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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
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-19
Item 3. Description of Property........................................................... I-23
Item 4. Security Ownership of Beneficial Owners and Management............................ I-24
Item 5. Directors and Executive Officers, Promoters and Control Persons................... I-27
Item 6. Executive Compensation............................................................ I-29
Item 7. Certain Relationships and Related Transactions.................................... I-31
Item 8. Description of Securities......................................................... I-32
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-3
Item 5. Indemnification of Officers and Directors......................................... II-3
Part F/S
Financial Statements........................................................................ F-1
Part III
Item 1. Index to and Description of Exhibits.............................................. III-1
Signatures.................................................................................. III-2
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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 superconductive
("HTS") materials. HTS materials are complex metal oxides - ceramics - of
certain stoichiometries (chemical mixture ratios) which exhibit superconducting
phenomena when cooled to at least 196DEG. Centigrade. These complex metal
oxides are identified as members of the Perovskite family of ceramic materials.
Perovskites are a large family of crystalline ceramics that derive their name
from the perovskite mineral. The perovskite minerals are the most abundant
minerals on earth and have approximately a 2:3 metal-to-oxygen ratio.
Copper-oxide superconductors are layered perovskites.
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 perovskites, 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, the
National Aeronautics and Space Administration and the National Science
Foundation. The Company's sponsored research programs are discussed more fully
at Pages I-10 and I-11 with respect to their revenues and time lines. The
following table summarizes this information:
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SPONSOR PROGRAM TYPE AWARD START DATE END DATE
------- ------------ ----- ---------- --------
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National Aeronautics and SBIR Phase II $ 585,000 4/1/99 3/31/01
Space Administration
National Science Foundation SBIR Phase II $ 399,000 9/1/99 8/31/01
National Science Foundation STTR Phase I $ 100,000 7/1/99 6/30/00
Cambridge Research Institute Private Contract $ 25,000 9/1/99 12/31/00
Ceramphysics, Inc. Private Contract $ 20,500 9/1/99 12/31/00
TOTAL: $1,129,500
</TABLE>
The Company intends to continue to seek such funding because this funding
maintains and expands the technical understanding within the Company.
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With the exception of processes and devices being developed under federal
or private research grants (which are discussed more fully in "The SCI Division
- Sensors in Development" and "- Sponsored Product Development Programs within
the SCI Division"), the Company's products are fully developed and currently are
being sold in the marketplace. The Company supplies materials to customers who
are engaged in product or process development themselves, but such customers
purchase the Company's products based on clear specifications for a fixed price.
The Company currently does not have any export restrictions on foreign
sales of its products. Since the Company was formed in 1987, the total amount of
accumulated deficit it has generated is $6,009,192.
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. For the types of superconductors that the Company manufactures,
this critical temperature is -196DEG. Centigrade. 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 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 zero up to as high as
+23DEG. Kelvin.
Kelvin is the temperature scale used to identify the extremely cold
conditions required for superconductivity. The Kelvin scale starts at "absolute
zero," which is the equivalent of -273DEG. Centigrade, and is the coldest
theoretical temperature attainable. The unit of measure on this temperature
scale is called a Kelvin ("K") and is equal to a single degree on the Centigrade
scale.
With the discovery of new ceramic compounds in 1986, superconductivity can
now be accomplished at higher temperatures by using liquid Nitrogen for cooling.
The boiling point of Liquid Nitrogen is 77DEG. K, which is equivalent to
-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.
HTS materials 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. Additionally, the
ceramic superconductors manufactured by the Company must overcome several
hurdles if they are to gain wide spread commercial application. These include
problems associated with making flexible structures such as wire from brittle
materials such as ceramics, the limited performance of these materials at what
are considered practical temperatures, such as the boiling point of liquid
Nitrogen (77DEG. K), and the cost of any device based on these materials. The
scientific community has been working on these and other difficulties with HTS
materials since 1987. There is no assurance that all of these difficulties can
be overcome.
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, 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 materials require cooling to as cold as 4DEG. K
or -269DEG. C , with the use of the more expensive liquid Helium.
The problem of system-wide cooling is being addressed by various of the
Company's customers and others.
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While this problem must be solved for the success of large area applications,
such as power transmission lines, high performance applications such as
superconductive magnets for medical applications have been widely demonstrated.
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. For example, with wire and
cables, the HTS material requires considerably more processing steps and
possibly a higher degree of processing precision, in order to manufacture a
useful product. In many respects these processes are still in development by the
Company's customers and others.
Because of these difficulties, it has been necessary to develop a number of
new or modified processes to achieve satisfactory results with the HTS material.
The Company's process development in this area is being sponsored by the
National Science Foundation through a Phase II SBIR grant. This two year program
is intended to produce a fine grained superconductive powder which can be
manufactured in large batches. The Company is on schedule with its development
plans and continues to make sales based on the enhanced powder products that
have resulted from this research.
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 ceramic powders. The Company sold ceramic
powders as finished products and in other forms such as pressed pills or
pellets, which were achieved by sintering the ceramic powders, and solid shapes.
Ceramic powders sold in such forms were used primarily in 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 had 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.
A sputtering target is a pressed and sintered ceramic pellet which has been
sized to fit into a special coating device called a sputtering system.
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 deposition 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.
Additionally, the Target Markets, Inc. ("TMI") Division of the Company is
marketing some of the non-superconducting products that the Company has
developed. The Company established the TMI Division in 1992 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. For
additional information, see "The TMI Division."
The following chart summarizes the annual revenues and percentage of total
consolidated sales for the fiscal years ended December 31, 1997, 1998, and 1999,
respectively, and for the nine months ended September 30, 2000, for each class
of products that the Company produces.
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ANNUAL REVENUE BY PRODUCT CLASS
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12/31/97 12/31/98 12/31/99 9/30/00
-------- -------- -------- -------
% of % of % of % of
Annual Total Annual Total Annual Total Annual Total
PRODUCT CLASS Revenue Sales Revenue Sales Revenue Sales Revenue Sales
------------- ------- ----- ------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Superconductive
Powders $ 126,780 5.78% $ 73,959 2.96% $ 107,277 4.01% $ 43,916 1.91%
Nonsuperconductive
Powders 9,870 0.45% 8,456 0.34% 18,003 0.67% 29,343 1.28%
Superconductive
Targets 105,649 4.82% 52,899 2.12% 85,386 3.19% 42,223 1.84%
Nonsuperconductive
Targets(1) 1,074,410 49.01% 1,035,725 41.46% 1,079,133 40.29% 947,041 41.28%
Buy & Resell(2) 469,349 21.41% 435,119 17.42% 552,663 20.63% 525,338 22.90%
Bonding and Backing
Plates(3) 188,152 8.58% 142,161 5.69% 163,200 6.09% 154,298 6.73%
Demonstration Kits 26,537 1.21% 21,644 0.87% 15,141 0.57% 14,026 0.61%
Levitators 33,330 1.52% 21,182 0.85% 11,245 0.42% 17,290 0.75%
Contract Research 4,300 0.20% 470,552 18.84% 425,153 15.87% 417,079 18.18%
Other 153,628 7.02% 236,465 9.45% 221,161 8.26% 103,838 4.52%
---------- ---------- ---------- ----------
$2,192,005 $2,498,162 $2,678,362 $2,294,392
========== ========== ========== ==========
</TABLE>
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(1) Includes nonsuperconductive targets from the SCI division and ceramic and
metal targets from the TMI Division.
(2) Includes buy and resell of precious metals, buy/resell targets and other
miscellaneous items.
(3) Includes sales from the SCI and TMI divisions.
ORIGINAL COMPANY FOCUS IN HTS PRODUCTS
The Company's original focus was to offer HTS powders in various chemical
mixture ratios and bulk solid state forms of HTS materials, including:
- sputtering targets;
- Levitators-TM-, which produce a large oriented grain useful for
its high levitation forces, ability to trap magnetic flux, and carry
large currents;
- magnetic shields; and
- various kits, support equipment and other materials.
Superconductors can be used as magnetic shields because of their unique
diamagnetic properties. Diamagnetism is the ability of a material to repel a
magnetic field. Many naturally-occurring substances, such as water, wood, and
paraffin, exhibit weak diamagnetism. Superconductors exhibit strong diamagnetism
below their T(c), which represents the critical transition temperature below
which a material begins to superconduct. The sudden loss of resistance in a
superconductive medium may occur across a range as small as twenty millionths of
a degree Centigrade.
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The market for all HTS products, although small, has historically been
represented by groups seeking to establish a fundamental understanding of the
properties, principles 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. A beta prototype is a device or system in a pre-commercial
stage of development, which has been tested in a laboratory as an alpha
prototype, and then further developed to be tested in an actual customer site in
a typical operating environment. Operating experience and customer feedback in
the beta test phase can be used in the design of an initial commercial product.
