SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO.1 TO CURRENT REPORT ON FORM 8-K
Filed with the Securities and Exchange Commission on
June 14, 2000
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report August 14, 2000
UNIROYAL TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State of other jurisdiction of incorporation)
0-20686 65-0341868
------------------------ -------------------------
(Commission File Number) (IRS Employer Identification No.)
Two North Tamiami Trail, Suite 900
Sarasota, Florida 34236
-------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (941) 361-2100
--------------
<PAGE>
Item 5. Other Events
On May 31, 2000, Uniroyal Technology Corporation (the "Company")
completed the merger among the Company, BayPlas4, Inc., a wholly-owned
subsidiary of the Company, and Sterling Semiconductor, Inc.
("Sterling"), as reported in the Company's Form 8-K filed on June 14,
2000. Pursuant to Item 7(a) of Form 8-K, this amendment is submitted to
file certain financial statements of Sterling.
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired.
The Sterling Semiconductor, Inc. (Successor to Novecon
Technologies Corporation) interim unaudited condensed
financial statements as of March 31, 2000 and for the three
months ended March 31, 2000 and March 31, 1999.
The Novecon Technologies Corporation audited consolidated
financial statements as of December 31, 1999 and December 31,
1998 and for the years ended December 31, 1999, December 31,
1998 and December 31, 1997.
(b) Exhibits.
23.1 - Consent of PricewaterhouseCoopers LLP
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
UNIROYAL TECHNOLOGY CORPORATION
George J. Zulanas, Jr.
Date: August 14, 2000 By:---------------------------
George J. Zulanas, Jr., Executive Vice
President,Treasurer and Chief Financial
Officer
<PAGE>
Item 7(a).
STERLING SEMICONDUCTOR, INC.
SUCCESSOR TO
NOVECON TECHNOLOGIES CORPORATION
--------------------------------
FINANCIAL STATEMENTS
STERLING SEMICONDUCTOR, INC.
As of March 31, 2000 and for the three months ended
March 31, 2000
NOVECON TECHNOLOGIES CORPORATION
As of December 31, 1999 and for the three months ended
March 31, 1999
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
Sterling Semiconductor,
Inc., Successor To Novecon
Novecon Technologies Technologies
Corporation Corporation
March 31, December 31,
2000 1999
--------------- ---------------
(Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,021,494 $ 594,795
Cash in trust 25,000 25,000
Accounts receivable 419,176 411,030
Inventories (Note 2) 260,418 326,486
Prepaid expenses and other assets 289,342 174,694
--------------- --------------
Total current assets 3,015,430 1,532,005
Property and equipment, net 1,904,408 1,938,905
Goodwill (Note 3) 1,215,581 -
Intangibles 1,230,000 1,320,000
Other assets, net 56,490 54,591
--------------- --------------
Total assets $ 7,421,909 $ 4,845,501
=============== ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES, MANDATORILY REEDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' DEFICIT
Sterling Semiconductor,
Inc., Successor To Novecon
Novecon Technologies Technologies
Corporation Corporation
March 31, December 31,
2000 1999
--------------- -------------
(Unaudited)
Current liabilities:
<S> <C> <C>
Notes payable, current (Note 4) $ 4,239,200 $ 2,529,035
Accounts payable 1,066,882 717,715
Accrued liabilities 151,378 387,719
Customer deposits 14,381 165,003
Capital lease obligations, current 84,000 72,038
--------------- -------------
Total current liabilities 5,555,841 3,871,510
Note payable 416,667 416,667
Capital leases, long-term 161,882 121,867
--------------- -------------
Total liabilities 6,134,390 4,410,044
--------------- -------------
Commitments and contingencies
Minority interest in subsidiary - 17,316
Mandatorily redeemable convertible preferred stock:
Sterling Semiconductor, Inc.:
Series A preferred stock: $0.01 par value; 1,000,000
shares authorized; 254,729 issued and outstanding at
March 31, 2000 3,714,750 -
Novecon Technologies Corporation:
Series A preferred stock: $0.01 par value; 500,000 shares
authorized; 255,729 issued and outstanding at December
31, 1999 - 3,840,126
Shareholders' deficit (Note 5):
Sterling Semiconductor, Inc.:
Common stock: $0.01 par value; 2,600,000 shares authorized;
704,670 shares issued and outstanding at March 31, 2000 7,047 -
Additional paid-in capital 3,450,522 -
Novecon Technologies Corporation:
Common stock: $0.01 par value; 1,500,000 shares authorized;
599,334 shares issued and outstanding at December 31, 1999 - 5,993
Additional paid-in capital - 1,514,279
Accumulated deficit (5,816,928) (4,942,257)
Less treasury stock at cost - 14,012 shares at March 31,2000 (67,872) -
--------------- --------------
Total shareholders' deficit (2,427,231) (3,421,985)
--------------- --------------
Total liabilities, mandatorily redeemable convertible preferred
stock and shareholders' deficit $ 7,421,909 $ 4,845,501
=============== ==============
See notes to condensed consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Sterling Semiconductor,
Inc., Successor To Novecon
Novecon Technologies Technologies
Corporation Corporation
For The Three Months Ended
--------------------------------------------------
March 31, 2000 March 31, 1999
----------------------- --------------------
Revenues:
<S> <C> <C>
Contract revenues $ 675,458 $ 90,309
Product revenues 219,148 352,972
------------- ------------
Total revenues 894,606 443,281
Cost of revenues:
Contract revenues 561,502 137,694
Product revenues 197,055 262,092
------------- ------------
Total cost of revenues 758,557 399,786
Gross profit 136,049 43,495
Operating expenses:
Research and development 212,951 383,688
Sales and marketing 34,548 7,336
General and administrative 385,580 354,441
------------- ------------
Total operating expenses 633,079 745,465
Loss from operations (497,030) (701,970)
Interest income 26,145 6,626
Interest expense (408,694) (62,513)
Other expense, net (12,408) (2,173)
------------- ------------
Loss before minority interest in subsidiary (891,987) (760,030)
Minority interest in net loss of subsidiary 17,316 164,849
------------- ------------
Net loss $ (874,671) $ (595,181)
============= ============
Net loss per share
Basic $ (1.49) $ (0.84)
============= ==============
Diluted $ (1.49) $ (0.84)
============= ==============
