SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
Commission File Number 0-28375
RHOMBIC CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 86-0824125
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
11811 N. Tatum Blvd. # 3031, Phoenix, Arizona 85028
(Address of principal executive offices) (Zip Code)
Telephone Number: (602) 953-7702
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
-------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S) 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
At December 31, 2001, the aggregate market value of the registrant's Common
Stock held by non-affiliates of the registrant was approximately $ 1,332,353
At March 15, 2002, the number of shares outstanding of registrant's Common
Stock was 28,697,042.
PART I
ITEM 1 - BUSINESS
GENERAL
Rhombic Corporation ("Rhombic" or the "Company"), is a development-stage company
incorporated under the laws of the State of Nevada. The corporation was
initially formed on February 26, 1987 as Toledo Medical Corporation. The name
was changed to Almaz Space Corporation on February 9, 1991 and to Ready When You
Are Funwear, Inc. on April 14, 1992. On December 30, 1994 a group of individuals
acquired control of the corporation. On February 17, 1995, they changed the name
to Rhombic Corporation. The Company is currently headquartered in Phoenix,
Arizona.
The Company is in the development stage and its efforts, since inception, have
been primarily focused on the acquisition of the rights to intellectual property
that could lead to the development of innovative technologies. During the years
of 1999 and 2000 it began to focus on the research and development of its
portfolio of acquired intellectual property. During 2001, the Company's main
objective was to identify and develop specific applications from its
intellectual property in order to make them commercially marketable. The
business strategy of the Company is to develop a specific application from a
technology, then commence or contract for a marketing effort for the developed
application that would generate sales.
The Company has four wholly owned inactive subsidiaries, Rockford Technology
Associates, Inc. ("Rockford"),Nanophase Diamond Technologies, Inc.
("Nanophase"), AEP Technologies, Inc. ("AEPT") and Rhombic Detection
Technologies, Inc.
By assignment from the University of Illinois on September 5, 1995, filed with
the Patent and Trademark Office, Rockford owns a patent for the Inertial
Electrostatic Confinement and Neutron Monitor technology. On June 27, 1996,
Rockford entered a licensing agreement with Daimler Benz Aerospace and the
University of Illinois by which it is entitled to receive a long-term royalty on
all IEC sales throughout the world including North America and may engage in
direct marketing of the technology in North America without restriction. In
return, Rockford assigned to Daimler Benz Aerospace, "Daimler", its right, title
and interest to the Inertial Electrostatic Confinement technology for its
development and commercialization by Daimler Benz Aerospace. In late August
2000, Astrium, which is a subsidiary of Daimler-Chrysler Aerospace, informed
Rhombic that they would not continue to self-fund the Neutron Generator project
beyond December 31, 2000. As a result, Rhombic attempted to form of a joint
venture between itself, Astrium and other partners that would provide capital
and technological expertise to commercialize the technology within certain
applications. The joint venture company was planned to originate in the wholly
owned subsidiary of Rhombic named AEP Technologies, Inc. ("AEPT"). Agreements
were obtained from all of the participating joint venture partners to perform
their respective roles; however, Rhombic was unable to raise the necessary
capital to begin the project.
Nanophase owns the Diamond Film Forced Diffusion technology. No activity
occurred during 2001 in the subsidiary.
Rhombic Detection Technologies, Inc. was formed during 2000 in anticipation of
Rhombic's being awarded a contract from the Department of Energy ("DOE") to
develop a Beryllium detection device. Rhombic was not awarded the contract by
the DOE; therefore, the subsidiary was not used.
1
As a technology transfer and development start-up company, Rhombic has limited
finances. On March 8, 2001 it signed a $ 2.5 million convertible debenture to be
funded with installment payments starting May 1, 2001 in order to accomplish its
growth objectives and development of products and marketing of its technologies.
The Holder funded $200,000 on the debenture and converted the advances into
1,166,142 shares of the Company under the terms of the debenture. On July 20,
2001, the Company withdrew its registration statement for the shares issued and
to be issued under the debenture because it was no longer applicable to the
Company.
There is no assurance that the Company will be able to secure any additional
funding necessary for such growth and expansion. There is also no assurance that
even if the Company obtains adequate funding to complete any contemplated
acquisition, such acquisition will succeed in enhancing the Company's business
and will not ultimately have an adverse effect on the Company's business and
operations.
On November 5, 2001, the Company entered into a non-binding letter of intent
with Famco Holding Company, LLC to reach a definitive agreement wherein
Rhombic would acquire all the outstanding shares of six corporations that it
owned. On March 18, 2002, Rhombic canceled the letter intent because it had not
received sufficient financial information from the six corporations in order to
negotiate an agreement.
ACQUISITION OR DISPOSITION OF ASSETS
The Company intends to make future acquisitions of with a revenue generating
operation. However, currently, the Company does not have a fixed source of
capital to finance such acquisitions. In this respect, the Company intends to
accomplish its acquisition plans by exchange of the Company stock. There is no
assurance that the Company will be able to arrange for such acquisitions or as
to the trading price or liquidity of the Company's common stock. Low trading
price or poor liquidity of the Company's common stock may adversely affect the
Company's ability to engage in future acquisitions and to accomplish its growth
objectives.
On January 3, 2000, the Company acquired the right, title and interest in an
invention named "Micro Wave Driven Ultra Violet Lamp" or "Excimer Lamp". The
seller agreed to provide technical support for the research and development of
the Excimer Lamp when the development takes place. The Company issued 100,000
restricted shares at a deemed value of $ 281,250 and issued the inventor and
option to purchase 50,000 shares of its common stock at $ 1.00 per share until
December 31, 2000. The option was not exercised on December 31, 2000 and
expired.
On April 12, 2000, the Company issued 100,000 shares of its common stock at a
deemed value of $194,250 for the patent rights, title and interest to an
invention called long-lived nuclear waste by low energy nuclear reactions in
host metals and Disperse Composite Material "LENR/DCM". The invention is a
defined process to convert the long-lived nuclear wastes by low energy nuclear
reactions using hydrogen in host metals. The inventor and seller, Dr. Heinrich
Hora, agreed to provide reasonable technical support under a compensation
agreement to be decided upon for the research and development of the technology.
2
The Company is seeking joint venture partners or others to effect
commercialization of its other impaired technologies. There is no assurance that
Company will be able to locate a joint venture partner to develop any or all of
these technologies. In addition, there is no assurance that even if a joint
venture partner is found that any of these technologies will ever result in
marketable or viable products.
INTELLECTUAL PROPERTY
In early July 2001, the Company hired a scientific consultant to evaluate all of
the patents and patent applications of the Company for relevance to potential
commercial applications. The consultant first stated that all patents and
provisional patents involving Field Enhanced Diffusion by Optical Activation
(FEDOA) which covered diamond based fuel cells, diamond doping and the removal
of impurities, listed inventors that are or were faculty members of the
University of Missouri at Columbia. The University Administration asserts that
all inventions created at the University by its faculty members are its
intellectual property and not Rhombic's. The following opinions on Rhombic's
provisional patents invented by faculty members at the University of Missouri
are summarized as follows:
1. Provisional patents for the System and Method for Diamond Based Fuel
Cells give substantial evidence that the described process using FEDOA
is too slow to be economically feasible.
2. Provisional patent applications covering the doping of natural and
chemically vacuum deposited (CVD) diamond using FEDOA is too slow of a
process to be economically feasible. Additional research into
electrical applications of these provisional patents could be used
with other doping processes to explore potential commercial
applications.
3. Provisional patent applications for a System and Method for Removal of
Imputities from materials such as semiconductors using FEDOA would
require significantly more research to determine commercial value.
Although the process appears to offer an increase yield of chips
obtainable from wafers, the commercial viability is questionable
because the FEDOA is very slow for commercial applications.
4. Provisional patent applications for Carbon Crystal Growth Using
Electric Emission Enhanced Showerhead Hot Filament Chemical Vapor
Deposition offers an improved process for the CVD process, but the
applications and inventors do not have enough data to determine
commercial viability.
The conclusion of the consultant and the company was not to continue the patent
process of the above listed provisional patent applications because of (1) the
limited economic viability due primarily to the process speed of FEDOA; (2) the
high costs of patent counsel and the direct costs to obtain domestic and foreign
patents; and (3) the potential exposure to royalty payments to the University of
Missouri with corresponding costs of defending ownership of the patents.
3
The consultant also evaluated Rhombic's intellectual property that was
unaffected by potential claims from the University of Missouri. His opinions are
as follows:
1. Provisional patent for the Method and System for Manufacturing
Disperse Composite Materials is of great economic value if the process
is fully developed for the numerous applications that are being
proposed now by industry or that will emerge shortly.
2. Provisional patent for a Method of Contact Diffusion into Diamond and
Other Crystalline Structures and Products using its thermal diffusion
method is commercially viable.
The consultant recommended proceeding with a development plan for commercial
applications involving the Manufacturing of Disperse Composite Materials. He
also recommended to proceed with Contact Diffusion into Diamond if reasonable
arrangements could be made to secure a license to receive the processed diamond
material necessary to complete the process.
Upon the recommendations of the consultant, the company met with its patent
attorneys and determined that the application deadlines to extend the patents
pending on the Manufacturing of Disperse Composite Materials had expired. As a
result, the President, Roger Duffield, met with the inventors of the patents and
determined a commitment of $ 500,000 to $1,000,000 in capital would be needed to
begin a development program for any commercial applications that would provide
specific patent coverage for any process developed. Due to existing financing
problems that the Company was facing, Rhombic's President recommended a merger
with a private research and development company that had capital and scientists.
