.50 per
common share for 150,000 shares of common stock related to the
subordinated notes payable to Dr. Edward and Ingeborg Funk. The
warrants are 100% vested and expire in ten years from the date of
grant of January 7, 2000.
NOTE 7. COMMON AND PREFERRED STOCK
COMMON STOCK ISSUES
During 1998, 4,600 shares of common stock were issued in exchange for
options at $2.50 per share. Additionally, 20,000 shares were issued
for cash at $2.50 per share.
During 1999, 960 shares of common stock were issued in exchange as
partial payment for consulting services at $2.50 per share.
PREFERRED STOCK
<TABLE>
<CAPTION>
SHARES SHARES
AUTHORIZED OUTSTANDING
---------- -----------
<S> <C> <C>
10% Convertible/voting 10,000 --
Nonvoting 125,000 83,537
Voting 125,000 --
---------- -----------
260,000 83,537
========== ===========
</TABLE>
F-14
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7. COMMON AND PREFERRED STOCK (CONTINUED)
In June 1995, the Company completed an offering of 215 shares of
$1,000 stated value 1995 Series A 10% non-voting convertible preferred
stock. In January 1996, the Company completed an offering of 70,000
shares of $10 stated value 1995 Series B 10% non-voting convertible
preferred stock. For the first three years, the dividends on both
issues were payable by issuing additional Series A or B preferred
shares or in cash. The Series A shares are convertible to common
shares at the rate of $6.00 per share and Series B shares at the rate
of $5.00 per share. At the Company's option, Series A and Series B
shares are redeemable at 103% after the respective third anniversary
dates.
Series A has a mandatory redemption at 25% annually of the issued
Series A shares at their stated value plus accrued and unpaid
dividends commencing on the fourth anniversary date. As security for
cash dividends, or mandatory redemption payments due on the Series A
preferred shares, and to collateralize the preference upon a
liquidation, dissolution or winding up of the affairs of the Company,
Dr. and Mrs. Funk pledged an aggregate of 60,000 shares of common
stock, $.01 par value of Interpore/Cross International (Cross)
(formerly known as Cross Medical Products, Inc.). The unamortized
issue costs of $14,744 (included on the balance sheet as "Other
Assets") on Series A are being amortized over the remaining five year
life of the issue due to the mandatory redemption of the shares.
As security for cash dividends on the Series B preferred shares, Dr.
and Mrs. Funk pledged an aggregate 131,000 shares of $.01 par value
common stock of Cross. Issue costs of approximately $116,110 on Series
B were netted against the proceeds of that issue.
Cumulative dividends in arrears on Series A preferred stock are
$47,091 ($352.00 per share) at December 31, 1999.
During 1999, Series B cash dividends totaling $83,537 were paid.
Additionally, preferred stock was converted to 35,522 shares of common
stock.
During 1999, the Company redeemed $41,250 of Series A preferred stock
which represented an early redemption of the mandatory redemption
requirement for certain shareholders. Series A accrued dividends
totaling $28,875 were paid in connection with the Series A redemption.
On July 20, 2000, the Company redeemed approximately $102,000 of the
outstanding Series A preferred stock. Additionally, Edward Funk
purchased the remaining outstanding shares of Series A preferred
stock.
Subsequent to year-end, Series B preferred shareholders converted
55,862 shares of Series B preferred shares at $5.00 per share. The
Company issued 111,724 shares of common stock for the conversion of
Series B and 1,694 shares common stock for cumulative dividends
accrued at 10% per annum.
F-15
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 8. INCENTIVE STOCK OPTION PLANS
In November 1987, the Company adopted the 1987 Incentive Stock Option
Plan (the Incentive Plan) for key employees under which options to
purchase up to 40,000 shares of the Company's common stock may be
granted to qualified employees, subject to the execution of stock
option agreements. Options may be exercised for periods up to 10 years
from the date of grant at prices not less than 100% of fair market
value on the date of grant.
In February 1991, the Company adopted the 1991 Non-Statutory Stock
Option Plan (the Non-Statutory Plan) under which options to purchase
up to 20,000 shares of the Company's common stock may be granted to
key employees, directors, consultants, advisors and sales
representatives, subject to the execution of stock option agreements.
Options may be exercised for periods up to 10 years from the date of
grant at prices to be determined by the Board of Directors. The
Company has reserved 2,000 of the shares subject to the Non-Statutory
Plan for options to be granted to sales representatives.