Average number of shares used in computation
Basic 701,898 704,670
============= ==============
Diluted 701,898 704,670
============= ==============
See notes to condensed consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Sterling Semiconductor,
Inc., Successor To Novecon
Novecon Technologies Technologies
Corporation Corporation
For The Three Months Ended
--------------------------------------------------
March 31, 2000 March 31, 1999
----------------------- --------------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (874,671) $ (595,181)
Adjustments to reconcile net loss to net cash used in
operating activities:
Minority interest in net loss of subsidiary (17,316) (164,849)
Loss on disposal of property and equipment 537 -
Amortization of note discount 277,906 -
Depreciation and amortization 250,121 215,478
Changes in current assets and liabilities:
Accounts receivable (8,146) 51,158
Inventory 66,068 (71,953)
Prepaid expenses and other assets (116,547) 19,784
Accounts payable 350,088 (1,828)
Accrued liabilities (388,408) 18,250
---------------- --------------
Net cash used in operating activities (460,368) (529,141)
---------------- --------------
Cash flows from investing activities:
Sale of property 3,850 -
Purchase of property and equipment (35,509) (18,626)
---------------- --------------
Net cash used in investing activities (31,659) (18,626)
---------------- --------------
Cash flows from financing activities:
Proceeds from note payable 2,025,000 -
Proceeds from issuance of mandatorily redeemable
convertible preferred stock - 1,125,000
Principal payments on capital lease obligations (21,923) (34,178)
Purchase of treasury stock (67,872) -
Redemption of preferred stock (16,479) -
Stock issuance costs - (70,515)
---------------- --------------
Net cash provided by financing activities 1,918,726 1,020,307
---------------- --------------
Net increase in cash and cash equivalents 1,426,699 472,540
Cash and cash equivalents at beginning of year 594,795 734,132
---------------- --------------
Cash and cash equivalents at end of year $ 2,021,494 $ 1,206,672
================ ==============
See notes to condensed consolidated financial
statements.
</TABLE>
<PAGE>
STERLING SEMICONDUCTOR, INC., SUCCESSOR TO NOVECON TECHNOLOGIES CORPORATION,
AND NOVECON TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended
March 31, 2000 and March 31, 1999, respectively
1. BASIS OF PRESENTATION
The Merger
On February 23, 2000, a reverse merger occurred between Novecon
Technologies Corporation ("Novecon") and its majority-owned subsidiary,
Sterling Semiconductor, Inc. ("Sterling") (the "Merger"). Under the
agreement, Novecon was merged with and into Sterling in accordance with
the provisions of Article 12 of the Virginia Stock Corporation Act and
of Section 252 of the Delaware General Corporation Law. Sterling was
the surviving legal entity. Immediately prior to the consummation of
the merger, Sterling's common stock was split 75-for-1.
Under the terms of the Merger, each issued and outstanding share of
Novecon common stock was converted into one share of Sterling common
stock, par value $0.01 per share. Each issued and outstanding share of
Novecon Series A Convertible Preferred Stock, par value $0.01 per
share, was converted into one share of Sterling Series A Convertible
Preferred Stock, par value $0.01 per share. All outstanding employee
and non-employee Novecon stock options were each converted into an
option to purchase one share of Sterling common stock under
substantially similar terms. All outstanding Novecon warrants to
purchase shares of Novecon common stock were each converted into
warrants to purchase one share of Sterling common stock under
substantially similar terms.
On the merger date, Novecon common stockholders received 612,195 shares
of Sterling common stock and Novecon preferred stockholders received
254,729 shares of Sterling preferred stock.
All of the issued and outstanding shares of Sterling common stock owned
immediately prior to the consummation of the merger other than those
owned by Novecon (92,475 shares), as well as all issued and outstanding
Sterling options and Sterling warrants, remained issued and outstanding
subsequent to the merger. All issued and outstanding shares of Sterling
common stock owned by Novecon immediately prior to the merger were
cancelled and retired.
Basis of Presentation
The interim condensed financial statements presented as of and for the
three months ended March 31, 2000 are the Sterling financial statements
(including the consolidated results of Novecon from January 1, 2000
through February 22, 2000). The condensed consolidated financial
statements as of December 31, 1999 and the interim condensed
consolidated financial statements for the three months ended March 31,
1999 are the consolidated financial statements of Novecon.
In the opinion of Sterling , all adjustments necessary for a fair
presentation of such interim condensed consolidated financial
statements have been included. Such adjustments consist only of normal
recurring items. Interim results are not necessarily indicative of
results for a full year. The interim condensed consolidated financial
statements and notes thereto are unaudited and should be read in
conjunction with the Novecon audited consolidated financial statements
and notes thereto for the years ended December 31, 1999, December 31,
1998 and December 31, 1997.
<PAGE>
2. INVENTORIES
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------------- --------------
<S> <C> <C>
Finished goods $ 120,000 $ 123,440
Work-in-process 115,782 135,112
Raw material 59,636 86,397
------------ ------------
295,418 344,949
Less reserve for obsolete inventory (35,000) (18,463)
------------ ------------
Total $ 260,418 $ 326,486
============ ============
</TABLE>
3. GOODWILL
For accounting purposes, the Merger between Novecon and Sterling is
deemed to be an acquisition of Sterling's minority interest by Novecon
with the resulting entity identified as Sterling. The acquisition of
Sterling's minority interest is accounted for under the "purchase
method of accounting" on a fair value basis with the excess treated as
goodwill. Goodwill recorded in connection with the merger was
approximately $1,236,000 and is being amortized over its estimated
useful life of five years.