Unfortunately, Rhombic never received enough information from the company to
evaluate a merger and Rhombic's President subsequently resigned.
Rhombic impaired the value of FEDOA and its corresponding intellectual
properties as a result of the consultants report and its inability to raise
money during 2001 for the development of any of its applications.
Rhombic believes that its Ultra Violet (Excimer) Lamp may have commercial
application based upon numerous inquiries it has received from potential buyers.
This lamp uses a highly efficient photon emission reaction (7-50%) from excimers
to produce wavelengths of vacuum ultra violet (VUV) to visible light. An excimer
is an excited state in a molecule that dissociates into an unbound state. This
feature means that self-absorption in the lamp is small, and because of this,
the lamp can be scaled to large volumes without severe degradation of the
emission wavelength. The pioneering excimer lamp technology developed by
Columbia Research Instruments is now owned by Rhombic. It efficiently transfers
the energy of electricity to microwaves and microwaves to excimers (transfer
efficiency between 50 and 90%). This technology produces light of a pure
wavelength more efficiently than any other light source. This is significant
because light is used to induce chemical reactions that are wavelength specific.
The excimer lamp is orders of magnitude more cost effective (dollar/photon
bandwidth) than anything that current technology is capable of producing.
4
POTENTIAL COMMERCIAL APPLICATIONS
The development of these low-cost, high power and large-area VUV to visible
sources promises enormous potential for materials' processing and several
applications of such sources have already been demonstrated. These sources have
been used in the production of silicon dioxide; silicon nitride, silicon
oxynitride, tantalum pentoxide, titanium oxide, zinc oxide, PZT and polymers.
Multi-layered films can also be produced at low temperature (below 400oC) by
photo-induced processing (photo-CVD and sol-gel processing). Excimer photon
sources provide selective intense VUV to visible radiation at specific
wavelengths as opposed to other types of light sources. This narrow-band
radiation can initiate chemical reactions, break molecular bonds or modify
surface properties. Like other UV sources, Excimer lamps can be used to induce
photo-polymerization of special paints, varnishes, and adhesives, (a process
called UV-curing) but do so at a much lower cost per photon than any competitor.
The following is an overview of current and potential application areas:(1)
Materials deposition/coating of metals: for the production of dielectrics (high
and low dielectric constant materials), and semiconducting layers. (2) UV
curing: hardening of paints, lacquers, adhesives, e.g. for printing, textile
finishing, lamination, automotive engineering and equipment engineering. (3)
Surface treatment: surface etching including three-dimensional applications. (4)
Photochemistry:for-photo-chlorination,photosulpho-oxidation,
photonitrosylization, and photo-oxidation. (5) Photomedicine: for treatment of
skin conditions, and tanning. (6) Environmental technology: for ozone
generation, elimination of pollutants in water and air (chlorofluorocarbons
(CFCs), dioxins, etc.) (7) Fluorescent lamps: for flat plasma display panels
without the use of hazardous mercury. (8) Decontamination: for the destruction
of harmful bio-organisms in soil, water or air, for the decontamination of
biological agents in the aftermath of biological weapon attack, for the
destruction of hazardous chemicals in soil, water, or air, and for the
decontamination of chemical agents in the aftermath of a chemical weapon attack.
(9) Photosynthesis: for the initiation of photosynthesis at wavelengths suited
for chlorophyll absorption. modification of polymers, dry etching of polymers,
synthesis of hydrophilic polymers, increasing adhesion between metal and
polymer, and surface cleaning.
IMPAIRED INTELLECTUAL PROPERTY
All of Rhombic's intellectual properties are in the development phase. Rhombic's
current portfolio of impaired intellectual property includes (1) Inertial
Electrostatic Confinement and the Neutron Monitoring Detector, (2)
Diamond-reinforced Flywheel Battery and Radio Nuclide Battery, (3) Active Engine
("Rhombic Explorer") (4) Disperse Composite Material (5) LENR/DCM technology and
(6) Diamond Film and Forced Diffusion. All of these have been acquired by
Rhombic in exchange for shares of its common stock from different parties
including research companies and individual inventors throughout the world. In
certain cases, as part of the acquisition of the technology, the Company has
agreed to pay royalty fees based on sales, when and if any such sales occur.
1. Inertial Electrostatic Confinement "IEC"
The IEC device is a large, negatively charged grid ionizing the gas inside a
spherical vacuum chamber. The positive ions produced by this plasma are
attracted toward the central cathode (negative electrode). Since the grid is
mostly transparent, most of the ions will pass through the grid toward the
center of the device, rather than collide with the grid. At the center, many of
the ions will collide with each other. If the gas consists of fusionable fuels
(tritium, deuterium, helium-3), then some of the collisions will result in
fusion and release of energy. Increasing the number of fusion reactions would
increase the energy output of a fusion reactor, or would increase the number of
valuable fusion products produced (neutrons, helium-3). Potentially the IEC
device may become a source of energy. Currently, however, the IEC device does
not produce as much energy as is used to operate it.
5
Research on the technology began during 1993 under a licensing agreement between
Daimler-Benz Aerospace (DASA), the University of Illinois and Rockford
Technology Associates (a wholly owned subsidiary of Rhombic). The development
program objective was to develop a neutron generator for multiple applications.
As of December 2000, the development program with Astrium successfully proved
the demonstrator model of the neutron generator in continuous operation for over
5,000 hours. This achievement was significant because there are not any known
competitors that have been able to match the longevity of Astrium's
demonstrator. Competitors have been able to generate a higher output of neutrons
per second than the demonstrator. Current applications suitable for the Astrium
demonstrator are:
a. medical cancer treatments
b. bulk foodstuffs quality control
c. On-line measurement of coal quality at the power station for
combustion emission control.
d. On-line measurement of mineral quality in the mining industry.
e. Land mine detection
Rhombic acquired a related device during September 1999 utilizing the principle
described above. The device is named the Neutron Monitoring Detector and
monitors the speed and frequency of passing neutrons to assess the quality of
alloy. Some practical applications of this technology may include detection of
impurities in high quality alloys, mineral quality analysis in coal, cement and
similar industries, detection contraband at airports, bus stops, train stations,
and detection of nonmetallic antipersonnel land mines.
During the second quarter of this year, the Company paid $22,000 in cash and
issued 50,000 restricted common shares to Roger Duffield to prepare a business
plan to develop and commercialize the Inertial Electrostatic Confinement
technology. On September 1, 2000 Mr. Duffield became the President of the
Company and completed the business plan. While completing the business plan in
late August, Astrium, which is a subsidiary of Daimler-Chrysler Aerospace,
informed Rhombic that they would not continue to self-fund the Neutron Generator
project beyond December 31, 2000. As a result, the business plan provided for
the formation of a joint venture between Astrium, Rhombic, and other partners
that would provide capital and technological expertise to commercialize the
technology within certain applications. Agreements were obtained from all of the
participating joint venture partners to perform their respective roles. The
joint venture was not funded by the participating partner that committed to
capitalizing the joint venture. As a result, Astrium informed the Company and
the University of Illinois that it had no intention to continue research on the
neutron generator project and paying any future royalties beyond December 31,
2000.
As a result of the written statements from Astrium declining to continue further
research on the IEC, the Company is in discussions with the University of
Illinois to determine how to obtain the patent rights and the best way to move
forward with the technology. It also believes that its rights to the Neutron
Monitoring Detector will be relevant to continued research on the IEC
technology.
6
The Company will need to determine specific applications and potential customers
before pursuing development work because it has already identified competitors
that are able to generate confined neutron streams in at higher outputs than
what was developed by Astrium.
2. Diamond-reinforced Flywheel Battery and Radio Nuclide Battery.
The battery operates on a principle using diamond layers instead of carbon
filters to increase the power density of electro-mechanical energy storage for
batteries used in automobiles or other storage systems. This concept is based on
a rupture stress measure for present polycrystalline diamond. An increase in
storage capacity may result in the development of a satisfactory method for
storing large amounts of electrical energy for portable applications, such as
automobiles and satellites, as well as fixed appliances, such as electric power
load leveling from the individual house to the utility level. Throughout the
world, much work is being performed on improving electrochemical cells with
limited success. The hydrogen fuel cell, long used in space, is just now
receiving its first tests in motor vehicles, but offers no great improvement on
electrochemical batteries and requires a large, expensive infrastructure. Of
greatest current interest for electric automobiles is electromechanical storage
(a flywheel coupled to a motor-generator), which, with new technology promises
all the advantages of an all-electric automobile but with the performances of a
gasoline-powered automobile.
Carbon fiber technology, developed for high rotational velocity uranium
enrichment centrifuges, has been used to produce automobile prototypes. Cars
equipped with this "rotation battery" are projected to demonstrate performance
(speed and range) equal to that of a standard mid-engine automobile and quite
superior to ones with electrochemical batteries, which last only about 40,000km.
On May 30, 2000, the Company received an extensive five volume Technical and
Business Panning and Development report on its Radionuclide Batteries for space
applications. The conclusion was that the Noble Gas battery was not economically
feasible nor commercially viable because of the scarcity of the required gases
and the cost to produce those gases such as Kr-85 and Ar-39.
The dust plasma battery was evaluated as not feasible because the Technetium-99
isotope is not a practical radioisotope because extremely large amounts would be
required for the battery. Strontium-90 would not be appropriate for commercial
use because it represents a major biological hazard.
3. Active Engine ("Rhombic Explorer"):
The Active Engine or Magnesite is a software program designed to economize on
Internet search and data download costs. It creates site directories and
translates hypertext references, making the information fully useable offline.
The development of the Magnesite is interrelated with the Company's efforts to
develop and launch the Rhombic Explorer, a personal Internet search engine.