The Company provides the basic building blocks for many HTS products, since
nearly all applications of HTS start with powder that is subsequently processed
into products such as wire, sputtering targets, or large single crystals, which,
in turn, can be used to manufacture transmission cables, superconductive
magnets, sensors, radio frequency ("Rf") filters for wireless communications,
and frictionless bearing systems for linear or rotating system applications. A
frictionless bearing system is a non-contact device that utilizes the
diamagnetic characteristics of a superconductor to stably levitate or suspend a
load which may be in rotational or linear motion. The system overcomes normal
frictions which limit conventional mechanical bearings by eliminating physical
contact between the components. This bearing design has been used in energy
storage systems under development by Boeing, among others.
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 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 the newly created TMI Division. The Company's products are marketed and
identified under the TMI name.
The total market for non-superconducting metal, metal alloy and simple
ceramic targets for the thin film industry is estimated at $720 million globally
based on a Business Communications Company ("BCC") report dated August 26, 1999.
The Company, through its TMI Division, also embarked on a program to move
selected products developed for research and development applications into
production applications. Through continuing relationships with equipment
manufacturers and potential customers, TMI is able to compete in the production
markets with existing products both on a technical and price basis. There are
new materials being continuously investigated, and these new ceramics and metal
alloys sometimes develop rapidly into significant markets. The Company believes
that it has positioned itself well in the marketplace to move quickly as these
materials move from research and development 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
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include nearly 200 items of ceramic materials and metals and alloys available in
various sizes and shapes. TMI shipments were 66.4% of total Company shipments in
1999.
The Company offers a wide range of HTS products to the marketplace. The
Company has competitors for all of its various products. In general, the
Company's HTS products are distinct in the marketplace due to the molecular
level mixing achieved through the Company's patented and proprietary chemical
precipitation processes for ceramic powders, the chemical purity achievable by
these processes, and the high level of characterization and customization the
Company performs for each client. Accordingly, the Company intends to be price
competitive on its products but not the low price leader.
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 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. Wet chemistry refers to a mixing technique
using liquid precursors from the Company's processes which utilize dry blending
of chemical precursors. Superconducting powders represented approximately 4.0%
of Company revenues in 1999, 3.0% 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 counterparts. There currently
are several highly-publicized prototype devices or systems based on HTS
materials, most of which in the United States are sponsored by the Department of
Energy through its Strategic Partnership Initiatives ("SPI"), including:
- Fault Current Limiter
- Transformer
- Transmission Line
- Flywheel Energy Storage system
The purpose of the engineering prototypes now in evaluation is to determine
the technical and economic feasibility of the specific applications. Although it
is unlikely that all of the initially configured prototypes now in testing will
be economically viable, there are a number of applications being tested, and the
Company believes that some of these will move into production in the next
several years, although in most cases the time lines for development are
unclear. Specifically, the development of YBCO wires based on the coated
conductor approach still has several technical and financial hurdles to
overcome, and at this time it is unclear when such wires will move into
production phase. 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 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. Rf filters are used in wireless
communication systems to enable the selection of desired radio frequencies and
the exclusion of undesired signals. Such
I-6
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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
conducted by Siemens 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 Siemens tests were not conducted with wire containing the
Company's HTS materials, but with wire of similar composition produced by the
Company's competitors. At this time, the Company's HTS products have not been
tested in an MRI system.
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 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
4.8% in 1997.
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, although it has not sold these
products to such producers as of yet.
The "next generation" of HTS wires and cables is expected to be based on a
structure called a "coated conductor." In this case the conductor, Ittrium
Barium Copper Oxide ("YBCO"), is deposited using a thin film technique onto a
metal tape or foil which has been modified so that the area receiving the
superconductor is specifically aligned or "textured" to promote optimal
performance of the coating. Thin film deposition is a method of fabricating
ceramic superconductors to more precisely control the growth of the crystalline
structure to eliminate grain boundaries and achieve a desired T(c). 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 for which the Company has been issued the trademark
"Levitators-TM-." In a typical melt processing method, YBCO is heated above
its peritectic point where it melts incongruently into Y(2)BaCuO(5) and a
Ba-and Cu- rich liquid. The semi-solid melt is cooled slowly to obtain
aligned grains of YBCO or domains. In order to achieve high levitation
forces, large domain size and high critical current density, J(c), are
desirable. One way to increase the domain size is by initiating grain growth
by using a seed crystal. In the presence of a favorable temperature gradient,
the seed not only ensures a single nucleation site but also permits
controlled orientation of the grains. The seeding technique along with a
controlled temperature gradient enable growth of YBCO domains as large as
that of the sample size.
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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 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 is
withdrawn at nearly 90.0% efficiency as needed.
At this time, Commonwealth Edison, through Commonwealth Research
Corporation, has placed the development of FFES units on hold pending further
funding from Commonwealth Edison. 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
Levitators-TM- supplied by the Company for this program were tested by
Argonne National Laboratory.
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 Platinum Oxide, which is one of the most
expensive components of its basic powder mix for Levitators-TM-. If
successful, levitator production costs will be substantially reduced. Currently
the Company is exploring the use of Cerium as a substitute for Platinum Oxide
with some success.
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. Commonwealth Edison,
which purchased the Company's LDL in 1996, at that time supplied approximately
5% of the electrical power used in the United States. Officials at the utility
have advised the Company that they view the development of the FFES 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.
Currently the Boeing Corporation, which is one of the Company's competitors, is
developing a competitive FFES system that uses HTS materials as an enabling
component of the bearing system.
SUPERCONDUCTING ACCESSORIES. The Company provides certain accessory
superconducting products that are needed, in addition to the Company's core HTS
materials, to support its customers' research or manufacturing programs. The
Company does not manufacture accessory superconducting products, but rather it
purchases such products for resale to the Company's customers.
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.
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These combined categories represented approximately 0.6% of Company revenues in
1999, 0.9% in 1998 and 1.1% 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.
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 0.07% of Company revenues in 1999, 0.3% 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. The energy storage and optical
industries are working to utilize the unique properties of electronic ceramics
to enhance the performance or reduce the 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
customers' 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 was awarded a Phase I SBIR contract by the National
Science Foundation to develop a sensor for NO(x) and to be used in harsh
environments. The Company has also been given a purchase order by Cambridge
Research Instruments to develop a temperature sensor, based on a thin film
superconductor, for use at or slightly above the boiling point of liquid
Nitrogen. 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 generators of oxides of Nitrogen gas
("NO(x)"), currently no low cost detection system exists. The harmful effects
of NO(x) are a 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 NO(x)
sensor market is global and may be expected to exceed several million dollars
in the next decade.
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The Company has recently completed a Phase I feasibility study 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. This
Small Business Innovative Research grant ("SBIR") program consists of three
phases: (1) Phase I, which is the feasibility study, (2) Phase II, in which a
prototype is developed, and (3) Phase III, which includes the realization of a
commercial product, backed by private funds. The Company is currently preparing
a Phase II proposal for this sensor. The goal of the program, funded through a
competitive award in the amount of $399,000 by the National Science Foundation,
is to build on the Company's strengths in ceramic fabrication and to devise a
device 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. Sensors based on the
superconductor YBCO are being developed for the temperature range of 77-92DEG.
K. The skill set developed to perfect these devices 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 from
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 SUPPLIERS AND CUSTOMERS
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 to manufacture its superconducting products. Several
suppliers currently satisfy the Company's requirements for this material. 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 this material 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
The Company focuses its research and development efforts in areas that
build on its expertise in multi-component ceramic oxides. These efforts
currently include optimization and scale up efforts for BSCCO 2-2-1-2 powders
sponsored by the National Science Foundation, large and specially formulated
YBCO discs and rotation/levitation apparatus for gravity modification research
sponsored by NASA, and a sensing device based on the Company's ceramic products
which identify the presence of NO(x) gases in harsh environments which is also
sponsored by the National Science Foundation.
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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 according to a study
commissioned by the United States Department of Energy, 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 the SCI 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, a device fabrication technique where individual
layers of the device are less than one micron thick and are typically
constructed using specialized coating techniques that can utilize the
Company's sputtering targets; and
- thick film technology, a device fabrication technique where individual
layers of the device are more than one micron thick and are typically
constructed using specialized coating processes like tape casting,
which can utilize the Company's ceramic powders.
These developments are realized through partnerships with the Company's
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 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. The research program sponsored by NASA involved various experiments
to determine the proper composition and crystal structure of a specialized
ceramic material which, when used in conjunction with a superconductive YBCO
layer, and the assembly is both cooled and rotated at high speeds, may shield
the effects of gravity. Another research program sponsored by the National
Science Foundation as a Phase II SBIR involves the automation of the chemical
precipitation and also the scale up and automation of the low pressure
calcination process for the Company's BSCCO 2-2-1-2 superconductor powder.
Experiments are being performed to determine the reliability of the automated
process, and the effects of the larger batch size on quality in the calcination
step. The Company's subcontractor, IGC Advanced Superconductor, was also using
selected powder samples to make multi-filament superconductive wire and also
developing a process for the continuous heat treatment of long lengths of HTS
wire. The Phase I STTR program, also sponsored by NSF, included experiments
using various combinations of the Company's ceramic substrates and powders to
determine which pairing showed the most sensitivity to NO(x) gases at
temperatures in the range of 700-1000DEG. C. 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:
- National Aeronautics and Space Administration ("NASA"), 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-
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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.