4. NOTES PAYABLE
In January 2000, Novecon entered into a loan agreement (the "January
2000 Note") with an investment group for $2,025,000. The loan accrues
interest at 10% and is due January 2001. The loan is immediately due
and payable upon a change in control, breach of covenant or material
misrepresentation or distribution of cash or assets which exceeds the
last twelve months of pretax earnings. In connection with the debt,
Novecon issued a detachable warrant to purchase 108,135 shares of
Novecon common stock for $15.00 per share. The warrant is immediately
exercisable and has a seven-year life. Using the Black-Scholes
valuation model, Novecon determined that the fair value of the warrant
was approximately $838,000. Novecon allocated $592,741 for the warrant
to shareholders' equity and $1,432,259 to the note payable, based upon
their relative fair values. The resulting debt discount will be
amortized to interest expense using the effective interest rate method
over the term of the note.
5. SHAREHOLDERS' DEFICIT
During the quarter ended March 31, 2000, Novecon declared and paid a
dividend to the Novecon preferred shareholders of approximately
$174,000 through the issuance of 12,861 shares of Novecon common stock.
The preferred stock dividend has been added to the March 31, 2000 net
loss in the computation of earnings per share. There was no dividend
declared or paid by Novecon during the quarter ended March 31, 1999.
6. STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Supplemental disclosures of cash flow information are as follows:
Three months ended
----------------------------------------------
March 31, March 31,
2000 1999
----------------- ------------------
<S> <C> <C>
Non-cash investing and financing transactions:
Interest paid $ 194,219 $ 51,438
=============== ================
</TABLE>
<PAGE>
7. SUBSEQUENT EVENT
On April 10, 2000, Sterling signed a merger agreement with Uniroyal
Technology Corporation. ("Uniroyal"). The merger agreement provides for
the exchange of Sterling's outstanding common and preferred stocks for
Uniroyal common stock and the exchange of Sterling outstanding employee
stock options for Uniroyal employee stock options. The resulting merged
entity became a wholly-owned subsidiary of Uniroyal called Sterling
Semiconductor, Inc. The transaction closed on May 31, 2000.
<PAGE>
NOVECON TECHNOLOGIES CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
AND
REPORT THEREON
<PAGE>
Report of Independent Accountants
---------------------------------
To the Board of Directors and Shareholders of
Novecon Technologies Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Novecon Technologies Corporation (the "Company") and its subsidiary at December
31, 1999, 1998, and 1997 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
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 of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in Note 2 to the consolidated financial statements, the Company is
an early stage technology company that has experienced losses from operations
since inception, and has negative working capital and an accumulated deficit,
which collectively raise substantial doubt about the Company's ability to
continue an going concern. Management's plans in regards to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoppers LLP
McLean, Virginia
April 4, 2000
<PAGE>
<TABLE>
<CAPTION>
NOVECON TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
December 31,
-----------------------------------
1999 1998
----------------- -----------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 594,795 $ 734,132
Cash in trust 25,000 100,000
Accounts receivable 411,030 231,595
Inventory 326,486 257,481
Prepaid expenses and other assets 174,694 69,157
--------------- ----------------
Total current assets 1,532,005 1,392,365
Property and equipment, net 1,938,905 2,244,831
Intangibles 1,320,000 1,680,000
Other assets 54,591 36,258
--------------- ----------------
Total assets $ 4,845,501 $ 5,353,454
=============== ================
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' DEFICIT
Current liabilities:
Notes payable, current $ 2,529,035 $ 1,616,667
Accounts payable 717,715 314,836
Accrued liabilities 387,719 172,012
Customer deposits 165,003 -
Capital lease obligations, current 72,038 56,066
--------------- ----------------
Total current liabilities 3,871,510 2,159,581
Notes payable 416,667 833,333
Capital lease obligations, long-term 121,867 82,612
--------------- ----------------
Total liabilities 4,410,044 3,075,526
--------------- ----------------
Minority interest in subsidiary 17,316 486,826
Commitments and contingencies
Mandatorily redeemable convertible preferred stock:
Series A preferred stock: $0.01 par value; 500,000 shares authorized; 255,729
and 172,029 shares issued and outstanding at December 31, 1999 and 1998,
respectively 3,840,126 2,354,367
Shareholders' deficit:
Preferred stock: $0.01 par value; 500,000 shares authorized, no shares issued
and outstanding at December 31, 1999 and 1998, respectively. Liquidation
preference of $13.50 at December 31, 1998. - -
Common stock: $0.01 par value; 1,500,000 shares authorized; 599,334 and
596,000 shares issued and outstanding at December 31, 1999 and 1998,
respectively. 5,993 5,960
Additional paid-in capital 1,514,279 1,263,557
Accumulated deficit (4,942,257) (1,832,782)
--------------- ----------------
Total shareholders' deficit (3,421,985) (563,265)
--------------- ----------------
Total liabilities, mandatorily redeemable convertible preferred stock
and shareholders' deficit $ 4,845,501 $ 5,353,454
=============== ================
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NOVECON TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1999, 1998 and 1997
December 31,
------------------------------------------------------
1999 1998 1997
---------------- ------------------- -----------------
Revenues:
<S> <C> <C> <C>
Contract revenues $ 1,795,939 $ 1,364,576 $ 438,024
Product revenues 454,680 146,471 60,282
--------------- ------------------ -----------------
Total revenues 2,250,619 1,511,047 498,306
--------------- ------------------ -----------------
Cost of revenues:
Contract revenues 1,490,736 1,039,180 362,455
Product revenues 761,087 292,826 173,318
--------------- ------------------ ----------------
Total cost of revenues 2,251,823 1,332,006 535,773
--------------- ------------------ ----------------
Gross profit (loss) (1,204) 179,041 (37,467)
Operating expenses:
Research and development 1,254,030 433,099 4,331
Sales and marketing 146,184 100,831 27,056
General and administrative 1,730,916 807,603 761,432