During September, the Company and its strategic marketing partner, Vision
Magnetics, conducted quality assurance testing on the Magnesite code to ensure
product reliability and to allow for expansion of Magnesite into Magnesite Pro.
The results of the testing indicated that the program was not suitable for
marketing because of its inability to download graphics and certain web sites in
their entirety. As a result of the testing, the Company is evaluating the cost
and benefits involved in debugging the program and bringing it to the
marketplace. In conjunction with the planned marketing of Magnesite during the
third quarter, Vision Magnetics engaged programmers to create a new website for
Rhombic to sell, deliver and maintain user registration and update information
as well as hard delivery of diskettes containing Magnesite code to end users.
Vision informed Rhombic that it needed to obtain a marketing study in order to
determine the specifications needed for the Magnesite Pro. During the fourth
quarter of 2000, the Company engaged a programmer to debug the program in order
to prepare it for quality assurance testing.
7
During the first quarter of 2001, it became apparent to Rhombic that there was
no cost benefit to continue developing Magnesite because of the necessary costs
to continue developing a working program, conducting marketing studies,
incurring marketing costs and incurring administrative and legal costs for
licensing and customer service. On March 14, 2001, Rhombic and Vision agreed to
cancel all of their agreements with each other under a Mutual Release, Hold
Harmless and Cross Indemnification Agreement.
4. Disperse Composite Material
During the fourth quarter of 2000, the Company impaired its Disperse Composite
Material technology. The Company determined that it was not cost beneficial to
incur patent and research costs to advance the theory of the technology. Its
decision was mainly due to having identified numerous competitors with more
capital resources intending to develop comparable technologies.
5. LENR/DCM
During the fourth quarter of 2000, the Company impaired its LENR/DCM technology.
The Company determined that it was not cost beneficial to incur patent and
research costs to advance the theory of the technology. Its decision was mainly
due to having identified numerous competitors with more capital resources
intending to develop comparable technologies.
6. Diamond Film Forced Diffusion.
Rhombic's negative type diamond technology, referred to as "Forced Diffusion,"
has been successfully created in a former Soviet Republic laboratory to create
functional integrated circuits. This technology consists of diffusing different
elements into diamonds. Rhombic believes that Forced Diffusion has many spin off
applications. Certain elements in diamond can change the mechanical, optical,
and electrical properties of the material. For example, boron doping causes
diamond to turn blue, enhances the wear resistance of diamond and makes a p-type
conductor.
Methods of growing diamond on a film has been accomplished by chemical vapor
deposition. Generally methane gas is used as the source of carbon and hydrogen
is used as the flux and carrier gas. Substrate temperatures are generally in the
700 - 800 Centigrade range. Several different substrates have been used for
single crystal growth. In general, diamond has very good adhesion to most
carbide forming materials. Diamond will nucleate and grow on most non-carbide
forming materials but it tends to delaminate except on nickel, molybdenum and
tungsten. Diamonds conductivity can be varied from very low values to very high
values. It has tensile strength better than that of graphite and is the most
chemically resistive material known to engineering.
Producing diamond with electronic properties is greatly superior to those of
silicon which is the material currently used for computer chips. This technology
allows for the exponential decrease of the space required for a computer
microchip. Such diamond film is considerably more heat and radiation resistant
extending the life of the electronic circuitry. Harder cutting tools and
abrasives, diamond television and computer monitor screens, sensor bearing and
radar screens are among a number of potential commercial applications of this
technology.
8
The research plan for this technology has four aspects. First, attention on
understanding the forced diffusion process and how it produces n-type diamond
material with Lithium, Oxygen and Chlorine will be done. Second, an examination
on the forced diffusion of a variety of elements will be conducted. Third, a
study on how the addition of these impurities change the mechanical, optical,
chemical, and electrical properties of diamond. Fourth, an evaluation of the
electrical characteristics of various elements put into diamond by the forced
diffusion process will be conducted.
During the year 2000, the Company targeted the development of the following four
applications of its Diamond Film Forced Diffusion technology:
1. A Silicon-Carbide purification technology for the high-tech
manufacturing industry,
2. An integrated Diamond Circuit for the computer and electronics
industry,
3. A Heavy Doped Diamond Fuel-Cell Electrode for the fuel cell industry,
4. Quality colored diamonds for the high-end jewelry accessory market.
Rhombic believes that controlling impurities in Gallium Nitride "GaN" and
Silicon Carbide "SiC" is important because impurities are used to make n-type
and p-type materials. The n-type and p-type material is used to form transistors
and other structures in integrated circuits. Impurities represent an
imperfection in the crystal structure and a center for further propagation of
imperfections during the growth phase. A high quality crystal structure is
necessary in order to shrink the size of the transistors and other electrical
elements. Crystal quality is also a means of increasing the lifetime of the
integrated circuit. A second benefit of a relatively impurity free crystal
structure is in the limitation of unwanted leakage currents.
During the first quarter 2000 approximately $85,000 was spent to build three
second generation forced diffusion reactors. One reactor will be used for the
n-type diamond material, one reactor for p-type materials and the third reactor
for purification of crystals. Also, a high voltage Silicon Carbide purification
reactor was built. This reactor will enhance the impurities removal rate from
Silicon Carbide materials. Results from research during the year reduced
impurity levels for oxygen and nitrogen from 10 parts per million to .5 parts
per million. GaN is at the point where impurity levels are about the one part
per million level and SiC is at about the 20ppm level. It is imperative that the
GaN and SiC industries continue along the path of high quality crystal
production. We know from the silicon industry that when the impurity levels in
silicon were decreased by one or two orders of magnitude that silicon achieved a
factor of ten improvements in chip power consumption and lifetime. We can
therefore anticipate improvements in GaN and SiC.
A specific program of work has been defined at the University of Missouri to
demonstrate the process for treating 2-inch wafers using the existing reactor
and to have designed and tested a prototype FEDOA for 6-inch GaN wafer
treatment. Development budgets for this work program are estimated at $.5
million.
9
6A. Diamond Fuel Cell
Previous research over many years by the team of scientists at the University of
Missouri have developed innovations in diamond materials that have shown the
capability to replace the current polymer electrolyte membrane with diamond.
This new development in proton diamond electrode membrane (PDEM) technology may
allow high proton transport through the membrane by the process of a non-porous
structure supported by an improved anode and cathode and to which hydrogen ions
are not affected. Furthermore, a major advantage of using diamond is that it can
withstand temperatures four times greater than current membrane material.
Rhombic believes that its planned PDEM could operate at higher temperatures than
current standard proton polymer electrolyte membrane(PPEM) fuel cells,
subsequently, reaction rates would be increased considerably with the platinum
content decreased by a similar factor, while manufacturing costs would be
drastically reduced. The new diamond membrane does not require moisture; whereas
current PPEM must be kept moist, thus restricting operating temperatures
In conclusion the Diamond PDEM fuel cell may allow for higher operating
temperatures, an increased reaction rate and longevity and a much smaller fuel
cell stacked system. Reduced platinum and manufacturing costs that can provide
an opportunity to produce a fuel cell stacked system at an affordable price. The
research budget would require a minimum of $500,000 to create a working model
and approximately $1,500,000 to create prototypes with marketing plans.
6B. Coloring Gemstones
Forced diffusion technology has been demonstrated on mined diamond, diamond
films, and gahnite. Impurities were added to diamond and the results were
verified. In these studies it was found that changes occurred to the mechanical,
chemical, optical and electrical properties of diamond. The diamond became more
wear resistant, the crystal color changed to blue, and the diamond became a
p-type semiconductor. Each of these property changes has a commercial value.
Another example is that the addition of lithium to mined diamond and
polycrystalline diamond film made the diamonds an n-type conductor.
The forced diffusion process has demonstrated that the optical properties of
diamond can be changed with the addition of impurities. Mined blue diamonds are
rare; 1 in 1,000,000 diamonds is blue. Other impurities added to a diamond
crystal change its color from red to green. Modification of the optical
properties of diamond can impact the gem market. The diamond gem market is about
$4.8 billion. The colored diamond market is about $500 million. It is well known
that the rare blue diamond is more than double the cost of a white diamond. In
addition, red diamonds are the most rare gemstones known. Recently a 1/2 carat
red diamond was auctioned for the price of $1.5 million dollars.
Forced diffusion is being applied to gemstone quality Type II diamond. The goal
of this work is to demonstrate that the technology can be used to induce a color
change in the crystal. The forced diffusion process used for coloring is used
commercially and there are numerous patents by competitors covering the area.
Rhombic does not believe that it is sufficiently capitalized to pursue
commercializing its doping technology as it applies to coloring diamonds.
10
COMPETITION
The Company operates in the competitive environment of developing technologies
where other companies may be developing similar technologies with substantially
larger financial resources, operations, staffs, scientists and facilities. The
Company is working toward developing prototype demonstrative models for certain
applications of its technologies. There can be no assurance that the prospects
will yield substantial economic returns or that a competitor may develop a
similar prototype and enter the marketplace ahead of Rhombic. Failure to develop
applications from the technologies with an estimated economic return could have
a material adverse impact on the Company's future financial condition and could
result in a write-off of a significant portion of its investment in the
technologies.
The Company's competitors include major integrated international companies in
various industries with research and development programs. The international
companies are large, well established companies with substantially larger
operating staffs and greater capital resources than the Company's and which, in
many instances, have been engaged in the technology development arena for a much
longer time.