- THE CAMBRIDGE RESEARCH INSTRUMENT CORP., funded by a Phase II SBIR
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 ended on September 30, 2000.
- CERAMPHYSICS, INC., which has a funded Phase II SBIR 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 December 1, 2000, the
Company had $1,129,500 of funding from government sponsored research and
development programs that could be cancelled at any time.
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 customers' 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 SCI 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.
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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. On 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 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 customers in 42 countries worldwide.
The total number of customers served by the Company was 185 in 1999, 129 in
1998, and 95 in 1997.
No single customer accounts for more than 10.0% of total SCI Division
sales.
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 the year 2001. The Company was able to increase its
production capacity in the year 2000 to keep pace with customer demand. The cost
of this expansion was supported by grants from NSF and by additional investment
in equipment by the Company. Currently, the Company is on track to meet future
demand. Generally, the Company has not had instances where it was unable to meet
demand, although delivery times have been extended by a few weeks in some cases
without any loss of sales. Increasingly, however, 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 near future.
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 X-ray Diffraction ("XRD"), for major and trace
elemental composition by Inductively Couples Plasma ("ICP"), 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.
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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:
- ICP manufactured by Leeman Laboratories, Inc.;
- Particle Size Analyzer ("PSA") manufactured by Toshiba Corporation.;
- 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 National Institute of
Standards ("NIST") traceable standards; and
- Various digital weight scales that are routinely calibrated against
NIST traccable standards.
INTELLECTUAL PROPERTY
The Company has developed or acquired intellectual property in the form of
patents, patent applications, and licenses on patents. The Company currently is
not aware of any litigation involving its products or processes, nor has the
Company been contacted by any potential litigants regarding the same.
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 patent was issued in
January 1999 and will expire on October 28, 2016. 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. Currently, the Company has also received notice of allowance from
the United States Patent and Trademark Office on a patent application submitted
for the joining of large single domains of YBCO. 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 and Chief Executive Officer 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.
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- 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.
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
in 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.
A Business Communications, Inc. Report, dated August 26, 1999,
summarizes sputtering target consumption as follows:
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SPUTTERED FILMS AND SPUTTERING TARGETS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
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.
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, 66.3% in 1998 and 77.0% in
1997. In addition to the TMI Division, the SCI Division of the Company also
makes and markets sputtering targets. The SCI Division sputtering targets,
however, are made of more complex ceramics which require specialized processing.
The SCI Division has greater scientific expertise to bring to bear on the
manufacture of these sputtering targets. The TMI and SCI divisions have an
agreed list of items that each division quotes on and manufactures.
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. Physical vapor deposition processes are
coating techniques that deposit thin metal, ceramic or other materials onto a
substrate, and include sputtering, laser ablation, evaporation, and iron
bea0m deposition. 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
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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 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.
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 20.0% 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
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 equipment and 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 from these
customers based on on-going sales and marketing programs and long-term
relationships that have been developed with current and prospective customers.
MARKETING AND SALES
The TMI Division 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. All sales are conducted in United States dollars.
In the United States, the TMI Division 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 TMI division 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 currently on hand will
accommodate a throughput of $4.0 million or greater per year, depending on
product mix and the addition of a second shift operation. In order to enter
production accounts requiring larger, more complex targets, the Company
intends to acquire a larger machine center in
I-17
<PAGE>
2001. The new center will cost approximately $150,000 and will be financed
through a leasing program. This additional center will increase the TMI
Division production capacity by approximately 25%. 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 sputtering targets made from gold,
platinum, palladium or other materials considered in the market as precious
metals. As a service to its customers who require such materials, TMI buys
finished targets from one of several suppliers and resells these targets at a
markup. The approximate percent of the Company's overall revenues consisting of
precious metals was 5.3% in 1998 and 7.9% in 1999. 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.
The Company also purchases other finished sputtering targets made with
unique compositions of common materials from outside sources for resale at a
markup to its customers as a service. The approximate percent of the Company's
overall revenues consisting of these "buy/re-sell" items was 12.1% in 1998 and
12.7% 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.
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<PAGE>
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. The Company has not requested the required
examination by the controlling authorities for ISO 9000 and does not plan to do
so in fiscal year 2001.
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,
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 for the emission of the exhaust
from 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. To date, the
Company is not under any EPA strictures.
The Company does not handle "hazardous materials" as defined on the
Materials Safety and Data Sheets ("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, 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 $6,009,192 from
inception to September 30, 2000.
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<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Revenue for the nine months ended September 30, 2000, was $2,294,392, an
increase of $323,583 or 16.4% from the year earlier period when sales totaled
$1,970,809. For the nine months ended September 20, 2000, and 1999, product
sales totaled $1,405,427 and $1,302,755, respectively, for the TMI division, or
an increase of 7.9%. For these same periods, SCI Division sales totaled $888,965
and $668,054, or an increase of 33.1%. The increase was primarily attributable
to additional research contracts in 2000 versus 1999 in the SCI Division and
higher sales volume in commercial products in the TMI Division.
The gross margin on sales of products was $392,606 or 20.9% for the nine
months ended September 30, 2000 compared to $354,753 or 20.8% for the earlier
period. For the nine months ended September 30, 2000, and 1999, gross margin on
product sales for the TMI Division represented 22.8% and 23.8%, respectively,
and for the SCI Division represented 15.3% and 11.2%, respectively. The increase
in margin in the SCI Division for product sales is due to increased sales as the
gross margin is impacted by utilization of production capacity. The gross margin
on contract research revenue reported in the SCI Division in segment reporting
was 22.8% in 2000 versus 18.2% in 1999. The increase in gross margin for the
contract research revenue is due to higher sales volume in 2000. Gross margins
on the Company's various products vary widely and the gross margins are impacted
from period to period by sales mix and utilization of production capacity. The
gross margins on the contract research is generally lower than on other
products. The Company expects that gross margins on product sales will improve
as sales grow.
General and administrative expenses were $357,018 or 10.6% of total
revenue for the nine months ended September 30, 2000, and $221,909 or 11.3%
of total revenue for the earlier period. The increase in these costs related
to the expansion of the Company's infrastructure, including the addition of
executive management. Wages and related benefits increased $82,000 related to
additional corporate staff and cost-of-living raises, legal and accounting
increased $26,000 related to the audit of financial statements and
preparation for regulatory filings and bad debt expense increased $27,000 due
to an increase in the allowance for doubtful accounts for related parties.
The related party receivable is due from a Diamond Fiber Composites, Inc., a
company owned jointly by Dr. Funk and a non-affiliate of the Company. See
"Certain Relationships and Related Transactions" for additional information.
Sales expense of $219,131 or 9.6% in the nine months ended September 30,
2000, was up from the $192,161 or 9.7% for the nine months ended September
30, 1999. The increase included expenditures for the development of foreign
market opportunities.
The increase of interest expense from $32,035 or 1.4% in 1999 to $50,073
or 2.2% for the nine months ended September 30, 2000, relates to interest on
both the subordinated notes payable and on the bank borrowings.
The Company's net loss for the nine months ended September 30, 2000,
totaled $(137,271), or $(.14) per share, compared to a loss of $(19,822), or
$(.07) per share for the previous year. The 2000 period was impacted by the
increase in general and administrative expenses in comparison to the prior
period.
FISCAL YEAR 1999 AS COMPARED TO FISCAL YEAR 1998
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%.
TMI Division sales increased to $1,779,519 in 1999 from $1,655,178 in
1998 or an increase of 7.5%. SCI Division sales for product sales increased
to $473,690 from $372,432 or an increase of 27.1%. Increase in sales is
credited to increased sales of existing customers and efforts by management
to expand into additional markets creating new customers.
I-20
<PAGE>
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. 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.
Gross margin on sales revenue for the TMI Division was 23.3% in 1999
versus 18.3% in 1998. The improvement in gross margin is due primarily to
increased sales as the gross margin is impacted by utilization of production
capacity.
Gross margin on sales revenue for the SCI Division product sales was
0.7% for 1999 compared to 0.9% in 1998. The gross margin on product sales is
reasonable between years.
Inventory reserves are established for obsolete inventory and excess
inventory quantities based on management's estimate of net realizable value.
Changes in this reserve are expensed to cost of goods sold and approximated
$9,000 and $28,000 for the years ended December 31, 1999, and 1998,
respectively. The TMI Division was charged $6,000 and $20,000 and the SCI
Division was charged $3,000 and $8,000 for the years ended December 31, 1999,
and 1998, respectively. The decrease in inventory reserves between years is
due to better inventory control by management.
Gross margin on contract research revenue reported in the SCI Division
in segment reporting was 13.9% for 1999 compared to 28.2%. The decrease in
gross margin on contract research revenue of 14.3% was 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. The increase in interest
expense was attributable to the increased capital lease obligations during
1998 and 1999. Subordinated notes payable to shareholders increased by
$205,125 during 1999.
