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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission File Number 0-22302
ILLINOIS SUPERCONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-3688459
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
451 KINGSTON COURT, MOUNT PROSPECT, ILLINOIS 60056
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (847) 391-9400
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(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 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. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, based upon the last reported sale price of
the registrant's Common Stock on March 20, 1997 was $75,455,474.
The number of shares outstanding of the registrant's Common Stock, par
value $.001, as of March 20, 1997 was 5,023,510.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1. BUSINESS
Because Illinois Superconductor Corporation (the "Company") wants to
provide investors with more meaningful and useful information, this Annual
Report on Form 10-K (the "Form 10-K") contains, and incorporates by reference,
certain forward-looking statements (as such term is defined in the rules
promulgated pursuant to the Securities Act of 1933, as amended (the "Securities
Act")) that reflect the Company's current expectations regarding the future
results of operations and performance and achievements of the Company. Such
forward-looking statements are subject to the safe harbor created by the
Private Securities Litigation Reform Act of 1995. The Company has tried,
wherever possible, to identify these forward-looking statements by using words
such as "anticipate," "believe," "estimate," "expect" and similar expressions.
These statements reflect the Company's current beliefs and are based on
information currently available to it. Accordingly, these statements are
subject to certain risks, uncertainties and assumptions, including the factors
set forth under the heading "Risk Factors" in the Company's Registration
Statement on Form S-3 filed with the Securities and Exchange Commission on the
date hereof, which could cause the Company's future results, performance or
achievements to differ materially from those expressed in, or implied by, any
of these statements. The Company undertakes no obligation to release publicly
the results of any revisions to any such forward-looking statements that may be
made to reflect events or circumstances after the date of this Form 10-K or to
reflect the occurrence of unanticipated events.
GENERAL
The Company develops, manufactures and markets high performance
products for wireless telecommunications markets based on its proprietary high
temperature superconductor ("HTS") materials, radio frequency ("RF") filter
design and cryogenic technologies. Superconductor materials, when cooled below
a critical temperature, are able to transmit an electrical current with either
no or minimal loss of energy. Because of this minimal energy loss,
superconductors are attractive for a wide range of commercial applications.
The wireless telecommunications industry has experienced significant
growth in recent years, which has led to increased competition among service
providers, rapid growth in base station installations and significant increases
in RF interference. By reducing the effects of this interference, the
Company's RF filter products enable cellular and Personal Communications
Services ("PCS") service providers to improve the quality and increase the
coverage, capacity and flexibility of their networks in an economical manner.
The Company's RF filter products, which are based on superconductor technology,
offer the following performance benefits:
- call quality is improved and the frequency of blocked or
dropped calls is reduced because adjacent band interference
from competing wireless service providers and other radio
services is reduced;
- coverage gaps between base stations are reduced because the
radio range of these base stations is extended, thereby
minimizing the number of base stations required in a wireless
network;
- network call carrying capacity is increased because channels
which were previously unusable due to adjacent band
interference now become available; and
- flexibility in the location of base stations is improved
because wireless service providers can locate base stations in
areas where RF interference or other restrictions currently
inhibit operations.
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The Company currently offers two product lines to address the needs of
cellular and PCS service providers. The SpectrumMaster(TM) product line is
designed primarily to improve the RF performance of cellular and PCS systems in
high interference environments, including urban areas and near airports. The
RangeMaster(TM) product line combines the interference rejection advantages of
a SpectrumMaster(TM) filter with a cryogenically-cooled low-noise amplifier.
RangeMaster(TM) is designed to serve the range extension needs of rural,
suburban or small city cellular and PCS operators. In addition, the Company is
developing other products based on its core technologies, including adapting
current products to meet the specific needs of international wireless markets
and developing RF transmitter products.
The Company has completed 14 field trials with several major cellular
service providers. As a result of these field trials and other marketing
initiatives, the Company has received orders from certain of these service
providers for commercial units. In the third quarter of 1996, the Company
began shipping its first RF filter products to the cellular market, which were
installed and accepted into customers' commercially operational base stations.
In addition, the Company has received orders for its products from certain
other customers who have not participated in field trials.
INDUSTRY BACKGROUND
The wireless telecommunications industry has experienced significant
growth, both domestically and internationally, in recent years. This growth
has been attributable primarily to the widespread availability of wireless
services, continued decreases in the price of service and equipment,
deregulation, introduction of new technologies and increased RF spectrum
availability. This growth in the popularity of wireless services has led to
significant increases in competition among service providers, numbers of base
stations and RF interference.
In addition to the growth of the wireless communications market, new
digital technologies are rapidly being introduced into the marketplace,
including Time Division Multiple Access, Global System for Mobile
Telecommunications ("GSM") and Code Division Multiple Access ("CDMA").
Although analog technology represents the most widely deployed cellular
protocol, it has several limitations, including inconsistent service quality
and inefficient use of the radio spectrum. Digital cellular technologies are
being implemented or deployed in cellular networks to address some of the
shortcomings of analog technology. Digital technologies, however, do not fully
resolve these shortcomings and have other limitations.
To date, cellular telephone has been the largest segment of the
wireless communications market. According to the Cellular Telecommunications
Industry Association ("CTIA"), as of December 1996, there were over 44
million cellular subscribers in the U.S. In addition, industry publications
indicate that the current worldwide market for wireless services is in excess
of 100 million subscribers. According to the CTIA, there are in excess of
30,000 cellular base stations in the U.S. The Company believes that there are
currently in excess of 60,000 cellular base stations worldwide and that this
number is increasing rapidly as cellular service providers increase capacity
to meet subscriber growth. PCS represents the most significant new wireless
service currently being deployed in the U.S. PCS is based on digital
technologies and is designed to provide subscribers with additional
choices of carriers, improved signal quality, increased services and greater
data transmission capabilities. Industry sources estimate that there were
approximately 6,000 PCS base stations in service at the end of 1996 and
forecast that over 100,000 PCS base stations will be built in the U.S. over
the next four years. PCS services are also being implemented in other
countries around the world.
The Company believes that competition for subscribers will continue to
intensify as the U.S. and foreign governments continue deregulating the
telecommunications industry, allocating more spectrum
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and allowing additional service providers to enter markets with new services.
Increased competition is causing service providers to differentiate themselves
on the basis of quality, price and coverage. The intensity of competition is
evidenced by an ongoing movement of customers among carriers. This customer
movement can reduce service providers' revenues while increasing their
marketing costs.
The rapid growth and increased competition experienced by the wireless
telecommunications industry have increased the difficulty of providing quality
wireless services. Wireless service providers face the challenge of providing
quality services in this environment which is increasingly characterized by RF
interference and congestion. In addition, the rapid rate of growth and
community concerns have affected the manner in which service providers locate
their base stations. Base stations provide the link between a wireless user
and the telecommunications network and are being positioned closer together,
often in the same location, which results in RF interference problems. There
has also been an increase in the use of portable handheld phones which transmit
weaker signals than mobile, or car-mounted, phones and therefore base stations
do not receive their signal as well as those from mobile phones. As a result,
cellular networks which were laid out based on mobile phone power levels have
in many areas developed coverage gaps which operators must fill in to satisfy
their goals of providing seamless coverage. Furthermore, in order to compete
with these already broadly deployed cellular networks, PCS service providers
need to deploy coverage quickly and with the lowest possible capital investment.
The Company believes that the resulting demands on system performance
will lead service providers to invest in new infrastructure technologies, such
as high performance RF filters, to address their growth and quality needs. RF
filters are used in wireless networks to process radio signals received from a
base station's antenna and provide as "clean" and strong a signal as possible
to the other radio equipment in the wireless base station system. Traditional
filters suffer substantial performance limitations due to energy loss
experienced by the types of materials used. Wireless service providers
therefore have a need for RF filtering with much higher performance
characteristics than are currently available using conventional technology.
The Company believes that the changing market conditions, the drive to
implement new technologies and the technical issues faced by wireless service
providers create significant opportunities for new equipment suppliers.
THE COMPANY'S SOLUTION
The Company's products are designed to address the high performance RF
filter needs of domestic and international commercial wireless systems by
providing the following advantages:
- Improved Call Quality. The Company's RF filter products
improve call quality by reducing dropped and blocked calls.
During field trials in urban cellular locations, the Company's
RF filter products have typically demonstrated a 20 to 40%
reduction in dropped calls caused by out-of-band interference
and base station front-end overloading. During these field
trials, the Company's RF filter products have also
demonstrated a reduction in blocked calls experienced in urban
cellular locations. The Company believes that its RF filter
products also improve audio fidelity by reducing noise and
interference.
- Increased Base Station Range. The Company's RF filter
products extend the uplink range (the distance from which a
base station can receive a signal from a portable unit) of
cellular and PCS base stations. The Company believes that
cellular service providers will be able to use its filters to
fill coverage gaps without having to install additional base
stations. The Company also believes that PCS service
providers can lower capital costs by reducing the number of
base stations required to build out new wireless networks.
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- Greater Network Capacity and Utilization. The Company's RF
filter products increase the capacity and utilization of a
wireless base station. In some cases, capacity increases
because channels which were previously unusable due to
interference are recovered. In other cases, system
utilization increases result from reductions in the number of
blocked and dropped calls and increases in the ability of the
system to permit weak signals to be processed with acceptable
call quality.
- Improved Flexibility of Base Station Location. The Company's
RF filter products allow wireless service providers to locate
base stations in areas where RF interference or other
restrictions currently inhibit operations. For example, the
Company's RF filter products enable base stations to be
located in close proximity to a number of other RF signal
transmitters. Because of the performance characteristics of
the Company's RF filter products, base stations can also be
located in less than optimal sites due to zoning or other
governmental restrictions.
PRODUCTS
The Company currently offers two product lines to address the multiple
needs of cellular and PCS service providers. The SpectrumMaster(TM) product
line is designed primarily to improve the RF performance of cellular and PCS
systems in high interference environments, including urban areas and near
airports. The RangeMaster(TM) product line combines the interference rejection
advantages of a SpectrumMaster(TM) filter with a cryogenically-cooled low-noise
amplifier. RangeMaster(TM) is designed to serve the range extension needs of
rural, suburban or small city cellular and PCS operators. All of the Company's
products are designed to be smoothly integrated into a service provider's base
station equipment. Service requirements for its SpectrumMaster(TM) and
RangeMaster(TM) products are minimal and can be performed by either a wireless
service provider or the Company's personnel. The Company's products are
currently being sold to U.S. cellular service providers, have been tested with
a PCS service provider and are being adapted and marketed to international
cellular and PCS service providers.
SpectrumMaster(TM). The Company currently markets three models of its
SpectrumMaster(TM) filter for the cellular market. These products address the
interference rejection needs of wireless service providers with U.S. A or B
frequency band allocations and meet all analog and digital protocol
specifications in the U.S. The Company shipped the first of these products in
the third quarter of 1996.
The Company has developed its first filter products specifically
targeted to satisfy the needs of PCS service providers to increase call quality
by reducing the RF signal noise in PCS systems due to interference and radio
system noise. These products are intended to address the high performance
filter needs of service providers with PCS frequency band allocations and will
be compatible with all PCS digital protocol specifications in the U.S.
RangeMaster(TM). The Company currently markets two models of its
RangeMaster(TM) receiver front end for the cellular market. These products
address the range extension needs of cellular service providers with U.S. A or
B frequency band allocations and meet all analog and digital protocol
specifications in the U.S. The RangeMaster(TM) products permit operators to
fill coverage gaps in their networks caused by insufficient RF uplink range
without adding new base stations. The first field trials using these products
have been completed, and the Company received its first orders for these
products in the first quarter of 1997.
The Company also offers RangeMaster(TM) products specifically designed
to enable PCS service providers to minimize their infrastructure costs and
deployment times by lowering the number of base stations needed to provide
continuous wireless coverage over a given area. These products address the
need for greater base station range of service providers with PCS frequency
band allocations and are
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compatible with all PCS digital protocol specifications in the U.S. The
Company completed prototype testing of its RangeMaster(TM) receiver front end
products with a PCS service provider and expects to begin operational field
trials during the second quarter of 1997.
International Cellular Products Offerings. The Company is adapting
its SpectrumMaster(TM) and RangeMaster(TM) products for international cellular
markets to address their specific interference rejection and range extension
needs. For example, along with the adaptation of its products for various
Asian cellular and PCS markets, the Company is developing products for the
Japanese Personal Digital Cellular market that will address its unique growing
interference protection needs. In addition, the Company is developing products
for European cellular and PCS markets, including GSM filters in various
configurations.
SUPERCONDUCTIVITY AND TECHNOLOGY
Superconductor materials, when cooled below a critical temperature, are
able to transmit an electrical current with either no or minimal loss of
energy. Because of this extremely low energy loss, superconductors are
attractive for a wide range of commercial applications. In the case of direct
currents, superconductors are perfect conductors, with no energy loss at all.
In the case of alternating currents, including RF currents, some slight energy
losses occur due to the superconductor's interaction with changing magnetic
fields. Until 1986, most known superconductors operated at temperatures very
near absolute zero (0 degrees K or -459 degrees Fahrenheit). The difficulty
and expense required to maintain these temperatures limited the commercial
application of these low temperature superconductors. In 1986, researchers
discovered a class of materials which become superconducting at temperatures
greater than 77 degrees K (-320 degrees Fahrenheit). These high temperature
superconductors can be cooled with economical and reliable mechanical
refrigerators.
The Company's products are based upon its proprietary and patented
technologies, which provide several strategic advantages in the development,
manufacturing and marketing of its products. The Company considers its
technology strengths to include its thick-film HTS fabrication technology, its
high performance RF filter design technology and its cryogenics technology.
Thick-Film HTS Fabrication Technology. A number of HTS compounds have
been discovered in the last ten years. The most significant of these compounds
to the Company is yttrium barium copper oxide ("YBCO"). The Company focuses
its product application efforts on this compound for two main reasons. First,
YBCO materials are readily manufacturable using the Company's thick-film
fabrication technology. Second, this material offers superior RF electrical
performance at commercial wireless frequencies.
The Company's exploitation of HTS materials is based on thick-film
fabrication technology. The Company's technology position in thick- film HTS
fabrication is based on owned and licensed patents, as well as extensive
know-how and trade secrets. In addition, the Company has acquired HTS
thick-film fabrication technology from other parties, primarily the University
of Birmingham (UK). The Company believes that its HTS thick-film fabrication
technology overcomes many of the drawbacks of using alternative HTS fabrication
technologies (thin-film or bulk) to fabricate superconducting RF filters for
cellular, PCS and other wireless markets.
The Company's HTS thick-film fabrication process uses conventional
ceramic deposition techniques. The simplicity of the HTS thick-film
fabrication process and its reliance on proven industrial production techniques
is expected to result in a reduction in processing and materials costs over
those of thin-film and bulk HTS fabrication processes. For example, the
Company has developed a patented technique to form superconducting thick-films
on cost-effective substrates.
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The Company believes that its HTS thick-film fabrication technology
presents the most feasible way to fabricate economical RF devices in the
frequency range used in cellular, PCS and other wireless telecommunications
systems when compared to other HTS fabrication technologies. The Company
believes its HTS thick-film technology allows the design of higher performing
RF filters, handles greater levels of RF power and introduces lower levels of
RF distortion. The Company also believes its HTS thick-film technology
permits greater flexibility in RF filter design due to the ability to
economically manufacture the three-dimensional shapes required to produce very
high levels of RF performance. In addition, the Company believes that RF
products produced by its HTS thick-film fabrication process cost less to
manufacture. The Company's HTS thick-film process, unlike HTS thin-film
processes which are based on semiconductor fabrication processes, do not
require clean room facilities and require lower capital investments for a
production facility.
RF Filter Design Technology. The technology and tools for designing,
constructing and testing conventional RF filters are well established.
However, with the introduction of HTS materials, a new set of customized design
tools and techniques has been developed by the Company to support filter
product development. These customized design tools, which include electrical
circuit design and analysis software, engineering design rules and filter
assembly and testing procedures, are important competitive advantages to the
Company and are protected mainly as trade secrets. They enable the rapid
design and implementation of the Company's RF filter products.
Cryogenics Technology. Since HTS materials have to be maintained at
cryogenic temperatures (below -300 degrees Fahrenheit) in order to function,
the Company must incorporate efficient and economical cryogenic technologies
into its products. The cryocooling systems used in the Company's products
consist of two parts: the cryostat or insulating vessel, which houses the
superconducting electronic components, and the cryogenic refrigerator, which
maintains the required temperatures within the cryostat package. The Company
has created a substantial base of technology in the design, assembly and
operation of these cryogenic systems. The Company works closely with the
vendors of the refrigerator systems to design smaller, lower cost and more
reliable components. In order for the Company to produce commercially
successful products, it must design into its products cryogenic systems which
offer long life, low maintenance, high reliability and low cost.
SALES AND MARKETING
To date, the Company's sales and marketing efforts have focused on
major cellular service providers in retrofit applications. The Company expects
to continue such efforts, as well as build on its experience to establish OEM
channels and a PCS market presence. The Company currently uses a direct sales
force to sell its products. The Company also makes selective use of
consultants and agents to facilitate its sales efforts.
Although the Company believes that with increasing market acceptance
of its products it will be able to shorten the sales cycle, in general, sales
of the Company's RF filter products to larger cellular service providers in
retrofit applications have consisted of the following three steps:
- Conduct an Operational Field Trial Program. The initial step
in the Company's sales process consists of coordination with,
and active involvement of, a service provider's central
engineering organization and an appropriate regional service
area. The process includes identifying candidate cell sites
which suffer performance degradation due to high levels of
RF interference and range limitation, measuring cell site
performance before installation of the Company's RF filter
products, installing the Company's RF filter products for a
number of weeks while collecting cell site performance data,
and then compiling and interpreting the data to measure the
benefits provided by the Company's RF filter products.
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- Obtain Corporate Engineering Approval for Installation in
Service Provider Sites. Upon review of the products'
performance during the field trials, the wireless service
provider's engineering staff provides an approval so that
managers in regional service areas can purchase the Company's
RF filter products for commercial deployment in their
networks.
- Sell Products Directly to Service Providers' Regional Service
Areas. Once approval is obtained from the corporate
organization, the Company sells its products directly to
decision makers within a service provider's regional service
area.
Commercial field trials of the Company's cellular RF filter products
in operational base stations began in November 1995. The Company has completed
14 trials in eight regional markets with five major cellular service providers.
During field trials, the Company's RF filter products have demonstrated several
benefits for the cellular market, including reduced dropped calls, improved
uplink range, increased call quality and increased capacity. Certain
details of field trial experience to date are contained in the following table:
<TABLE>
<CAPTION>
Service Provider Class Cell Site Environment Number of Trials Status
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SPECTRUMMASTER(TM)
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<S> <C> <C> <C>
U.S. B-Band Cellular Urban High Interference 3 Completed
U.S. A-Band Cellular Urban High Interference 2 Completed
U.S. B-Band Cellular Adjacent to Airport 2 Completed
U.S. A-Band Cellular Adjacent to Airport 2 Completed
U.S. B-Band Cellular Antenna Farm 1 Completed
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RANGEMASTER(TM)
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U.S. B-Band Cellular Rural Range Extension 1 Completed
U.S. A-Band Cellular Rural Range Extension 2 Completed
U.S. B-Band Cellular Suburban Range 2 One Completed/One Underway
Extension
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</TABLE>
Completed field trials have enabled the Company to begin shortening
the sales cycle with its customers. As the Company's products have become more
accepted, new customers are beginning to rely on the results of extensive
testing that other service providers have conducted. Because these field trial
results have demonstrated several benefits to the cellular market, some cellular
service provider customers have elected not to engage in their own
trials, but to purchase the units based on certain proven performance criteria.
The Company has also established marketing efforts to begin
qualification testing with original equipment manufacturers ("OEM") customers
who serve as the major suppliers to cellular and PCS service providers. As part
of its field trials with cellular service providers, the Company involves the
staff of the OEM vendor that provided the cellular infrastructure system to the
service provider. This allows the Company to demonstrate the benefits of its RF
filter products to the OEM, to demonstrate the products' compatibility with the
OEM's
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equipment and to cause the OEM to design the Company's products into their
system product offerings. As a result, the Company's cellular products are
beginning to undergo evaluation at a major OEM's test facilities.