MARKETING
The Company's primary business focus is placed upon the commercialization of
advanced technologies and commercial products resulting there from. The Company
has limited experience in marketing of products and services in these fields of
applications for its intellectual property and intends to rely on licensing and
joint venture opportunities with companies for the marketing and sale of its
technologies. The Company also has little experience marketing products of a
consumer nature. There is no assurance that the Company will be successful in
developing a market for any of its products or that it will gain any market
recognition and acceptance.
PATENTS
Current patents
* Field-Enhanced Diffusion Using Optical Activation, U.S. Patent No.
5,597,762
* Microwave-Driven UV Light Source and Solid-State Laser, US Patent No.
5,659,567
* Microwave-Driven UV Light Source and Solid-State Laser, U.S. Patent
No. 5,659,567
Patent applications
* System and Method for Network Based Information Retrieval (Magnesite),
U.S. Patent App. No. 60/240,770
* Compact Power Technology Using Photon-Intermediate Direct Conversion
of Radioisotope Energy to Electricity, U.S. Patent App. No. 60/223,869
* System and Method for Diamond Based Fuel Cells, U.S. Patent App. No.
60/241,097
* System and Method for Diamond Based Fuel Cells, Docket No.
790072.408P2
* System and Method for Conductive Diamond and Ohmic Contacts 60/251,823
* System and Method for Conductive Diamond and Ohmic Contacts 60/255,686
* System and Method for Removal of Impurities From Materials Such as
Semi-conductors, Docket No. 790072.411P1
* System and Method for Removal of Impurities from Materials Such as
Semi-conductors, Docket No. 790072.411P1
11
Patent applications terminated
* Supercompact Radio Nuclide Battery Docket No. 790072.401
* Low-cost Elimination of Long-lived Nuclear Waste, U.S. App. 09/013,179
* Method and System for Manufacturing Disperse Composite Materials,
International Patent Application No. PCT/US99/16552.
EMPLOYEES
The Company currently has no employees.
RISK FACTORS
The Company has no Revenues and is Currently Operating at a Loss. The Company
has not received any revenues to date and is operating at a loss. The Company
will need to raise additional capital through the placement of its securities or
from debt or equity financing. If the Company is not able to raise such
financing or obtain alternative sources of funding, management will be required
to curtail operations. There is no assurance that the Company will be able to
continue to operate if additional sales of its securities cannot be generated or
other sources of financing located.
Limited History of Operations. The Company has only a limited history of
operations. The Company operations are subject to the risks and competition
inherent in the establishment of a relatively new business enterprise in a
highly competitive field of technology transfer. There can be no assurance that
future operations will be profitable. Revenues and profits, if any, will depend
upon various factors, including market acceptance of its products and
technologies, market awareness, its ability to promptly and accurately recognize
a marketable technology or invention, dependability of an advertising and
recruiting network, and general economic conditions. There is no assurance that
the Company will achieve its expansion goals and the failure to achieve such
goals would have an adverse impact on it.
The Company May Need Additional Financing. Future events, including the
problems, delays, expenses and difficulties frequently encountered by startup
companies may lead to cost increases that could make the Company's source of
funds insufficient to fund the Company's proposed operations. The Company may
seek additional sources of capital, including an additional offering of its
equity securities, an offering of debt securities or obtaining financing through
a bank or other entity. The Company has not established a limit as to the amount
of debt it may incur nor has it adopted a ratio of its equity to a debt
allowance. If the Company needs to obtain additional financing, there is no
assurance that financing will be available, from any source, or that it will be
available on terms acceptable to the Company, or that any future offering of
securities will be successful. The Company could suffer adverse consequences if
it is unable to obtain additional capital when needed.
Trademark Protection and Proprietary Marks. The Company may continue pursuing
patents and several pending patents as a result for its intellectual property.
There is no assurance that the Company will be able to prevent competitors from
using the same or similar names, marks, concepts or appearances or that it will
have the financial resources necessary to protect its marks against infringing
use.
12
The Company's Intellectual Property and Inventions May become Obsolete. Patent
review is usually a lengthy, tedious and expensive process that may take months
or, perhaps, several years to complete. With the current rate of technology
development and its proliferation throughout the world, those inventions may
become commercially obsolete during or after the patent review. There is no
assurance that the Company's intellectual property, acquired or developed, may
not become obsolete and remain commercially viable.
The Company May Fail to Obtain Patent Protection in Various Jurisdictions. The
Company has filed patent applications in several jurisdictions, including Japan,
Korea, and the United States. The filing process is usually a costly and
time-consuming undertaking requiring proper legal counsel under the laws of the
jurisdiction where patent protection is sought. There is no assurance that those
patent protection filings were properly and timely made. There is also no
assurance that upon review, those applications may not be rejected for lack of
novelty or any other bases sufficient to reject a pending patent application in
any of those jurisdictions.
Commercial Viability of the Company's Current Technologies. The Company was
organized to identify, assess, acquire and capitalize on technologies introduced
and developed by scientists throughout the world. These technologies are new and
in their research and development stage. Generally, it requires a substantial
time and resource effort to bring be able to both recognize a commercially
successful technology or invention at an early stage and conduct a successful
marketing campaign to sell this technology or invention. There is no assurance
that all or any of the Company's research and development efforts will result in
commercially viable final products.
The Company May Fail to Generate Sufficient Interest in Acquired Technologies.
The Company must undertake substantial effort to educate the buying public,
consumers and businesses, in the U.S. and worldwide, as to the Company's
products and technologies. There is no assurance that the Company will be able
to generate interest in and to create and maintain steady demand for its
products over time.
Reliance on Future Acquisitions Strategy. The Company expects to continue to
rely on acquisitions as a primary component of its growth strategy. It regularly
engages in evaluations of potential target candidates, including evaluations
relating to acquisitions that may be material in size and/or scope. There is no
assurance that the Company will continue to be able to identify potentially
successful companies that provide suitable acquisition opportunities or that the
Company will be able to acquire any such companies on favorable terms. Also,
acquisitions involve a number of special risks including the diversion of
management's attention, assimilation of the personnel and operations of the
acquired companies, and possible loss of key employees. There is no assurance
that the acquired companies will be able to successfully integrate into the
Company's existing infrastructure or to operate profitably. There is also no
assurance given as to the Company's ability to obtain adequate funding to
complete any contemplated acquisition or that any such acquisition will succeed
in enhancing the Company's business and will not ultimately have an adverse
effect on the Company's business and operations.
13
Possible Inability to Finance Acquisitions. In transactions in which the Company
agrees to make an acquisition for cash, it will have to locate financing from
third-party sources such as banks or other lending sources or it will have to
raise cash through the sale of its securities. There is no assurance that such
funding will be available to the Company when required to close a transaction or
if available on terms acceptable to the Company.
Loss of the Company Key Directors May Adversely Affect Growth Objectives. The
Company's success in achieving its growth objectives depends upon the efforts of
of its directors. Their experience and industry-wide contacts significantly
benefit the Company. The loss of the services of any of these individuals may
have a material adverse effect on the Company business, financial condition and
results of operations. There is no assurance that the Company will be able to
maintain and achieve its growth objectives should it lose any or all of these
individuals' services.
Failure to Attract Qualified Personnel. A change in labor market conditions that
either further reduces the availability of employees or increases significantly
the cost of labor could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's business
growth is dependent upon its ability to attract and retain qualified research
personnel, administrators and corporate management. There is no assurance that
the Company will be able to employ a sufficient number of qualified training
personnel in order to achieve its growth objectives.
Issuance of Future Shares May Dilute Investors Share Value. The Certificate of
Incorporation of the Company authorizes the issuance of 70,000,000 shares of
common stock and 1,000,000 shares of preferred stock. The future issuance of all
or part of the remaining authorized common or preferred stock may result in
substantial dilution in the percentage of the Company's common stock held by the
its then existing shareholders. Moreover, any common stock issued in the future
may be valued on an arbitrary basis by the Company. The issuance of the
Company's shares for future services or acquisitions or other corporate actions
may have the effect of diluting the value of the shares held by investors, and
might have an adverse effect on any trading market for the Company's common
stock.
Penny Stock Regulation. The Company's common stock is deemed to be a penny
stock. Penny stocks generally are equity securities with a price of less than
$5.00 per share other than securities registered on certain national securities
exchanges or quoted on the NASDAQ Stock Market, provided that current price and
volume information with respect to transactions in such securities is provided
by the exchange or system. The Company's securities may be subject to "penny
stock rules" that impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally those with assets in excess of
$1,000,000 or annual income exceeding $200,000 or $300,000 together with their
spouse). For transactions covered by these rules, the broker-dealer must make a
special suitability determination for the purchase of such securities and have
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the "penny stock rules" require the delivery, prior to the transaction,
of a disclosure schedule prescribed by the Commission relating to the penny
stock market. The broker-dealer also must disclose the commissions payable to
both the broker-dealer and the registered representative and current quotations
for the securities. Finally, monthly statements must be sent disclosing recent
price information on the limited market in penny stocks. Consequently, the
"penny stock rules" may restrict the ability of broker-dealers to sell the
Company's securities. The foregoing required penny stock restrictions will not
apply to the Company's securities if such securities maintain a market price of
$5.00 or greater. There can be no assurance that the price of the Company's
securities will reach or maintain such a level.
14
ITEM 2. PROPERTIES
PROPERTY
As the Company is not producing any products at present, it has no lease or
physical facilities commitments. The Company's executive office is 11811 North
Tatum Suite 3031 Phoenix, 85028 Arizona on a month-to-month basis.
ITEM 3. LEGAL PROCEEDINGS
LITIGATION
There is no current outstanding litigation in which the Company is involved and
the Company is unaware of any pending actions or claims against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
GENERAL
The Company has an authorized capitalization of 70,000,000 shares of Common
Stock and 1,000,000 shares of Preferred Stock, $.001 par value per share of
which 28,697,042 were issued and outstanding at March 15, 2002.