--------------- ------------------ ----------------
Total operating expenses 3,131,130 1,341,533 792,819
--------------- ------------------ ----------------
Loss from operations (3,132,334) (1,162,492) (830,286)
Interest income 34,369 25,446 14,343
Interest expense (587,621) (93,582) (49)
Other income (expense), net (32,200) (27,320) 2,227
--------------- ------------------ ----------------
Loss before minority interest of subsidiary (3,717,786) (1,257,948) (813,765)
Minority interest in net loss of subsidiary 608,311 311,192 69,442
--------------- ------------------ ----------------
Net loss $ (3,109,475) $ (946,756) $ (744,323)
=============== ================== ================
Net loss per share
Basic $ (5.20) $ (1.59) $ (1.25)
=============== ================== ================
Dilution $ (5.20) $ (1.59) $ (1.25)
=============== ================== ================
Average number of shares used in computation
Basic 597,667 596,000 595,500
=============== ================== ================
Dilution 597,667 596,000 595,500
=============== ================== ================
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NOVECON TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Years Ended December 31, 1999, 1998 and 1997
Total
Common Stock Additional Shareholders'
-------------------- Paid-In Accumulated Equity
Shares Amount Capital Deficit (Deficit)
-------- ----------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 595,000 $ 5,950 $ 1,138,401 $ (141,703) $ 1,002,648
Issuance of common stock, net of $675 in issuance costs 1,000 10 12,815 - 12,825
Sale of subsidiary stock above book value - - 273,719 - 273,719
Net loss - - - (744,323) (744,323)
------- --------- ----------- ----------- -------------
Balance, December 31, 1997 596,000 5,960 1,424,935 (886,026) 544,869
Issuance of warrants - - 75,000 - 75,000
Sale of subsidiary stock below book value - - (236,378) - (236,378)
Net loss - - - (946,756) (946,756)
------- --------- ----------- ----------- -------------
Balance, December 31, 1998 596,000 5,960 1,263,557 (1,832,782) (563,265)
Issuance of common stock 3,334 33 49,977 - 50,010
Issuance of warrants - - 650,441 - 650,441
Sale of subsidiary stock below book value - - (211,077) - (211,077)
Accretion of Series A Preferred Stock to redemption value - - (238,619) - (238,619)
Net loss - - - (3,109,475) (3,109,475)
------- --------- ----------- ----------- -------------
Balance, December 31, 1999 599,334 $ 5,993 $ 1,514,279 $(4,942,257) $ (3,421,985)
======= ========= =========== =========== =============
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NOVECON TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
Years Ended December 31,
---------------------------------------------------
1999 1998 1997
---------------- ----------------- ----------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (3,109,475) $ (946,756) $ (744,323)
Adjustments to reconcile net loss to net cash used in
operating activities:
Minority interest in net loss of subsidiary (608,311) (311,192) (69,442)
Loss (gain) on disposal of property and equipment (4,235) 27,792 972
Amortization of note discount 263,443 - -
Warrants issued to third parties 57,700 - -
Depreciation and amortization 883,162 360,402 152,868
Changes in current assets and liabilities:
Accounts receivable (179,435) (126,475) (45,015)
Inventory (69,005) (148,422) (4,059)
Prepaid expenses and other assets (73,861) (27,441) (55,395)
Accounts payable 402,880 250,845 37,328
Accrued liabilities 380,710 82,095 35,351
--------------- ---------------- ----------------
Net cash used in operating activities (2,056,427) (839,152) (691,715)
--------------- ---------------- ----------------
Cash flows from investing activities:
Sale of property and equipment 4,235 12,514 -
Cash in trust 75,000 (100,000) -
Organizational costs - - 804
Purchase of property and equipment (82,235) (297,075) (142,026)
ATMI purchase - (800,000) -
--------------- ---------------- ----------------
Net cash used in investing activities (3,000) (1,184,561) (141,222)
--------------- ---------------- ----------------
Cash flows from financing activities:
Payments on note payable to ATMI (1,200,000) - -
Proceeds from note payable 2,025,000 - -
Proceeds from issuance of mandatorily redeemable
convertible preferred stock 1,255,500 2,441,156 -
Issuance of common stock - - 13,500
Proceeds from sale of warrants - 3,750 -
Principal payments on capital lease obligations (79,774) (34,623) -
Stock subscriptions receivable - - 154,690
Proceeds for sale of subsidiary common stock to minority
interest - 124,456 524,715
Stock issuance costs (80,636) (159,909) (675)
--------------- ---------------- ----------------
Net cash provided by financing activities 1,920,090 2,374,830 692,230
--------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents (139,337) 351,117 (140,707)
Cash and cash equivalents at beginning of year 734,132 383,015 523,722
--------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 594,795 $ 734,132 $ 383,015
=============== ================ ================
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
NOVECON TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
1. The Company and Summary of Significant Accounting Policies
Novecon Technologies Corporation, and its majority-owned subsidiary,
Sterling Semiconductor, Inc. (collectively, the "Company"), were
incorporated in the state of Delaware and the Commonwealth of Virginia,
respectively. The Company was originally established as a Delaware
limited partnership in 1993, and converted to a C corporation on
December 10, 1996. The Company manufacturers and sells SIC wafers,
which are used as a substrate material for making advanced
micro-electronic components. SIC is a third-generation semiconductor
material with properties superior to silicon, such as for greater heat
resistance and better electrical properties.
Use of estimates
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Principles of consolidation
The consolidated financial statements include the accounts of the
Company and its majority-owned U.S. subsidiary, Sterling
Semiconductor. All material intercompany accounts and transactions
have been eliminated.
Revenue recognition
Product revenues are recognized upon shipment to customers.
Consulting revenue is recognized over the contract period or as
services are rendered. Contract revenue on cost-type contracts are
recognized to the extent of costs incurred plus a proportional
amount of the fee earned. Contract revenue on fixed-price
contracts are recognized using the percentage-of-completion method
based on costs incurred in relation to total estimated costs.