LIQUIDITY AND WORKING CAPITAL
The working capital of the Company at September 30, 2000, was $165,798
compared to $168,167 at September 30, 1999. The Company provided cash from
operations for the nine months ended September 30, 2000, and 1999 of
approximately $88,000 and $34,000, respectively. Significant non-cash
expenses including
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<PAGE>
depreciation and an inventory reserve on excess and obsolete inventory were
approximately $271,000 and $261,000, respectively, for the nine months ended
September 30, 2000, and 1999. Overall, accounts receivable, inventory and
prepaids increased in excess of increases in accounts payable and accrued
expenses by approximately $169,000 and $183,000, respectively, as a result of
timing of receipt of inventory versus required scheduled payments on this
inventory.
At December 31, 1999, working capital was $57,991 compared to $13,055 at
December 31, 1998. The increase in working capital of $44,936 was 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 included 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, $62,000 and $42,000 for the years ended December 31, 1999,
and 1998 and nine months ended September 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 issuance of
subordinated notes payable of approximately $80,000 to a shareholder were
used to pay accrued cumulative dividends approximating $84,000 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. Cash payments to third
parties for debt and capital lease obligations approximated $54,000. Proceeds
from subordinated notes payable to a shareholder totaling $155,000, sales of
common stock of $50,000 and the exercise of stock options of $11,500 was used
to reduce accounts payable and fund operations.
For financing activities for the nine months ended September 30, 2000,
the Company utilized cash of approximately $12,000. Due to tight cash flow,
$31,000 was overdrawn with the bank. Cash payments to third parties for debt
and capital lease obligations approximated $155,000. Proceeds from a bank
promissory note totaled $75,000. Proceeds from subordinated notes payable
from shareholders totaled $89,000. The proceeds from these were used to
redeem $70,000 of Series A preferred stock and accrued dividends.
For financing activity for the nine months ended September 30, 1999, the
Company provided cash of approximately $6,000. Cash payments to third parties
for debt and capital lease obligations approximated $64,000. Proceeds from
subordinated notes payable from shareholders totaled $89,000 and was used by
the Company to redeem $70,000 of Series A preferred stock and accrued
dividends and to fund operations.
Subsequent to September 30, 2000, the Company received proceeds from the
sale of common stock totaling $500,000 for 200,000 shares of common stock and
$28,000 for the sale of warrants to purchase 140,000 shares of common stock
at $3.50 per share. Additionally, the Company has available $25,000 on bank
debt. In conjunction with the sale of common stock and common stock warrants,
Dr. and Mrs. Funk converted approximately $506,000 to common stock. See
"Recent Sales of Unregistered Securities" for additional information.
While officers of the Company have advanced funds in the form of
subordinated debt, accounts payable and guaranteeing bank debt in the past,
there is no commitment by these individuals to continue funding the Company
or guaranteeing bank debt in the future. However, the Company believes the
combination of increased capital from these two common stock transactions and
the reduction of debt by the conversion to equity allows management to pursue
its current plans. The Company will continue to seek new financing or equity
financing arrangements. However, the Company cannot be certain that it will
be successful in efforts to raise additional new
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<PAGE>
funds.
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 has improved cash provided from operations in 1999 and 2000.
The Company is currently looking to relocate from its present facilities in
the second quarter of 2001. The relocation will provide the Company with the
space to expand its production facilities.
The Company has improved its equity and debt position in 2000. Series A
preferred stock has been reduced by $79,000 through redemption by the
Company. Dr. and Mrs. Funk hold the remaining 71 outstanding shares of Series
A preferred stock. Series B preferred stock was converted to equity during
2000 with 26,648 shares of Series B preferred stock outstanding as of
December 1, 2000. Effective October 10, 2000, the Company sold 200,000 shares
of common stock for total proceeds of $500,000 and subordinated notes payable
to Dr. and Mrs. Funk approximating $506,000 was converted to common stock.
These debt and equity transactions improve the Company's cash and equity
position to allow for future relocation, plant expansion and increasing
employees as management deems necessary to provide for a business strategy
being developed. This business strategy anticipates material and device
development using the Company's core skills in the area of electronic
ceramics, spinning off the SCI Division and offering a minority interest to
the public and cooperation with its investors to establish the necessary
relationships for the capitalization of the various projects.
The Company will continue its emphasis on inventory control and reducing
excess inventory levels. The Company has recently implemented purchasing
strategies to reduce the amount of excess inventory. These purchasing
strategies examine both price and quantity, therefore, inventory purchases
are more representative of current inventory quantity requirements versus
making purchasing decisions using only pricing. Additionally, the Company is
posting excess inventory on its web site in an effort to sell slow moving
inventory.
The Company plans to place some of its larger 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 price increases by making an annual commitment, but drawing the
material either as required, or on a monthly or quarterly basis. Such annual
commitments may reach $500,000 in 2000 and greater in 2001 depending on sales
volume increases. The terms of payment for such commitments are worked out
with the vendor on a case-by-case basis, but in all cases are cancelable at
the Company's discretion without penalty to the Company.
DEVELOPMENT STAGE OF THE COMPANY'S PRODUCTS AND UNCERTAINTY REGARDING
DEVELOPMENT OF MARKETS
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.
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 for Company use 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.
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<PAGE>
There is adequate power running to several locations in the building and
other utilities are adequate for the projected growth.
The Company is current on all operating lease liabilities.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
COMMON STOCK
The following tables set forth certain information as of December 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) 41.3%
Columbus, OH 43212
Ingeborg V. Funk
1145 Chesapeake Avenue 842,327(3) 41.3%
Columbus, OH 43212
Mangart Global Fund Limited
P.O. Box 309 170,000(4) 9.0%
George Town, Cayman Islands
British West Indies
Windcom Investment SA
Corso Elvezia 25 170,000(5) 9.0%
6900 Lugan, CH
Curtis A. Loveland
41 South High Street 154,198(6) 8.5%
Columbus, OH 43215
Diego Ratti
Via Antonietti 7 122,300 6.7%
6900 Paradiso
Switzerland
Edward W. Ungar
929 Harrison Avenue 9,310(7) *
Columbus, OH 43215
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<PAGE>
Robert J. Baker
1145 Chesapeake Avenue 5,350(8) *
Columbus, OH 43212
Lloyd E. Hackman
15508 Fiddlesticks Blvd., S.E. 60,507(9) 3.3%
Ft. Myers, FL 33912
Charles E. Washbush
1233 Langeston Dr. 4,750(10) *
Columbus, OH 43220
Don Raifsnider
1145 Chesapeake Avenue 16,000(11) *
Columbus, OH 43212
James R. Gaines
1145 Chesapeake Avenue 29,532(12) 1.6%
Columbus, OH 43212
Robert H. Peitz
43 Little St. 2,000(13) *
Matawan, NJ 07747
Dr. Suvankar Sengupta
5692 Hillcrest Dr. 30,040(14) 1.6%
Hilliard, OH 43026
All executive officers and
directors as a group (11 persons)(15) 1,154,014 54.9%
</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 December 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 December 1, 2000. As of
December 1, 2000, the Company had 1,816,977 shares of common stock
outstanding.
(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 common
shares held of record by Dr. and Mrs. Funk as tenants in common;
options, warrants and convertible notes for 225,337 common shares,
which can be acquired by Dr. Funk and Mrs. Funk, respectively, under
stock options and warrants and convertible notes exercisable within 60
days of December 1, 2000. This number also includes 96,904 common
shares which are owned by Funk
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<PAGE>
Metallurgical Corporation, a corporation wholly owned by Dr. and
Mrs. Funk.
(4) Includes 70,000 common shares which can be acquired by Mangart
Global Fund Limited under warrants exercisable within 60 days of
December 1, 2000.
(5) Includes 70,000 common shares which can be acquired by Windcom
Investments SA under warrants exercisable within 60 days of December
1, 2000.
(6) Includes options to exercise 1,000 common shares of the Company, 200
shares held by Mr. Loveland in a Keough account, and 153,198 common
shares held of record by Mr. Loveland for various irrevocable trusts
for the benefit of Dr. and Mrs. Funk's children and grandchildren.
(7) Includes 4,260 common shares, owned by Taratec Corp., a company
controlled by Mr. Ungar, 3,500 common shares, which can be acquired
by Mr. Ungar under stock options exercisable within 60 days of
December 1, 2000, and 1,550 shares owned by Mr. Ungar directly.
(8) Includes 2,000 common shares which can be acquired by Mr. Baker
under stock options exercisable within 60 days of December 1, 2000.
(9) Includes 4,250 common shares which can be acquired by Mr. Hackman
under stock options exercisable within 60 days of December 1, 2000,
and 56,257 shares owned by Mr. Hackman directly.
(10) Includes 1,000 common shares which can be acquired by Mr. Washbush
under stock options exercisable within 60 days of December 1, 2000.
(11) Includes 10,000 common shares which can be acquired by Mr.