MARKET INFORMATION
The Company's common stock is traded in the over-the-counter market on the OTC
Bulletin Board under the symbol "NUKE". The following table sets forth the range
of high and low bid quotes of the Company's Common Stock per calendar quarter
which reflect inter-dealer prices without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
2001 Low High
---- --- ----
Fourth quarter .050 .160
Third quarter .090 .210
Second quarter .150 .280
First quarter .160 .480
2000 Low High
---- --- ----
Fourth quarter .218 .969
Third quarter .625 1.500
Second quarter 1.313 3.781
First quarter 1.875 5.563
On March 10, 2000 the Company's common shares began trading on the Hamburg Stock
Exchange in Hamburg, Germany under the symbol "919335".
15
HOLDERS
As of March 15, 2002, the Company had 28,697,042 shares of common stock
outstanding. A total of approximately 140 shareholders of record held a total of
10,000,000 common shares. The Company estimates the remaining 18,697,042 common
shares in street name to be held by over 400 additional individual shareholders.
DIVIDENDS
The Company has never declared or paid cash dividends on its common stock and
anticipates that future earnings, if any, will be retained for development of
its business. Payment of cash dividends in the future will be wholly dependent
upon the Company's earnings, financial condition, capital requirements and other
factors deemed relevant by them. It is not likely that cash dividends will be
paid in the foreseeable future. In the event of the acquisition of or merger
with a business by the Company, control of the Company and its Board of
Directors may pass to others. In that event, the payment of dividends would be
wholly dependent upon such persons.
ITEM 6. MANAGEMENT'S PLAN OF OPERATION
In the following discussion we are providing an analysis of our financial
condition and Plan of Operation during the next quarter and the balance of the
fiscal year. This discussion should be read in conjunction with our financial
statements and the notes thereto. Certain matters discussed below are based on
potential future circumstances and developments, which the Company anticipates,
but which cannot be assured. Such forward-looking statements include, but are
not limited to, seeking a revenue generating business to acquire and conducting
research and development on the Excimer Lamp within the Company and in
conjunction with joint venture partners.
The competition in the technology proliferation and transfer market is highly
intense and is based on product and technology recognition and acceptance,
novelty and marketability of an invention, price, and sales expertise. The
Company has placed its primary emphasis on product development, dependability
and commercial viability of its acquired technologies. Management is currently
determining the expenses involved to develop its Excimer Lamp intellectual
property into commercial applications. To date, the Company has not generated
any revenues from any of its acquired intellectual property except minimal
royalties from Daimler Benz from the IEC Technology. Rhombic is currently a
development stage company and is operating at a loss. None of the technologies
have been developed to commercialization. The Company is not able to determine
an approximate date for commercialization of any of its intellectual property at
this time. No assurances can be given that any of the Company's intellectual
property will ever be developed to a point of usefulness or, if developed, that
any will be commercially feasible.
Development of its intellectual property may be possible through joint ventures
where Rhombic contributes its intellectual property for an ownership percentage
in a joint venture and all costs are paid by the other joint venture partners.
On March 19, 2002, Rhombic canceled the letter intent with FAMCO because it had
not received sufficient financial information from the six corporations in order
to negotiate an agreement. During the calendar year 2002, Rhombic plans to
actively seek the acquisition of a revenue generating operation. The acquisition
may or may not bear a relationship to the intellectual property currently owned.
In the event Rhombic is able to acquire sufficient working capital to begin a
development project, it would proceed toward the Excimer Lamp.
16
Rhombic's plan during the next twelve months is to acquire a revenue producing
operation. Ideally, the acquisition will have operations that bear some
relationship to one or more of the intellectual properties currently held by
Rhombic.
In the event Rhombic had an opportunity to raise cash, it would pay for a
marketing study and development plan for the Excimer Lamp. An 18-month budget of
approximately $ 350,000 to develop a prototype with patent protection.
The Company currently has options outstanding from which it could obtain cash;
however, it is not probable that the Rhombic will obtain cash from the options
while the stock price trades below the outstanding option strike prices. In the
event all of the outstanding options were exercised, the Company would receive $
$ 1,725,000 before December 31, 2002. The Company has a total of 2,000,000
options outstanding at an average exercise price of $ .86 per share. The
exercise prices range from $.50 to $4.50.
At December 31, 2000 the Company had $ 9,100 in cash and $ 49,092 in current
payables. Rhombic may be able to settle the majority of the debt with its common
shares; however, it has no source of income.
Rhombic believes that it will be able to survive during the next twelve months
with the limited amount of cash and resources that it has. Because of the
limited resources and the lack of investor interest in its current intellectual
property, Rhombic will be seeking a revenue producing operation.
The Company does not have any employees because its Directors are handling all
of the business required to maintain its status and seek a revenue producing
operation.
ITEM 7. FINANCIAL STATEMENTS
The following financial information is filed as part of this report:
(1) Financial Statements:
Independent Auditors Report F-2
Consolidated Balance Sheet December 31, 2001 F-3
Consolidated Statements of Operations years Ended
December 2000 and 2001 F-4
Consolidated Statement of Stockholders' Equity Years
Ended December 31, 2000 and 2001 F-5
Consolidated Statement of Cash Flows Years Ended
December 31, 2000 and 2001 F-6
Notes to Consolidated Financial Statements F-7
(2) Schedules
Supplemental Disclosure of Cash Flow Information F-6
Supplemental Schedule of Non-Cash Investing and
Financing Activities F-6
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company had no disagreements on accounting and financial disclosures with
its independent auditors during the reporting period.
17
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following table sets forth the names and ages of the current directors and
executive officers of the Company, the principal offices and positions with the
Company held by each person and the date such person became a director or
executive officer of the Company. Each serves until the next annual meeting of
the stockholders.
Names of Executive
Officers and Directors Age Title
---------------------- --- -----
R.G. Krushnisky 41 Director since 1/1/95
Albert Golusin 47 C.F.O. & Director since 2/5/99
Stanley Porayko 66 Secretary & Director since 1/1/95
R.G. Krushnisky, Director of the Company. Mr. Krushnisky served as past
President of Rockford Technology Corporation which is a Canadian company
involved in Hydrogeneration plants. Since 1984, Mr. Krushnisky has been the
owner and operator of International Laser Games, Ltd., a British Columbia,
Canada, and coin-operated arcade machinery business. Mr. Krushnisky is a
graduate of the United States International University at San Diego with a
Bachelor Science degree in Business and International Commerce
Albert Golusin, Chief Financial Officer and Director, is a Certified Public
Accountant in Phoenix, Arizona. Since 1992, Mr. Golusin has been in private
practice as an accounting consultant to public companies. He has also served as
a controller for Glenayre Electronics, a NASDAQ company, from 1984 - 1991. From
1983 to 1984, Mr. Golusin worked for Kenneth Leventhal & Company. From 1979 to
1981, Mr. Golusin worked for the international accounting firm of Grant Thornton
& Company. Mr. Golusin graduated from Brigham Young University in 1978. Mr.
Golusin worked full-time for Rhombic during part of 2000 and has continued
working on a part-time basis.
Stanley Porayko, Secretary and Director of the Company, is a self-employed
rancher from Alberta, Canada. He was a founder of the huge jade deposit on Ogden
Mountain, British Columbia, and a director of Yugold Mines. Mr. Porayko
graduated from Ryerson Institute of Technology in 1957.
18
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the compensation
paid by the Company for services rendered in all capacities to the Company for
the two fiscal years ended December 31, 2001 and 2000 of the chief executive
officer at December 31, 2001 and all officers and directors, as a group.
Annual Compensation Long-Term Compensation
----------------------------------------- -----------------------
Securities
Name and Principal Other Annual Underlying All
Positions at 12/31/00 Salary Bonus Compensation Options Other
--------------------- ------ ----- ------------ ------- -----
William L. Owen, 2001 0 0 None None None
President & Chairman 2000 0 0 $60,000 (1) None None
Roger Duffield, 2001 $ 70,000 0 $10,000 (2) None None
President & CEO 2000 $ 50,000 $50,000 (2) $12,500 (2) None None
All officers and directors, 2001 $145,000 0 $46,000 (4) None
As a group (five persons) 2000 $ 40,000 (2) $50,000 $60,450 None None
(3),(4),(5),(6)
----------
(1) William Larry Owen, was compensated by Owen & Associates through an
agreement with the Company to provide office and administrative support for
$7,500 a month. He served as the President of the Company from inception
until April 2000 in which he then became the Chairman until his retirement
on July 26, 2000.
(2) During the year 2000, Roger Duffield provided services as a consultant and
received $ 12,500 in cash for such services. On August 1, 2000 Mr. Duffield
became the President and Chief Executive Officer and received 50,000 shares
of restricted stock at a deemed value of $50,000 as a signing bonus. During
the remaining part of 2000 he received $50,000 in cash. During the year
2001, the Company issued 125,000 restricted common shares at a deemed value
of $10,000 to reimburse him for moving expenses.
(3) Albert Golusin, Chief Financial Officer and Director of the Company,
provided his services on a part-time basis during 2000 until September 1,
2000. During the year 2000, he received $20,000 in cash for services and
25,000 shares at a deemed value of $30,563 for office expenses. During
2001, Mr. Golusin received $60,000 for his services.
(4) R.G. Krushnisky, Vice President and Director of the Company, provides his
consulting services on a part-time basis. During 2000, he received $20,000.