The Company began tests of its RF filter products with a PCS service
provider in late 1996. The Company's marketing and sales personnel are working
directly with both PCS service providers and PCS OEMs to enhance the
probability of sales success in this market. The Company is undergoing
technical discussions with a PCS OEM regarding integrating the Company's RF
filter products into its PCS product line.
MANUFACTURING
The Company has focused its manufacturing efforts on maintaining
control of key technologies while avoiding the cost and complexities of
vertical integration. The Company's manufacturing operations consist primarily
of the manufacture of superconducting components from raw materials, and the
assembly, tuning, testing, quality verification and shipping of the Company's
products. All of these activities occur at the Company's manufacturing
facility in Mount Prospect, Illinois, which began operations during the third
quarter of 1996. The Company believes that manufacturing of its RF filter
products requires only moderate capital investments and is scaleable. The
Company also believes that capacity can be rapidly expanded to meet growing
demand without the need for large, upfront capital investments. The Company
purchases all of the components, except for superconducting components, for its
filter products from third party suppliers. The Company believes it has access
to adequate supplies of these purchased components, most of which are produced
to the Company's proprietary designs and specifications. The Company is using
its just-in-time manufacturing capability to maximize quality, insure
flexibility, limit management complexity and minimize inventory cost.
RESEARCH AND DEVELOPMENT
The Company's research and development ("R&D") efforts to date have
been focused on developing and improving cellular and PCS RF filter products.
These efforts have resulted in products with improved interference rejection,
reduced desired signal loss, decreased size, lower cost and enhanced
operational reliability. The Company plans to devote significant resources in
the future to continue to develop and improve these products and expand its
product lines.
The Company has evaluated and will continue to evaluate other markets
for product opportunities using its HTS technology. The Company has conducted,
and plans to continue, R&D into the technology for superconducting fault
current limiters which would act in electrical power distribution applications
much more rapidly than mechanical circuit breakers. The majority of the
Company's development efforts devoted to this technology have to date been
supported by R&D contracts from the U.S. Government. The Company has also
entered into a cooperative development agreement with a major provider of
electrical power distribution products. The goal of this program is to
determine if superconducting fault current limiters have applications in
commercial markets, including electrical grid protection, industrial machinery
protection, and protection of electrical and electronic components such as high
power radio amplifier tubes and transistors.
A key component of the Company's R&D strategy is to develop
relationships with domestic and international research groups to leverage its
internal R&D investments. The Company believes it enjoys many benefits from
these research relationships including accelerated introduction of new
technologies into its product lines, early indications of new technology
developments which could enhance or compete with its products, and high value
improvements in its current key technologies.
Another part of the Company's R&D strategy has been to contract with
and receive funding under government contracts and cooperative agreements.
Government programs under which the Company has
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received R&D funding include the Advanced Technology Program ("ATP") with the
U.S. Department of Commerce and Small Business Innovation Research ("SBIR")
contracts with a number of defense and non-defense government agencies. The
Company has pursued, and will continue to pursue, government contract
opportunities in areas which are directly applicable to its core technologies
and offer attractive commercial opportunities. The Company believes that it
receives benefits from these contracts through leveraging of its internal R&D
investments, and also by developing longer range, more speculative technology
areas.
The Company's total R&D expenses during 1994, 1995 and 1996 were
approximately $2,582,000, $5,205,000 and $6,623,000, respectively, with total
R&D expenses from inception through December 31, 1996 of approximately
$16,195,000. R&D costs reimbursed under government contracts and collaborative
agreements during 1994, 1995 and 1996 were approximately $619,000, $650,000 and
$200,000, respectively, and approximately $1,980,000 from inception through
December 31, 1996.
STRATEGIC RELATIONSHIPS
In addition to its own research staff, the Company has from time to
time entered into research relationships to leverage its internal resources by
seeking assistance in solving specific problems and providing awareness of
technical trends that influence its business. As a result, the Company has
relationships with institutions which have significant superconductivity
research programs. The Company's initial research relationship was with
Argonne National Laboratory ("Argonne"), which currently conducts one of the
largest superconductivity R&D programs in the U.S. In addition to a number of
formal joint R&D projects that the Company has had with Argonne in the past, it
is currently engaged in a two year Cooperative Research and Development
Agreement with Argonne aimed at the development of fault current limiters for
utility applications.
The Company has also entered into agreements with Lucent Technologies,
Inc. ("Lucent") through which the Company and Lucent have jointly designed and
developed technology for use in products for cellular, PCS and other wireless
telecommunications applications. The development work with Lucent was funded
from March 1993 through March 1996 primarily through an ATP cooperative
agreement awarded to the Company by the U.S. Department of Commerce, which the
Company used to offset R&D expenses. The Company's ATP agreement with Lucent
was completed in March 1996. The Company and Lucent entered into a joint
development agreement to continue joint research efforts to further the
development of superconducting filters for cellular and PCS communications
systems using CDMA technology.
The Company has also entered into a technology transfer agreement with
the University of Birmingham (UK), by which the Company purchased certain
intellectual property rights as well as design information relating to the
production of HTS thick-films. The Company is currently funding research at
the University of Birmingham's (UK) Interdisciplinary Research Centre over a
four-year period and has procured additional consulting services from
researchers involved in the program. The agreement covering these activities
ends in December 1998 and is subject to renewal.
The Company also participates in the Science and Technology Center for
Superconductivity, a superconductivity R&D center which is operated by the
University of Illinois under funding from the National Science Foundation, and
the Company is currently funding superconductor research activities at the
University of Illinois.
INTELLECTUAL PROPERTY AND PATENTS
The Company regards certain elements of its product design,
fabrication technology and manufacturing process as proprietary and protects
its rights in them through a combination of patents,
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trade secrets and nondisclosure agreements. The Company also has obtained
exclusive and non-exclusive licenses for technology developed with or by its
research partners, Argonne and Northwestern University, and expects to continue
to obtain licenses from such research partners and others. The Company
believes that its success will depend in part upon the protection of its
proprietary information, its patents and licenses of key technologies from
third parties, and its ability to operate without infringing on the proprietary
rights of others.
As of March 19, 1997, the Company has been issued six U.S. patents and
has filed and is actively pursuing applications for 23 other U.S. patents, and
is the licensee of 11 patents and patent applications held by others. Such
patents and patent applications relate to various aspects of the Company's
superconductor technology and to its current and proposed products. One of the
Company's patent applications has been filed jointly with Lucent and relates to
superconducting filters. Additional inventions are the subject of a group of
patent applications currently under preparation. Furthermore, the Company
expects to pursue foreign patent rights on certain of its inventions and
technologies critical to its products.
In 1994, the Company purchased from Ceramic Process Systems two
additional patents and the related technical know-how covering a process for
producing YBCO powder and manufacturing YBCO electrical fibers. In 1994, the
Company also purchased technology relating to the fabrication of HTS thick-film
components from the University of Birmingham (UK). This thick-film technology
complements the Company's existing patented processes for making thick-film
superconducting components.
Through collaborative relationships with Argonne and Northwestern
University, the Company has licensed patents and patent applications issued or
filed in the U.S. and in certain foreign countries arising under or related to
such collaborative relationships. These licenses primarily relate to the
processing and composition of HTS materials, including the preferential
orientation of HTS materials and the processing of YBCO on a variety of metals,
as well as design technology for some of the Company's current and proposed
products. The Company's licenses from ARCH and Northwestern University
continue for the lives of the patent rights licensed thereby, subject to
termination on certain events, and permit the Company to retain rights to its
patentable improvements to the licensed technology. Certain of the Company's
research has been or is being funded in part by SBIR and other government
contracts. Although the U.S. Government has or will have certain rights in the
technology developed with this funding, the Company does not believe that these
rights will have a material impact on the Company's current RF filter products.
COMPETITION
The market for wireless telecommunications products is very
competitive. The Company views its competition as (i) conventional RF filter
products, (ii) RF filters based on new technologies and (iii) other
superconductor-based RF products.
The Company's RF filter products compete against conventional RF
filter products produced by such companies as Celwave, certain divisions of the
Allen Telecom Group, Inc., Filtronic Comtek, Sinclair Radio Labs, Inc., K&L
Microwave, Inc., Wacom Technology Corp., EMR Corp. and TX-RX Systems, Inc.,
among others. Although these conventional RF filter products are generally
less expensive than the Company's products, the Company believes its RF filter
products are superior on a cost benefit basis.
In addition, other competitive RF filter products based on new
technologies may provide competition in the future to the Company's RF filter
products. In addition to competitive filter products, other companies
including Hazeltine Corp., Metawave Communications Corporation, Allen Telecom
11
<PAGE> 12
Group, Inc., Repeater Technologies, Inc. and ArrayCom, Inc., among others, are
developing products based on "smart" antenna, digital signal processing,
microcell or repeater technologies which are also aimed at reducing
interference problems or providing range extension by means other than RF
filtering. The Company does not believe that these technologies pose a direct
competitive threat at present, but cannot exclude them as competition
to the Company's RF filter products at some point in the future.
The existing market for high temperature superconductor-based products
is very small and in the early stages of development. The Company believes
that the market for superconducting products will become intensely competitive,
especially if products with significant market potential are developed. In
addition, the Company believes the superconducting products market will
continue to be characterized by rapid technological change.
A number of large multinational companies are engaged in R&D programs
that could lead to the commercialization of superconducting products, including
products for the wireless telecommunications market. These include, among
others, E.I. DuPont de Nemours & Co., International Business Machines
Corporation, TRW Inc. and Westinghouse Electric Corp. in the U.S. and Fujitsu
Ltd., Hitachi Ltd., NEC Corp., Siemens A.G., and Thomson S.A. in Japan and
Europe. The Company also believes that a number of smaller companies are
engaged in various aspects of the development and commercialization of
superconducting electronics products, including products for the cellular, PCS
and other wireless telecommunications markets. These include, among others,
Conductus, Inc., Superconductor Technologies Inc., and Superconducting Core
Technologies, Inc.
The Company believes that it competes on the basis of product
performance, cost, quality, reliability and focus on the wireless
telecommunications market. Many of the Company's competitors have
substantially greater financial resources, larger R&D staffs and greater
manufacturing and marketing capabilities than the Company.
GOVERNMENT REGULATIONS
Although the Company believes that its wireless telecommunications
products themselves are not licensed or governed by approval requirements of
the Federal Communications Commission ("FCC"), the operation of base stations
is subject to FCC licensing and the radio equipment into which the Company's
products would be incorporated is subject to FCC approval. Base stations and
the equipment marketed for use therein must meet specified technical standards.
The Company's ability to sell its RF filter products is dependent on the
ability of wireless base station equipment manufacturers and of wireless base
station operators to obtain and retain the necessary FCC approvals and
licenses. In order to be acceptable to base station equipment manufacturers
and to base station operators, the characteristics, quality, and reliability of
the Company's base station products must enable them to meet FCC technical
standards.
The Company uses certain hazardous materials in its research,
development and manufacturing operations. As a result, the Company is subject
to stringent federal, state and local regulations governing the storage, use
and disposal of such materials. It is possible that current or future laws and
regulations could require the Company to make substantial expenditures for
preventive or remedial action, reduction of chemical exposure, or waste
treatment or disposal. The Company believes it is in material compliance with
all environmental regulations and to date the Company has not had to incur
significant expenditures for preventive or remedial action with respect to the
use of hazardous materials. However, there can be no assurance that the
operations, business or assets of the Company will not be materially and
adversely affected by the interpretation and enforcement of current or future
environmental laws and regulations. In addition, although the Company believes
that its safety procedures for handling and disposing of such materials comply
with the standards prescribed by state and federal regulations, there is the
risk of
12
<PAGE> 13
accidental contamination or injury from these materials. In the event of an
accident, the Company could be held liable for any damages that result.
Furthermore, the use and disposal of hazardous materials involves the risk that
the Company could incur substantial expenditures for such preventive or
remedial actions. The liability in the event of an accident or the costs of
such actions could exceed the Company's resources or otherwise have a material
adverse effect on the Company's business, results of operations and financial
condition.
EMPLOYEES
As of February 28, 1997, the Company had a total of 76 employees, 23
of whom hold advanced degrees. Of the employees, 19 are engaged in
manufacturing and production, 36 are engaged in research, development and
engineering, and 21 are engaged in general management, marketing, finance and
administration. The Company also employs a number of consultants and
independent contractors. The Company considers its relations with its
employees to be satisfactory.
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters in a 35,000 square
foot building located in Mount Prospect, Illinois under a lease which expires
in October 2004. This facility also houses the Company's manufacturing,
research, development, engineering, and marketing activities. The Company
believes that this facility is adequate and suitable for its current needs and
that additional space would be available on commercial terms as necessary to
meet any future needs.
Under the terms of its lease, which expires October 2004, the Company
is responsible for all real estate taxes and operating expenses. The lease
provides for a $350,000 security deposit at December 31, 1996, decreasing by
$50,000 each year, and is secured by a certificate of deposit owned by the
Company.
ITEM 3. LEGAL PROCEEDINGS
On June 5, 1996, Craig M. Siegler filed a complaint against the
Company in the Circuit Court of Cook County, Illinois, County Department,
Chancery Division. The complaint alleged that, in connection with the
Company's private placement of securities in November 1995, the Company
breached and repudiated an oral contract with Mr. Siegler for the issuance and
sale by the Company to Mr. Siegler of 370,370.37 shares of the Company's common
stock, $.001 par value per share (the "Common Stock"), plus warrants
(immediately exercisable at $12.96 per share) to purchase an additional
370,370.37 shares of the Common Stock, for a total price of $4,000,000. The
remedy sought by Mr. Siegler was a sale to him of such securities on the terms
of the November 1995 private placement.
On August 16, 1996, the Company's motion to dismiss Mr. Siegler's
complaint was granted with leave to amend. On September 19, 1996, Mr.
Siegler's motion for reconsideration was denied. On October 9, 1996, Mr.
Siegler filed his First Amended Verified Complaint and Jury Demand, seeking a
jury trial and money damages equal to the difference between $8,800,000
(370,370.37 shares at $10.80 per share and 370,370.37 shares at $12.96 per
share) and 740,740.74 multiplied by the highest price at which the Common Stock
traded on The Nasdaq Stock Market between November 20, 1995 and the date of
judgment. Mr. Siegler also preserved his claim for specific performance for
purposes of appeal. On November 1, 1996, the case was transferred to the
Circuit Court of Cook County, Illinois, County Department, Law Division. The
Company's Answer was filed on November 21, 1996 and discovery has commenced.
The Company believes that the suit is without merit and intends to continue to
defend itself vigorously in this litigation. However, if Mr. Siegler prevails
in this litigation and is awarded damages in accordance with the formula
described above, such judgment would have a material adverse effect on the
Company's operating results and financial condition.
13
<PAGE> 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock has been traded on the Nasdaq National Market under
the symbol ISCO since the Company's initial public offering on October 26,
1993. The following table sets forth for the periods indicated the range of
high and low closing sale prices for the Common Stock:
High Low
------- -------
Fiscal year ending December 31, 1995
First Quarter . . . . . . . . . . . . . . . $8.50 $6.00
Second Quarter . . . . . . . . . . . . . . $11.50 $7.00
Third Quarter . . . . . . . . . . . . . . . $11.75 $7.50
Fourth Quarter . . . . . . . . . . . . . . $21.25 $10.00
Fiscal year ending December 31, 1996
First Quarter . . . . . . . . . . . . . . . $34.00 $15.50
Second Quarter . . . . . . . . . . . . . . $27.25 $19.75
Third Quarter . . . . . . . . . . . . . . . $27.25 $15.75
Fourth Quarter . . . . . . . . . . . . . . $22.25 $14.75
On March 20, 1997, the last reported sale price for the Common Stock
was $16.50, and there were 220 holders of record of the Common Stock.
The Company has never declared or paid cash dividends on its Common
Stock and the Company does not expect to pay any dividends on its Common Stock
in the foreseeable future. It is the current policy of the Company's Board of
Directors to retain any earnings to finance the Company's operations and the
expansion of its business. The payment of any cash dividends in the future
will depend upon the Company's earnings, financial condition and capital needs
and on other factors deemed relevant by the Board of Directors.
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<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data with respect to
the Company as of and for the years ended December 31, 1992, 1993, 1994, 1995
and 1996. The selected financial data as of the end of and for each of the
years in the five-year period ended December 31, 1996 have been derived from
the financial statements of the Company audited by Ernst & Young LLP,
independent accountants. The information set forth below should be read in
conjunction with the financial statements, related notes and other financial
information included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues . . . . . . . . . . . . . $ 202,348 $ 251,977 $ 208,168 $ 27,830 $ 209,822
Costs and expenses:
Cost of government contract
revenue . . . . . . . . . . . . . 149,303 234,191 194,098 19,286 49,534
Research and development . . . . 230,895 608,373 1,962,678 4,554,946 6,422,921
Selling and marketing . . . . . . 87,943 48,587 454,968 469,600 1,834,640
General and administrative . . . 718,789 1,102,576 2,199,597 2,763,615 3,290,810
----------- ----------- ----------- ----------- -------------
(984,582) (1,741,750) (4,603,173) (7,779,617) (11,388,083)
Other income (expense):
Investment income . . . . . . . 15,586 102,260 496,392 487,543 503,911
Interest expense . . . . . . . . (25,182) (10,136) (8,582) (39,600) (29,602)
----------- ----------- ----------- ----------- -------------
(9,596) 92,124 487,810 447,943 474,309
----------- ----------- ----------- ----------- -------------
Net loss . . . . . . . . . . . . . $ (994,178) $(1,649,626) $(4,115,363) $(7,331,674) $ (10,913,774)
=========== =========== =========== =========== =============
Net loss per common share . . . . . $ (1.15) $ (2.01) $ (2.41)
Weighted average number of
common shares outstanding . . . . 3,578,485 3,641,196 4,536,034
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------
1992 1993 1994 1995 1996
--------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents . . . . . $705,943 $16,739,861 $ 90,362 $ 953,093 $ 5,188,047
Working capital . . . . . . . . . . 687,484 16,597,042 9,806,670 5,458,474 5,207,923
Total assets . . . . . . . . . . . 996,909 17,632,020 14,732,501 11,105,766 13,388,496
Long-term debt/capital lease
obligations, less current
portion . . . . . . . . . . . . . 40,101 47,971 8,355 509,079 91,618
Stockholders' equity . . . . . . . 875,817 16,843,855 12,821,746 9,185,379 11,520,128
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company was founded in 1989 by ARCH Development Corporation
("ARCH"), an affiliate of The University of Chicago, to commercialize
superconducting technologies developed initially at Argonne. Since its
inception, the Company has been in the development stage, primarily engaging in
research and product development activities, both internally funded and under
government-funded contracts and cooperative agreements, recruiting technical
and administrative personnel, and raising capital. Throughout its development
stage, the Company's primary focus has been to use its patented and proprietary
HTS materials technologies to develop RF filter products designed to enhance
the quality, coverage, capacity and flexibility of cellular and PCS wireless
telecommunications services. To date, the Company has received a majority of
its revenue from government research contracts. While government research and
development contracts have historically provided the Company's primary source
of revenue, the Company believes that they will not be a significant source of
revenue in the future. The Company has incurred cumulative losses of
$26,361,562 from inception to December 31, 1996.
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<PAGE> 16
During the second half of 1996, the Company made the first commercial
sales of its RF filter products. The Company has received additional orders
for its products which are scheduled for delivery during the first and second
quarters of 1997. Product revenues have been derived from sales of the
Company's RF filter products and to a lesser extent other development stage
products. The Company expects sales of its RF filter products to increase.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
The Company's revenues increased in 1996 to $209,822 from $27,830 in
1995, primarily as a result of sales of the Company's RF filter products. A
government research and development contract begun during the fourth quarter of
1995 generated $53,122 in revenues in 1996. The Company has concentrated its
efforts on its commercial product development programs and does not expect
revenues to increase dramatically unless and until it ships a significant
amount of its commercial products.
Cost of government contract revenue was $49,534 in 1996, as compared to
$19,286 for 1995. Cost of government contract revenue consists primarily of
research and development expenses associated with government contracts,
including engineering personnel, engineering materials and other overhead costs.