Raifsnider under stock options exercisable within 60 days of
December 1, 2000.
(12) Includes 17,300 common shares which can be acquired by Mr. Gaines
under stock options exercisable within 60 days of December 1, 2000.
(13) Includes 2,000 common shares which can be acquired by Mr. Peitz
under stock options exercisable within 60 days of December 1, 2000.
(14) Includes 20,040 common shares which can be acquired by Dr. Sengupta
under stock options exercisable within 60 days of December 1, 2000.
(15) Includes 286,427 vested options, warrants, subordinated debt, and
Series A preferred stock which are exercisable within 60 days of
December 1, 2000, for all directors and executive officers listed.
SERIES A 10% PREFERRED SHARES
The following tables set forth certain information as of December 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.
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<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 71 100%
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 December 1, 2000,
which was 71 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 54 Secretary and Director 1987
Edward W. Ungar 64 Director 1990
Robert J. Baker, Jr. 60 Director 1992
Lloyd E. Hackman 70 Director 1993
Charles E. Washbush 71 Director 1994
James R. Gaines, Jr. 44 Director 1997
Robert H. Peitz 42 Director 1997
</TABLE>
I-27
<PAGE>
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 Cross Medical Products, Inc. ("Cross"), a Columbus, Ohio publicly
held company which manufactured electromechanical orthopedic devices and
related medical products. Dr. Funk resigned as Chairman in May, 1998, at
which time Cross merged with Interpore International to form Interpore/Cross
International. 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 Cross. 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 has served as Secretary and as a Director of the Company
since 1987. Mr. Loveland has been a practicing attorney since 1973 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.
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.
I-28
<PAGE>
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 son
of Mrs. Funk and 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
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARD OPTIONS COMPENSATION
($) ($) ($) (#) ($)
--------------------------- ---- ------ ----- ---------- ---------- ------------
<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 $0
</TABLE>
I-29
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning the grant
of stock options to the Named Executive Officers for the fiscal year ended
December 31, 1999. The Company did not grant any stock appreciation rights
for the fiscal year 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES % OF TOTAL OPTIONS
UNDERLYING OPTIONS GRANTED TO EMPLOYEES IN EXERCISE PRICE
NAME GRANTED (#) FISCAL YEAR(2) ($/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% $2.00 1/13/05
</TABLE>
----------------------
(1) This table covers the period from January 1, 1999 to December 31, 1999.
(2) Percentage is based upon 85,000 options granted to employees in fiscal year
1999.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1999
AND FISCAL YEAR-END OPTION/SAR VALUES
The following table provides certain information regarding the number
and value of stock options held by our Named Executive Officers at December
31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END (#) FISCAL YEAR-END ($)(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>
--------------------
(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.
I-30
<PAGE>
(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 a 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. Additionally, on January 1, 2000, and October
23, 2000, each director received a non-statutory option to purchase 1,000
common shares of the Company at an option price of $2.125 per share, and
5,000 common shares at an option price of $2.00 per share, respectively. The
options generally are exercisable one year from the grant date and expire on
the sixth anniversary of the grant date, except for the options granted on
October 23, 2000, which expire on the tenth 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.
DIAMOND FIBER COMPOSITES, INC.
The Company has trade and other receivables from Diamond Fiber Composites,
Inc. ("DFC"), a company jointly owned by Dr. Funk and Peter Williams, who is not
affiliated with the Company. DFC rents space from SCI and also uses utilities
for which DFC is billed monthly. SCI has also supplied tools to DFC in the past.
The Company has trade and other receivables due from DFC totaling $44,607 at
December 31, 1999, in which the Company had written off the entire outstanding
balance. The receivables relate to the sale of inventory, rent for warehouse
space and reimbursement of expenses.
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 of the Company at $2.50 per share. On January 7, 2000, the
Company issued common stock purchase warrants at $2.50 per share for 150,000
shares of common stock related to the subordinated notes payable to Dr. and
Mrs. Funk. The warrants are 100% vested and expire ten years from the date of
grant. In conjunction with a sale of common stock and common stock warrants
by the Company on October 10, 2000, Dr. and Mrs. Funk converted their
Subordinated Promissory Notes to 202,613 shares of common stock of the
Company at the $2.50 per share conversion rate.
NOTES PAYABLE
The Company has a note payable to a bank in the amount of $95,025 at
December 31, 1999, due June 30, 2000
I-31
<PAGE>
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, 2001. No collateral, other than the personal guarantee by Dr. Funk,
collateralizes the note or letter of credit. On February 28, 2000, Dr. Funk
paid the bank note payable totaling $89,408 in full. The Company increased
the amount of Dr. Funk's subordinated note payable as reimbursement for
payment on the bank note payable.
TARATEC CORPORATION
On January 31, 1999, the Company issued 1,920 shares of common stock of the
Company to Taratec Corporation for consulting services in lieu of making a cash
payment of $2,400to Taratec Corporation for the services rendered. Mr. Ungar,
who is a director of the Company, is the President of Taratec Corporation.
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.
OTHER
The Company also has a note receivable from an Mr. Gaines, who is the Vice
President and General Manager of the SCI Division of the Company, in the amount
of $4,283. The note bears interest at a rate of 4% per annum.
ITEM 8. DESCRIPTION OF SECURITIES
The Company's authorized capital stock is 15,260,000 shares, 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").
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 December 1, 2000, the Company
had 1,816,977 shares of common stock outstanding. Of these shares, 749,390
shares are held by nonaffiliates and are freely tradable without restriction or
further registration under the Securities Act of 1933 or eligible for resale
under an exemption from registration. The holders of the remaining 1,067,587
shares are entitled to resell them only pursuant to a registration statement
under the Securities Act of 1933 or an applicable exemption from registration
thereunder.
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 and outstanding Series A and Series
B Preferred Shares.
I-32
<PAGE>
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.
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 December 1, 2000, all 71 of the
outstanding Series A Preferred Shares were beneficially owned by Dr. Funk.
As of December 1, 2000, $111,827 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
I-33
<PAGE>
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 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 December 1, 2000, 26,648 Series B Preferred Shares remained issued
and outstanding and had not been converted to equity.
I-34
<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 Quarters ended June 30, 2000, and September
30, 2000, which set 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 29 1 1/2
Quarter Ended June 30, 2000 5 2
Quarter Ended September 30, 2000 3 3/5 1 3/4
</TABLE>
The quotation provided herein may reflect inter-dealer prices without
retail mark-up, markdown, or commissions, and may not represent actual
transactions.
As discussed above, at the present time, the Company's common stock is
not listed on The Nasdaq SmallCap Stock Market or on any stock exchange, but
trades in the "pink sheets." Based on its trading price, the Company's common
stock is considered a "penny stock" for purposes of federal securities laws,
and therefore is subject to certain regulations which are summarized below.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
special disclosure relating to the market for penny stocks in connection with
trades in any stock defined as a "penny stock." Specifically, Rules 15g-1
through 15g-9 under the Securities Exchange Act of 1934 (the "Exchange Act")
impose sales practice and disclosure requirements on NASD brokers-dealers who
make a market in a "penny stock." Securities and Exchange
II-1
<PAGE>
Commission regulations generally define a penny stock to be an equity
security that has a market price of less than $5.00 per share and that is not
listed on The Nasdaq SmallCap Stock Market or a major stock exchange. These
regulations affect the ability of broker-dealers to sell the Company's
securities and also may affect the ability of purchasers of the Company's
common stock to sell their shares in the secondary market.
Under the penny stock regulations, a broker-dealer selling penny stock
to anyone other than an established customer or "accredited investor,"
generally, an individual with net worth in excess of $1,000,000 or an annual
income exceeding $200,000, or $300,000 together with his or her spouse, must
make a special suitability determination for the purchaser and must receive
the purchaser's written consent to the transaction prior to sale, unless the
broker-dealer or the transaction is otherwise exempt. In addition, the penny
stock regulations require the broker-dealer to deliver, prior to any
transaction involving a penny stock, a disclosure schedule prepared by the
Commission relating to the penny stock market, unless the broker-dealer or
the transaction is otherwise exempt. A broker-dealer is also required to
disclose commissions payable to the broker-dealer and the registered
representative and current quotations for the securities. Finally, a
broker-dealer is required to send monthly statements disclosing recent price
information with respect to the penny stock held in a customer's account and
information with respect to the limited market in penny stocks.
As long as the penny stock regulations apply to the Company's stock, it
may be difficult to trade such stock because compliance with the regulations
can delay and/or preclude certain trading transactions. Brokers-dealers may
be discouraged from effecting transactions in the Company's stock because of
the sales practice and disclosure requirements for penny stock. This could
adversely effect the liquidity and/or price of the Company's common stock,
and impede the sale of the Company's stock in the secondary market.