During 2000 he exercised an option and purchased 100,000 shares for
$100,000. During 2001, Mr. Krushnisky received $15,000 for services as a
Vice President. He also earned $18,000 for director fees during 2001.
(5) Stanley Porayko, Secretary and Director of the Company, provides his
consulting services on a part-time basis. He did not receive any shares
during 2000 for services. He received $450 for his participation in board
meetings during the year 2000. During 2001, he earned $18,000 in director
fees.
(6) All of the current directors collectively have an option to purchase
1,000,000 shares at $.50 per share until June 30, 2002.
There are no current plans to pay cash or stock dividends on the Company's
stock.
19
VALUE OF OPTIONS AT DECEMBER 31, 2001
The Company currently has options outstanding from which it could obtain cash.
In the event all of the outstanding options were exercised, the Company would
receive $ 1,725,000 before December 31, 2002. The Company has a total of
2,000,000 options outstanding at an average exercise price of $ .86 per share.
The exercise prices range from $.50 to $4.50.
At December 31, 2001 officers and directors held a total of 1,000,000 options
outstanding at an exercise price of $ .50 per share expiring on June 30, 2002.
OPTION GRANTS IN THE LAST FISCAL YEAR
The Company granted the following options during 2001:
Number of Shares Options Granted Exercise Expiration
Name Underlying Options During Year Price($/sh) Date
---- ------------------ ----------- ----------- ----
Albert Golusin 400,000 400,000 .50 6/30/02
Robert Krushnisky 350,000 350,000 .50 6/30/02
Gordon Krushnisky 100,000 100,000 .50 6/30/02
Stanley Porayko 250,000 250,000 .50 6/30/02
STOCK OPTION PLAN
The Board of Directors of the Company has approved its year 2000 Incentive Stock
Option Plan ("Plan") that authorizes the Company to grant incentive stock
options. The Plan relates to a total of 2,500,000 shares of common stock
including all unexercised options from prior plans. All options which may be
outstanding at any point in time must be exercised no later than three months
after termination of employment or service as a director, except that any
optionee who is unable to continue employment or service as a director due to
total and permanent disability may exercise such options within one year of
termination and the options of an optionee who is employed or disabled and who
dies must be exercised within one year after the date of death.
The Plan is to be administered by the Company's Board of Directors or a
committee thereof which determines the terms of options granted, including the
exercise price, the number of shares of common stock subject to the option, and
the terms and conditions of exercise. Options granted under the plan are
transferable by the optionee.
20
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table contains information, as of December 31, 2001, regarding the
shareholdings of (1) Rhombic's current directors and executive officers, (2)
those persons or entities who beneficially own more than 5% of its common stock
and (3) all of the directors and executive officers as a group(giving effect to
the exercise of the warrants held by each such person or entity). Unless
otherwise indicated, the person or entity listed in the table is the beneficial
owner of the shares and has sole voting and investment power with respect to the
share indicated:
Number of shares Percent of
Common Stock Common Stock
Name Beneficially Owned Beneficially Owned (1)
---- ------------------ ----------------------
R.G. Krushnisky 2,350,000 7.9%
Vice President, Director
Suite 901, 1212 Howe Street
Vancouver, British Columbia
Canada V6Z 2M9
Albert Golusin (1) 420,000 1.4%
Chief Financial Officer, Director
10641 North 44 Street,
Phoenix, Arizona 85028
Stanley Porayko (1) 250,000 0.8%
Director
P.O. Box 1765
Vegreville, Alberta
Canada T9C 1S8
Total shares owned by Directors and 3,020,000 10.1%
Officers of the Company (4 persons)
Rockford Technology Corporation(2) 2,045,500 7.66%
4873 Delta Street
Delta, British Columbia, Canada
----------
(1) Based upon 29,697,042 outstanding shares of common stock, which includes
the exercise of 1,000,000 outstanding options.
(2) Mr. Krushnisky is a director of Rhombic and is one of three directors of
Rockford Technology Corporation but does not own controlling interest.
21
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
William Owen received $60,000 during 2000 through his wholly owned Canadian
company named Owen & Associates. Owen & Associates provided an office, local
telephone service, postage and compensated William Owen on behalf of Rhombic.
On August 18, 2000, Robert G. Krushnisky the Company's Vice President, a citizen
of Canada, purchased 200,000 shares for $200,000. The shares were exempt from
registration under Rule 504 adopted under Regulation D of the Securities Act.
They were also subject to the restrictions under Rule 144.
On September 1, 2000, the Company canceled 3,000,000 escrowed shares to William
Owen, the President and 6,000,000 escrowed shares to Durham Technology, which is
a A Niue Island (New Zealand overseas territory) corporation primarily engaged
in marketing of new technologies. The Rhombic shares were held in escrow and
couldn't be sold or hypothecated until Rhombic generated a net income of at
least $.01 per share in any year.
22
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
RHOMBIC CORPORATION
By /s/ Albert Golusin April 12, 2002
-----------------------------------
Albert Golusin
Acting Chief Executive Officer, Principal Executive
Officer, Chief Financial Officer & Director,
Principal Accounting Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/ R.G. Krushnisky April 12, 2002
-----------------------------------
Director
By /s/ Stanley Porayko April 12. 2002
-----------------------------------
Secretary & Director
23
RHOMBIC CORPORATION
(A DEVELOPMENT STAGE COMPANY)
December 31, 2001 and 2000
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
REPORT OF INDEPENDENT AUDITORS F-2
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2001 AND 2000 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 2001 AND 2000 F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE
YEARS ENDED DECEMBER 31, 2001 AND 2000 F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 2001 AND 2000 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7
F-1
INDEPENDENT ACCOUNTANTS' REPORT
To the Stockholders and Board of Directors of
Rhombic Corporation:
We have audited the accompanying consolidated balance sheets of Rhombic
Corporation (a Development Stage Company) and subsidiaries as of December 31,
2001, and the related consolidated statements of operations, stockholders'
equity and cash flows for the two years then ended and the period from inception
to December 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 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 Rhombic Corporation and its
consolidated subsidiaries as of December 31, 2001, and the results of their
operations and cash flows for the two years then ended and the period from
inception to December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
As disclosed in Note 1, the accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
experienced material operating losses and has yet to commence significant
revenue producing operations. Ultimate realization of material investments in
intellectual properties is uncertain. These and other conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments that might
be necessary should the Company be unable to continue as a going concern.
/s/ James C. Marshall, CPA, P.C
Scottsdale, Arizona
April 8, 2002
F-2
RHOMBIC CORPORATION
CONSOLIDATED BALANCE SHEET
(A Development Stage Company)
December 31, 2001
ASSETS
CURRENT ASSETS:
Cash $ 9,100
Receivables --
Prepaid expenses 300
-----------
Total Current Assets 9,400
-----------
OTHER ASSETS:
Investments 12,042
Licensing Agreements and Intellectual property 281,258
Patents 734
-----------
Total assets $ 303,434
===========
LIABILITIES
CURRENT
Accounts Payable $ 49,092
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value,
1,000,000 shares authorized, none issued
Common stock, $.001 par value, 70,000,000 shares
authorized, 28,697,042 and 26,286,100 issued and
outstanding at December 31, 2001 and 2000 28,697
Additional paid-in capital 8,452,629
(Deficit) accumulated during the development stage (8,226,984)
Net unrealized holding loss on available for sale securities (7,476)
-----------
Total stockholders' equity 254,342
-----------
Total liabilities and stockholders' equity $ 303,434
===========
See accompanying notes to these consolidated financial statements.
F-3
RHOMBIC CORPORATION
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
Cummulative From
For the 12 Months Ended November 21, 1994
--------------------------------- (Inception) to
2001 2000 December 31, 2001
------------ ------------ -----------------
REVENUES
Royalty income $ -- $ -- $ 5,729
Interest income 80 5,690 6,954
------------ ------------ ------------
80 5,690 12,683
EXPENSES
Research and development expense 12,159 494,082 697,747
Write down on intellectual property 404,158 1,487,630 1,891,788
Legal and accounting 164,055 259,397 741,318
Consulting, related party 1,294 60,000 368,294
Consulting 37,375 1,891,556 2,876,830
Other general and administrative 291,329 970,924 1,583,750
------------ ------------ ------------
Total Expenses 910,370 5,163,589 8,159,727
Net (loss) from operations (910,290) (5,157,899) (8,147,044)
OTHER REVENUES & EXPENSES
(Loss) on sale of investments (72,464) -- (72,464)
------------ ------------ ------------
NET (LOSS) ($ 982,754) ($ 5,157,899) ($ 8,219,508)
============ ============ ============
NET (LOSS) PER SHARE:
Basic $ (0.04) $ (0.20)
============ ============
Diluted $ (0.04) $ (0.20)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 27,097,894 25,749,799
============ ============
Diluted 27,097,894 25,749,799
============ ============
See accompanying notes to these consolidated financial statements.
F-4
RHOMBIC CORPORATION
( A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Net
Unrealized
(Deficit) Holding
Accumulated Loss On
Common Stock Additional During Available
---------------------- Paid-In Development For Sale
Shares Amount Capital Stage Securities Total
------ ------ ------- ----- ---------- -----
Balance at December 31, 1999 24,741,100 $24,741 $ 4,589,750 $(2,078,855) $ 2,535,636
Acquisition of Excimer Lamp Technology 100,000 100 281,150 281,250
Acquisition of LENR/DCM intellectual property 100,000 100 194,150 194,250
Shares issued to acquire Emerald Investments 200,000 200 (200) 0
Shares issued for services 775,000 775 2,671,810 2,672,585
Exercise of stock options 370,000 370 306,880 307,250
Net (loss) (5,157,899) (5,157,899)
---------- ------- ---------- ----------- ------- -----------
Balance at December 31, 2000 26,286,100 26,286 8,043,540 (7,236,754) 833,072
Shares issued for services 1,244,800 1,245 210,255 211,500
Shares issued under convertible debenture 1,166,142 1,166 198,834 200,000
Net unrealized holding loss on available
for sale securities $(7,476) (7,476)
Net (loss) (982,754) (982,754)
---------- ------- ---------- ----------- ------- -----------
28,697,042 $28,697 $8,452,629 $(8,219,508) $(7,476) $ 254,342
========== ======= =========== =========== ======= ===========
See accompanying notes to these consolidated financial statements.