The increase of these costs resulted from increased activity under government
contracts. Costs associated with development stage product sales are reflected
as research and development expenses.
The Company's internally funded research and development expenses for
1996 were $6,422,921 compared to $4,554,946 for 1995. The Company incurred
increased expenditures to expand its RF filter product lines, develop and
implement its manufacturing processes and also to conduct advanced research and
development activities. These expenditures consisted primarily of personnel
costs, materials and supplies expenses and costs associated with the Company's
product sales. Under the terms of a government contract entered into in March
1993 and amended in March 1994 and March 1995, the U.S. Government agreed to
share costs of certain of the Company's research and development efforts. This
contract was completed in March 1996. Funding of $200,445 for 1996 has been
offset against the related research and development costs, as compared to
$649,660 for 1995. The Company anticipates it will maintain a similar level of
research and development expenses during 1997 to expand its existing product
lines.
Selling and marketing expenses for 1996 were $1,834,640, as compared
to $469,600 for 1995. This increase was attributable to the addition of sales,
marketing and field service personnel, increases in expenditures to conduct
customer field trials and expansion of product marketing and advertising
efforts.
General and administrative expenses for 1996 were $3,290,810, as
compared to $2,763,615 for 1995. This increase was attributable to increased
administrative expense necessary to support growth in Company personnel and
higher outside service provider costs.
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<PAGE> 17
Investment income increased to $503,911 in 1996 from $487,543
in 1995. This increase was primarily due to a larger average investment
portfolio during 1996, which was attributable primarily to the Company's private
placement completed in February 1996.
Interest expense decreased to $29,602 in 1996 from $39,600 in 1995
primarily due to a lower average debt balance outstanding in 1996 as compared
to 1995.
YEARS ENDED DECEMBER 31, 1995 AND 1994
The Company's revenues decreased in 1995 to $27,830 from $208,168 in
1994, primarily as a result of completing several government contracts in 1994.
A new government contract begun during the fourth quarter of 1995 generated
$21,832 in government contract revenue, and the balance of $5,998 in revenues
was the result of development stage non-RF filter product sales.
Cost of government contract revenue was $19,286 in 1995, as compared
to $194,098 for 1994. Cost of government contract revenue consists primarily
of research and development expenses associated with government contracts,
including engineering personnel, engineering materials and other overhead
costs. The decrease in these costs resulted from decreased activity under
government contracts. Costs associated with development stage product
sales are reflected as research and development expenses.
The Company's internally funded research and development expenses for
1995 were $4,554,946 compared to $1,962,678 for 1994. This increase reflects
the Company's increased commitment of resources to the commercialization of its
RF filter product lines. To support field tests of these products, the Company
continued to expand its internal research and development activities through
the hiring of additional personnel and increasing expenditures for materials
and services needed to produce field test units. Under the terms of a
government contract entered into in March 1993, and amended in March 1994 and
March 1995, the U.S. Government agreed to share costs of certain of the
Company's research and development efforts. Funding of $649,660 for 1995 has
been offset against the related research and development costs, as compared to
$619,028 for 1994.
Selling and marketing expenses for 1995 were $469,600, as compared to
$454,968 for 1994. This increase was attributable to the hiring of additional
marketing and administrative personnel, and increased expenditures for product
marketing and advertising efforts.
General and administrative expenses for 1995 were $2,763,615, as
compared to $2,199,597 for 1994. This increase was primarily attributable to
increased occupancy costs as a result of the Company's move to its new
facility and additional Company personnel.
Investment income decreased to $487,543 in 1995 from $496,392 in 1994.
This decrease was primarily due to a smaller average investment portfolio in
1995.
Interest expense increased to $39,600 in 1995 from $8,582 in 1994
primarily due to higher average debt balance outstanding in 1995 as compared
to 1994.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operations primarily through
public and private equity financings which have raised approximately
$39,000,000, net of related expenses. In February 1996, the Company completed a
private placement which raised approximately $8,334,000, net of expenses. At
December 31, 1996, the Company's cash, cash equivalents and investments,
including certain restricted
17
<PAGE> 18
investments, was approximately $6,038,000, reflecting a decrease of
approximately $861,000, from $6,899,000 at December 31, 1995. In December
1996, the Company received an aggregate of approximately $4,400,000 from the
exercise of warrants that were issued in the Company's private
placement completed in November 1995, approximately $1,100,000 of which was
in the form of promissory notes. Approximately $716,000 in principal amount of
these promissory notes is currently outstanding and is due on April 30, 1997.
The Company had provided notice of its intent to redeem the warrants in
November 1996.
During 1995 and 1996, the Company financed a portion of its leasehold
improvements and capital equipment additions through various borrowings
approximating $743,000, approximately $172,000 of which was outstanding at
December 31, 1996. The remaining balance is due in monthly installments
through May 1999.
The Company to date has generated limited revenues from product sales.
The Company invested approximately $3,100,000 during 1996 in the build-out of
its manufacturing facility and other manufacturing equipment. The development
and expansion of the Company's RF filter product lines will require continued
commitment of substantial funds to conduct product development and field trial
activities to establish commercial-scale manufacturing and to market its RF
filter products. The Company currently estimates that additional investments
aggregating approximately $500,000 for machinery, equipment and improvements
associated with expansion of its manufacturing operations will be made over the
next 12 months. The actual amount of the Company's future funding requirements
will depend on many factors, including: the amount and timing of future
revenues, the level of product marketing and sales efforts needed to support
the Company's commercialization efforts, the magnitude of its research and
product development programs, the cost of additional plant and equipment for
manufacturing and the costs involved in protecting the Company's patents or
other intellectual property. Without consideration of any funds under new
government contracts or cooperative agreements, or from the sale of its
products, the Company believes that its available cash, cash equivalents and
investments provide sufficient funds to meet the Company's current operating
plans and debt service requirements for at least until July 1997. The Company
has filed a registration statement on the date hereof covering the sale of
1,000,000 shares of Common Stock. There can be no assurance that the Company
will be successful in this or any other financing plans. If adequate funds are
not available on acceptable terms when needed, the Company may be required to
delay, scale-back or eliminate the manufacturing, marketing or sales of one or
more of its products or research and development programs. The Company
continues to evaluate its needs for capital and may pursue additional sources
of capital it considers appropriate based upon the Company's requirements and
market conditions. If the Company's planned offering is not successful,
there would be a material adverse effect on the Company's business, operating
results and financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedules, with the
report of independent auditors, listed in Item 14 are included in this Form
10-K.
18
<PAGE> 19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company, their ages and
their positions in the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------- ----- -----------------------------------------------------------
<S> <C> <C>
Ora E. Smith (1) . . . . . . . 49 President, Chief Executive Officer and Director
Edward W. Laves, Ph.D. . . . . 49 Executive Vice President and Chief Operating Officer
Stephen G. Wasko . . . . . . . 37 Vice President, Chief Financial Officer, Treasurer and
Secretary
James D. Hodge, Ph.D. . . . . . 43 Vice President and Chief Scientist
Dennis M. Craig . . . . . . . . 38 Vice President, Manufacturing
James C. DeBelina . . . . . . . 45 Vice President, Sales and Marketing
Benjamin Golant . . . . . . . . 46 Vice President, Product Development
James Pajcic . . . . . . . . . 45 Vice President, Human Resources
Steven Lazarus (1)(2) . . . . . 65 Chairman of the Board of Directors
Leonard A. Batterson (1)(2) . . 52 Director
Michael J. Friduss (3) . . . . 54 Director
Peter S. Fuss (3) . . . . . . . 63 Director
Tom L. Powers (2) . . . . . . . 60 Director
Paul G. Yovovich (1)(2) . . . . 43 Director
- ------------------
(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Audit Committee
</TABLE>
Mr. Smith has served as the President and Chief Executive Officer and
a director of the Company since October 1990. From 1989 until joining the
Company, Mr. Smith was the Vice President and Chief Marketing Officer of
Conductus, Inc., a superconducting electronics company. From 1979 to 1989, Mr.
Smith served in a number of executive positions with Rockwell International
Corporation, including Corporate Director of External Technology Development.
Between 1984 and 1985, Mr. Smith served as the Industrial Research Institute
Fellow in The White House Science Office. Mr. Smith holds S.B. and S.M.
degrees in Mechanical Engineering from the Massachusetts Institute of
Technology and a J.D. degree from Harvard Law School.
Dr. Laves joined the Company in December 1994 as its Executive Vice
President and Chief Operating Officer. Dr. Laves is responsible for the
Company's manufacturing functions, the continuing development of its high
temperature superconducting products for the wireless telecommunications
markets, other corporate research and development activities and the Company's
marketing and sales activities. From 1985 until joining the Company, Dr. Laves
was at Motorola, Inc. where he was Director of Wireless Local Loop Products.
From 1991 to 1993, he served as General Manager of the Cellular Infrastructure
Division of Nippon Motorola, Ltd. From 1988 to 1990, Dr. Laves managed the
development and introduction to the market of Motorola, Inc.'s CoveragePLUS
wide area Special Mobile Radio System (SMRS). Dr. Laves holds Ph.D. and M.B.A.
degrees from the University of Chicago, and received his B.A. degree from
Cornell University.
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<PAGE> 20
Mr. Wasko joined the Company in November 1990, and has served as Vice
President and Treasurer since 1992. He was elected Secretary of the Company in
April 1993 and Chief Financial Officer in August 1993. Mr. Wasko is
responsible for the Company's financial and administrative operations. Prior
to joining the Company's management team, he was Manager of Commercial
Development in the Space Station Division of McDonnell Douglas Corporation.
Additionally, Mr. Wasko served as Program Manager for Technology Development on
the Rockwell International Corporation National Aerospace Plane Program and
managed external technology development activities for Rockwell from 1986 to
1988. Mr. Wasko holds a B.S. degree in aerospace engineering from the
University of Michigan, an M.S. in the same field from the University of
Southern California and an M.B.A. degree from the Harvard Graduate School of
Business Administration.
Dr. Hodge joined the Company in December 1990 as its Vice President,
Engineering and Chief Technical Officer. He has served as Vice President and
Chief Scientist since June 1995. Dr. Hodge possesses experience in the
synthesis and processing of a wide variety of ceramic materials. Additionally,
he has expertise in commercial application of materials in areas such as
electronics packaging, high intensity discharge lamps and certain fast-ion
conductors. Dr. Hodge joined the Company after serving from 1988 to 1990 as
Vice President of Engineering at CPS Superconductor Corporation ("CPS"), a
superconducting electronics company, where he was Principal Investigator on
CPS's contract to produce high strength high temperature superconducting wire
with the U.S. Government. Dr. Hodge was also a member of the technical staff
at General Electric Company's Corporate Research and Development Center. He
holds a B.S. degree from the University of Utah and a Ph.D. from the
Massachusetts Institute of Technology, both in Materials Science. He currently
holds nine patents and is the author of thirty papers in refereed journals.
Mr. Craig joined the Company in December 1996 as Vice President,
Manufacturing. Before joining the Company, Mr. Craig worked for eight years at
Motorola, Inc., where he most recently served as manufacturing operations
manager in the Component Products Group. During his career at Motorola, Inc.,
his responsibilities included production management, new product
implementation, cost reduction and capacity analysis and planning. Prior to
joining Motorola, Inc., Mr. Craig served as a manufacturing process development
engineer at Northrop Corporation in its defense systems division. He received
an M.B.A. degree from Lake Forest Graduate School of Management and a B.S.
degree in mechanical engineering from the University of Illinois at Chicago.
Mr. DeBelina joined the Company in October 1995 as Vice President,
Sales and Marketing. Before joining the Company, Mr. DeBelina was North
American Sales Director for DataTAC(R) network products for Motorola, Inc.
From 1985 until joining the Company, Mr. DeBelina held several other sales and
marketing management positions at Motorola, Inc. Previously, Mr. DeBelina
served both as Product Manager and Planning Manager for FMC Corporation. He
holds a B.S. degree in math and computer science from Illinois Institute of
Technology and an M.B.A. degree from the Harvard Graduate School of Business
Administration.
Mr. Golant joined the Company in January 1996 as Vice President,
Product Development. From 1989 until joining the Company, Mr. Golant was at
E.F. Johnson Company where he served as Director of Engineering, Chief Engineer
and Director of Product Marketing. His responsibilities included managing the
development of mobile, portable and base station equipment for wireless land
mobile radio systems. From 1976 to 1989, Mr. Golant was employed by Motorola
Inc.'s communications sector, leading teams to develop and commercialize a
variety of radio component and system products. He holds a B.S. degree in
electrical engineering from Lehigh University. He holds one patent in the area
of RF filter technology.
20
<PAGE> 21
Mr. Pajcic joined the Company in January 1995 as Human Resource
Director. He has served as Vice President, Human Resources since January 1997.
Before joining the Company, Mr. Pajcic spent 15 years at Morton International
where he most recently served as Director Employment and Human Resource
Development on the corporate staff. Prior to his employment with Morton
International, Mr. Pajcic held Human Resource positions at General Foods
Corporation and American Hospital Supply Corporation. He holds a B.S. degree
in psychology from Northwestern University and a Masters Degree in Management
from Northwestern University's Kellogg School of Management, with emphases in
Industrial Relations, Organizational Behavior and Finance.
Mr. Lazarus has served as a director of the Company since January 1992
and as Chairman of the Board since August 1993. He is a Managing General
Partner of Arch Venture Fund L.P. and served previously as President and Chief
Executive Officer of ARCH, an affiliate of the University of Chicago. The
Company was founded by ARCH in 1989. As President of ARCH, he also served as
Associate Dean of the University of Chicago's Graduate School of Business.
Before joining ARCH in 1987, he was the Group Vice President of the Health Care
Services Group of Baxter Travenol Laboratories, Inc., the predecessor of Baxter
Healthcare Corporation. During his 13 years at Baxter, he was also Senior Vice
President for Technology, with responsibilities for manufacturing, materials
management, R&D and engineering. Mr. Lazarus is a director of Amgen
Corporation and Primark Corporation, both public companies.
Mr. Batterson has served as a director of the Company since February
1990. He is the Chairman and Chief Executive Officer of Batterson Venture
Partners, L.L.C., a venture capital management company founded in 1995. Since
1987, he has been the Managing General Partner of Batterson Johnson & Wang
Venture Partners, a partnership formed with Donald Johnson and Sona Wang. The
Batterson Johnson & Wang L.P. fund, a stockholder of the Company, invests in
the following industries: publishing, communications, telecommunications,
medical, biotechnology, materials, retailing, consumer products, manufacturing,
computers and software. As Managing General Partner, Mr. Batterson manages its
daily operations, investor relationships, reporting and investment strategy.
Prior to co-founding Batterson Johnson & Wang Venture Partners, Mr. Batterson
was director of the Venture Capital Division of the Allstate Insurance
Companies. He is Chairman of the Board of LinksCorp, Inc., a golf course
management company, as well as Nanophase Technologies Corporation, a material
science company. Mr. Batterson holds a B.A. degree from Washington University
(St. Louis), a J.D. degree from Washington University Law School and an M.B.A.
degree from the Harvard Graduate School of Business Administration.
Mr. Friduss has served as a director of the Company since October
1996. Mr. Friduss is president of MJ Friduss & Associates, telecommunications
consultants to some of the largest carriers and suppliers in the
telecommunications industry. From 1992 until 1993, Mr. Friduss served as vice
president of customer service and information technology for Ameritech
Corporation. From 1989 until joining Ameritech Corporation, he served as vice
president of operations at Michigan Bell. In 1991, he founded the
Telecommunications Industry Benchmarking Consortium, a collaboration of local,
long distance and alternate access companies, whose mission is to identify and
replicate the communications industry's best practices. Mr. Friduss holds a
B.S. degree in industrial engineering from Illinois Institute of Technology and
a master's degree in management from Northwestern University. He currently
serves on the Board of Trustees of Harris Associates Investment Trust (The
Oakmark Funds) and is the editor of The Friduss Report, a newsletter focused on
the purchasing practices of the Regional Bell Operating Companies.
Mr. Fuss has served as a director of the Company since June 1995. Mr.
Fuss is a management consultant, primarily for Tellabs, Inc. ("Tellabs") as a
member of the International Executive Committee of Tellabs International, Inc.
Prior to his retirement from Tellabs in 1993, Mr. Fuss was President of Tellabs
International, Inc., which he founded in 1987 as a subsidiary. Tellabs
International, Inc. is
21
<PAGE> 22
responsible for all Tellabs operations outside of North America. From 1986 to
1987, he was Senior Vice President, Technical Marketing and Business
Development of Tellabs. Mr. Fuss joined Tellabs as Vice President, Engineering
in 1979. From 1977 to 1979, he was Director of R&D at Teletype Corporation and
from 1958 to 1977 he held engineering and management positions at AT&T Bell
Laboratories. Mr. Fuss holds a B.S. degree in electrical engineering from the
University of Michigan and an M.S.E.E. from New York University. He served two
years as an officer in the United States Air Force. He holds ten patents,
primarily in the area of digital signal processing. He is also a director of
Clear Communications, Inc., NetEdge Systems, Inc., Process Control Technologies,
Inc. and Batterson Venture Partners, LLC.
Mr. Powers has served as a director of the Company since October 1996.
Mr. Powers is a professor and associate director of the Advanced Manufacturing
Center at New Mexico State University in Las Cruces, New Mexico, as well as a
consultant to a number of companies. From 1989 to 1991, he was president of
the cellular systems business unit of AT&T Network Systems Group, now known as
Lucent. Under his leadership, the business unit became the market leader in
wireless infrastructure equipment in the United States, opened markets
internationally and introduced the industry's first digital cellular system.
In 1983, he became vice president of AT&T and Philips Telecommunications B.V.,
a joint venture located in the Netherlands. He joined AT&T in 1958 as a member
of the technical staff of Bell Laboratories and went on to management positions
in consumer products, customer switching systems engineering and network
planning. Mr. Powers holds a B.S. degree in electrical engineering with high
honors from the University of Arkansas and a master's degree in electrical
engineering from New York University. He also is a graduate of the Wharton
Advanced Marketing Program and the Stanford Executive Program.
Mr. Yovovich has served as a director of the Company since its initial
public offering in October 1993. He is a private investor and corporate
director. From 1993 until May 1996 he was President of Advance Ross
Corporation, a public company, which through a merger in January 1996 became a
wholly-owned subsidiary of CUC International, Inc., a public company. From
1982 through 1992, Mr. Yovovich held a number of executive positions at Centel
Corporation, a major national telecommunications company, most recently serving
as President of its Central Telephone Company subsidiary. He is also a
director of U.S. Robotics Corporation, Comarco, Inc. and APAC TeleServices,
Inc., each a public company. He holds B.A. and M.B.A. degrees from the
University of Chicago and is a C.P.A. Mr. Yovovich has advised the Company
that he will not stand for re-election when his term expires at the Company's
1997 annual meeting of stockholders.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 of the Securities and Exchange Act of 1934, as amended,
requires the Company's officers, directors and persons who own greater than 10%
of a registered class of the Company's equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the Nasdaq National Market. Based solely on a review of the forms it has
received and on written representations from certain reporting persons that no
such forms were required for them, the Company believes that during 1996 all of
the Section 16 filing requirements applicable to its officers, directors and
10% beneficial owners were complied with by such persons, except that James D.
Hodge did not timely report four transactions that took place on the same day
on a Form 4 during 1996; however, the information required was included in a
Form 5 filed February 1997.