HOLDERS OF RECORD
As of December 1, 2000, there were approximately 745 holders of record
of the common stock of the Company and 1,816,977 shares outstanding, and
approximately 68 holders of Series B Preferred and one holder of Series A
Preferred stock. The Company has come to have approximately 745 registered
holders of common stock as a result of various unregistered exempt private
offerings of its common stock since the Company's inception in 1987,
including issuances of stock options to employees and to members of the
Company's board of directors, and subsequent trading of the common stock on
the OTC Bulletin Board and on the "pink sheets." See "Recent Sales of
Unregistered Securities" for additional information. The number of holders of
common stock has also increased due to conversions of Series B preferred
shares into shares of common stock. There is no market for the Series A and B
preferred shares.
The Company's 68 Series B Preferred holders acquired their Series B
Preferred Stock in an private offering by the Company that was completed in
1996. The total amount of this offering was $700,000. The Company issued the
Series B Preferred Shares in reliance on an exemption pursuant to Rule 504 of
Regulation D under the Securities Act of 1933, and the offering was
registered by qualification in the State of Ohio under Section 1707.09 of the
Ohio Revised Code. As of December 1, 2000, there were 71 shares of Series A
Preferred outstanding and 26,648 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.
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.
II-2
<PAGE>
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
totaling $140,960 for Dr. and Mrs. Funk, as well as accounts payable to Funk
Metallergical, Inc. in the amount of $58,190. 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 1,920 shares of common stock to
Taratec Corporation, for consulting services in lieu of making a cash payment
of $2,400 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, the Company registered 300,000 shares of common
stock of the Company for sale on behalf of its directors and executive
officers upon the exercise of certain vested options. As of December 1, 2000,
31,920 of the 300,000 shares have been sold upon the exercise of vested
options, generating proceeds of $79,800. These proceeds have been used by the
Company for general working capital. The Company has 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. The registration will
terminate 16 months from the registration date.
On January 7, 2000, the Company issued common stock purchase warrants at
$2.50 per share for 150,000 shares of common stock related to the
subordinated notes payable to Dr. and Mrs. Funk. The warrants are 100% vested
and expire ten years from the date of grant. The Company issued the warrants
in reliance on an exemption from registration under Section 4(2) of the Act.
On October 10, 2000, the Company issued 200,000 shares of common stock
of the Company at a per share price of $2.50 per share (aggregate of
$500,000), and warrants to purchase up to an additional 140,000 shares of
common stock for $0.20 per share (aggregate of $28,000) to Mangart Global
Fund Ltd. and Windcom Investments SA for a total price of $528,000. The
warrants are exercisable for a period of 12 months from the date of purchase
for a per warrant share price of $3.50. In connection with the sale, the
Company agreed that it will, at its own expense, use its reasonable efforts
to file a shelf registration for at least 340,000 shares of its common stock,
without par value, to facilitate the resale of the shares and the warrant
shares by these investors. The Company issued the shares in reliance on an
exemption from registration under Section 4(2) of the Act.
In connection with the issuance of shares and warrants to Mangart Global
Fund Ltd. and Windcom Investments SA, the Company issued an aggregate of
202,613 shares of common stock of the Company to Dr. and Mrs. Funk upon
conversion of Subordinated Promissory Notes of $506,000. The Company issued
the shares in reliance on an exemption from registration under Section 4(2)
of the Act.
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
II-3
<PAGE>
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.
The Company currently carries directors and officers insurance in the
amount of one million dollars.
II-4
<PAGE>
PART F/S
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.............................................................................. F-1
Balance Sheets, December 31, 1999 and September 30, 2000 (unaudited)...................................... F-2
Statements of Operations for the years ended December 31, 1998 and 1999, and for
the nine months ended September 30, 1999 and 2000 (unaudited).......................................... F-4
Statements of Shareholders' Equity for the years ended December 31, 1998 and 1999,
and for the nine months ended September 30, 2000 (unaudited)........................................... F-5
Statements of Cash Flows for the years ended December 31, 1998 and 1999, and for
the nine months ended September 30, 1999 and 2000 (unaudited).......................................... F-6
Notes to Financial Statements............................................................................. F-8
</TABLE>
<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-1
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS (UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
CURRENT ASSETS
Cash (Note 2) $ - $ 14,462
Accounts and notes receivable (Notes 2 and 11):
Trade, less allowance for doubtful accounts of $24,000 and
$22,000, respectively 321,801 349,012
Related party receivables, less allowance for doubtful accounts
of $0 and $21,000, respectively 4,283 4,283
Inventories (Notes 2 and 3): 531,682 606,341
Prepaid expenses 20,804 64,493
----------- -----------
Total current assets 878,570 1,038,591
----------- -----------
PROPERTY AND EQUIPMENT,
AT COST (Notes 2, 4 and 5)
Machinery and equipment 1,868,965 1,915,138
Furniture and fixtures 10,393 15,250
Leasehold improvements 293,491 304,666
----------- -----------
2,172,849 2,235,054
Less accumulated depreciation (1,440,331) (1,660,070)
----------- -----------
732,518 574,984
----------- -----------
OTHER ASSETS
Deferred stock offering costs (Note 7) 14,744 9,742
Other (Note 2) 41,151 41,649
----------- -----------
55,895 51,391
----------- -----------
$ 1,666,983 $ 1,664,966
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------- ------------
<S> <C> <C>
CURRENT LIABILITIES
Bank overdraft $ 30,735 $ -
Note payable, bank (Note 4) 95,025 75,000
Capital lease obligation, current portion (Note 5) 74,359 30,372
Accounts payable 305,544 350,186
Accounts payable, shareholders (Note 11) 8,916 74,730
Accrued interest, shareholders (Note 6) 37,078 74,248
Accrued expenses 268,922 268,259
------------- ------------
Total current liabilities 820,579 872,795
------------- ------------
CAPITAL LEASE OBLIGATION, NET OF
CURRENT PORTION (Note 5) 79,686 63,642
------------- ------------
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 $38,886, respectively) (Note 7) 180,841 109,911
------------- ------------
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% 691,672 358,174
Common stock, no par value, authorized 15,000,000
shares; 1,244,859 and 1,397,576 shares issued and outstanding, 4,854,248 5,321,038
respectively
Additional paid-in capital 449,536 442,065
Accumulated deficit (5,826,704) (6,009,192)
------------- ------------
168,752 112,085
------------- ------------
$ 1,666,983 $ 1,664,966
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED)
YEARS ENDED NINE MONTHS ENDED
---------------------------------- ----------------------------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 2000 1999
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
SALES REVENUE $ 2,253,209 $ 2,027,610 $ 1,877,313 $ 1,701,527
CONTRACT RESEARCH REVENUE 425,153 470,552 417,079 269,282
------------- ------------- ------------- -------------
2,678,362 2,498,162 2,294,392 1,970,809
------------- ------------- ------------- -------------
COST OF SALES REVENUE 1,835,027 1,721,986 1,484,707 1,346,774
COST OF CONTRACT RESEARCH 366,156 337,953 322,143 220,157
------------- ------------- ------------- -------------
2,201,183 2,059,939 1,806,850 1,566,931
------------- ------------- ------------- -------------
GROSS MARGIN 477,179 438,223 487,542 403,878
GENERAL AND ADMINISTRATIVE EXPENSES 332,709 359,751 357,018 221,909
SALES AND PROMOTIONAL EXPENSES 265,631 301,618 219,131 192,160
------------- ------------- ------------- -------------
LOSS FROM OPERATIONS (121,161) (223,146) (88,607) (10,191)
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE)
Interest (44,473) (28,847) (50,073) (32,035)
Miscellaneous, net 19,700 10,190 1,409 22,404
------------- ------------- ------------- -------------
(24,773) (18,657) (48,664) (9,631)
------------- ------------- ------------- -------------
LOSS BEFORE INCOME TAX (145,934) (241,803) (137,271) (19,822)
INCOME TAX EXPENSE (Note 10) - - - -
------------- ------------- ------------- -------------
NET LOSS (145,934) (241,803) (137,271) (19,822)
DIVIDENDS ON PREFERRED STOCK (91,356) (94,137) (52,688) (63,297)
------------- ------------- ------------- -------------
LOSS APPLICABLE TO COMMON SHARES $ (237,290) $ (335,940) $ (189,959) $ (83,119)
============= ============= ============= =============
EARNINGS PER SHARE - BASIC
AND DILUTIVE (NOTE 2)
NET LOSS PER COMMON SHARE $ (0.19) $ (0.28) $ (0.14) $ (0.07)
============= ============= ============= =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 1,226,138 1,188,136 1,361,879 1,219,898
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1999 AND NINE MONTHS ENDED SEPTEMBER 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 $ 481,752 $(5,285,693) $ 608,342
Accretion of cumulative dividends 76,637 - (17,500) (76,637) (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 4,674,238 464,252 (5,604,133) 410,539
Accretion of cumulative dividends 76,637 - (14,716) (76,637) (14,716)
Conversion of preferred stock to common stock
(35,522 shares) (177,610) 177,610 - - -
Common stock issued in exchange for services received
(1920 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 4,854,248 449,536 (5,826,704) 168,752
Accretion of cumulative dividends 45,217 - (7,471) (45,217) (7,471)
Exercise of options (31,920 shares @ $2.50/share) - 79,800 - - 79,800
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) - - - (137,271) (137,271)
------------ ---------- ---------- ----------- -----------
Balance - September 30, 2000 (unaudited) $ 358,174 $ 5,321,038 $ 442,065 $ (6,009,192) $ 112,085
============ ========== ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