<PAGE>
Cash and cash equivalents
The Company considers all highly liquid investments purchased with
an original maturity of three months or less to be cash
equivalents.
At December 31, 1999 and 1998 approximately $609,000 and $661,000,
respectively, of cash and cash equivalents are held in money
market funds.
In October 1999, the Company entered into a one-year agreement
with Bank of America for credit card clearing service, which
required the Company to establish a $25,000 cash deposit account
to cover potential chargebacks. This cash deposit is included in
cash in trust at December 31, 1999.
Concentration of credit risk
The Company's accounts receivable are derived from revenue earned
from customers located in the U.S. The Company performs ongoing
credit evaluations of its customers' financial condition and,
generally, requires no collateral from its customers. All sales
are denominated in U.S. dollars. The Company maintains an
allowance for doubtful accounts receivable based upon the expected
collectibility of accounts receivable.
The U.S. government represented 56%, 63% and 29% of total revenues
for the years ended December 31, 1999, 1998 and 1997,
respectively. In addition, revenue from certain commercial
customers exceeded 10% of revenues during the years ended December
31, 1999, 1998 and 1997. Company A represented 24%, 20% and 25% of
total revenues for the years ended December 31, 1999, 1998 and
1997, respectively.
Approximately 42% and 51% of accounts receivable at December 31,
1999 and 1998, respectively, are due from the U.S. Government. In
addition, accounts receivable from certain commercial customers
exceeded 10% of total accounts receivable for the years ended
December 31, 1999 and 1998. Company A represents 31% and 23% of
total accounts receivable for the year ended December 31, 1999 and
1998, respectively.
<PAGE>
Inventory
Inventory is stated at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
Property and equipment
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, generally
three to five years, or the lease term of the respective assets.
Long-lived assets
The Company evaluates the recoverability of its long-lived assets
in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," (SFAS No. 121). SFAS No. 121
requires recognition of impairment of long-lived assets in the
event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets. The Company
also assesses the impairment of intangibles, including goodwill,
based on the future estimated cash flows of the acquired
technology and business information. Based on its most recent
analysis, the Company believes that there was no impairment of its
property, plant and equipment or intangibles as of December 31,
1999.
Stock-based compensation
The Company accounts for stock-based employee compensation
arrangements in accordance with provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," (APB No. 25) and complies with the disclosure
provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," (SFAS No. 123).
Reclassifications
Certain amounts in the 1998 and 1997 financial statements have
been reclassified to conform with the 1999 presentation.
<PAGE>
Income taxes
The Company accounts for deferred income taxes using the liability
method, under which the expected future tax consequences of timing
differences between the book and tax basis of assets and
liabilities are recognized as deferred tax assets and liabilities.
Segment Reporting
SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information, requires that a business enterprise report
financial and descriptive information about its reportable
operating segments. The Company currently manages its business as
one operating segment and, accordingly, does not report segment
information.
Earnings per Share
SFAS No. 128, Earnings per Share, requires that "basic" and
"diluted" earnings per share replace primary and fully diluted
earnings per share, respectively, for financial statement periods
ending after December 15, 1997. The Company had adopted SFAS No.
128 for the years ended December 31, 1999, December 31, 1998, and
December 31, 1997.
The basic calculation computes earning per share based only on the
weighted average number of shares outstanding during the year. The
diluted calculation uses the weighted average number of shares
outstanding plus common stock equivalents. The Company did not use
its stock options, Series A preferred stock, and warrants,
equivalent shares of common stock, in calculating diluted earnings
per share for the years ended December 31, 1999, December 31,
1998, and December 31, 1997, because their effect would have been
antidilutive.
<PAGE>
2. Financing Activities
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company
contemplates ongoing development of its technology, revenue producing
operations and realization of assets in the ordinary course of
business. The Company is an early stage technology company and
accordingly has incurred net losses since its inception and had
negative working capital of approximately $2,340,000 and an accumulated
deficit of approximately $4,942,000 at December 31, 1999. Additional
capital will be needed to further the Company's development and achieve
its business plan, either through new financing agreements or by means
of a business combination with an entity possessing such capital. The
Company is currently in negotiations with an outside party for the
purchase of 100% of the Company's outstanding common stock. Should this
business combination not be completed, management intends to pursue
alternative financing sources. These new sources might include, but are
not limited to, investments in the Company by new investors, additional
investment by current investors or a public offering of stock.
There is no assurance that the business combination will be successful
or that sufficient amounts of alternative financing can be obtained
and, therefore, substantial doubt currently exists regarding the
Company's ability to continue as a going concern.
3. Balance Sheet Components
<TABLE>
<CAPTION>
December 31,
-----------------------------
1999 1998
-------------- --------------
Inventory:
<S> <C> <C>
Finished goods $ 123,440 $ 41,212
Work-in-progress 135,112 150,029
Raw materials 86,397 79,024
------------- -------------
344,949 270,265
Less reserve for obsolete inventory (18,463) (12,784)
------------- -------------
$ 326,486 $ 257,481
============= =============
Property and Equipment:
Equipment $ 2,529,127 $ 2,335,502
Computers, software and hardware 61,872 43,984
Furniture and fixtures 39,928 34,205
Leasehold improvements 81,400 81,400
------------- -------------
2,712,327 2,495,091
Less accumulated depreciation and amortization (773,422) (250,260)
------------- -------------
$ 1,938,905 $ 2,244,831
============= =============
</TABLE>
<PAGE>
Equipment includes $308,302 and $173,301 of manufacturing equipment and
computer equipment, respectively, under capital leases at December 31,
1999 and 1998. Accumulated depreciation under capital leases totaled
$65,036 and $20,680 at December 31, 1999 and 1998. Total depreciation
expense for the three years ended December 31, 1999, 1998 and 1997 was
$523,162, $218,075, and $49,157, respectively.
4. ATMI Commercial and Development Agreement
On June 30, 1998, the Company entered into a Commercial and Development
Agreement with Advanced Technology Materials, Inc. ("ATMI") for the
license and purchase of certain technologies, equipment, inventory,
business information and the creation of a joint research and
development program.