On September 29, 1995, the Company adopted the 1995 Stock Option Plan
(the 1995 Plan) as incentive to key employees, directors and
consultants under which options to purchase up to 600,000 shares of
the Company's common stock may be granted, subject to the execution of
stock option agreements. Incentive stock options may be granted to key
associates of the Company and Non-Statutory options may be granted to
directors who are not employees and to consultants and advisors who
render services to the Company. Options may be exercised for periods
up to 10 years from the date of grant at prices not less than 100% of
fair market value on the date of grant.
F-16
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 8. INCENTIVE STOCK OPTION PLANS (CONTINUED)
The cumulative status at December 31, 1999 and 1998 of options granted
and outstanding, as well as options which became exercisable in
connection with the Incentive Plan is summarized as follows:
EMPLOYEE STOCK OPTION PLANS
<TABLE>
<CAPTION>
1987 1991 1995
PLAN PLAN PLAN
---- ---- ----
<S> <C> <C> <C>
Options outstanding -12/31/97 9,100 4,800 14,830
Options issued or exercisable -- -- 24,680
Options exercised -- (1,600) (500)
Options cancelled/expired -- (600) (1,500)
------- ------- -------
Options outstanding - 12/31/98 9,100 2,600 37,510
Options issued or exercisable -- -- 24,680
Options exercised -- -- --
Options cancelled/expired -- -- (400)
------- ------- -------
Options outstanding - 12/31/99 9,100 2,600 61,790
======= ======= =======
Weighted average option price $ 2.50 $ 2.50 $ 2.50
======= ======= =======
Exercise price range of options outstanding $ 2.50 $ 2.50 $ 2.50
======= ======= =======
</TABLE>
F-17
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 8. INCENTIVE STOCK OPTION PLANS (CONTINUED)
NON-EMPLOYEE DIRECTOR OPTION PLANS
<TABLE>
<CAPTION>
1991 1995
PLAN PLAN
------ ------
<S> <C> <C>
Options outstanding - 12/31/97 8,750 1,000
Options issued or exercisable -- 3,000
Options exercised (2,500) (500)
Options cancelled/expired -- --
------ ------
Options outstanding - 12/31/98 6,250 3,500
Options issued or exercisable -- 3,500
Options exercised -- --
Options cancelled/expired -- --
------ ------
Options outstanding - 12/31/99 6,250 7,000
====== ======
Weighted average option price $ 2.50 $ 2.50
====== ======
Exercise price range of options outstanding $ 2.50 $ 2.50
====== ======
</TABLE>
The Company utilizes the intrinsic value method under APB no. 25 to
account for employee stock options. The Company has utilized the Black
Scholes option pricing model for proforma footnote purposes with the
following assumptions used for grants in all years. Dividend yield
rate of 0%, risk-free interest rate of 6%, and expected option life in
years of 4.6 years. Expected volatility was 108.7%. If the Company had
utilized the fair value based method under FASB No. 123, the impact
would not be significant to the financial statements.
Subsequent to year-end, the Board of Directors and shareholders
approved the granting of 113,500 employee stock options and 7,000
non-employee director options. These options vest 100% one year from
the date of grant and have an exercise price of $2.125.
F-18
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 9. WARRANTS ISSUED
Warrants unexercised at December 31, 1999, issued to related parties
and others are as follows:
<TABLE>
<CAPTION>
# of Issue Exercise
Shares Issued To Consideration Date Expiration Price
------ --------- ------------- ---- ---------- -----
Common
Shares
------
<S> <C> <C> <C> <C> <C>
7,000 Edward Funk Loan Guarantee 8-90 8-00 $11.00
15,000 Edward Funk Value Received 12-94 12-01 6.00
10,000 Edward Funk Lease Guarantee 3-96 3-03 5.00
75,000 Edward Funk Subordinated notes payable 1-00 1-10 2.50
75,000 Ingeborg Funk Subordinated notes payable 1-00 1-10 2.50
</TABLE>
NOTE 10. INCOME TAXES
Deferred tax assets and liabilities result from temporary differences
in the recognition of income and expense for tax and financial
reporting purposes. Significant components of the Company's deferred
tax assets and liabilities are as follows at December 31:
<TABLE>
<CAPTION>
1999
-----------
<S> <C>
Deferred tax assets
NOL Carryforward $ 1,578,000
UNICAP 25,300
Allowance for doubtful accounts 23,400
Reserve for obsolete inventory 50,500
-----------
1,677,200
Deferred tax liability
Property and equipment (13,600)
-----------
Net deferred tax asset 1,663,600
Valuation allowance (1,663,600)
-----------
Net $ --
===========
</TABLE>
F-19
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS.