YEARS ENDED NINE MONTHS ENDED
----------------------------- ----------------------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 2000 1999
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (145,934) $ (241,803) $ (137,271) $ (19,822)
------------ ---------- ---------- ----------
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 255,180 246,727 219,739 190,430
Amortization 10,119 10,116 5,002 7,591
Inventory reserve 9,220 28,605 51,427 70,092
Provision for doubtful accounts 6,643 6,653 19,589 3,131
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (75,054) 81,216 (46,799) (179,356)
Inventories (61,674) (12,105) (126,086) (163,458)
Prepaid expenses 8,861 (9,413) (43,690) 8,763
Other assets 1,302 (7,501) (498) 3,163
Increase (decrease) in liabilities:
Accounts payable (34,615) (19,066) 147,626 (37,152)
Accrued expenses 133,585 (37,445) (664) 150,537
Deferred revenue - (3,464) - -
------------ ---------- ---------- ----------
Total adjustments 253,567 284,323 225,646 53,741
------------ ---------- ---------- ----------
Net cash provided by operating activities 107,633 42,520 88,375 33,919
------------ ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (66,322) (207,444) (62,205) (42,022)
------------ ---------- ---------- ----------
Net cash used in investing activities (66,322) (207,444) (62,205) (42,022)
------------ ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft 30,735 - (30,735) -
Proceeds on notes payable, bank - - 75,000 (12,677)
Principal repayments on notes payable, bank (3,330) - (95,025) -
Principal repayments on long-term debt (12,677) (11,057) - -
Proceeds from subordinated notes payable 80,000 155,000 89,408 70,125
Principal payments on capital lease obligation (57,083) (42,758) (60,031) (50,969)
Proceeds from exercise of common stock options - 11,500 - -
Proceeds from the sale of common stock - 50,000 79,800 -
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 (11,708) 6,479
------------ ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH (4,580) (2,239) 14,462 (1,624)
CASH - Beginning of period 4,580 6,819 - 4,580
------------ ---------- ---------- ----------
CASH - End of period $ - $ 4,580 $ 14,462 $ 2,956
============ ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
(UNAUDITED)
YEARS ENDED NINE MONTHS ENDED
---------------------------- -----------------------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 2000 1999
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the years for:
Interest $ 14,681 $ 21,561 $ 12,903 $ 10,822
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 - - 55,000
Common stock was issued as partial payment for accounts payable 2,400 - - 2,400
Preferred stock, Series A was redeemed by issuing additional
subordinated notes payable 70,125 - - 70,125
Preferred stock, series A converted to common stock - - 8,275 -
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<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 September 30, 2000 and for the nine months
ended September 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. Inventory
reserves are established for obsolete inventory and excess
inventory quantities based on management's estimate of net
realizable value.
The Company enters into cancelable purchase commitment
arrangements for some suppliers. Estimated purchase
commitments to these suppliers approximate $500,000 for
2000. The Company can cancel these commitments at the
Company's discretion without penalty.
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.
F-8
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 nine months ended September 30, 2000 and
1999 were $15,392, $41,421, $23,211 and $45,351, respectively.
Third-party research and development costs are expensed when
the contracted work has been performed or as milestone results
have been achieved. These contracts vary from six to
twenty-four months in duration. The terms of the contracts,
which are fixed price, require the Company to submit final
reports and/or progress reports to the sponsor. While the
contracts are subject to cancellation, management believes
that the Company will comply with all terms of the contracts
and that all of the amounts awarded to the Company will be
collected.
Research revenue and expenses associated to third parties are
separately identified in the Statements of Operations. During
1998, the Company was awarded contracts approximating $467,000
with 100% of the contracts complete at December 31, 1998. At
December 31, 1998, accounts receivable from these contracts
totaled $50,000 which was collected during 1999. During 1999,
the Company was awarded contracts approximating $1,084,000
with $409,000 of the total contract amount earned during 1999.
At December 31, 1999, accounts receivable from these contracts
approximated $45,000. For the nine months ended September 30,
2000 and 1999, accounts receivable (deferred revenue) from
these contracts approximated $94,861 and $(15,163),
respectively.
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 September 30, 2000 are $24,500 and
$8,661; $24,500 and $9,676, 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 September 30, 2000 are $26,318 and
$1,206; $28,535 and $5,168, 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.
F-9
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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). For stock based
compensation other than employees, the Company utilizes the
fair value method as provided for in FASB #123.
I. Loss Per Common Share - Loss per common share amounts are
based on the weighted average number of shares outstanding.
Due to the net loss 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.
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.
F-10
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 reviewed their policies
for revenue recognition in comparison to the requirements in
SAB 101 and no change will occur to its income statement
presentation, operating results or financial position as a
result of implementing SAB 101.
NOTE 3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
Raw materials $ 365,688 $ 452,625
Work-in-procress 90,841 120,837
Finished goods 223,797 232,950
---------- ----------
680,326 806,412
Less reserve for obsolete inventory (148,644) (200,071)
---------- ----------
$ 531,682 $ 606,341
========== ==========
</TABLE>
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, 2001. 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 September 30, 2000, $75,000 has 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.
F-11
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
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> <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 September 30, 2000
and 1999 were $56,022 and $64,253, $41,820 and $33,393,
respectively.
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.
F-12
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6. SUBORDINATED NOTES PAYABLE
Subordinated notes payable consists of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER SEPTEMBER 30,
1999 2000
--------- -------------
<S> <C> <C>
Dr. Edward Funk $ 256,125 $ 345,533
Ingeborg Funk 161,000 161,000
--------- ---------
$ 417,125 $ 506,533
========= =========
</TABLE>
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. 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.
Interest expense totaled $29,972, $7,286, $37,170 and $21,253
for the years ended December 31, 1999 and 1998 and the nine
months ended September 30, 2000 and 1999, respectively.
Accrued interest payable, shareholder totaled $37,078 and
$74,248 at December 31, 1999 and September 31, 2000,
respectively.
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.
F-13
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7. COMMON AND PREFERRED STOCK (CONTINUED)
PREFERRED STOCK
<TABLE>
<CAPTION>
SHARES SHARES
AUTHORIZED OUTSTANDING
---------- -----------
<S> <C> <C>
10% Convertible/voting 10,000 -
10% Convertible/nonvoting 215 133
Nonvoting 125,000 83,537
Voting 125,000 -
-------- -------
260,215 83,670
======== =======
</TABLE>
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 deferred stock
offering costs of $14,744 on Series A are being amortized over
the remaining five year life of the issue due to the mandatory
redemption of the shares. Accumulated amortization at December
31, 1999 and September 30, 2000 is $55,533 and $60,536,
respectively. Amortization expense for the years ended
December 31, 1999 and 1998 and September 30, 2000 and 1999 is
$8,916, $8,916, $5,003 and $7,591, respectively.
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.
F-14
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7. COMMON AND PREFERRED STOCK (CONTINUED)
During 1999, the Company redeemed 41.25 shares of Series A
preferred stock for $41,250 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. The fair
market value at the date of grant was $3.00. The Company will
record compensation expense of $17,500 for the difference
between market price and exercise price.
In March 2000, a Series A preferred stockholder converted
8.275 shares of preferred stock for 1,379 shares of common
stock. Additionally, Series A preferred stockholders holding
54.45 shares of preferred stock were redeemed for cash of
$70,125 (principle - $54,450, accrued dividends - $15,675).
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.
EARNINGS PER SHARE
All outstanding common stock equivalents which include
preferred stock Series A and B, employee and director stock
options and warrants are antidilutive due to the net loss.
Common stock equivalents that were excluded in the diluted
loss per share calculation totaled 166,850; 245,260; 352,613
and 134,850 for the years ended December 31, 1999 and 1998 and
nine months ended September 30, 2000 and 1999, respectively.
Additional common stock equivalents were not considered as
equivalents as they were not "in-the-money" and, therefore,
not considered a common stock equivalent. Additional
outstanding common stock equivalents excluded from the above
totaled 399,339; 236,402; 297,186 and 426,542 for the years
ended December 31, 1999 and 1998 and the nine months ended
September 30, 2000 and 1999, respectively.
SUBSEQUENT EVENTS (UNAUDITED)
On October 10, 2000, the Company issued 200,000 shares of
common stock at $2.50 per share for total proceeds of
$500,000. The same investors were issued warrants for the
purchase of up to an additional 140,000 shares of common stock
for an aggregate purchase price of $28,000, or $.20 for each
warrant, exercisable at $3.50 per share for a period of twelve
months from the date of issuance.
Effective October 22, 2000, the Company granted 62,500 stock
options to employees at an exercise price of $2.50 per share.