F-5
RHOMBIC CORPORATION
(A Devlopment Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended Cummulative from
December 31, November 21, 1994
------------------------------- (Inception) to
2001 2000 Dec. 31, 2001
----------- ----------- -------------
OPERATING ACTIVITIES
Net (loss) income for the period $ (982,754) $(5,157,899) $(8,300,709)
Adjustments to reconcile net cash used by operations:
Write down on intellectual property and patents 404,158 1,487,630 1,891,788
Loss on sale of marketable securities 72,464 72,464
Rockford shares issued for services 32,275 32,275
Common stock issued for services 211,500 1,108,653 1,920,484
Fair value of options granted -- 1,563,932 2,082,113
(Increase)/decrease in accounts receivable -- 18,896 --
(Increase)/decrease in prepaid expenses 2,200 197,500 (300)
Increase/(decrease) in accounts payable (67,463) 74,155 49,092
----------- ----------- -----------
Net Cash (Used) by Operating Activities (327,620) (707,133) (2,252,793)
INVESTING ACTIVITIES
Cost of patents (50,163) (64,286) (168,430)
Proceeds from sale marketable securities 93,499 93,499
Investment in Rockford Technologies (207,756)
Investment in marketable securities (10,000)
----------- ----------- -----------
Net Cash (used) in investment activities 43,336 (64,286) (292,687)
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from private placements 1,347,830
Proceeds from exercise of stock options 307,250 1,006,750
Proceeds from conversion of debenture 200,000 200,000
----------- ----------- -----------
Net Cash provided from financing activities 200,000 307,250 2,554,580
----------- ----------- -----------
Increase (decrease) in cash (84,284) (464,169) 9,100
Cash at beginning of period 93,384 557,553 --
----------- ----------- -----------
Cash at end of period $ 9,100 $ 93,384 $ 9,100
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Issuance of common stock for licensing agreements
and intellectual property $ -- $ 475,500 $ 2,005,350
=========== =========== ===========
Noncash investing and financing activities
Unrealized loss on available for sale stock $ 7,476 -- $ 7,476
=========== =========== ===========
See accompanying notes to these consolidated financial statements
F-6
RHOMBIC CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2001 AND 2000
Note 1 - ORGANIZATION AND BASIS OF PRESENTATION
Pursuant to an Agreement and Plan of Reorganization dated January 18, 2000,
Rhombic Corporation (the "Company") acquired all the outstanding shares of
common stock of Emerald Acquisition Corporation ("Emerald"), a Delaware
corporation, from the shareholders thereof in an exchange for an aggregate of
200,000 shares of common stock of Rhombic ("the Acquisition"). As a result,
Emerald became a wholly owned subsidiary of Rhombic and was later merged into
the Company.
The Acquisition was approved by the unanimous consent of the Board of
Directors of Rhombic on January 18, 2000. The Acquisition was effective on
January 20, 2000. Upon effectiveness of the Acquisition, pursuant to Rule
12g-3(a) of the General Rules and Regulations of the Securities and Exchange
Commission, Rhombic elected to become the successor issuer to Emerald for
reporting purposes under the Securities Exchange Act of 1934 and elected to
report under the Act effective January 20, 2000.
The Company has acquired rights to certain intellectual properties and
intends to further develop, determine commercial applications and market these
intellectual properties. Since its inception, the Company had directed most of
its efforts toward identifying and acquiring intellectual properties, primarily
from universities in the United States or entities related to those
universities. The Company's primary office is located in Phoenix, Arizona. The
majority of the Company's assets, liabilities and expenses relate to operations
in the United States.
The Company owns 100% of the issued and outstanding shares of Nanophase
Diamond Technologies, Inc. and Rockford Technology Associates, Inc. Theses
entities had no significant operations nor any significant assets or liabilities
at the time of acquisition other than specific intellectual property rights.
These entities have been merged into the Company and are included in the
financial statements. During 2000, the Company formed two new subsidiaries for
the purpose of participating in joint ventures. These subsidiaries have had no
activities to date.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has had material
operating losses and has had to rely on offerings of its common stock to obtain
sufficient cash to meet its operating expenses. The Company has yet to generate
substantive revenue. Also, there can be no assurances that the intellectual
properties owned by the Company will be successfully developed to a marketable
prototype level to be used as the basis for licensing agreements or marketing
activity or that the book value of the investments in intellectual properties
will be realized. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The Company intends to determine
commercial applications for intellectual properties that it owns or for which it
has licenses. However, there can be no assurances that the applications will be
commercially viable nor that Company will be able to generate profitable
operations. The financial statements do not include any adjustments relating to
the recoverability of the carrying value of assets or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
F-7
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the results of operations,
account balances and cash flows of the Company and its wholly owned subsidiaries
after elimination of intercompany transactions
CASH AND EQUIVALENTS
The Company considers cash to be all short-term, highly liquid investments
that are readily convertible to known amounts of cash and have original
maturities of three months or less.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company is the U. S. dollar. Certain of the
Company's assets, liabilities and expenses are denominated in Canadian dollars.
Transactions denominated in Canadian dollars are translated to U.S. dollars
using an average exchange rate applicable for the month in which the
transactions occur. Assets and liabilities denominated in Canadian dollars are
translated to U.S. dollars at the exchange rate existing at the balance sheet
date. Foreign exchange transaction gains and losses have been immaterial.
FINANCIAL INSTRUMENTS
Financial instruments consist primarily of cash, investments in closely
held entities and obligations under accounts payable and accrued expenses. The
carrying amounts of cash, accounts receivable, accounts payable notes payable
and accrued expenses approximate fair value because of the short term maturity
of those instruments. The Company has not determined the fair value of certain
of its investments due to the lack of marketability and liquidity of those
investments and the common director with one such investee.
INVESTMENTS
At December 31, 2001, the Company the investments were held for sale. At
December 31, 2000, the Company accounted for its approximately 15% interest in
Rockford Technologies, Inc. under the cost method. The Company also had a
minority ownership in Peabody Coffee, Inc. which was recorded under the cost
method. The investment in Peabody is recorded at its cost, which approximates
the market value on the basis of trading values at December 31, 2000..
INTELLECTUAL PROPERTY
Intellectual properties have been acquired through the issuance of shares
of the Company's common stock and further developed for cash. These intellectual
properties are valued at the estimated fair market value of the stock issued at
the time of purchase. The value of the common stock is determined by the trading
value of the shares at and near the date of the transaction less a 25% discount
to that trading value due to restrictions on those securities. All stock issued
in those transactions contains regulatory restrictions, and in some cases
contractual restrictions, on transferability. Management periodically analyzes
the values of the intellectual properties for impairment. During 2001 and 2000,
the Company evaluated its intellectual properties and determined, based on the
limited resources of the Company, market for the end products and potential
development times and required development costs, that it would not pursue
development of certain of the intellectual properties. The Company wrote off its
investments in those intellectual properties in 2001 and 2000. The purchase
price of the remaining intellectual properties will be amortized over the
estimated useful lives when revenue begins to be generated from those assets.
F-8
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
STOCK-BASED COMPENSATION
Statements of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, ("SFAS 123") established accounting and disclosure
requirements using a fair-value based method of accounting for stock-based
employee compensation. The Company periodically issues options to consultants
and members of the Board of Directors. The estimated value of these options is
determined in accordance with SFAS No. 123 and expensed as the granted options
vest to the grantees.
INCOME TAXES
The Company accounts for income taxes under the liability method pursuant
to the Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR
INCOME TAXES, ("SFAS 109"). Deferred taxes arise from temporary differences, due
to differences between accounting methods for tax and financial statement
purposes.
LOSS PER SHARE
Net loss per share is calculated using the weighted average number of
shares of common stock outstanding during the year.
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.
NEW TECHNICAL PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. This statement establishes accounting and reporting standards for
goodwill and intangibles for years commencing after December 15, 2001. Whether
already acquired or subsequently acquired after the effective date, companies
are required to identify intangibles with finite lives and those with indefinite
lives. Those intangibles with finite lives are to be amortized over the
estimated useful lives of the assets while those with indefinite lives are not
to be amortized. Each intangible or goodwill asset should be analyzed at least
annually for impairment where the carrying value is in excess of the fair value
of the intangibles and in excess of the implied fair value in the case of
goodwill assets. The asset's carrying value is to be reduced by a charge to
income if the fair value is lower than the carrying value. The Company has not
determined the effect of this new standard; however, the impact is not expected
to be material.
F-9
Note 3 - INTELLECTUAL PROPERTY
The Company has entered into numerous agreements having acquired certain
rights to various complex intellectual properties which it intends to further
develop, with the assistance of strategic partners, for commercial applications.