NOTE 10. INCOME TAXES (CONTINUED)
A valuation allowance has been recorded against the realizability of
the net deferred tax asset, such that no value is recorded for the
asset in the accompanying financial statements. The valuation
allowance totaled $1,663,200 and $1,614,000 at December 31, 1999 and
1998, respectively .
The Company has net operating loss carryovers available for federal
and state tax purposes of approximately $4,640,000, which expire in
varying amounts from 2003 through 2014.
For the years ended December 31, 1999 and 1998, a reconciliation of
the statutory rate and effective rate for the provisions for income
taxes consists of the following:
<TABLE>
<CAPTION>
PERCENTAGE
----------------
1999 1998
---- ----
<S> <C> <C>
Federal statutory rate (34.0) (34.0)
Valuation allowance 34.0 34.0
---- ----
Effective rate -- % -- %
==== ====
</TABLE>
The expense (benefit) for income taxes consists of the following:
<TABLE>
<S> <C> <C>
Current expense $ -- $ --
Deferred expense -- --
---- ----
Total $ -- $ --
==== ====
</TABLE>
NOTE 11. RELATED PARTY TRANSACTIONS
The Company has trade and other receivables from an affiliated entity
of $44,607, which has been written off as bad debt expense, related to
sales of inventory, rent and reimbursement of expenses. Sales to this
related party amounted to $16,962 and $22,926 in 1999 and 1998,
respectively.
The Company has a note receivable from an officer of the Company in
the amount of $4,283.
The Company has trade payables, shareholder of $45,994 pertaining to
reimbursement for purchase of goods and services obtained for Company
purposes.
For additional information regarding related party transactions, see
Notes 4, 6 and 9.
F-20
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS.
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments represents the amount at which
the instrument could be exchanged in a current transaction between
willing parties, other than in a forced sale or liquidation.
Significant differences can arise between the fair value and carrying
amount of financial instruments that are recognized at historical cost
amounts.
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:
- Cash and cash equivalents, short-term debt and current maturities
of long-term debt: Amounts reported in the balance sheet
approximate fair market value due to the short maturity of these
instruments.
- Long-term capital lease obligations: Amounts reported in the
balance sheet approximate fair value as the interest rates on
these obligations approximate current rates available based on
the relative stability of prime.
- Subordinated notes payable: Amounts reported in the balance sheet
represent convertible debt to officers and major shareholders.
Conversion rates approximate current trade prices. The stated
interest is typically waived by the shareholders. Additionally,
these shareholders have historically converted previous balances
of subordinated convertible debt to equity. Due to the limited
trading of the Company's common stock and the non-payment of
interest on the subordinated debt to equity, fair market value
approximates the amounts reported in the balance sheet.
- Redeemable convertible preferred stock: Amounts reported in the
balance sheet approximate fair value as approximately $102,000 of
the outstanding preferred stock was redeemed on July 20, 2000 at
book value.
NOTE 13. CONTINUED EXISTENCE
The Company has suffered recurring losses since inception,
approximating $5,526,000 at December 31, 1999, has been unable to fund
payments of subordinated debt interest and dividends, and has been
highly dependent upon major shareholders for working capital support
funded through subordinated debentures (see Note 6) or pledge of
security to raise new capital. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.
Management's plans to alleviate these conditions include additional
marketing efforts to increase sales, searching for a merger or
investment partner(s) and other actions such as research grants. The
financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
F-21
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
3(a) Amended and Restated Articles of Incorporation of
Superconductive Components, Inc.
3(b) Restated Code of Regulations of Superconductive
Components, Inc.
10(a) Lease Agreement between Superconductive Components,
Inc. and University Area Rentals dated as of February
7, 1997.
10(b) Subcontract Agreement between Superconductive
Components, Inc. and The Ohio State University
effective as of April 1, 2000.
10(c) 1987 Incentive Stock Option Plan.
10(d) 1991 Non-Statutory Stock Option Plan.
10(e) 1995 Stock Option Plan.
23 Consent of Independent Accountants.
24 Power of Attorney.
27 Financial Data Schedules.
</TABLE>
III-1
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the Registrant has caused this Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized.
SUPERCONDUCTIVE COMPONENTS, INC.
Date: September 28, 2000 By: /s/ Edward R. Funk
---------------------------------
Edward R. Funk, President and
Chief Executive Officer
III-2