Under this agreement, the Company purchased certain assets and was
granted an exclusive, worldwide, non-transferable license to use
technology related to the production of silicon carbide substrates,
which is owned by ATMI. In consideration for these assets, the Company
paid $800,000, issued 400 shares of Sterling Semiconductor's common
stock valued at $1,000 per share and delivered two promissory notes,
Note A and Note B. Note A has a principal amount of $1,250,000, payable
over three years in three equal installments beginning in December 1999
and bears interest at 10.5 % per annum. The required three payments of
Note A were extended to June 2000, September 2000 and March 2001. Note
B has a principal amount of $1,200,000 payable on February 1, 1999 and
bears interest at 7% per annum. The required payment of Note B was
extended to June 30, 1999 and was paid on that date. In 1999 and 1998
interest expense on Note A and B totaled $173,624 and $70,177,
respectively.
In addition, the Company agreed to pay ATMI royalties of 2% of net
sales of licensed products after June 30, 1999. These royalties include
minimum quarterly payments of $6,000, $12,000, $21,000 and $30,000 for
each quarter in the years ending June 30, 2000, 2001, 2002 and 2003,
respectively. Total royalties shall not exceed $1,000,000. In 1999
total royalty payments to ATMI were $8,000.
<PAGE>
The Company capitalized $1,400,000 related to the license and allocated
$1,750,000, $100,000 and $400,000 of the purchase price to equipment,
inventory and business information, respectively, based on independent
appraisals and estimates of fair values. The license, equipment and
business information are being amortized over their estimated useful
lives of five years. Amortization expense for the years ended December
31, 1999 and 1998 was $360,000 and $120,000, respectively.
The Company and ATMI agreed to establish a joint development program
for research to be performed by ATMI. The Company has agreed to fund
the development program and pay to ATMI $3,000,000, in monthly
installments of $83,333 beginning September 2, 1998. The Company is
expensing these costs as they are incurred. The development program
will expire at the earlier of the termination of the Commercial and
Development Agreement or September 1, 2001.
5. Note Payable
In June 1999, the Company entered into a loan agreement (the "June 1999
Note") with an investment group for $2,025,000. The loan accrues
interest at 10% and is due June 2000. The loan is immediately due and
payable upon a change in control, breach of covenant or material
misrepresentation or distribution of cash or assets which exceeds the
last twelve months of pretax earnings. In connection with the debt, the
Company issued a detachable warrant to purchase 108,135 shares of the
Company's common stock for $15.00 per share. The warrant is immediately
exercisable and has a seven-year life. Using the Black-Scholes
valuation model, the Company determined that the fair value of the
warrant was approximately $838,000. The Company allocated $592,741 for
the warrant to shareholders' equity and $1,432,259 to the note payable,
based upon their relative fair values. The resulting debt discount will
be amortized to interest expense using the effective interest rate
method over the term of the note. At December 31, 1999, approximately
$367,464 of interest expense has been recorded.
In January 2000, the Company entered into an additional loan agreement
with the same investment group for $2,025,000. This loan has terms and
conditions consistent with the June 1999 note.
<PAGE>
6. Income Taxes
Novecon Technologies Corporation has not recorded a provision or
benefit for income taxes for the years ended December 31, 1999, 1998
and 1997. The net increase in the valuation allowance of approximately
$1,193,000 in 1999 relates primarily to income tax operating losses
generated from the current year operating loss.
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1999 1998 1997
--------------- ---------------- ---------------
Deferred tax assets:
<S> <C> <C> <C>
Net operating loss carryforwards $ 2,082,017 $ 900,416 $ 326,815
Accruals to cash adjustment 49,481 31,225 25,482
Amortization 128,466 37,266 26,859
Tax credits 42,096 28,151 282
Warrants 93,363 47,203 -
Accrued vacation and other 3,692 2,493 368
-------------- --------------- --------------
2,399,115 1,046,754 379,806
-------------- --------------- --------------
Deferred tax liabilities:
Depreciation (340,566) (181,525) (18,829)
-------------- --------------- --------------
Net deferred tax assets 2,058,549 865,229 360,977
Valuation allowance (2,058,549) (865,229) (360,977)
-------------- --------------- --------------
$ - $ - $ -
============== =============== ==============
</TABLE>
Management believes that, based on a number of factors, it is more
likely than not that the deferred tax assets will not be utilized, and
as a consequence, a full valuation allowance has been recorded. At
December 31, 1999, the Company had approximately $5,480,000 of federal
and state net operating loss carry forwards available to offset future
taxable income which expire in varying amounts beginning in 2011. Under
the Tax Reform Act of 1986, the amounts of and benefits from net
operating loss carryforwards may be impaired or limited in certain
circumstances.
<PAGE>
7. Commitments
Leases
The Company leases office space and equipment under noncancelable
operating and capital leases with various expiration dates through
2004, including lease options at the discretion of the Company,
which the Company intends to exercise. The Company subleased
certain properties through April 1999. Sublease income of $15,500
was recorded in 1999. Rent expense for the years ended December
31, 1999, 1998 and 1997 was $234,441, $143,866 and $100,105,
respectively. The terms of the facility lease provide for rental
payments on a graduated scale. The Company recognizes rent expense
on a straight-line basis over the lease period, and has accrued
for rent expense incurred but not paid.