22
<PAGE> 23
ITEM 11. EXECUTIVE COMPENSATION
The following table provides information concerning the annual and
long-term compensation for services in all capacities to the Company for the
years ended December 31, 1996, 1995 and 1994 of those persons who were at
December 31, 1996, either (i) the chief executive officer; or (ii) the four
other most highly compensated (based on combined salary and bonus) executive
officers of the Company whose total salary and bonus exceeded $100,000 during
1996 (collectively, the "Named Officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS (1)
OTHER ANNUAL SECURITIES ALL OTHER
SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) OPTIONS (#) ($)
- ----------------------------- ----- -------- -------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ORA E. SMITH . . . . . . . . 1996 $194,250 (2) $0 75,000 $0
President and Chief Executive 1995 $185,000 $92,500 $0 n/a $0
Officer 1994 $177,100 $30,000 $73,894(3) 62,500 $0
EDWARD W. LAVES, PH.D. . . . 1996 $147,000 (2) $0 60,000 $0
Executive Vice President and 1995 $140,097 $70,000 $0 n/a $0
Chief Operating Officer 1994(4) $10,606 $25,000 $0 50,000 $0
JAMES D. HODGE, PH.D. . . . . 1996 $126,000 (2) $0 15,000 $0
Vice President and Chief 1995 $120,000 $25,000 $0 n/a $3,500(5)
Scientist 1994 $110,000 $15,000 $0 32,500 $3,500(5)
JAMES DEBELINA . . . . . . . 1996 $120,000 $5,000 $0 10,000 $0
Vice President, Sales and 1995(6) $25,000 $10,000 $0 20,000 $0
Marketing
STEPHEN G. WASKO . . . . . . 1996 $115,500 (2) $0 17,500 $0
Vice President, Chief 1995 $105,833 $38,500 $0 n/a $0
Financial Officer, Treasurer 1994 $93,750 $18,000 $0 5,000 $0
and Secretary
- ------------------
(1) None of the Named Officers had any restricted stock holdings as of December 31, 1996.
(2) The bonus for the year ended December 31, 1996 for this Named Officer has not yet been determined.
(3) $66,094 of this amount represents payments to Mr. Smith for reimbursement of income taxes attributable
to debt forgiveness from the preceding year and $7,800 of this amount represents reimbursement of
automobile expenses.
(4) Dr. Laves commenced employment with the Company in December 1994.
(5) This amount represents the balance forgiven in connection with a loan made to Dr. Hodge in April 1993.
(6) Mr. DeBelina commenced employment with the Company in October 1995.
</TABLE>
23
<PAGE> 24
OPTION GRANTS IN 1996
The following table contains information concerning the grant of stock
options by the Company to the Named Officers during 1996.
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF OF TOTAL
SHARES OPTIONS POTENTIAL REALIZABLE
UNDERLYING GRANTED TO EXERCISE VALUE AT ASSUMED ANNUAL
OPTIONS EMPLOYEES OF BASE RATES OF STOCK PRICE
GRANTED IN FISCAL PRICE EXPIRATION APPRECIATION FOR OPTION
NAME (1)(2) YEAR ($/SH) DATE (1) TERM (2)
- ----------------------------- ---------- ----------- -------- ----------- -------------------------
5%($) 10%($)
-------- ---------
<S> <C> <C> <C> <C> <C> <C>
Ora E. Smith . . . . . . . . 25,000 7.9% $18.25 1/15/06 286,933 727,145
50,000 15.88% $17.25 12/20/06(3) 542,422 1,374,603
Edward W. Laves, Ph.D. . . . 20,000 6.35% $18.25 1/15/06 229,547 581,716
40,000 12.70% $17.25 12/20/06(3) 433,937 1,099,682
James D. Hodge, Ph.D. . . . . 5,000 1.59% $18.25 1/15/06 49,242 132,460
10,000 3.18% $17.25 12/20/96(3) 108,484 274,921
James DeBelina . . . . . . . 10,000 3.18% $17.25 12/20/06(3) 108,484 274,921
Stephen G. Wasko . . . . . . 7,500 2.38% $18.25 1/15/06 86,080 218,143
10,000 3.18% $17.25 12/20/06(3) 108,484 274,921
</TABLE>
- ------------------
(1) Subject to certain restrictions, these options vest over a four-year period
as follows: one-fourth of the options vest on the first anniversary of the
grant date and one-thirty-sixth of the remaining options vest each month
thereafter. The grant dates are 10 years prior to the respective
expiration dates.
(2) Potential realizable value is presented net of the option exercise price
but before any federal or state income taxes associated with exercise.
These amounts represent certain assumed rates of appreciation only.
Actual gains are dependent on the future performance of the Common Stock
and the option holder's continued employment throughout the vesting
period. The amounts reflected in the table may not necessarily be
achieved.
(3) One-third of the options are subject to cancellation for each of three
specified performance targets that are not met by the Company by the end of
1997.
AGGREGATED OPTION EXERCISES IN 1996 AND YEAR-END 1996 OPTION VALUES
The following table provides information concerning option exercises
in 1996 by the Named Officers and concerning the Named Officers' unexercised
options at December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
SHARES OPTIONS AT YEAR-END 1996 MONEY OPTIONS AT YEAR-END
ACQUIRED (#) 1996 ($) (1)
ON VALUE --------------------------- -----------------------------
EXERCISE REALIZED
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- --------- --------- ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Ora E. Smith . . . . . 0 $0 34,167 103,333 $237,815 $210,623
Edward W. Laves, Ph.D. 5,000 $98,750 15,833 89,167 $156,351 $288,024
James D. Hodge, Ph.D . 20,000 371,700 40,448 50,627 $563,163 $463,209
James C. DeBelina . . . 0 $0 6,250 23,750 $36,719 $80,781
Stephen G. Wasko . . . 5,000 118,500 21,165 33,585 $245,462 $186,158
- ------------------
(1) The value per option is calculated by subtracting the exercise price from the closing price of the Common Stock
on the Nasdaq National Market on December 31, 1996 (the last business day of 1996) of $17.125.
</TABLE>
24
<PAGE> 25
DIRECTOR COMPENSATION
During 1996, the Company did not provide any cash compensation to its
directors for their services on the Board of Directors. Each director of the
Company who is not an employee of the Company (the "Non-Employee Directors")
and was first elected to the Board of Directors after the adoption of the 1993
Stock Option Plan is granted non-qualified stock options ("NQSOs") to purchase
10,000 shares of Common Stock at the closing price of the Common Stock as
reported on the Nasdaq National Market on the date of their initial election to
the Board of Directors. In consideration of their service on the Board of
Directors, on the date of the annual meeting of the stockholders of the Company
each Non-Employee Director who is elected, re-elected or continues to serve as
a director because his term has not expired shall be granted NQSOs to purchase
3,000 shares of Common Stock, provided that no such automatic grant shall be
made to a Non-Employee Director who is first elected to the Board of Directors
at the first such meeting or was first elected to the Board of Directors within
three months prior to such annual meeting.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Batterson, who has been a member of the Compensation Committee
since August 19, 1993 and the Executive Committee since January 17, 1997 and
who is a member of the Board of Directors, is a general partner of Batterson
Johnson & Wang L.P., which beneficially owns more than five percent of the
outstanding Common Stock.
EMPLOYMENT AGREEMENTS
Effective January 1, 1997, the Company entered into employment
agreements with each of Mr. Smith and Drs. Laves and Hodge. Each agreement
terminates on December 31, 1997 and stipulates an annual base salary of not
less than $203,960, $170,000, and $126,000, respectively. Each agreement also
includes a provision for a bonus to be paid at the discretion of the Board of
Directors, severance payments if the executive is terminated other than for
"Cause" as defined in such agreement, and certain non-competition and
confidentiality provisions.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 28, 1997, certain
information with respect to the beneficial ownership of Common Stock by (i)
each person known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each Company director, (iii) each
Named Officer and (iv) all Company executive officers and directors as a group.
<TABLE>
<CAPTION>
NUMBERS OF PERCENT OF
SHARES SHARES
BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OWNED(1) OWNED
- ------------------------------------------------------------------------- ------------- --------------
<S> <C> <C>
Batterson Johnson & Wang L.P. (2) . . . . . . . . . . . . . . . . . . . . 598,018 11.4%
Sheldon Drobny (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 426,313 8.3
Aaron Fischer (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 376,302 7.3
State of Illinois (5) . . . . . . . . . . . . . . . . . . . . . . . . . . 360,944 6.7
Stewart Shiman (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . 335,485 6.6
Ora E. Smith (7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,952 2.3
James D. Hodge, Ph.D. (8) . . . . . . . . . . . . . . . . . . . . . . . . 52,249 1.0
Stephen G. Wasko (9) . . . . . . . . . . . . . . . . . . . . . . . . . . 29,202 *
Edward W. Laves, Ph.D. (9) . . . . . . . . . . . . . . . . . . . . . . . 25,417 *
Paul G. Yovovich (10) . . . . . . . . . . . . . . . . . . . . . . . . . . 13,000 *
James C. DeBelina (11) . . . . . . . . . . . . . . . . . . . . . . . . . 8,117 *
Peter S. Fuss (9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,333 *
Tom L. Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,400 *
Leonard A. Batterson (12) . . . . . . . . . . . . . . . . . . . . . . . . 2,000 *
Steven Lazarus (9) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 *
Michael J. Friduss . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 *
All executive officers and directors as a group (14 persons) (13) . . . . 266,477 5.1
</TABLE>
- ------------------
* Denotes beneficial ownership less than one percent.
(1) Unless otherwise indicated below, the persons in the above table have sole
voting and investment power with respect to all shares shown as beneficially
owned by them.
(2) Includes 221,515 shares issuable upon exercise of warrants presently
exercisable. The address of the stockholder is 303 West Madison Street,
Chicago, Illinois 60606.
(3) Includes 84,603 shares issuable upon exercise of warrants presently
exercisable. Includes 73,402 shares held by Drobny/Fischer General
Partnership ("DFGP"). Mr. Drobny is a general partner of DFGP and in such
capacity he shares voting and investment power with respect to shares held
by DFGP and therefore may be deemed the beneficial owner of the shares of
Common Stock directly held by DFGP. Includes 7,688 shares held by Paradigm
Venture Investors, L.L.C. ("Paradigm"). Mr. Drobny is the managing director
of Paradigm and in such capacity he shares voting and investment power with
respect to shares held by Paradigm and therefore may be deemed the
beneficial owner of the shares of Common Stock directly held by Paradigm.
The address of the stockholder is 95 Revere Drive, Suite A, Northbrook,
Illinois 60062.
(4) Includes 117,149 shares issuable upon exercise of warrants presently
exercisable. Includes 73,402 shares held by DFGP. Mr. Fischer is a general
partner of DFGP and in such capacity he shares voting and investment power
with respect to shares held by DFGP and therefore may be deemed the
beneficial owner of the shares of Common Stock directly held by DFGP.
Includes 7,688 shares held by Paradigm. Mr. Fischer shares voting and
investment power with respect to shares held by
25
<PAGE> 26
Paradigm and therefore may be deemed the beneficial owner of the shares of
Common Stock directly held by Paradigm. The address of the stockholder is
95 Revere Drive, Suite A, Northbrook, Illinois 60062.
(5) Includes 69,080 shares issuable upon exercise of warrants presently
exercisable. The Company has been advised by the Illinois Department of
Commerce and Community Affairs ("DCCA") that because of Illinois state law
and regulations, DCCA cannot exercise its voting rights with respect to
the shares of common stock it holds. As a result, pursuant to a written
proxy dated June 8, 1994, DCCA has given its irrevocable proxy for all of
the voting securities of the Company it now or hereafter owns to the
individual who is the chief executive officer of the Company. The address
of the stockholder is Illinois Department of Commerce and Community
Affairs, 100 West Randolph, Chicago, Illinois 60601.
(6) Includes 93,642 shares issuable upon exercise of warrants presently
exercisable. Includes 7,688 shares held by Paradigm. Mr. Shiman shares
voting and investment power with respect to shares held by Paradigm and
therefore may be deemed the beneficial owner of the shares of Common Stock
directly held by Paradigm. The address of the stockholder is 95 Revere
Drive, Suite A, Northbrook, Illinois 60062.
(7) Includes 46,979 shares issuable upon exercise of options exercisable
currently or within 60 days of February 28, 1997. Excludes 291,864 shares
held by the State of Illinois and 69,080 shares issuable upon exercise of
warrants presently exercisable and held by the State of Illinois. Mr.
Smith, as the chief executive officer of the Company, has an irrevocable
proxy to vote these shares. Therefore, Mr. Smith may be deemed the
beneficial owner of the shares of Common Stock directly owned by the State
of Illinois. Mr. Smith disclaims this beneficial ownership.
(8) Includes 52,224 shares issuable upon exercise of options exercisable
currently or within 60 days of February 28, 1997.
(9) Represents shares issuable upon exercise of options exercisable currently
or within 60 days of February 28, 1997.
(10) Includes 12,000 shares issuable upon exercise of options exercisable
currently or within 60 days of February 28, 1997.
(11) Includes 7,917 shares issuable upon exercise of options exercisable
currently or within 60 days of February 28, 1997.
(12) Represents shares issuable upon exercise of options exercisable currently
or within 60 days of February 28, 1997. Excludes 376,503 shares held by
Batterson Johnson & Wang L.P. ("BJ&W") and 221,515 shares issuable upon
exercise of warrants presently exercisable and held by BJ&W. Mr. Batterson
is the managing general partner of BJ&W and in such capacity he shares
voting and investment power with respect to shares held by BJ&W and
therefore may be deemed the beneficial owner of the shares of Common Stock
directly owned by BJ&W. Mr. Batterson disclaims this beneficial ownership.
(13) Includes 192,529 shares issuable upon exercise of options exercisable
currently or within 60 days of February 28, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to promissory notes dated December 12, 1996, each of the
following persons owes the Company the following principal amounts: Sheldon
Drobny, $140,387; Aaron Fischer, $123,697; Stewart Shiman, $123,697; and
Drobny/Fischer General Partnership ("DFGP"), $17,812, which were the largest
amounts of indebtedness for such persons to the Company since the beginning of
1996. Messrs. Drobny, Fischer and Shiman each beneficially own more than five
percent of the Company's outstanding Common Stock. Messrs. Drobny and Fischer
are also general partners of DFGP which is a stockholder of the Company. The
promissory notes, which bear interest at a rate per annum equal to 8.25% with a
default interest rate of 10.25%, were issued in connection with the exercise of
warrants of the Company by Messrs. Drobny, Fischer and Shiman and DFGP. These
warrants had been called for redemption by the Company. The promissory notes
are due on April 30, 1997. Paradigm Venture Investors L.L.C., an affiliate of
Messrs. Drobny, Fischer and Shiman, is a guarantor of the promissory notes.
Additional information in response to this item appears in Item 11
under the heading "Compensation Committee Interlocks and Insider
Participation."
26
<PAGE> 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
1. The following financial statements of the Company, with the
report of independent auditors, are filed as part of this Form
10-K:
Report of Independent Auditors
Balance Sheets as of December 31, 1995 and 1996
Statements of Operations for the Years Ended December 31, 1994,
1995, and 1996 and the Cumulative Period from October 18, 1989
(Date of Inception) to December 31, 1996
Statements of Stockholders' Equity for the Years
Ended December 31, 1994, 1995, and 1996 and the Cumulative Period
from October 18, 1989 (Date of Inception) to December 31, 1996
Statements of Cash Flows for the Years Ended December 31, 1994,
1995, and 1996 and the Cumulative Period from October 18, 1989
(Date of Inception) to December 31, 1996
otes to Financial Statements
2. The following financial statement schedules of the Company are
filed as part of this Form 10-K:
Schedule II -- Valuation and Qualifying Accounts
All other financial schedules are omitted because such
schedules are not required or the information required has
been presented in the aforementioned financial statements.
3. The following exhibits are filed with this Report or
incorporated by reference as set forth below.
Exhibit
Number
-------
3.1 Certificate of Incorporation of the Registrant, incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement
on Form S-1, Registration Statement No. 33-67756 (the "IPO
Registration Statement").
3.2 Bylaws of the Registrant, incorporated by reference to Exhibit 3.2
to the IPO Registration Statement.
3.3 Certificate of Amendment of Certificate of Incorporation of the
Registrant, incorporated by reference to Exhibit 3.3 to the IPO
Registration Statement.
4.1 Specimen stock certificate representing Common Stock, incorporated
by reference to Exhibit 4.1 to the IPO Registration Statement.
4.2 Form of Series B Warrants, incorporated by reference to Exhibit
4.2 to the IPO Registration Statement.
27
<PAGE> 28
4.3 Form of Series C Warrants, incorporated by reference to Exhibit
4.3 to the IPO Registration Statement.
4.4 Form of Representative Warrant, incorporated by reference to
Exhibit 4.4 to the IPO Registration Statement.
4.5 Rights Agreement dated as of February 9, 1996 between the Company
and LaSalle National Trust, N.A., to the Exhibit to the Company's
Registration Statement on Form 8-A, filed February 12, 1996.
10.1 The Company's 1993 Amended and Restated Stock Option Plan,
incorporated by reference to Exhibit B to the Company's Proxy
Statement filed May 6, 1996.
10.2 Directors Indemnification Agreement, incorporated by reference to
Exhibit 10.2 to the IPO Registration Statement.
10.3 Third Amended and Restated Registration Rights Agreement dated as
of July 14, 1993, as amended, incorporated by reference to Exhibit
10.4 to the IPO Registration Statement.
10.4 Public Law Agreement dated February 2, 1990 between Illinois
Department of Commerce and Community Affairs and the Company,
incorporated by reference to Exhibit 10.5 to the IPO Registration
Statement.
10.5 Public Law Agreement dated December 30, 1991 between Illinois
Department of Commerce and Community Affairs and the Company,
amended as of June 30, 1992, incorporated by reference to Exhibit
10.6 to the IPO Registration Statement.
10.6 Representative Warrant Agreement, incorporated by reference to
Exhibit 10.7 to the IPO Registration Statement.
10.7 Subcontract and Cooperative Development Agreement dated as of June
1, 1993 between American Telephone and Telegraph Company and the
Company, incorporated by reference to Exhibit 10.9 to the IPO
Registration Statement.
10.8 Intellectual Property Agreement dated as of June 1, 1993 between
American Telephone and Telegraph Company and the Company,
incorporated by reference to Exhibit 10.10 to the IPO Registration
Statement.
10.9 Financial Assistance Award No. 70NANB3H1381 dated March 1, 1993 by
the United States Department of Commerce under the Advanced
Technology Program, incorporated by reference to Exhibit 10.11 to
the IPO Registration Statement.
10.10 License Agreement dated January 31, 1990 between the Company and
Northwestern University, incorporated by reference to Exhibit
10.13 to the IPO Registration Statement.
10.11 License Agreement dated February 2, 1990 between the Company and
ARCH Development Corporation, incorporated by reference to Exhibit
10.14 to the IPO Registration Statement.
10.12 License Agreement dated August 9, 1991 between the Company and
ARCH Development Corporation, incorporated by reference to Exhibit
10.15 to the IPO Registration Statement.
28
<PAGE> 29
10.13 License Agreement dated October 11, 1991 between the Company and
ARCH Development Corporation, incorporated by reference to Exhibit
10.16 to the IPO Registration Statement.
10.14 Public Law Agreement dated August 18, 1993 between Illinois
Department of Commerce and Community Affairs and the Company,
incorporated by reference to Exhibit 10.17 to the IPO Registration
Statement.
10.15 Amendment to Financial Assistance Award No. 70NANB3H1381 dated
March 1, 1994 by the United States Department of Commerce under
the Advanced Technology Program, incorporated by reference to
Exhibit 10.20 to the Form 10-K for the period during December 31,
1993.
10.16 Employment Agreement dated January 1, 1997 between the Company and
James D. Hodge, Ph.D.*
10.17 Employment Agreement dated January 1, 1997 between the Company and
Edward W. Laves, Ph.D.*
10.18 Employment Agreement dated January 1, 1997 between the Company and
Ora E. Smith.*
10.19 Single-Tenant Industrial building Lease between Teachers'
Retirement System of the State of Illinois, landlord, and Illinois
Superconductor Corporation, tenant, dated June 24, 1994,
Incorporated by reference to Exhibit 10.1 to the Form 10-Q for the
period ending June 30, 1994.
10.20 Amendment to Financial Assistance Award No. 70NANB3H1381 dated
March 1, 1995 by the United States Department of Commerce under
the Advanced Technology Program, incorporated by reference to
Exhibit 10.20 to the Form 10-K for the period ending December 31,
1994.
23. Consent of Ernst & Young L.L.P.
27. Financial Data Schedule
- ---------------
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit on this Form 10-K.
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the fourth
quarter of 1996.
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 24th day of
March, 1997.