Or, it may sell or license these rights and transfer the control of such to the
buyer or licensee. The acquisitions of these intellectual properties have
occurred since 1995. The intellectual properties include titles such as; Nuclear
Battery, Radio Nuclide Battery, Inertial Electrostatic Confinement, Diamond Film
Electromechanical Battery and Disperse Composite Material. There has yet to be
proven profitable commercial applications for these intellectual properties. The
Company works with U.S. universities and their professors to further develop
these intellectual properties through funding of research projects. In most
cases, the rights to the intellectual properties were acquired from the
universities, or from the professors or inventors to the extent they had rights
to the intellectual properties. The consideration given by the Company for the
most part was shares of the Company's common stock. The value of the shares
given was the basis for the recorded value of the purchases (Note 1).
The Company periodically analyzes the investments in these intellectual
properties for impairment. The stage in which these intellectual properties are
in make estimation of value or determination of impairment a difficult task. The
Company has only one such technology for which there is a commercial strategic
partner. However, there have been no substantive revenues yet generated from
that arrangement. The Company has determined that there is no evidence that the
book values of these intellectual properties are impaired until it has been
determined that there is no likely commercial application or one that will
produce adequate cash flow to support those values. The Company believes that
its current intellectual properties each require substantial development
dedication of resources, in both financial and human resources. The Company has
determined to pursue a limited number of these intellectual properties and not
pursue a number of others for various reasons. Therefore, the Company has taken
a write off of those intellectual properties that it does not intend to pursue.
The Company is funding further research and is more actively marketing and
seeking strategic partners for the remaining intellectual properties. However,
any change in estimates of impairment may have a significant effect on the
financial condition and results of operations of the Company.
Note 4 - INVESTMENTS
The Company has the following investments at December 31, 2001 and
2000:
December 31, 2001 December 31, 2000
---------------------- ---------------------
Estimated Estimated
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
AVAILABLE FOR SALE SECURITIES
Peabody's Coffee, Inc. $ -- $ -- $ 10,000 $ 10,000
Rockford Technologies, Inc. 24,750 17,274 207,756 207,756
-------- -------- -------- --------
Totals $ 24,750 $ 17,274 $217,756 $217,756
======== ======== ======== ========
F-10
Statements of Financial Accounting Standards No. 115, ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, ("SFAS 115") requires that
all applicable investments be classified as trading securities, available for
sale securities or held to maturity securities. The Company did not have any
investments classified as trading securities or held-to-maturity securities. The
statement further requires that available for sale securities be reported at
fair value, with unrealized gains and losses excluded from earnings but reported
in a separate component of shareholders' equity (net of the effect of income
taxes) until they are sold. At the time of sale, any gains or losses, will be
recognized as a component of operating results.
At December 31, 2000, the estimated fair value of Peabody's was estimated
based on the quoted trading price of the security at December 31, 2000, the
value of the Peabody's stock approximated the cost. This stock was sold in 2001
and the Company realized a loss of $6,000.
The Company acquired 2,900,000 shares of Rockford Technologies, Inc.
("Rockford") in the year ended December 31, 1999 for $207,756 as part of a legal
settlement with Rockford. The 2,900,000 shares represented an approximate 15%
interest in Rockford. As part of that settlement, members of the Company's Board
of Directors assumed half of the Board seats of Rockford. At December 31, 2001,
one of the Company's directors was also one of three directors of Rockford.
Rockford had no material operations during the two years ended December 31,
2001. During 2001, the Company sold 1,654,519 shares and distributed 900,000
shares for goods and services. The Company realized a loss of $66,464. At
December 31, 2001, the Company the unrealized decline in value was $7,476.
Note 5 - INCOME TAXES
The Company does not provide any current or deferred income tax provision or
benefit for any period presented because it has experienced operating losses
since inception. The Company has provided a full valuation allowance because of
the uncertainty regarding the utilization of the net operating loss
carryforwards.
For the year ended December 31,
2001 2000
----------- -----------
Current income tax benefit $ 238,115 $ 1,541,513
----------- -----------
Deferred income tax benefit $ 165,705 $ 624,805
----------- -----------
Total current and deferred income tax benefit 403,820 2,166,318
Valuation allowance (403,820) (2,166,318)
----------- -----------
Benefit of income taxes $ -- $ --
=========== ===========
Income tax expense does not differ from amounts computed by applying the
U.S. Federal income tax rate of 34% and the state rate of 7% and 8%,
respectively, at December 31, 2001 and 2000, except for the valuation allowance.
F-11
At December 31, 2001, the Company had realized net operating losses of
approximately $6,838,123. Future realization of the net deferred tax assets is
dependent on generating sufficient taxable income prior to their expiration. The
realized net operating losses expire, as follows: Note 5 - INCOME TAXES
(continued)
Expiration Federal State
---------- ------- -----
2002 $ 236,028
2003 861,526
2004 603,950
2005 3,670269
2006 580,770
2009 $ 44,994
2010 379,485
2011 461,101
2012 236,028
2018 861,526
2019 603,950
2020 3,670,269
2021 580,770
---------- ----------
Total net operating loss available $6,838,123 $5,952,543
========== ==========
Note 6 - COMMITMENTS
The Company's acquisition agreements for intellectual properties generally
contain requirements to pay royalties to the sellers when revenue is generated
from those intellectual properties. At December 31, 2001 and 2000, the Company
had no royalties payable.
The Company periodically enters into agreements with third parties,
primarily U.S. universities, to fund research projects related to its
intellectual properties. At December 31, 2001 and 2000, there were no long-term
commitments under such arrangements.
Note 7 - STOCKHOLDERS' EQUITY
The Company issues common stock as compensation to consultants and to
acquire intellectual properties. During the year ended December 31, 2000 the
Company issued 200,000 of its common stock to acquire new intellectual
properties. The value of those transactions was determined based upon the
trading value of the Company's common stock at the time of the transactions.
During 2001, the Company issued $200,000 of 10% convertible debentures.
These debentures were converted during 2001 into 1,166,142 shares of common
stock.
Prior to 1999, the Company entered into an agreement granting 9,000,000
shares to three of the Company's officers and directors and a consultant. The
shares were placed in escrow and could not be released until the Company meets
certain operating milestones and profitability. The shares are presented as
issued and outstanding and are included in the loss per share calculation.
During 2000, the Company cancelled the escrow agreement and the restricted
shares held by the escrow agent were returned to the treasury of the Company and
cancelled. No value or cost had been associated with those shares when issued.
Expense was to be recognized at the time the shares become earned and released
from escrow to the individuals and consultant. The loss per share calculations
have been recomputed based on the cancellation.
F-12
Note 8 - STOCK OPTIONS
The Company issues stock options periodically to consultants and members of
the Board of Directors. The Company has adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation". The
options granted in the years ended December 31, 2000 and 1999, were granted to
other than employees, the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees",
does not apply. Accordingly, compensation cost has been recognized for the stock
options granted to other than employees.
Under the provisions of SFAS No. 123, the number of fully vested options
granted of 1,500,000 and 1,300,000 options for the years ended December 31, 2001
and 2000, respectively, were used to determine compensation cost. The value of
options charged to expense during the year ended December 31, 2001 and 2000 were
$0 and $1,645,133.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions for years
ended December 31:
2001 2000
---- ----
Dividend yield None None
Volatility .894 1.61
Risk free interest rate 4.07% 5.75%
Expected asset life 7.5 months 2.04 year
The Board of Directors authorized the granting of 1,500,000 and 1,300,000
options during the years ended December 31, 2001 and 2000. The price of the
options granted pursuant to these grants is not to be less than 100 percent of
the fair market value of the shares on the date of grant. The options expire one
year from date of grant and are immediately vested.
The summary of activity for the Company's stock options is presented
below:
Weighted Weighted
Average Average
Exercise Exercise
2001 Price 2001 2000 Price 2000
---- ---------- ---- ----------
Options outstanding at beginning of year 1,100,000 N/A 250,000 N/A
Granted 1,500,000 $ 0.50 1,300,000 $ 0.42
Exercised -- N/A (450,000) $ 0.26
Terminated/Expired (600,000) $ 1.00 -- N/A
Options outstanding at end of year 2,000,000 $ 2.30 1,100,000 $ 2.30
Options exercisable at end of year 2,000,000 $ 2.30 1,100,000 $ 2.30
Options available for grant at end of year -- --
Price per share of options outstanding $0.50 - $0.50 $1.00 - $4.50
Weighted average remaining contractual lives 7.5 months 2 years
Weighted Average fair value of options granted
during the year $0.50 $1.37
F-13
Note 9 - LOSS PER SHARE
Outstanding options to purchase common stock were not considered in the
calculation for diluted earnings per share for the years ended December 31, 2001
and 2000 because the effect of their inclusion would be antidilutive. A
reconciliation of the numerator and denominator of the basic and diluted per
share calculations for the loss from continuing operations is as follows:
2001 2000
---------------------------------- -----------------------------------
Per Per
Loss Shares share Loss Shares share
---- ------ ----- ---- ------ -----
Net (Loss) $(984,928) $(5,239,100)
BASIC LOSS PER SHARE
Loss available to common
stockholders $(984,928) 27,097,894 $(0.04) $(5,239,100) 25,749,799 $(0.20)
Effect of dilutive
securities N/A N/A
DILUTED LOSS PER SHARE $(0.04) $(0.20)
Options to purchase 1,500,000 and 1,300,000 shares of common stock were
outstanding at December 31, 2001 and 2000, and were excluded from the
computation of diluted loss per share because the effect of their inclusion
would be anti-dilutive
Note 10 - CREDIT RISK AND OTHER CONCENTRATIONS
The Company has historically relied upon cash raised in private placements
of the Company's common stock for working capital. At times, the Company
maintains cash balances at banks that exceed insured limits. At December 31,
2001 and 2000 the Company did not have funds on deposit that exceeded the
insured limits.
F-14