<TABLE>
Future minimum lease payments are:
Capital Operating
Year Ending December 31, Leases Leases
----------------------------------------------------------- ------------- --------------
<S> <C> <C>
2000 $ 108,950 $ 208,698
2001 66,827 2,006
2002 50,453 167
2003 33,887 -
2004 11,803 -
------------ -------------
Total minimum lease payments and sublease income 271,920 $ 210,871
=============
Less amount representing interest (78,015)
------------
Present value of capital lease obligations 193,905
Less current portion (72,038)
------------
Long-term portion of capital lease obligations $ 121,867
============
</TABLE>
<PAGE>
8. Mandatorily Redeemable Convertible Preferred Stock
On January 15, 1998, the Company authorized 500,000 shares of Preferred
Stock having a par value of $0.01 per share. All shares issued to date
have been designated by the Company as Class A Convertible Preferred
Stock ("Series A"). The shares are identical to the Company's common
stock except, for preferences in liquidation and dividend payments. The
Series A Preferred Stock shall be superior in priority to the Common
Stock of the Company as to the Company's assets. Each share of Series
A Preferred Stock may be converted, at any time and at the option of
the holder, without payment of any consideration, into one share of
common stock. In the event of the involuntary liquidation, dissolution
or winding up of the Company, the holders of Series A Preferred Stock
shall have the first right of return of $13.50 per share, interest at a
rate of 200 basis points over the then current yield on the three-year
Treasury Note on the date of such liquidation. Within four years after
the issuance of Series A Preferred Stock the Company is obligated to
repurchase such shares. The repurchase price shall equal $13.50 per
share, interest at a rate of 200 basis points over the then current
yield on the three-year Treasury Note on the date of such liquidation,
less any amount per share that shall have been previously paid as a
dividend any accrued but unpaid dividends. As of December 31, 1999, the
liquidation preference was $15.90 per share. Holders of Series A
Preferred Stock shall be entitled to receive a cumulative annual
dividend at the rate of $0.54 per share from funds legally available.
During 1998, the Company sold 172,029 shares of its Series A
Convertible Preferred Stock to third parties at $15.00 per share. From
January 1, 1999 to March 31, 1999, the Company has sold 83,700 shares
of its Series A Convertible Preferred Stock to third parties at $15.00
per share. As of December 31, 1999, the liquidation preference of these
shares was $15.02 per share.
9. Warrants for Common Stock
On February 24, 1998, in exchange assistance in fund raising and cash
of $3,750 the Company issued warrants to purchase 37,500 shares of the
Company's common stock for $13.50 per share. Such warrants are
outstanding at December 31, 1998 and expire on February 1, 2003. Using
the Black-Scholes valuation model, the Company determined that the fair
value of the warrants were $75,000 at the date of grant. This amount is
considered a cost of issuing stock and raising capital and accordingly
has been recorded as a reduction to the mandatorily redeemable
convertible preferred stock.
In March 1999, in exchange for acting as its business advisor the
Company issued a third party a warrant to purchase 10,000 shares of the
Company's common stock for $15.00 per share. Such warrants are
immediately exercisable and expire on February 1, 2003. Using the
Black-Scholes valuation model, the Company determined that the fair
value of the warrants was $57,700 at the date of grant, which was
expensed over the period the services were furnished.
<PAGE>
10. Stock Option Plans
Novecon Technologies Corporation
The Company has an Option Plan for Selected Key Employees. The
stock options granted under this plan are nonqualified stock
options. The Company has reserved 150,000 shares of Novecon
Technologies Corporation's common stock for issuance under this
plan. Stock options generally vest immediately or over a period
not to exceed one year. Additional stock options may be issued, so
that each of these option holders maintains exercisable stock
options equal to 50,000 shares or 5% of the outstanding common
stock, whichever is greater.
The Company has an Option Plan for Non-Employee Advisory Board
members. The Plan provides for the granting of stock options to
certain non-employee advisors. The stock options granted under
this plan are nonqualified stock options. The Company has reserved
21,425 shares of Novecon Technologies Corporation's common stock
for issuance under this plan. Stock options generally vest
immediately or over a period not to exceed one year. Additional
stock options may be issued, so that each of these option holders
maintains exercisable stock options equal to 2,857 shares or
0.2857% of the outstanding common stock, which ever is greater.
On December 31, 1996, the Company adopted the Novecon Technologies
Corporation Employee Stock Option Plan (the "Novecon Employee
Plan"), effective January 1, 1997. The Novecon Employee Plan
provides for the granting of stock options to employees, directors
and consultants of the Company. Stock options granted under the
Novecon Employee Plan may be either incentive stock options or
nonqualified stock options. Incentive stock options (ISO) may be
granted only to Company employees (including officers and
directors who are also employees). Nonqualified stock options
(NSO) may be granted to Company employees and consultants. The
Company has reserved 130,000 shares of Novecon Technologies
Corporation's common stock for issuance under the plan. Stock
options under the Novecon Employee Plan may be granted for periods
of up to ten years and at prices determined by the Board of
Directors. Stock options generally vest immediately or over a
period not to exceed one year.
<PAGE>
The following table summarizes the stock option activity under all
three plans:
<TABLE>
<CAPTION>
Weighted
Number Option Average
Of Amount Exercise
Shares Per Share Price
------------ --------------- ---------------
<S> <C> <C> <C>
Outstanding, December 31, 1996 114,285 $ 2.50-11.50 $ 5.42
Granted 62,500 11.50 11.50
----------- -------------- --------------
Outstanding, December 31, 1997 176,785 2.50-11.50 7.57
Granted 88,498 13.50-14.00 13.62
----------- -------------- --------------
Outstanding, December 31, 1998 265,283 2.50-14.00 9.59
Granted 32,432 14.00 -15.00 14.62
Forfeited 4,285 5.00-13.50 9.13
----------- -------------- --------------
Outstanding, December 31, 1999 293,430 $ 2.50-15.00 $ 10.18
=========== ============== ==============
Options exercisable, December 31, 1999 235,718 $ 2.50-15.00 $ 10.16
=========== ============== ==============
</TABLE>
As of December 31, 1999 there were 7,995 options available for
future grant under the Novecon Employee Plan.