ILLINOIS SUPERCONDUCTOR CORPORATION
By: /s/ ORA E. SMITH
-------------------------------
Ora E. Smith
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 24th day of March, 1997.
Signature Title
/s/ ORA E. SMITH President, Chief Executive Officer
------------------------- (Principal Executive Officer)
Ora E. Smith and a Director
/s/ STEPHEN G. WASKO Chief Financial Officer, Treasurer
------------------------- and Secretary (Principal Financial and
Stephen G. Wasko Accounting Officer)
/s/ LEONARD A. BATTERSON Director
-------------------------
Leonard A. Batterson
/s/ MICHAEL J. FRIDUSS
-------------------------
Director
Michael J. Friduss
/s/ PETER S. FUSS
-------------------------
Director
Peter S. Fuss
/s/ STEVEN LAZARUS Chairman of the Board and Director
-------------------------
Steven Lazarus
/s/ THOMAS J. POWERS
------------------------- Director
Thomas J. Powers
/s/ PAUL G. YOVOVICH
------------------------- Director
Paul G. Yovovich
30
<PAGE> 31
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Illinois Superconductor Corporation
We have audited the accompanying balance sheets of Illinois Superconductor
Corporation as of December 31, 1995 and 1996, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996, and the cumulative period from October 18,
1989 (date of inception) to December 31, 1996. Our audits also included the
financial statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Illinois Superconductor
Corporation at December 31, 1995 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996, and the cumulative period from October 18, 1989 (date of inception) to
December 31, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
ERNST & YOUNG LLP
Chicago, Illinois
January 29, 1997
except for paragraph 8
of Note 6, for which the
date is March 7, 1997.
<PAGE> 32
ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1995 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 953,093 $ 5,188,047
Investments............................................... 5,083,809 500,313
Inventories............................................... -- 653,696
Accounts receivable....................................... 310,529 130,752
Prepaid expenses and other................................ 465,298 436,052
----------- -----------
Total current assets........................................ 6,812,729 6,908,860
Property and equipment, net................................. 3,193,777 5,742,804
Restricted certificates of deposit.......................... 862,500 350,000
Patents and trademarks, net................................. 236,760 386,832
----------- -----------
Total assets................................................ $11,105,766 $13,388,496
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 876,369 $ 1,126,009
Accrued liabilities....................................... 381,306 494,507
Current portion of long-term debt......................... 96,580 80,421
----------- -----------
Total current liabilities................................... 1,354,255 1,700,937
Long-term debt, less current portion........................ 509,079 91,618
Deferred occupancy costs.................................... 57,053 75,813
Stockholders' equity:
Capital stock:
Preferred stock ($.001 par value); 100,000 shares
authorized and none issued and outstanding............ -- --
Common stock ($.001 par value); 15,000,000 shares
authorized and 3,998,952 and 5,023,352 shares issued
and outstanding at December 31, 1995 and 1996,
respectively.......................................... 3,999 5,023
Additional paid-in capital................................ 24,670,560 39,019,421
Deferred compensation..................................... (41,392) --
Notes receivable from stockholders........................ -- (1,142,754)
Deficit accumulated during the development stage.......... (15,447,788) (26,361,562)
----------- -----------
Total stockholders' equity.................................. 9,185,379 11,520,128
----------- -----------
Total liabilities and stockholders' equity.................. $11,105,766 $13,388,496
=========== ===========
</TABLE>
See notes to financial statements.
2
<PAGE> 33
ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CUMULATIVE FROM
YEARS ENDED DECEMBER 31 OCTOBER 18, 1989
------------------------------------ (DATE OF INCEPTION) TO
1994 1995 1996 DECEMBER 31, 1996
---- ---- ---- -----------------
<S> <C> <C> <C> <C>
Revenues:
Development stage product sales...... $ 2,787 $ 5,998 $ 156,700 $ 194,412
Government contracts................. 205,381 21,832 53,122 800,215
----------- ----------- ------------ ------------
Total revenues......................... 208,168 27,830 209,822 994,627
Costs and expenses:
Cost of government contract
revenue........................... 194,098 19,286 49,534 675,226
Research and development............. 1,962,678 4,554,946 6,422,921 14,215,011
Selling and marketing................ 454,968 469,600 1,834,640 3,068,684
General and administrative........... 2,199,597 2,763,615 3,290,810 10,940,405
----------- ----------- ------------ ------------
Total costs and expenses............... 4,811,341 7,807,447 11,597,905 28,899,326
----------- ----------- ------------ ------------
(4,603,173) (7,779,617) (11,388,083) (27,904,699)
Other income (expense):
Investment income.................... 496,392 487,543 503,911 1,658,250
Interest expense..................... (8,582) (39,600) (29,602) (115,113)
----------- ----------- ------------ ------------
487,810 447,943 474,309 1,543,137
----------- ----------- ------------ ------------
Net loss............................... $(4,115,363) $(7,331,674) $(10,913,774) $(26,361,562)
=========== =========== ============ ============
Net loss per common share.............. $ (1.15) $ (2.01) $ (2.41)
=========== =========== ============
Weighted average number of common
shares outstanding................... 3,578,485 3,641,196 4,536,034
=========== =========== ============
</TABLE>
See notes to financial statements.
3
<PAGE> 34
ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (OCTOBER 18, 1989) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK NOTES
----------------------- -------------------- ADDITIONAL RECEIVABLE
NUMBER OF NUMBER OF PAID-IN DEFERRED FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS
---------- ------ --------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
October 18, 1989 to December 31,
1990:
Issuance of common stock; October
20, 1989 -- $.0007 per share.... -- $ -- 136,250 $ 100 $ -- $ -- $ --
Issuance of preferred stock --
Series A, $1.00 per share....... 1,000,000 1,000,000 -- -- -- -- --
Issuance of common shares;
September 10, 1990; $.0184 per
share........................... -- -- 105,973 1,944 -- -- --
Net loss.......................... -- -- -- -- -- -- --
---------- ---------- --------- -------- ----------- --------- -----------
Balance at December 31, 1990....... 1,000,000 1,000,000 242,223 2,044 -- -- --
Issuance of preferred stock --
Series A; $1.00 per share......... 500,000 500,000 -- -- -- -- --
Net loss........................... -- -- -- -- -- -- --
---------- ---------- --------- -------- ----------- --------- -----------
Balance as of December 31, 1991.... 1,500,000 1,500,000 242,223 2,044 -- -- --
Issuance of preferred stock --
Series B; $1.25 per share......... 926,000 1,157,500 -- -- -- -- --
Conversion of notes payable to
stockholder into shares of
preferred stock -- Series B; $1.25
per share......................... 440,000 550,000 -- -- -- -- --
Conversion of accrued interest to
common stock: $1.4679 per share... -- -- 11,851 17,398 -- -- --
Net loss -- -- -- -- -- -- --
---------- ---------- --------- -------- ----------- --------- -----------
Balance as of December 31, 1992.... 2,866,000 3,207,500 254,074 19,442 -- -- --
Issuance of stock options.......... -- -- -- -- 488,600 (488,600) --
Exercise of stock options; $.0184
per share......................... -- -- 9,634 177 -- -- --
Issuance of preferred stock --
Series C; $1.50 per share......... 1,500,000 2,250,000 -- -- -- -- --
Stock split of .5450 to 1.......... -- -- -- (19,355) 19,355 -- --
Conversion of preferred stock into
common shares..................... (4,366,000) (5,457,500) 1,761,971 1,762 5,455,738 -- --
Issuance of common stock -- Initial
public offering, net of offering
costs; $11.25 per share........... -- -- 1,350,000 1,350 13,083,011 -- --
Issuance of warrants............... -- -- -- -- 100 -- --
Issuance of common stock --
Exercise of underwriter's option
on overallotment shares; $11.25
per share......................... -- -- 202,500 202 2,095,673 -- --
Amortization of deferred
compensation...................... -- -- -- -- -- 187,151 --
Net loss........................... -- -- -- -- -- -- --
---------- ---------- ---------- -------- ----------- --------- -----------
Balance as of December 31, 1993.... -- -- 3,578,179 3,578 21,142,477 (301,449) --
Additional costs of initial public
offering.......................... -- -- -- -- (46,189) -- --
Exercise of stock options; $.229
per share......................... -- -- 545 1 124 -- --
Amortization of deferred
compensation...................... -- -- -- -- -- 139,318 --
Net loss........................... -- -- -- -- -- -- --
---------- ---------- --------- -------- ----------- --------- -----------
Balance as of December 31, 1994.... -- -- 3,578,724 3,579 21,096,412 (162,131) --
Exercise of stock options; $.184 --
$11.25 per share.................. -- -- 50,130 50 105,536 -- --
Exercise of warrants; $1.4679 per
share............................. -- -- 13,625 14 19,986 -- --
Forfeiture of stock options........ -- -- -- -- (132,300) 74,164 --
Issuance of common stock -- Private
placement, net of offering costs;
$10.80 per share.................. -- -- 356,473 356 3,580,926 -- --
Amortization of deferred
compensation...................... -- -- -- -- -- 46,575 --
Net loss........................... -- -- -- -- -- -- --
---------- ---------- --------- -------- ----------- --------- -----------
Balance as of December 31, 1995.... -- -- 3,998,952 3,999 24,670,560 (41,392) --
Exercise of stock options; $.184 --
$15.25 per share.................. -- -- 49,881 50 282,903 -- --
Exercise of warrants; $1.4679 --
$13.50 per share.................. -- -- 565,993 566 5,738,150 -- (1,142,754)
Forfeiture of stock options........ -- -- -- -- (5,438) 5,438 --
Issuance of common stock -- Private
placement, net of offering costs;
$21.80 per share.................. -- -- 408,526 408 8,333,246 -- --
Amortization of deferred
compensation...................... -- -- -- -- -- 35,954 --
Net loss........................... -- -- -- -- -- -- --
---------- ---------- --------- -------- ----------- --------- -----------
Balance as of December 31, 1996.... -- $ -- 5,023,352 $ 5,023 $39,019,421 $ -- $(1,142,754)
========== ========== ========= ======== =========== ========= ===========
<CAPTION>
DEFICIT
ACCUMULATED
DURING
DEVELOPMENT
STAGE TOTAL
----------- -----
<S> <C> <C>
October 18, 1989 to December 31,
1990:
Issuance of common stock; October
20, 1989 -- $.0007 per share.... $ -- $ 100
Issuance of preferred stock --
Series A, $1.00 per share....... -- 1,000,000
Issuance of common shares;
September 10, 1990; $.0184 per
share........................... -- 1,944
Net loss.......................... (469,177) (469,177)
------------ -----------
Balance at December 31, 1990....... (469,177) 532,867
Issuance of preferred stock --
Series A; $1.00 per share......... -- 500,000
Net loss........................... (887,770) (887,770)
------------ -----------
Balance as of December 31, 1991.... (1,356,947) 145,097
Issuance of preferred stock --
Series B; $1.25 per share......... -- 1,157,500
Conversion of notes payable to
stockholder into shares of
preferred stock -- Series B; $1.25
per share......................... -- 550,000
Conversion of accrued interest to
common stock: $1.4679 per share... -- 17,398
Net loss (994,178) (994,178)
------------ -----------
Balance as of December 31, 1992.... (2,351,125) 875,817
Issuance of stock options.......... -- --
Exercise of stock options; $.0184
per share......................... -- 177
Issuance of preferred stock --
Series C; $1.50 per share......... -- 2,250,000
Stock split of .5450 to 1.......... -- --
Conversion of preferred stock into
common shares..................... -- --
Issuance of common stock -- Initial
public offering, net of offering
costs; $11.25 per share........... -- 13,084,361
Issuance of warrants............... -- 100
Issuance of common stock --
Exercise of underwriter's option
on overallotment shares; $11.25
per share......................... -- 2,095,875
Amortization of deferred
compensation...................... -- 187,151
Net loss........................... (1,649,626) (1,649,626)
------------ -----------
Balance as of December 31, 1993.... (4,000,751) 16,843,855
Additional costs of initial public
offering.......................... -- (46,189)
Exercise of stock options; $.229
per share......................... -- 125
Amortization of deferred
compensation...................... -- 139,318
Net loss........................... (4,115,363) (4,115,363)
------------ -----------
Balance as of December 31, 1994.... (8,116,114) 12,821,746
Exercise of stock options; $.184 --
$11.25 per share.................. -- 105,586
Exercise of warrants; $1.4679 per
share............................. -- 20,000
Forfeiture of stock options........ -- (58,136)
Issuance of common stock -- Private
placement, net of offering costs;
$10.80 per share.................. -- 3,581,282
Amortization of deferred
compensation...................... -- 46,575
Net loss........................... (7,331,674) (7,331,674)
------------ -----------
Balance as of December 31, 1995.... (15,447,788) 9,185,379
Exercise of stock options; $.184 --
$15.25 per share.................. -- 282,953
Exercise of warrants; $1.4679 --
$13.50 per share.................. -- 4,595,962
Forfeiture of stock options........ -- --
Issuance of common stock -- Private
placement, net of offering costs;
$21.80 per share.................. -- 8,333,654
Amortization of deferred
compensation...................... -- 35,954
Net loss........................... (10,913,774) (10,913,774)
------------ -----------
Balance as of December 31, 1996.... $(26,361,562) $11,520,128
============ ===========
</TABLE>
See notes to financial statements.
4
<PAGE> 35
ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE FROM
OCTOBER 18,
1989 (DATE OF
YEAR ENDED DECEMBER 31 INCEPTION) TO
--------------------------------------- DECEMBER 31,
1994 1995 1996 1996
---- ---- ---- ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................... $ (4,115,363) $(7,331,674) $(10,913,774) $(26,361,562)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation......................................... 202,525 668,859 1,157,561 2,234,786
Amortization......................................... 15,667 7,541 6,639 52,572
Loss on disposal of property and equipment........... 15,070 499 -- 15,569
Loss (gain) on available-for-sale securities......... 124,000 (54,065) (43,171) 26,764
Net (amortization) accretion of bond (premiums)
discounts.......................................... (7,963) (11,454) (939) (20,356)
Note receivable from officer......................... -- -- -- 179,400
Provision for interest on notes payable.............. -- -- -- 17,398
Payments of patent costs............................. (91,141) (97,005) (156,711) (404,756)
Stock compensation expense........................... 139,318 46,575 35,954 408,998
Cancellation of stock options........................ -- (58,136) -- (58,136)
Changes in operating assets and liabilities:
Accounts receivable................................ 65,345 (28,936) 179,777 (130,752)
Inventories........................................ -- -- (653,696) (653,696)
Prepaid expenses and other......................... (532,388) 306,527 29,246 (436,052)
Accounts payable................................... 1,143,035 (818,844) 249,640 1,126,009
Accrued liabilities................................ (11,535) 252,159 113,201 494,507
Deferred occupancy costs........................... 38,567 18,486 18,760 75,813
------------ ----------- ------------ ------------
Net cash used in operating activities.................. (3,014,863) (7,099,468) (9,977,513) (23,433,494)
INVESTING ACTIVITIES
Purchases of available-for-sale securities............. (15,691,459) (8,060,495) (30,945,246) (54,697,200)
Sales of available-for-sale securities................. 2,987,121 4,566,564 2,500,000 10,053,685
Maturities of available-for-sale securities............ 2,061,578 9,002,364 33,072,852 44,136,794
(Increase) decrease in certificates of deposit, net.... (989,000) 137,500 512,500 (350,000)
Acquisitions of property and equipment................. (1,912,835) (1,888,694) (3,706,588) (7,751,926)
Decrease (increase) in notes receivable from
officers............................................. 3,500 -- -- (179,400)
------------ ----------- ------------ ------------
Net cash provided by (used in) investing activities.... (13,541,095) 3,757,239 1,433,518 (8,788,047)
FINANCING ACTIVITIES
Payments of organization costs......................... -- -- -- (64,495)
Proceeds from notes payable to stockholders............ -- -- -- 550,000
Proceeds from issuance of preferred stock.............. -- -- -- 4,907,500
Proceeds from issuance of common stock -- net of
offering costs....................................... (46,189) 3,581,282 8,333,654 27,051,304
Exercise of stock options.............................. 125 105,586 282,953 388,664
Exercise of warrants................................... -- 20,000 4,595,962 4,615,962
Proceeds from issuance of long-term debt............... -- 650,518 92,182 742,700
Payments on long-term debt............................. -- (44,859) (525,802) (570,661)
Payments under capital lease obligations............... (47,477) (107,567) -- (211,386)
------------ ----------- ------------ ------------
Net cash provided by (used in) financing activities.... (93,541) 4,204,960 12,778,949 37,409,588
------------ ----------- ------------ ------------
Increase (decrease) in cash and cash equivalents....... (16,649,499) 862,731 4,234,954 5,188,047
Cash and cash equivalents at beginning of period....... 16,739,861 90,362 953,093 --
------------ ----------- ------------ ------------
Cash and cash equivalents at end of period............. $ 90,362 $ 953,093 $ 5,188,047 $ 5,188,047
============ =========== ============ ============
Supplemental cash flow information:
Cash paid for interest............................. $ 8,582 $ 39,600 $ 29,602 $ 96,369
============ =========== ============ ============
Equipment capitalized under lease agreements....... $ -- $ 59,739 $ -- $ 211,386
============ =========== ============ ============
Conversion of notes payable and accrued interest to
preferred and common stock....................... $ -- $ -- $ -- $ 567,398
============ =========== ============ ============
</TABLE>
See notes to financial statements.
5
<PAGE> 36
ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Illinois Superconductor Corporation (Company) was founded in 1989 to
commercialize superconducting technologies primarily for the wireless
telecommunications industry. Since its inception, the Company has been in the
development stage, engaging in research and product development activities, both
internally funded and under government-funded contracts and cooperative
agreements, recruiting technical and administrative personnel, and raising
capital. The Company's primary focus has been on developing radio frequency
component products for the cellular and other wireless telecommunications
markets located mainly in the United States.
In the course of its development activities, the Company has experienced
net losses and negative cash flows from operations. Historically, the Company
has funded its operations primarily through the issuance of equity securities,
government contracts and debt. The Company intends to offer additional equity
securities during 1997. In the event the equity offering is not successful, the
Company believes that it is capable of sustaining operations throughout 1997
under plans which could include a reduction in the Company's operating levels.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH, CASH EQUIVALENTS AND INVESTMENTS
Cash and cash equivalents consist of demand deposits, time deposits, money
market funds, and commercial paper which have maturities of three months or less
from the date of purchase. Investments consist of U.S. corporate debt
securities, U.S. Treasury securities, and other U.S. government obligations.
Management believes that the financial institutions in which it maintains such
deposits are financially sound and, accordingly, minimal credit risk exists with
respect to these deposits.
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. All of the Company's investments are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses, net of tax, reported in a separate component of shareholders'
equity. The amortized cost of debt securities in this category is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization and accretion is included in investment income. Realized gains and
losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in investment income. The cost of
securities sold is based on the specific identification method. Interest and
dividends on securities classified as available-for-sale are included in
investment income.
INVENTORIES
Inventories are stated at the lower of cost (determined on a first in,
first out basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation,
and is depreciated over the estimated useful lives of the assets using
accelerated methods. Leasehold improvements are amortized using the
straight-line method over the shorter of the useful life of the asset or the
term of the lease. Amortization of
6
<PAGE> 37
ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
leasehold improvements is included in depreciation expense. The useful lives
assigned to property and equipment for the purpose of computing book
depreciation are as follows:
<TABLE>
<S> <C>
Lab equipment............................................... 5 years
Manufacturing equipment..................................... 3 to 5 years
Office equipment............................................ 3 to 5 years
Furniture and fixtures...................................... 5 years
Leasehold improvements...................................... Life of lease
</TABLE>
PATENTS AND TRADEMARKS
Patents and trademarks are recorded at cost and are amortized using the
straight-line method over the shorter of their estimated useful lives or 17
years. The recoverability of the carrying values of patents and trademarks is
evaluated on a recurring basis. Patents and trademarks are net of accumulated
amortization of$11,285 and $17,924 at December 31, 1995 and 1996, respectively.
INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
REVENUE RECOGNITION
Revenues from research and development contracts are recognized utilizing
the percentage-of-completion method measured by the relationship of costs
incurred to total contract costs. When the current contract estimate indicates a
loss, provision is made for the total anticipated loss. Revenues from
research-related activities are derived primarily from contracts and
cost-sharing agreements with agencies of the U.S. government (see Note 8).
All payments to the Company for work performed on contracts with agencies
of the U.S. government are subject to adjustment upon audit by agencies of the
U.S. government. Management believes that any such audits will not have a
significant effect on the financial position or results of operations of the
Company.
Revenues from product sales are recognized at the time of shipment.
ADVERTISING COSTS
Advertising costs are charged to expense in the period incurred.
Advertising expense for the years ended December 31, 1994, 1995, 1996, and the
cumulative period from October 18, 1989 (date of inception) to December 31,
1996, was approximately $119,000, $87,000, $135,000, and $341,000, respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs related to both present and future products
are charged to expense in the period incurred.
7
<PAGE> 38
ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER COMMON SHARE
Net loss per common share and pro forma net loss per common share (Note 7)
are computed based upon the weighted-average number of common shares
outstanding. Common equivalent shares are not included in the per share
calculations since the effect of their inclusion would be antidilutive.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
DESCRIPTION OF CERTAIN CONCENTRATIONS AND RISKS
The Company operates in a highly competitive and rapidly changing industry.
Product revenues are currently concentrated with a limited number of customers
and the supply of certain materials is concentrated among a few providers. The
development and commercialization of new technologies by any competitor could
adversely affect the Company's results of operations.
ADOPTION OF FASB 121
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of (FASB 121), which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. FASB 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company adopted FASB 121 in the first quarter of 1996. The effect of adoption
was not material.
RECLASSIFICATIONS
Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1996 presentation.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1995 1996
---- ----
<S> <C> <C>
Raw materials............................................... $-- $ 64,524
Work-in-process............................................. -- 214,172
Finished product............................................ -- 375,000
-- --------
$-- $653,696
== ========
</TABLE>
8
<PAGE> 39
ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS
The following is a summary of available-for-sale debt securities at
December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
-------------------------- ------------------------
AVAILABLE-FOR-SALE AVAILABLE-FOR-SALE
DEBT SECURITIES DEBT SECURITIES
-------------------------- ------------------------
COST FAIR VALUE COST FAIR VALUE
---- ---------- ---- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S.
government agencies.......... $3,456,281 $3,456,281 $500,313 $500,313
U.S. corporate debt
securities................... 1,627,528 1,627,528 -- --
---------- ---------- -------- --------
$5,083,809 $5,083,809 $500,313 $500,313
========== ========== ======== ========
</TABLE>
During the years ended December 31, 1995 and 1996, available-for-sale debt
securities with a fair value at the date of sale of $4,566,564 and $2,500,000,
respectively, were sold. The gross realized gains on such sales were $59,480 and
$43,171 in 1995 and 1996, respectively, and the gross realized losses were
$5,415 in 1995.
The available-for-sale debt security held at December 31, 1996, is due
after three years.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1995 1996
---- ----
<S> <C> <C>
Leasehold improvements................................ $1,959,276 $4,172,694
Lab equipment......................................... 1,352,786 1,606,594
Manufacturing equipment............................... -- 864,059
Office equipment...................................... 435,646 626,029
Furniture and fixtures................................ 409,041 593,961
---------- ----------
4,156,749 7,863,337
Less: Accumulated depreciation........................ 962,972 2,120,533
---------- ----------
$3,193,777 $5,742,804
========== ==========
</TABLE>
6. CAPITAL STOCK
The Company has an authorized class of undesignated preferred stock
consisting of 100,000 shares. Preferred stock may be issued in series from time
to time with such designations, relative rights, priorities, preferences,
qualifications, limitations and restrictions thereof, to the extent that such
are not fixed in the Company's certificate of incorporation, as the board of
directors determines.
In conjunction with the adoption of the Rights Plan (as discussed below),
the Company has created one series of preferred stock, consisting of 10,000
shares of Series A Junior Participating Preferred Stock (Series A Preferred).
Each share of Series A Preferred would entitle the holder to receive dividends
equal to 1,000 times the dividends per share declared with respect to the
Company's common stock and, in the event of liquidation, such holders would
receive a preference of 1,000 times the aggregate amount to be distributed per
share to the holders of the Company's common stock.
9
<PAGE> 40
ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CAPITAL STOCK (CONTINUED)
On February 9, 1996, the board of directors adopted a shareholder rights
plan (Rights Plan). Pursuant to such Rights Plan, a Series A Right is associated
with, and trades with, each share of common stock outstanding. The record date
for distribution of such Series A Rights was February 22, 1996, and for so long
as the Series A Rights are associated with the common stock, each new share of
common stock issued by the Company will include a Series A Right.
Each Series A Right will entitle its holder to purchase one one-thousandth
of a share of Series A Preferred for $200, subject to adjustment as defined in
the Rights Plan. The Series A Rights are not exercisable until the earlier of
(i) 10 days after any person or group becomes the beneficial owner of 15% or
more of the Company's outstanding common stock, or (ii) 10 business days (unless
extended by the board of directors) after the commencement of a tender offer or
exchange offer that would result in a person or group beneficially owning 15% or
more of the Company's outstanding common stock.
If any person or group (Acquiring Party) acquires 15% or more of the
Company's outstanding common stock (Shares Acquisition Date), each holder of a
Series A Right, except the Acquiring Party, has the right to receive upon
exercise (i) shares of the Company's common stock having a market value equal to
two times the exercise price of the Series A Right, and (ii) one Series B Right
(Series A Rights and Series B Rights are hereinafter collectively referred to as
the Rights). The board of directors has the option, after the Shares Acquisition
Date but before there has been a 50% acquisition of the Company, to exchange one
share of common stock (or one one-thousandth of a share of preferred stock) and
one Series B Right for each Series A Right (other than Series A Rights held by
the Acquiring Party).
If, after the Series A Rights become exercisable, the Company is involved
in a merger or other business combination, or if the Company sells or transfers
more than 50% of its assets or earning power, or if an acquiring party engages
in certain "self-dealing" transactions with the Company, as defined in the
Rights Plan, each Right then outstanding (other than Rights held by the
Acquiring Party) will be exercisable for common stock of the other party to such
transaction having a market value of two times the exercise price of the Right.
The Company has the right to redeem each Series A Right for $0.01 prior to
the Shares Acquisition Date. The Series B Rights, once issued, are not
redeemable. The Rights expire on February 9, 2006.
On November 14, 1995, the Company completed the private placement and
issuance of 356,473 Units, which raised $3,581,282, net of related expenses.
Each Unit consists of one share of common stock and one detachable common stock
purchase warrant. Each warrant had a term of two years and was exercisable for
the purchase of one share of common stock at $13.00 per share. Warrants for
15,700 of these shares were exercised prior to December 1996. The remaining
340,773 warrants were called for redemption by the Company in November 1996 and
were exercised in December 1996. In conjunction with the exercise, the Company
issued 340,773 shares of its common stock in exchange for $3,287,304 in cash
plus $1,142,754 of notes. The notes bear interest at 8.25% per annum, were due
on February 21, 1997, and are guaranteed by an affiliate of a stockholder.
On March 7, 1997, $716,319 of these notes were extended to April 30, 1997. If
any of the balance remains outstanding after April 30, 1997, the interest rate
defaults to 10.25% per annum.
On February 23, 1996, the Company completed the private placement and
issuance of 408,526 shares of its common stock at $21.80 per share. Proceeds,
net of related expenses, were $8,333,654.
10
<PAGE> 41
ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CAPITAL STOCK (CONTINUED)
At December 31, 1996, authorized but unissued shares of common stock have
been reserved for future issuance as follows:
<TABLE>
<S> <C>
Warrants.................................................... 670,225
Options outstanding......................................... 796,258
Options reserved for future issuance under the 1993 Stock
Option Plan (Note 7)...................................... 289,532
---------
1,756,015
=========
</TABLE>
7. STOCK OPTIONS AND WARRANTS
The Company has elected to follow Accounting Principals Board Opinion No.
25, "Accounting for Stock Issued to Employees," (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Financial Accounting Standards Board No. 123, "Accounting for Stock-Based
Compensation," (FASB 123) requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, since the
exercise price of the Company's employee stock option grants has equaled the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
On August 19, 1993, the Board of Directors adopted the 1993 Stock Option
Plan (the Plan) for employees, consultants, and directors who are not also
employees of the Company (outside directors). The maximum number of shares
issuable under the Plan, as amended in 1996, is 1,055,000, of which 80,000 are
reserved for issuance to outside directors. The Plan is administered by a
committee (Committee) consisting of two or more outside directors appointed by
the board of directors of the Company.
For employees and consultants, the Plan provides for granting of Incentive
Stock Options (ISOs) and Nonstatutory Stock Options (NSOs). In the case of ISOs,
the exercise price shall not be less than 100% (110% in certain cases) of the
fair value of the common stock, as determined by the committee, on the date of
grant. In the case of NSOs, the exercise price shall not be less than 85% (110%
in certain cases) of the fair value of the common stock, as determined by the
Committee, on the date of grant. The term of options granted to employees and
consultants will be for a period not to exceed 10 years (five years in certain
cases). Options granted under the Plan on or before May 31, 1995, generally vest
over a five year period (One-fifth of options granted vest after one year from
the grant date. The remaining options vest ratably each month thereafter).
Options granted under the Plan subsequent to May 31, 1995, generally vest over a
four year period (One-fourth of options granted vest after one year from the
grant date. The remaining options vest ratably each month thereafter). In
addition, the Committee may authorize option grants with vesting provisions that
are not based solely on employees' rendering of additional service to the
Company.
For outside directors, NSOs only will be granted with an exercise price of
100% of the fair value of the stock, as determined by the Committee, on the date
of grant. The Plan provides that each outside director will be automatically
granted 10,000 NSOs on the date of their initial election to the board of
directors. On the date of the annual meeting of the stockholders of the Company,
commencing with the 1994 meeting, each outside director who is elected,
reelected, or continues to serve as a director, shall be granted 2,000 NSOs
(3,000 NSOs for the 1996 meeting and all future annual meetings), except for
those outside directors who are first elected to the Board of Directors at the
meeting or three months prior. The options granted vest ratably over three years
and expire after seven years from the grant date.
11
<PAGE> 42
ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
The Company entered into stock option agreements with certain employees and
a consultant prior to the adoption of the Plan. These stock options generally
become exercisable over a five-year period, commencing from the date of grant,
and expire 10 years from the date of grant. Exercise prices are determined by
the Board of Directors and, for options granted through December 31, 1992,
represent estimated fair values of the Company's common stock at the grant date.
For the year ended December 31, 1993, the Company recorded an increase to
additional paid-in capital and a corresponding charge to deferred compensation
of approximately $489,000 to recognize the difference between the estimated fair
value of the Company's common stock at the date of grant and the exercise price
for 107,638 options granted in the year ended December 31, 1993. The deferred
compensation is being amortized over the five-year vesting period of the
options. During 1995 and 1996, 29,430 and 1,090 of these options were forfeited,
resulting in a reduction in compensation expense of $58,136 in 1995.
Amortization of compensation expense of $139,318, $46,575 and $35,954 was
recorded for the years ended December 31, 1994, 1995, and 1996, respectively.
Pro forma information regarding net income and earnings per share is
required under FASB 123, and has been determined as if the Company had accounted
for its stock options granted subsequent to December 31, 1994, under the fair
value method of that Statement. The fair value for these options was estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for the years ended December 31, 1995 and
1996: risk-free interest rate of 6.3% and 6.2%, respectively; a dividend yield
of 0%; volatility factor of the expected market price of the Company's common
stock of .75; and expected life of the options of 4.0 and 4.1 years,
respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------
1995 1996
---- ----
<S> <C> <C>
Pro forma net loss................................... $7,428,018 $11,590,957
Pro forma net loss per common share.................. 2.04 2.56
</TABLE>
Because FASB 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1999.
12
<PAGE> 43
ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
The table below summarizes all option activity through December 31, 1996:
<TABLE>
<CAPTION>
EXERCISE
OPTIONS PRICE
OUTSTANDING PER SHARE
----------- ---------
<S> <C> <C>
Period October 18, 1989 (date of inception) to December 31,
1990:
Granted................................................... 25,984 $ .0184 - .184
-------
Outstanding at December 31, 1990.......................... 25,984 .0184 - .184
Granted................................................... 2,725 .184
-------
Outstanding at December 31, 1991.......................... 28,709 .0184 - .184
Granted................................................... 39,513 .0184 - .229
-------
Outstanding at December 31, 1992.......................... 68,222 .0184 - .229
Granted................................................... 132,638 .229 - 11.25
Exercised................................................. (9,634) .0184
-------
Outstanding at December 31, 1993.......................... 191,226 .184 - 11.25
Granted................................................... 271,012 6.75 - 16.25
Exercised................................................. (545) .229
Forfeited................................................. (4,680) .229 - 16.25
-------
Outstanding at December 31, 1994.......................... 457,013 .184 - 16.25
Granted................................................... 190,360 6.75 - 19.25
Exercised................................................. (50,130) .184 - 11.25
Forfeited................................................. (71,975) .184 - 15.25
-------
Outstanding at December 31, 1995.......................... 525,268 .184 - 19.25
Granted................................................... 346,907 17.00 - 27.00
Exercised................................................. (49,881) .184 - 15.25
Forfeited................................................. (26,036) .229 - 26.50
-------
Outstanding at December 31, 1996.......................... 796,258 $ .184 - 27.00
=======
</TABLE>
The weighted-average exercise price of options outstanding at December 31,
1995 and 1996, was $8.93 and $13.40, respectively. The weighted-average exercise
price of options granted, exercised, and forfeited during 1996 was $18.93,
$5.67, and $11.76, respectively. The weighted-average fair value of options
granted during 1996 was $11.35.
13
<PAGE> 44
ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
Following is additional information with respect to options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
EXERCISE EXERCISE EXERCISE EXERCISE EXERCISE
PRICE FROM PRICE FROM PRICE FROM PRICE FROM PRICE FROM
$0.18 TO $6.75 TO $10.50 TO $16.00 TO $23.50 TO
$0.23 $9.13 $15.50 $22.13 $27.00
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Outstanding at December 31, 1996:
Number of options........................ 68,536 124,664 213,356 339,942 49,760
Weighted-average exercise price.......... $0.22 $7.37 $11.37 $17.83 $25.07
Weighted-average remaining contractual
life in years......................... 6.0 8.0 7.7 9.6 9.3
Exercisable at December 31, 1996:
Number of options........................ 39,380 41,916 109,068 14,825 --
Weighted-average exercise price.......... $0.22 $7.32 $11.84 $17.58 --
</TABLE>
The total number of unvested options outstanding at December 31, 1996, was
591,069, of which 451,069 will vest based on employees' continued service to the
Company and 140,000 will vest based on employees' continued service to the
Company and the Company's attainment of certain performance objectives
established by the Committee.
In December 1991 and January 1992, the Company issued common stock purchase
warrants for 34,063 and 74,938 shares, respectively, to preferred stockholders
in conjunction with short-term loans from the stockholders. These warrants have
an exercise price of $1.4679 per share and expire 10 years from the date of
issue. Warrants for 13,625 and 34,063 of these shares were exercised in 1995 and
1996, respectively.
In connection with the July 1992 issuance of Series B convertible preferred
stock, the Company issued common stock purchase warrants for 213,780 shares to
the Series B convertible preferred stockholders. These warrants have an exercise
price of $2.29 (71,260 shares), $2.75 (71,260 shares), and $3.21 (71,260 shares)
per share and expire upon the seventh anniversary of issuance. Warrants for
96,437 of these shares (36,107 shares at $2.29 per share, 36,107 shares at $2.75
per share and 24,223 shares at $3.21 per share) were exercised in 1996.
The Company also issued warrants to purchase 470,589 shares of common stock
in connection with the July 1993 issuance of Series C preferred stock. The
warrants are exercisable at $9.56 per share and expire in November 2000.
Warrants for 69,020 of these shares were exercised in 1996.
In conjunction with the Company's initial public offering in October 1993,
warrants to purchase an aggregate of 100,000 shares of common stock at an
exercise price of $13.50 (120% of the initial public offering price) per share
were issued for $100 to the managing underwriter of the initial public offering.
The warrants are exercisable through October 26, 1998. Warrants for 10,000 of
these shares were exercised in 1996.
8. RESEARCH AND DEVELOPMENT AGREEMENTS
In March 1993, the Company entered into a three-year cost-sharing
cooperative agreement with the U.S. government under the Department of Commerce
Advanced Technology Program. Funding totaling $619,000, $650,000
$200,000, $1,980,000, and for the years ended December 31, 1994, 1995, and 1996,
and for the period from March 1993 to December 31, 1996, respectively, has been
offset against the related research and development expenses.
The Company is party to a number of research and development contracts,
generally short-term in nature, which provided approximately $205,000, $22,000
and $53,000, of revenues for the years ended
14
<PAGE> 45
ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. RESEARCH AND DEVELOPMENT AGREEMENTS (CONTINUED)
December 31, 1994, 1995, and 1996, respectively. These contracts include
cost-plus and fixed-price arrangements.
Research and development expenses include the costs associated with
development stage product sales.
9. INCOME TAXES
The Company has net operating loss and research and development credit
carryforwards for tax purposes of approximately $27,700,000 and $624,000,
respectively, at December 31, 1996, which begin to expire in 2005.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1995 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward................... $ 5,716,000 $10,502,000
Research and development tax credit
carryforwards.................................. 744,000 624,000
Deferred compensation............................. 120,000 94,000
Property and equipment............................ 19,000 --
Development stage losses.......................... 17,000 --
----------- -----------
Total deferred tax assets........................... 6,616,000 11,220,000
Deferred tax liabilities:
Patent costs...................................... (85,000) (142,000)
Property and equipment............................ -- (68,000)
----------- -----------
(85,000) (210,000)
----------- -----------
Net deferred tax assets............................. 6,531,000 11,010,000
Valuation allowance................................. (6,531,000) (11,010,000)
----------- -----------
Net deferred tax assets............................. $ -- $ --
=========== ===========
</TABLE>
The valuation allowance increased during 1996 by $4,479,000 due primarily
to the increase in the net operating loss carryforward.
Based on the Internal Revenue Code and changes in the ownership of the
Company, utilization of the net operating loss carryforwards will be subject to
annual limitations.
10. LONG-TERM DEBT
The Company's long-term debt consists of two equipment financing notes with
a bank that mature in October 1998 and May 1999, respectively. The notes bear
interest at 8.5% per annum. Payments of principal plus accrued interest are due
monthly in arrears. Borrowings are collateralized by the related equipment
purchased, which has a carrying value of approximately $146,000 at December 31,
1996. The notes require the Company to maintain a minimum net worth and leverage
ratio, as defined. The Company's outstanding obligations under these notes was
$172,039 at December 31, 1996, with aggregate debt maturities of $80,421 in
1997, $78,074 in 1998, and $13,544 in 1999.
15
<PAGE> 46
ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents, the restricted certificates of
deposit, and the shareholder notes receivable approximates fair value due to the
short maturity of those instruments. The fair value of the Company's investments
approximates the carrying value based on quoted market prices for those or
similar investments. The fair value of the Company's long-term debt approximates
the carrying value based on current rates available to the Company for debt with
similar remaining maturities.
12. COMMITMENTS
OPERATING LEASES
The Company leases its manufacturing and office space. Under the terms of
the lease, which expires October 2004, the Company is responsible for all real
estate taxes and operating expenses. The lease provides for a security deposit
($350,000 at December 31, 1996) that is secured by a certificate of deposit
owned by the Company.
Future minimum payments under the operating lease consist of the following
at December 31, 1996:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- ------
<S> <C>
1997........................................................ $ 211,700
1998........................................................ 227,500
1999........................................................ 227,500
2000........................................................ 231,300
2001........................................................ 249,900
Thereafter.................................................. 699,900
----------
$1,847,800
==========
</TABLE>
Rent expense totaled $174,994, $267,991, and $227,334, for the years ended
December 31, 1994, 1995, and 1996, respectively.