The options vest at the rate of 20% per year from the date of
grant based on continued employment and shall terminate on
October 22, 2010. The fair market value at the date of grant
was $3.00. The Company will record compensation expense of
$31,250 for the difference between market price and exercise
price.
F-15
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7. COMMON AND PREFERRED STOCK (CONTINUED)
Effective October 22, 2000, the Company granted 35,000 stock
options to directors at an execise price of $2.50 per share.
The options are vested at the date of grant but exercisable at
any time after October 23, 2001 and shall terminate on October
22, 2010. The fair market value at the date of grant was
$3.00. The Company will record compensation expense of $17,500
for the difference between market price and exercise price.
In conjunction with the sale of common stock and common stock
warrants on October 10, 2000, Dr. and Mrs. Funk converted
their subordinated notes payable totaling $506,533 to 202,613
shares of common stock at a conversion rate of $2.50 per
share.
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>
WEIGHTED
AVERAGE
STOCK OPTIONS EXERCISE PRICE
------------- --------------
<S> <C> <C>
Outstanding at December 31, 1997 134,300 $ 2.50
Granted - -
Exercised (2,100) 2.50
Forfeited (2,100) 2.50
------------- --------------
Outstanding at December 31, 1998 130,100 2.50
Granted 65,000 2.00
Exercised - -
Forfeited (4,000) 2.00
------------- --------------
Outstanding at December 31, 1999 191,000 $ 2.38
============= ==============
Shares exercisable at December 31, 1998 34,710 $ 2.50
Shares exercisable at December 31, 1999 48,990 $ 2.50
</TABLE>
NON-EMPLOYEE DIRECTOR OPTION PLANS
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
STOCK OPTIONS EXERCISE PRICE
------------- --------------
<S> <C> <C>
Outstanding at December 31, 1997 67,250 $ 2.50
Granted 3,500 2.50
Exercised (3,000) 2.50
Forfeited - -
------------- --------------
Outstanding at December 31, 1998 67,750 2.50
Granted 23,500 2.00
Exercised - -
Forfeited - -
------------- --------------
Outstanding at December 31, 1999 91,250 $ 2.37
============= ==============
Shares exercisable at December 31, 1998 19,750 $ 2.50
Shares exercisable at December 31, 1999 33,250 $ 2.50
</TABLE>
F-17
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 8. INCENTIVE STOCK OPTION PLANS (CONTINUED)
Exercise prices for options range from $2.00 to $2.50 for
options outstanding at December 31, 1999. The weighted average
option price for all options outstanding is $2.38 with a
weighted average remaining contractual life of 4.6 years.
The exercise price for all options exercisable at December 31,
1999 is $2.50.
In electing to continue to follow APB #25 for expense
recognition purposes, the Company is obliged to provide the
expanded disclosures required under SFAS #123 for stock-based
compensation including disclosure of pro-forma net income and
earnings per share had compensation expense been measured
under the fair value recognition provisions.
The weighted average fair values at date of grant for options
granted during 1999 and 1998 were $1.00 and $1.738,
respectively and were estimated using the Black-Scholes option
valuation model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Expected life in years 4.6 5.5
Interest rate 6% 6%
Volatility 108.7% 108.7%
Dividend yield 0% 0%
</TABLE>
The Company's pro forma information for the years ended
December 31, 1999 and 1998 in accordance with the provisions
of FASB #123 is provided below. For purposes of pro forma
disclosures, stock-based compensation is amortized to expense
on a straight-line basis over the vesting period. The
following table compares 1999 and 1998 results as reported to
the results had the Company adopted the expense recognition
provisions of FSAB #123.
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net loss applicable to common
shares
As reported $ (237,290) $ (335,940)
Pro forma under SFAS #123 (243,751) (340,914)
Basic and diluted loss per share
As reported $ (0.19) $ (0.28)
Pro forma under SFAS #123 (0.20) (0.29)
</TABLE>
Effective January 10, 2000, 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. Fair value at date of grant was
$1.50.
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
------- ------------ -------------------------- ------ ---------- --------
<S> <C> <C> <C> <C> <C>
Common
Shares
-------
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 and $65,889 at December 31, 1999
and September 30, 2000, respectively. At December 31, 1999,
$44,607 was 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; $22,926; $21,282 and
$18,065 in 1999, 1998, and the nine months ended
September 30, 2000 and 1999, respectively.
The Company has a note receivable from an officer of the
Company in the amount of $4,283. The note bears interest at
4% per annum.
The Company has trade payables, shareholders of $8,916
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 are in excess of fair market value as
the conversion price is $6.00 per share and average market
price at 12/31/99 was $1.50 for difference in fair value
of $53,250 at December 31, 1999.
NOTE 13. CONTINUED EXISTENCE
The Company has suffered recurring losses since inception,
approximating $6,009,192 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>
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 14. SEGMENT INFORMATION
The Company utilizes FASB Statement No. 131, "Disclosures
about Segments of a Business Enterprise and Related
Information". The Company is managed in two operating
segments: TMI and SCI. While the Company sells overseas,
management does not separately identify and evaluate
financial information pertaining to overseas sales,
therefore, revenue by geographic location is not available.
Corporate operations include administrative and sales
functions. Corporate assets include cash and general fixed
assets.
The following is a summary of key segment information for the
years ended December 31, 1999 and 1998 and the nine months
ended September 30, 2000 and 1999, respectively.
<TABLE>
<CAPTION>
SCI TSI CORPORATE TOTAL
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
December 31, 1999
-----------------
Revenues $ 898,843 $ 1,779,519 $ - $ 2,678,362
Segment profit (loss) (33,705) 231,617 (343,846) (145,934)
Interest expense - - 44,473 44,473
Depreciation and amortization 35,317 48,598 181,384 265,299
Segment assets 451,780 634,246 580,957 1,666,983
Expenditures for segment assets 38,263 17,366 10,693 66,322
December 31, 1998
-----------------
Revenues $ 842,984 $ 1,655,178 $ - $ 2,498,162
Segment profit (loss) 99,106 97,593 (438,502) (241,803)
Interest expense - - 28,847 28,847
Depreciation and amortization 22,466 31,434 202,943 256,843
Segment assets 302,561 688,047 705,888 1,696,496
Expenditures for segment assets 86,964 75,143 45,337 207,444
September 30, 2000 (unaudited)
------------------------------
Revenues $ 888,965 $ 1,405,427 $ - $ 2,294,392
Segment profit (loss) 124,814 124,378 (386,463) (137,271)
Interest expense - - 50,073 50,073
Depreciation and amortization 37,206 19,530 172,547 229,283
Segment assets 488,160 713,615 463,191 1,664,966
Expenditures for segment assets 33,274 16,519 12,412 62,205
</TABLE>
F-22
<PAGE>
SUPERCONDUCTIVE COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS.
NOTE 14. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
SCI TSI CORPORATE TOTAL
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
September 30, 1999 (unaudited)
------------------------------
Revenues $ 668,054 $ 1,302,755 $ - $ 1,970,809
Segment profit (loss) 27,430 197,307 (244,559) (19,822)
Interest expense - - 32,035 32,055
Depreciation and amortization 12,006 14,670 173,298 199,974
Segment assets 482,873 744,295 571,772 1,798,940
Expenditures for segment assets 19,149 15,202 7,671 42,022
</TABLE>
NOTE 15. EMPLOYMENT AGREEMENT (UNAUDITED)
Effective October 23, 2000, the Company elected a President
and Chief Executive Officer to replace Dr. Funk who is
retiring from these positions. Dr. Funk will remain as
Chairman of the Board. The employment agreement provides for
a base salary with annual cash bonus based on net income
before income taxes. Additionally, the Company granted 135,000
stock options for the purchase of the company's common stock
with the options vesting at 10% at the date of grant, 40% on
the first anniversary of the agreement and 50% on the
second anniversary of the agreement provided that there is
continuous employment. The Company granted 15,000 shares of
common stock to the President on October 23, 2000.
F-23
<PAGE>
PART III
ITEM 1. INDEX TO AND DESCRIPTION OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <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.
10(f) License Agreement with Sandia Corporation dated
February 26, 1996.
10(g) Nonexclusive License with The University of Chicago
(as Operator of Argonne National Laboratory) dated
October 12, 1995.
10(h) Nonexclusive License with The University of Chicago
(as Operator of Argonne National Laboratory) dated
October 12, 1995.
10(i) Sales Distribution Agreement with Earth Chemical
Co., Ltd.
10(j) National Aeronautics and Space Administration
Contract dated April 8, 1999.
10(k) National Science Foundation Award dated
August 26, 1999.
10(l) National Science Foundation Award dated
November 27, 2000.
10(m) 10% Subordinated Promissory Note dated
March 1, 1993.
23 Independent Auditors' Consent.
24 * Power of Attorney.
</TABLE>
--------------
* Filed with the Company's initial Form 10-SB on September 28, 2000.
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: January 3, 2000 By: /s/ Edward R. Funk
--------------------------------------
Edward R. Funk, President and Chief
Executive Officer
III-2