Sterling Semiconductor
On May 1, 1997, Sterling Semiconductor, Inc. adopted the Sterling
Semiconductor, Inc., Employee Stock Option Plan (the "Sterling
Employee Plan"). The Sterling Employee Plan provides for the
granting of stock options to employees, directors and consultants
of the Company. Stock options granted under the Sterling Employee
Plan may be either incentive stock options or nonqualified stock
options. Incentive stock options (ISO) may be granted only to
Company employees (including officers and directors who are also
employees). Nonqualified stock options (NSO) may be granted to
Company employees and consultants. Sterling Semiconductor has
reserved 1,300 shares of Sterling
Semiconductor's common stock for issuance under the plan. Stock
options under the Sterling Employee Plan may be granted for
periods of up to ten years and at prices determined by the Board
of Directors. Stock options generally vest immediately or over a
period not to exceed one year.
<PAGE>
The following table summarizes the stock option activity under the
Sterling Employee Plan:
<TABLE>
<CAPTION>
Weighted
Number Option Average
of Amount Exercise
Shares Per Share Price
----------- ----------------------- ---------------
<S> <C> <C> <C>
Outstanding December 31, 1996
Granted 900 $575.00-1,000.00 $ 669.44
---------- ---------------- --------
Outstanding December 31, 1997 900 575.00-1,000.00 669.44
Granted 175 1,000.00 1,000.00
---------- ---------------- --------
Outstanding December 31, 1998 1,075 575.00-1,000.00 723.25
Granted 215 1,000.00 1,000.00
---------- ---------------- --------
Outstanding, December 31, 1999 1,290 $575.00-1,000.00 $ 769.17
========== ================ ========
Options exercisable, December 31, 1999 1,130 $575.00-1,000.00 $ 736.48
========== ================ ========
</TABLE>
As of December 31, 1999 there were 3,046 options available for
future grant under the Sterling Employee Plan.
In addition outside of the Sterling Employee Plan, in December
1996, Sterling Semiconductor entered into separate stock option
agreements with four individuals who assisted in the development
of Sterling Semiconductor's wafer technology. The stock option
agreements provide for the issuance of 6,848 shares of Sterling
Semiconductor common stock at $0.10 per share. The stock options
vest based upon certain performance metrics. In 1998, the stock
option agreements were amended and 2,267 stock options were
cancelled based in part upon non-performance. The revised stock
option agreements provide for the issuance of 4,581 shares of
Sterling Semiconductor's common stock at $0.10 per share. The
stock options are fully vested as of December 31, 1998.
<PAGE>
The following tables summarize information about stock options
outstanding at December 31, 1999:
Novecon Technologies Corporation
<TABLE>
<CAPTION>
Number Number
Exercise Price Outstanding Remaining Contractual Life (years) Exercisable
------------------ ----------------- -------------------------------------------------------
<S> <C> <C> <C>
$ 2.50 - 5.00 78,000 4.50 78,000
11.00-14.00 215,430 7.84 157,718
------- -------
293,430 235,718
======= =======
Sterling Semiconductor, Inc.
Number Number
Exercise Price Outstanding Remaining Contractual Life (years) Exercisable
------------------ ----------------- -------------------------------------------------------
$ 575.00 700 7.01 700
1,000.00 590 8.18 430
----- -----
1,290 1,130
===== =====
</TABLE>
Fair value disclosures
Had compensation cost for the Company's stock-based compensation
plan's been determined based on the fair value at the grant dates
for the awards under a method prescribed by SFAS No. 123, the
Company's net loss would have been as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1999 1998 1997
---------------- -------------- -------------
Net loss:
<S> <C> <C> <C>
As reported $ (3,109,475) $ (946,756) $ (744,323)
=============== ============== =============
Pro forma $ (3,319,565) $ (1,099,254) $ (1,451,383)
=============== ============== =============
</TABLE>
<PAGE>
The Company calculated the fair value of each option grant on the
date of grant using the Black-Scholes valuation model with the
following assumptions: dividend yield at 0%; weighted average
expected option term of 8, 8.3, 8.4 years, and risk free interest
rate of 6.25%, 4.67% and 5.71% for the years ended December 31,
1999, 1998 and 1997, respectively. The weighted average fair value
of options granted during 1999, 1998 and 1997 was $5.81, $5.90,
and $7.30, respectively.
11. Employee Benefit Plan
The Company sponsors a SEP-IRA plan covering all employees after a
specified period of employment. Contributions made by the Company are
determined annually by the Board of Directors. To date, no employer
contributions have been made.
12. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1999 1998 1997
-------------- -------------- ---------------
Non-cash investing and financing transactions:
<S> <C> <C> <C>
Issuance of common stock for prepaid expenses $ 50,010 $ - $ -
============= ============== ===============
Issuance of common stock for ATMI purchase $ - $ 400,000 $ -
============= ============== ===============
Issuance of note payable for ATMI purchase $ - $ 2,450,000 $ -
============= ============== ===============
Interest paid $ 331,459 $ 23,404 $ -
============= ============== ===============
</TABLE>
13. Capital Structure
During 1999, the Company began a comprehensive review of its capital
structure. As a result of this review it was determined that the
Company had not fully complied with the provisions of certain federal
and state security regulations. Accordingly, on October 22, 1999 the
Board of Directors agreed to fully inform the Company's preferred and
common shareholders of this matter and to offer them rescission.
Shareholders were notified on December 7, 1999 and were given 30 days
in which to exercise their rescission right. Shareholders rescinded
14,012 shares of common stock and 1,000 shares of Series A mandatorily
redeemable preferred stock for $84,351. This amount was paid to
shareholders on March 14, 2000.
<PAGE>
14. Subsequent Events
During February 2000, Novecon Technologies Corporation ("Novecon"), and
its majority-owned subsidiary, Sterling Semiconductor, Inc.
("Sterling") entered into an Agreement and Plan of Merger (the
"Agreement"). Under the agreement, Novecon was merged with and into
Sterling in accordance with the provisions of Article 12 of the
Virginia Stock Corporation Act and of Section 252 of the Delaware
General Corporation Law. Concurrent with this agreement Sterling's
common stock was split 75-for-1, these financial statements have not be
updated to reflect this split.