CONSULTING AND RESEARCH AGREEMENTS
During 1994, the Company entered into consulting and research agreements
related to the development of certain technology. The consulting agreement
requires annual payments of $50,000 through 1998, while the research agreement
provides for annual payments of $100,000 through 1997 with the right to renew
for one additional year at the Company's option.
13. 401(K) PLAN
The Company has a 401(k) plan covering all employees who meet prescribed
service requirements. The plan provides for deferred salary contributions by the
plan participants and a Company contribution. Company contributions, if any, are
at the discretion of the Board of Directors and are not to exceed the amount
deductible under applicable income tax laws. No Company contribution was made
for the years ended December 31, 1994, 1995, and 1996.
14. LEGAL PROCEEDINGS
In 1996, a stockholder filed a complaint against the Company alleging that,
in connection with the Company's private placement of securities in November
1995, the Company breached and repudiated an oral contract with the stockholder
for the issuance and sale by the Company of 370,370 shares of the Company's
16
<PAGE> 47
ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. LEGAL PROCEEDINGS (CONTINUED)
common stock at $10.80 per share, plus warrants (immediately exercisable at
$12.96 per share) to purchase an additional 370,370 shares of the Company's
common stock. The stockholder is seeking a jury trial and money damages equal to
the difference between $8,800,000 (370,370 shares at $10.80 per share and
370,370 shares at $12.96 per share) and 740,740 shares multiplied by the highest
price at which the Company's stock traded on the Nasdaq Stock Market between
November 20, 1995 and the date of judgment.
The Company believes that the suit is without merit and intends to continue
to defend itself vigorously in this litigation. As such, the Company believes
that the resolution of this matter will not have a material adverse effect on
the financial condition or results of operations of the Company.
17
<PAGE> 48
ILLINOIS SUPERCONDUCTOR CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING BALANCE AT
OF YEAR ADDITIONS DEDUCTIONS END OF YEAR
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Deducted from asset accounts:
Valuation allowance (1) . . . . . . . . . . . $ 6,531,000 $ 4,479,000 $ 0 $ 11,010,000
YEAR ENDED DECEMBER 31, 1995:
Deducted from asset accounts:
Valuation allowance (1) . . . . . . . . . . . $ 2,894,000 $ 3,637,000 $ 0 $ 6,531,000
YEAR ENDED DECEMBER 31, 1994:
Deducted from asset accounts:
Valuation allowance (1) . . . . . . . . . . . $ 1,331,000 $ 1,563,000 $ 0 $ 2,894,000
</TABLE>
- ------------------
(1) The valuation allowance offsets the net deferred tax assets, resulting
primarily from net operating loss carryforwards development stage losses
capitalized and amortized for income tax reporting purposes, and deferred
compensation.
<PAGE> 49
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------------------------------------------------------------
<S> <C>
10.16 Employment Agreement dated January 1, 1997 between the Company and James D.
Hodge, Ph.D.
10.17 Employment Agreement dated January 1, 1997 between the Company and Edward W.
Laves, Ph.D
10.18 Employment Agreement dated January 1, 1997 between the Company and Ora E.
Smith
23 Consent of Ernst & Young L.L.P.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.16
EMPLOYMENT AGREEMENT
Employment Agreement dated and effective as of January 1, 1997, (this
"AGREEMENT"), between ILLINOIS SUPERCONDUCTOR CORPORATION, a Delaware
corporation (with its successors and assigns, referred to as the "Company"),
and DR. JAMES D. HODGE (referred to as "HODGE").
PRELIMINARY STATEMENT
Hodge is now employed as vice president - engineering and chief
scientist of the Company.
The Company desires to continue to employ Hodge, and Hodge wishes to
continue to be employed by the Company, upon the terms and subject to the
conditions set forth in this Agreement. The Company and Hodge also wish to
enter into the other agreements set forth in this Agreement, all of which are
related to Hodge's employment under this Agreement.
AGREEMENT
Hodge and the Company therefore agree as follows:
1. EMPLOYMENT FOR TERM. The Company hereby employs Hodge and Hodge
hereby accepts employment with the Company for the period beginning on January
1, 1997, and ending on December 31, 1997 (the "TERM"), or upon the earlier
termination of the Term pursuant to Section 6 below. The end of the Term for
any reason shall end Hodge's employment under this Agreement, but shall not
terminate Hodge's or the Company's other obligations set forth in this
Agreement.
2. POSITION AND DUTIES. During the Term, Hodge shall serve as a vice
president of the Company or in such other position as the chief executive
officer of the Company may determine. During the Term, Hodge shall also hold
such additional positions and titles as the Board of Directors of the Company
(the "Board") or the chief executive officer of the Company may determine from
time to time. During the Term, Hodge's responsibilities shall be determined
from time to time by the chief executive officer of the Company. During the
term, Hodge shall devote substantially all of his business time and best
efforts to his duties as an employee of the Company.
3. COMPENSATION.
(a) BASE SALARY. The Company shall pay Hodge a base salary,
beginning on the first day of the Term and ending on the last day of the Term,
of not less than $126,000 per annum during that part of the Term on or after
January 1, 1997, payable at least monthly on the Company's regular pay cycle
for professional employees.
<PAGE> 2
(b) OTHER AND ADDITIONAL COMPENSATION. Section 3(a) establishes a
minimum salary for the Term, and shall not preclude the Board from awarding
Hodge a higher salary or any bonuses or stock options in the discretion of the
Board during the Term at any time.
4. EMPLOYEE BENEFITS. During the Term, Hodge shall be entitled to
the employee benefits, including vacation, health and other insurance benefits,
and deferred compensation arrangements, made available by the Company to any
other employee of the Company.
5. EXPENSES. The Company shall reimburse Hodge for actual
out-of-pocket expenses incurred by him in the performance of his services for
the Company (in accordance with the Company's policy for such reimbursements
applicable to the Company's executive officers on the same terms generally
offered to such officers), upon the receipt of appropriate documentation of
such expenses.
6. TERMINATION.
(a) GENERAL. The Term shall end immediately upon Hodge's death. The
Company may end the Term at any time for any reason or no reason, with or
without "Cause") as defined in Section 7(a) below) in the absolute discretion
of the Board (but subject to the Company's obligations under this Agreement).
(b) NOTICE OF TERMINATION. Promptly after it ends the Term, the
Company shall give Hodge notice of the termination, including a statement of
whether the termination was for Cause (as defined in Section 7(a) below). The
Company's failure to give notice under this Section 6(b) shall not, however,
affect the validity of the Company's termination of the Term.
7. SEVERANCE BENEFITS.
(a) "CAUSE" DEFINED. "Cause" means (i) willful malfeasance or
willful misconduct by Hodge in connection with his employment; (ii) Hodge's
gross negligence in performing any of his duties under this Agreement; (iii)
Hodge's conviction of, or entry of a plea of guilty to, or entry of a plea of
nolo contendere with respect to, any crime other than a traffic violation or
infraction which is a misdemeanor; (iv) Hodge's willful breach of any written
policy applicable to all employees adopted by the Company concerning conflicts
of interest, political contributions, standards of business conduct or fair
employment practices, procedures with respect to compliance with securities
laws or any similar matters, or adopted pursuant to the requirements of any
government contract or regulation; or (v) material breach by Hodge of any of
his agreements in this Agreement.
(b) TERMINATION WITHOUT CAUSE. If the Company ends the Term prior to
December 31, 1997, other than for Cause, then the Company shall make the
"Severance Payments" (as defined below) to Hodge for and during the "Severance
Period" (as defined
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<PAGE> 3
below). The Severance Payment shall be payable in proportionate amounts at
least monthly on the Company's regular pay cycle for professional employees and
(if the last day of the Severance Period is not the last day of a pay period)
on the last day of the Severance Period.
For purposes of this Agreement: (i) the term "SEVERANCE PAYMENT"
means, for the period of 180 days from the commencement of the Severance
Period, an amount equal to Hodge's base salary in effect on the day prior to
the date on which the Severance Period commences, and thereafter during the
Severance Period an amount equal to 50% of Hodge's base salary in effect at the
time the Severance Period commenced; and (ii) the term "SEVERANCE PERIOD" means
the period commencing on the day following the date of termination of Hodge's
employment with the Company and ending on the second anniversary of the date of
termination, subject to earlier termination as of the date that Hodge commences
full time employment with any other person or entity.
(c) TERMINATION FOR ANY OTHER REASON. If the Company ends the Term
for Cause, or if Hodge resigns as an employee or officer of the Company, or if
Hodge dies, then the Company shall have no obligation to pay Hodge any amount,
whether for salary, benefits, bonuses, or other compensation or expense
reimbursements of any kind (including without limitation any Incentive
Compensation), accruing after the end of the Term, and such rights shall,
except as otherwise required by law, be forfeited immediately upon the end of
the Term.
8. CONFIDENTIALITY, OWNERSHIP, AND COVENANTS OF NON-COMPETITION AND
NON-SOLICITATION.
(a) "COMPANY INFORMATION" AND "INVENTIONS" DEFINED. "COMPANY
INFORMATION" means all information, knowledge or data of or pertaining to (i)
the Company, and (ii) any other person, firm, corporation or business
organization with which the Company may do business during the Term, that is
not in the public domain (and whether relating to methods, processes,
techniques, discoveries, pricing, marketing or any other matters).
"INVENTIONS" collectively refers to any and all inventions, trade secrets,
ideas, processes, formulas, source and object codes, data, programs, other
works of authorship, know-how, improvements, discoveries, developments,
designs, and techniques regarding any of the foregoing.
(b) CONFIDENTIALITY. Except as provided in the next two
sentences, Hodge covenants and agrees that all Company Information shall be
kept secret and confidential at all times during and after the end of the Term
and shall not be used or divulged by him outside the scope of his employment as
contemplated by this Agreement, except as the Company may otherwise expressly
authorize by action of the Board. In the event that Hodge is requested in a
judicial, administrative or governmental proceeding to disclose any of the
Company Information, Hodge will promptly so notify the Company so that the
Company may seek a protective order or other appropriate remedy and/or waive
compliance with this Agreement. If disclosure of any of the Company
Information is required, Hodge may
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<PAGE> 4
furnish the material so required to be furnished, but Hodge will furnish only
that portion of the Company Information that legally is required.
(c) OWNERSHIP. Hodge hereby assigns to the Company all of Hodge's
right (including patent rights, copyrights, trade secret rights, and all other
rights throughout the world), title and interest in and to Inventions, whether
or not patentable or registrable under copyright or similar statutes, made or
conceived or reduced to practice or learned by Hodge, either alone or jointly
with others, during the course of the performance of services for the Company.
Hodge shall also assign to, or as directed by, the Company, all of Hodge's
right, title and interest in and to any and all Inventions, the full title to
which is required to be in the United States government by a contract between
the Company and the United States government or any of its agencies. The
provisions of Sections 8(a), 8(b) and this Section 8(c) are not intended to
supersede or limit the effect of any prior confidentiality or proprietary
rights agreements previously executed by Hodge.
(d) PERIOD DEFINED. "NON-COMPETITION PERIOD" means the period
beginning on the day following the date of termination of Hodge's employment
with the Company and ending on the second anniversary of the day following the
date of termination of Hodge's employment with the Company.
(e) COVENANTS OF NON-COMPETITION AND NON-SOLICITATION. Hodge
acknowledges that his services pursuant to this Agreement are unique and
extraordinary, that the Company will be dependent upon Hodge for the
development and growth of its business and related functions, and that he will
continue to develop personal relationships with significant customers of the
Company and to have control of confidential information concerning, and lists
of customers of, the Company. Hodge further acknowledges that the business of
the Company is international in scope and cannot be confined to any particular
geographic area of the United States. For the foregoing reasons, Hodge
covenants and agrees that during the Non-Competition Period Hodge shall not,
directly or indirectly, engage in, be financially interested in, represent,
render any advice or services to, or be employed by, any other business
(conducted for profit or not for profit) that is engaged in the development or
production of (i) high temperature superconducting materials, (ii) radio
frequency filter devices, or (iii) fault current limiter devices, in any such
case for or related to uses which are or could reasonably deemed to be
competitive with the current or currently contemplated business of the Company
in the world. For the reasons acknowledged by Hodge at the beginning of this
Section 8(e), Hodge additionally acknowledges, covenants, and agrees that,
during the Non-Competition Period, Hodge shall not, directly or indirectly,
whether on his own behalf or on behalf of any other person or entity, in any
manner (A) solicit the business of or otherwise contact in any commercial
capacity any person or entity that is, or is reasonably anticipated to become,
at the date of termination a customer, supplier, or contractor of the Company
for the purpose of obtaining business of the type performed by the Company, or
(B) solicit for employment any persons who were officers or employees of the
Company upon the date of termination of his employment hereunder or at any time
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<PAGE> 5
during a ninety-day period preceding such date, or aid any competitive business
organization in any attempt to hire any such officers or employees of the
Company.
(f) EQUITABLE REMEDIES. Hodge acknowledges, covenants and agrees
that, in the event he shall violate any provisions of this Section 8, the
Company will not have an adequate remedy at law and will therefore be entitled
to enforce each such provision by temporary or permanent injunctive or
mandatory relief obtained in an action or proceeding without the necessity of
proving damage or posting of any bond of any kind whatsoever, and without
prejudice to any other remedies that may be available at law or in equity. The
foregoing restrictions shall not preclude Hodge from the ownership of not more
than three percent (3%) of the voting securities of any corporation whose
voting securities are registered under Section 12(g) of the Securities Exchange
Act of 1934, even if its business competes with that of the Company.
9. SUCCESSORS AND ASSIGNS.
(a) HODGE. This Agreement is a personal contract, and the rights
and interests that the Agreement accords to Hodge may not be sold, transferred,
assigned, pledged, encumbered, or hypothecated by him. Hodge shall not have
any power of anticipation, alienation or assignment of the payments
contemplated by this Agreement, all rights and benefits of Hodge shall be for
the sole personal benefit of Hodge, and no other person shall acquire any
right, title or interest under this Agreement by reason of any sale,
assignment, transfer, claim or judgment or bankruptcy proceedings against
Hodge. Except as so provided, this Agreement shall inure to the benefit of and
be binding upon Hodge and his personal representatives, distributees and
legatees.
(b) THE COMPANY. This Agreement shall be binding upon the Company
and inure to the benefit of the Company and of its successors and assigns,
including (but not limited to) any corporation that may acquire all or
substantially all of the Company's assets or business or into or with which the
Company may be consolidated or merged. This Agreement shall continue in full
force and effect in the event that the Company sells all or substantially all
of its assets, merges or consolidates, otherwise combines or affiliates with
another business, dissolves and liquidates, or otherwise sells or disposes of
substantially all of its assets. The Company's obligations under this
Agreement shall cease, however, if the successor to, the purchaser or acquiror
either of the Company or of all or substantially all of its assets, or the
entity with which the Company has affiliated, shall assume in writing the
Company's obligations under this Agreement (and deliver an executed copy of
such assumption to Hodge), in which case such successor or purchaser, but not
the Company, shall thereafter be the only party obligated to perform the
obligations that remain to be performed on the part of the Company under this
Agreement.
10. ENTIRE AGREEMENT. This Agreement represents the entire
agreement between the parties concerning Hodge's employment with the Company
and supersedes all prior
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<PAGE> 6
negotiations, discussions, understandings and agreements, whether written or
oral, between Hodge and the Company relating to the subject matter of this
Agreement. The prior employment agreement between the Company and Hodge with
respect to the period through December 31, 1996, shall remain in full force and
effect with respect to all matters addressed in such prior employment agreement
occurring on or before the effective date of this Agreement.
11. AMENDMENT OR MODIFICATION, WAIVER. No provision of this
Agreement may be amended or waived unless such amendment or waiver is agreed to
in writing signed by Hodge and by a duly authorized officer of the Company
other than Hodge. No waiver by any party to this Agreement of any breach by
another party of any condition or provision of this Agreement to be performed
by such other party shall be deemed a waiver of a similar or dissimilar
condition or provision at the same time, any prior time or any subsequent time.
12. NOTICES. All notices, demands or other communications of any
kind to be given or delivered under this Agreement shall be in writing and
shall be deemed to have been properly given if (a) delivered by hand, (b)
delivered by a nationally recognized overnight courier service, (c) sent by
registered or certified United States Mail, return receipt requested and first
class postage prepaid, or (d) facsimile transmission followed by a confirmation
copy delivered by a nationally recognized overnight courier service. Such
communications shall be sent to the parties at their respective addresses as
follows:
If to Hodge: James D. Hodge
6515 N. Springfield
Lincolnwood, IL 60645
If to the Company: Illinois Superconductor Corporation
451 Kingston Court
Mt. Prospect, Illinois 60056
Attention: Chief Executive Officer
with a copy to: Bruce A. Zivian, Esq.
Eilenberg & Zivian
30 North LaSalle Street, Suite 2900
Chicago, Illinois 60602
Either party may change such address for delivery to the other party by
delivery of a notice in conformity with the provisions of this section
specifying such change. Notice shall be deemed to have been properly given (i)
on the date of delivery, if delivery is by hand, (ii) three (3) days after the
date of mailing if sent by certified or registered mail, (iii) one (1) day
after date of delivery to the overnight courier if sent by overnight courier,
or (iv) the next business day after the date of transmission by facsimile.
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<PAGE> 7
13. SEVERABILITY. If any provision of this Agreement or the
application of any such provision to any party or circumstances shall be
determined by any court of competent jurisdiction to be invalid and
unenforceable to any extent, the remainder of this Agreement or the application
of such provision to such person or circumstances other than those to which it
is so determined to be invalid and unenforceable shall not be affected, and
each provision of this Agreement shall be validated and shall be enforced to
the fullest extent permitted by law. If for any reason any provision of this
Agreement containing restrictions is held to cover an area or to be for a
length of time that is unreasonable or in any other way is construed to be too
broad or to any extent invalid, such provision shall not be determined to be
entirely null, void and of no effect; instead, it is the intention and desire
of both the Company and Hodge that, to the extent that the provision is or
would be valid or enforceable under applicable law, any court of competent
jurisdiction shall construe and interpret or reform this Agreement to provide
for a restriction having the maximum enforceable area, time period and such
other constraints or conditions (although not greater than those contained
currently contained in this Agreement) as shall be valid and enforceable under
the applicable law.
14. SURVIVORSHIP. The respective rights and obligations of the
parties hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
15. HEADINGS. All descriptive headings of sections and paragraphs
in this Agreement are intended solely for convenience of reference, and no
provision of this Agreement is to be construed by reference to the heading of
any section or paragraph.
16. WITHHOLDING TAXES. All salary, benefits, reimbursements and
any other payments to Hodge under this Agreement shall be subject to all
applicable payroll and withholding taxes and deductions required by any law,
rule or regulation of and federal, state or local authority.
17. APPLICABLE LAW: JURISDICTION. The laws of the State of
Illinois shall govern the interpretation, validity and performance of the terms
of this Agreement, without reference to rules relating to conflicts of law.
Any suit, action or proceeding against Hodge with respect to this Agreement, or
any judgment entered by any court in respect thereof, may be brought in any
court of competent jurisdiction in the State of Illinois, as the Company may
elect in its sole discretion, and Hodge hereby submits to the nonexclusive
jurisdiction of such courts for the purpose of any such suit, action,
proceeding or judgment.
18. INTERPRETATION AND CONSTRUCTION. Each of the parties to this
Agreement has been represented by their own counsel, each has reviewed and
approved this Agreement as executed, and neither party shall be charged with
the responsibility of having drafted any provision of this Agreement so as to
cause any rule of strict construction to be applied against such party.
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<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement on and effective as of the dates first specified above.
ILLINOIS SUPERCONDUCTOR CORPORATION
By: _____________________________
Ora E. Smith
President
_____________________________
JAMES D. HODGE
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<PAGE> 1
EXHIBIT 10.17
EMPLOYMENT AGREEMENT
Employment Agreement dated and effective as of January 1, 1997, (this
"AGREEMENT"), between ILLINOIS SUPERCONDUCTOR CORPORATION, a Delaware
corporation (with its successors and assigns, referred to as the "COMPANY"),
and EDWARD LAVES ("LAVES").
PRELIMINARY STATEMENT
Laves is now employed as the executive vice president and chief
operating officer of the Company.
The Company desires to continue to employ Laves, and Laves wishes to
continue to be employed by the Company, upon the terms and subject to the
conditions set forth in this Agreement. The Company and Laves also wish to
enter into the other agreements set forth in this Agreement, all of which are
related to Laves' employment under this Agreement.
AGREEMENT
Laves and the Company therefore agree as follows:
1. EMPLOYMENT FOR TERM. The Company hereby employs Laves and Laves
hereby accepts employment with the Company for the period beginning on January
1, 1997, and ending on December 31, 1997 (the "TERM"), or upon the earlier
termination of the Term pursuant to Section 6 below. The end of the Term for
any reason shall end Laves's employment under this Agreement, but shall not
terminate Laves' or the Company's other obligations in this Agreement.
2. POSITION AND DUTIES. During the Term, Laves shall serve as the
Executive Vice-President and Chief Operating Officer of the Company. During
the Term, Laves shall also hold such additional positions and titles as the
Board of Directors of the Company (the "BOARD") may determine from time to
time. During the Term, Laves shall devote substantially all of his business
time and best efforts to his duties as an employee of the Company.
3. COMPENSATION.
(a) BASE SALARY. The Company shall pay Laves a base salary,
beginning on the first day of the Term and ending on the last day of the Term,
of not less than $170,000 per annum, payable at least monthly on the Company's
regular pay cycle for professional employees.
(b) BONUSES. Laves shall be eligible to receive a bonus of up to
fifty percent (50%) of his base salary for calendar year 1997 based on the
achievement of performance objectives if and as developed in consultation with
Laves by the President and Board of the Company, and if such performance
objectives are attained as determined in the sole discretion of the Board.
<PAGE> 2
(c) OTHER AND ADDITIONAL COMPENSATION. Sections 3(a) and 3(b)
establish minimum salary and bonus grant levels for Laves during the Term, and
shall not preclude the Board from awarding Laves a higher salary or stock
options at any time, nor shall they preclude the Board from awarding Laves
bonuses or other compensation in the discretion of the Board.
4. EMPLOYEE BENEFITS. During the Term, Laves shall be entitled to
the employee benefits, including vacation, health and other insurance benefits,
and deferred compensation arrangements, made available by the Company to any
other employee of the Company.
5. EXPENSES. The Company shall reimburse Laves for actual
out-of-pocket expenses incurred by him in the performance of his services for
the Company (in accordance with the Company's policy for such reimbursements
applicable to the Company's executive officers on the same terms generally
offered to such officers), upon the receipt of appropriate documentation of
such expenses.
6. TERMINATION.
(a) GENERAL. The Term shall end immediately upon Laves's death. The
Company may end the Term at any time for any reason or no reason, with or
without "Cause" (as defined in Section 7(a) below) in the absolute discretion
of the Board (but subject to the Company's obligations under this Agreement).
(b) NOTICE OF TERMINATION. Promptly after it ends the Term, the
Company shall give Laves notice of termination, including a statement of
whether the termination was for Cause. The Company's failure to give notice
under this Section 6(b) shall not, however, affect the validity of the
Company's termination of the Term.
7. SEVERANCE BENEFITS.
(a) "CAUSE" DEFINED. "Cause" means (i) willful malfeasance or
willful misconduct by Laves in connection with his employment; (ii) Laves'
gross negligence in performing any of his duties under this Agreement; (iii)
Laves' conviction of, or entry of a plea of guilty to, or entry of a plea of
nolo contendere with respect to, any crime other than a traffic violation or
infraction which is a misdemeanor; (iv) Laves' willful breach of any written
policy applicable to all employees adopted by the Company concerning conflicts
of interest, political contributions, standards of business conduct or fair
employment practices, procedures with respect to compliance with securities
laws or any similar matters, or adopted pursuant to the requirements of any
government contract or regulation; or (v) material breach by Laves of any of
his agreements in this Agreement.
(b) TERMINATION WITHOUT CAUSE. If the Company ends the Term prior to
December 31, 1997, other than for Cause, then the Company shall make the
"Severance Payments" (as defined below) to Laves for and during the "Severance
Period" (as defined below). The Severance Payment shall be payable in
proportionate amounts at least monthly
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<PAGE> 3
on the Company's regular pay cycle for professional employees and (if the last
day of the Severance Period is not the last day of a pay period) on the last
day of the Severance Period.
For purposes of this Agreement: (i) the term "SEVERANCE PAYMENT"
means, for the period of 180 days from the commencement of the Severance
Period, an amount equal to Laves' base salary in effect on the day prior to the
date on which the Severance Period commences, and thereafter during the
Severance Period an amount equal to 50% of Laves' base salary in effect at the
time the Severance Period commenced; and (ii) the term "SEVERANCE PERIOD" means
the period commencing on the day following the date of termination of Laves'
employment with the Company and ending on the second anniversary of the date of
termination, subject to earlier termination as of the date that Laves commences
full time employment with any other person or entity.
(c) TERMINATION FOR ANY OTHER REASON. If the Company ends the Term
for Cause, or if Laves resigns as an employee or officer of the Company, or if
Laves dies, then the Company shall have no obligation to pay Laves any amount,
whether for salary, benefits, bonuses, or other compensation or expense
reimbursements of any kind, accruing after the end of the Term, and such rights
shall, except as otherwise required by law, be forfeited immediately upon the
end of the Term.
8. CONFIDENTIALITY, OWNERSHIP, AND COVENANTS OF NON-COMPETITION AND
NON-SOLICITATION.
(a) "COMPANY INFORMATION" AND "INVENTIONS" DEFINED. "COMPANY
INFORMATION" means all information, knowledge or data of or pertaining to (i)
the Company, and (ii) any other person, firm, corporation or business
organization with which the Company may do business during the Term, that is
not in the public domain (and whether relating to methods, processes,
techniques, discoveries, pricing, marketing or any other matters).
"INVENTIONS" collectively refers to any and all inventions, trade secrets,
ideas, processes, formulas, source and object codes, data, programs, other
works of authorship, know-how, improvements, discoveries, developments,
designs, and techniques regarding any of the foregoing.
(b) CONFIDENTIALITY. Except as provided in the next two
sentences, Laves covenants and agrees that all Company Information shall be
kept secret and confidential at all times during and after the end of the Term
and shall not be used or divulged by him outside the scope of his employment as
contemplated by this Agreement, except as the Company may otherwise expressly
authorize by action of the Board. In the event that Laves is requested in a
judicial, administrative or governmental proceeding to disclose any of the
Company Information, Laves will promptly so notify the Company so that the
Company may seek a protective order or other appropriate remedy and/or waive
compliance with this Agreement. If disclosure of any of the Company
Information is required, Laves may furnish the material so required to be
furnished, but Laves will furnish only that portion of the Company Information
that legally is required.
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<PAGE> 4
(c) OWNERSHIP. Laves hereby assigns to the Company all of Laves'
right (including patent rights, copyrights, trade secret rights, and all other
rights throughout the world), title and interest in and to Inventions, whether
or not patentable or registrable under copyright or similar statutes, made or
conceived or reduced to practice or learned by Laves, either alone or jointly
with others, during the course of the performance of services for the Company.
Laves shall also assign to, or as directed by, the Company, all of Laves's
right, title and interest in and to any and all Inventions, the full title to
which is required to be in the United States government by a contract between
the Company and the United States government or any of its agencies. The
provisions of Sections 8(a), 8(b) and this Section 8(c) are not intended to
supersede or limit the effect of any prior confidentiality or proprietary
rights agreements previously executed by Laves.
(d) PERIOD DEFINED. "NON-COMPETITION PERIOD" means the period
beginning on the day following the date of termination of Laves' employment
with the Company and ending on the second anniversary of the day following the
date of termination of Laves' employment with the Company.
(e) COVENANTS OF NON-COMPETITION AND NON-SOLICITATION. Laves
acknowledges that his services pursuant to this Agreement are unique and
extraordinary, that the Company will be dependent upon Laves for the
development and growth of its business and related functions, and that he will
continue to develop personal relationships with significant customers of the
Company and to have control of confidential information concerning, and lists
of customers of, the Company. Laves further acknowledges that the business of
the Company is international in scope and cannot be confined to any particular
geographic area of the United States. For the foregoing reasons, Laves
covenants and agrees that during the Non-Competition Period Laves shall not,
directly or indirectly, engage in, be financially interested in, represent,
render any advice or services to, or be employed by, any other business
(conducted for profit or not for profit) that is engaged in the development or
production of (i) high temperature superconducting materials, (ii) radio
frequency filter devices, or (iii) fault current limiter devices, in any such
case for or related to uses which are or could reasonably deemed to be
competitive with the current or currently contemplated business of the Company
in the world. For the reasons acknowledged by Laves at the beginning of this
Section 8(e), Laves additionally acknowledges, covenants, and agrees that,
during the Non-Competition Period, Laves shall not, directly or indirectly,
whether on his own behalf or on behalf of any other person or entity, in any
manner (A) solicit the business of or otherwise contact in any commercial
capacity any person or entity that is, or is reasonably anticipated to become,
at the date of termination to become, a customer, supplier, or contractor of
the Company for the purpose of obtaining business of the type performed by the
Company, or (B) solicit for employment any persons who were officers or
employees of the Company upon the date of termination of his employment
hereunder, or at any time during a ninety-day period preceding such date, or
aid any competitive business organization in any attempt to hire any such
officers or employees of the Company.
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<PAGE> 5
(f) EQUITABLE REMEDIES. Laves acknowledges, covenants and agrees
that, in the event he shall violate any provisions of this Section 8, the
Company will not have an adequate remedy at law and will therefore be entitled
to enforce each such provision by temporary or permanent injunctive or
mandatory relief obtained in an action or proceeding without the necessity of
posting any bond of any kind whatsoever, and without prejudice to any other
remedies that may be available at law or in equity. The foregoing restrictions
shall not preclude Laves from the ownership of not more than three percent (3%)
of the voting securities of any corporation whose voting securities are
registered under Section 12(g) of the Securities Exchange Act of 1934, even if
its business competes with that of the Company.
9. SUCCESSORS AND ASSIGNS.
(a) LAVES. This Agreement is a personal contract, and the rights
and interests that the Agreement accords to Laves may not be sold, transferred,
assigned, pledged, encumbered, or hypothecated by him. Laves shall not have
any power of anticipation, alienation or assignment of the payments
contemplated by this Agreement, all rights and benefits of Laves shall be for
the sole personal benefit of Laves, and no other person shall acquire any
right, title or interest under this Agreement by reason of any sale,
assignment, transfer, claim or judgment or bankruptcy proceedings against
Laves. Except as so provided, this Agreement shall inure to the benefit of and
be binding upon Laves and his personal representatives, distributees and
legatees.
(b) THE COMPANY. This Agreement shall be binding upon the Company
and inure to the benefit of the Company and of its successors and assigns,
including (but not limited to) any corporation that may acquire all or
substantially all of the Company's assets or business or into or with which the
Company may be consolidated or merged. This Agreement shall continue in full
force and effect in the event that the Company sells all or substantially all
of its assets, merges or consolidates, otherwise combines or affiliates with
another business, dissolves and liquidates, or otherwise sells or disposes of
substantially all of its assets. The Company's obligations under this
Agreement shall cease, however, if the successor to, the purchaser or acquiror
either of the Company or of all or substantially all of its assets, or the
entity with which the Company has affiliated, shall assume in writing the
Company's obligations under this Agreement (and deliver an executed copy of
such assumption to Laves), in which case such successor or purchaser, but not
the Company, shall thereafter be the only party obligated to perform the
obligations that remain to be performed on the part of the Company under this
Agreement.
10. ENTIRE AGREEMENT. This Agreement represents the entire
agreement between the parties concerning Laves's employment with the Company
and supersedes all prior negotiations, discussions, understandings and
agreements, whether written or oral, between Laves and the Company relating to
the subject matter of this Agreement.
11. AMENDMENT OR MODIFICATION, WAIVER. No provision of this
Agreement may be amended or waived unless such amendment or waiver is agreed to
in writing signed by
- 5 -
<PAGE> 6
Laves and by a duly authorized officer of the Company other that Laves. No
waiver by any party to this Agreement of any breach by another party of any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar condition or provision at
the same time, any prior time or any subsequent time.
12. NOTICES. All notices, demands or other communications of any
kind to be given or delivered under this Agreement shall be in writing and
shall be deemed to have been properly given if (a) delivered by hand, (b)
delivered by a nationally recognized overnight courier service, (c) sent by
registered or certified United States Mail, return receipt requested and first
class postage prepaid, or (d) facsimile transmission followed by a confirmation
copy delivered by a nationally recognized overnight courier service. Such
communications shall be sent to the parties at their respective addresses as
follows:
If to Laves: Edward Laves
622 North Elmwood Avenue
Oak Park, IL 60302
If to the Company: Illinois Superconductor Corporation
451 Kingston Court
Mount Prospect, Illinois 60056
Attention: Chief Executive Officer
with a copy to: Bruce A. Zivian
Eilenberg & Zivian
30 N. LaSalle Street, Suite 2900
Chicago, Illinois 60602
Either party may change such address for delivery to the other party by
delivery of a notice in conformity with the provisions of this section
specifying such change. Notice shall be deemed to have been properly given (i)
on the date of delivery, if delivery is by hand, (ii) three (3) days after the
date of mailing if sent by certified or registered mail, (iii) one (1) day
after date of delivery to the overnight courier if sent by overnight courier,
or (iv) the next business day after the date of transmission by facsimile.
13. SEVERABILITY. If any provision of this Agreement or the
application of any such provision to any party or circumstances shall be
determined by any court of competent jurisdiction to be invalid and
unenforceable to any extent, the remainder of this Agreement or the application
of such provision to such person or circumstances other than those to which it
is so determined to be invalid and unenforceable shall not be affected, and
each provision of this Agreement shall be validated and shall be enforced to
the fullest extent permitted by law. If for any reason any provision of this
Agreement containing restrictions is held to cover an area or to be for a
length of time that is unreasonable or in any other way is construed to be too
broad or to any extent invalid, such provision shall not be determined to be
entirely null, void and of no effect; instead, it is the intention and desire
of both the Company and Laves
- 6 -
<PAGE> 7
that, to the extent that the provision is or would be valid or enforceable
under applicable law, any court of competent jurisdiction shall construe and
interpret or reform this Agreement to provide for a restriction having the
maximum enforceable area, time period and such other constraints or conditions
(although not greater than those contained currently contained in this
Agreement) as shall be valid and enforceable under the applicable law.
14. SURVIVORSHIP. The respective rights and obligations of the
parties hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
15. HEADINGS. All descriptive headings of sections and paragraphs
in this Agreement are intended solely for convenience of reference, and no
provision of this Agreement is to be construed by reference to the heading of
any section or paragraph.
16. WITHHOLDING TAXES. All salary, benefits, reimbursements and
any other payments to Laves under this Agreement shall be subject to all
applicable payroll and withholding taxes and deductions required by any law,
rule or regulation of and federal, state or local authority.
17. APPLICABLE LAW: JURISDICTION. The laws of the State of
Illinois shall govern the interpretation, validity and performance of the terms
of this Agreement, without reference to rules relating to conflicts of law.
Any suit, action or proceeding against Laves with respect to this Agreement, or
any judgment entered by any court in respect thereof, may be brought in any
court of competent jurisdiction in the State of Illinois, as the Company may
elect in its sole discretion, and Laves hereby submits to the nonexclusive
jurisdiction of such courts for the purpose of any such suit, action,
proceeding or judgment.
18. INTERPRETATION AND CONSTRUCTION. Each of the parties to this
Agreement has been represented by their own counsel, each has reviewed and
approved this Agreement as executed, and neither party shall be charged with
the responsibility of having drafted any provision of this Agreement so as to
cause any rule of strict construction to be applied against such party.
- 7 -
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first above written.
ILLINOIS SUPERCONDUCTOR CORPORATION
By: _____________________________
Ora E. Smith
President
_____________________________
EDWARD LAVES
- 8 -
<PAGE> 1
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
Employment Agreement dated and effective as of January 1, 1997, (this
"AGREEMENT"), between ILLINOIS SUPERCONDUCTOR CORPORATION, a Delaware
corporation (with its successors and assigns, referred to as the "COMPANY"),
and ORA E. SMITH ("SMITH").
PRELIMINARY STATEMENT
Smith is now employed as the president and chief executive officer of
the Company.
The Company desires to continue to employ Smith, and Smith wishes to
continue to be employed by the Company, upon the terms and subject to the
conditions set forth in this Agreement. The Company and Smith also wish to
enter into the other agreements set forth in this Agreement, all of which are
related to Smith's employment under this Agreement.
AGREEMENT
Smith and the Company therefore agree as follows:
1. EMPLOYMENT FOR TERM. The Company hereby employs Smith and Smith
hereby accepts employment with the Company for the period beginning on January
1, 1997 and ending on December 31, 1997 (the "TERM"), or upon the earlier
termination of the Term pursuant to Section 6 below. The end of the Term for
any reason shall end Smith's employment under this Agreement, but shall not
terminate Smith's or the Company's other obligations set forth in this
Agreement.
2. POSITION AND DUTIES. During the Term, Smith shall serve as the
president and chief executive officer of the Company. During the Term, Smith
shall also hold such additional positions and titles as the Board of Directors
of the Company (the "BOARD") may determine from time to time. During the Term,
Smith shall devote substantially all of his business time and best efforts to
his duties as an employee of the Company.
3. COMPENSATION.
(a) BASE SALARY. The Company shall pay Smith a base salary,
beginning on the first day of the Term and ending on the last day of the Term,
of not less than $203,960 per annum, payable at least monthly on the Company's
regular pay cycle for professional employees.
(b) OTHER AND ADDITIONAL COMPENSATION. Section 3(a) establishes a
minimum salary during the Term, and shall not preclude the Board from awarding
Smith a higher salary or any bonuses or stock options in the discretion of the
Board during the Term at any time.
<PAGE> 2
4. EMPLOYEE BENEFITS. During the Term, Smith shall be entitled to
the employee benefits, including vacation, health and other insurance benefits,
and deferred compensation arrangements, made available by the Company to any
other employee of the Company. During the Term, Smith shall also be entitled
to a car allowance of $650 per month, or such greater amount as the Board shall
determine in its discretion.
5. EXPENSES. The Company shall reimburse Smith for actual
out-of-pocket expenses incurred by him in the performance of his services for
the Company (in accordance with the Company's policy for such reimbursements
applicable to the Company's executive officers on the same terms generally
offered to such officers), upon the receipt of appropriate documentation of
such expenses.
6. TERMINATION.
(a) GENERAL. The Term shall end immediately upon Smith's death. The
Company may end the Term at any time for any reason or no reason, with or
without "Cause" (as defined in Section 7(a) below) in the absolute discretion
of the Board (but subject to the Company's obligations under this Agreement).
(b) NOTICE OF TERMINATION. Promptly after it ends the Term, the
Company shall give Smith notice of the termination, including a statement of
whether the termination was for Cause. The Company's failure to give notice
under this Section 6(b) shall not, however, affect the validity of the
Company's termination of the Term.
7. SEVERANCE BENEFITS.
(a) "CAUSE" DEFINED. "Cause" means (i) willful malfeasance or
willful misconduct by Smith in connection with his employment; (ii) Smith's
gross negligence in performing any of his duties under this Agreement; (iii)
Smith's conviction of, or entry of a plea of guilty to, or entry of a plea of
nolo contendere with respect to, any crime other than a traffic violation or
infraction which is a misdemeanor; (iv) Smith's willful breach of any written
policy applicable to all employees adopted by the Company concerning conflicts
of interest, political contributions, standards of business conduct or fair
employment practices, procedures with respect to compliance with securities
laws or any similar matters, or adopted pursuant to the requirements of any
government contract or regulation; or (v) material breach by Smith of any of
his agreements in this Agreement.
(b) TERMINATION WITHOUT CAUSE. If the Company ends the Term prior to
December 31, 1997, other than for Cause, or if Smith resigns as an employee or
officer of the Company prior to December 31, 1997, then the Company shall make
the "Severance Payments" (as defined below) to Smith for and during the
"Severance Period" (as defined below). The Severance Payment shall be payable
in proportionate amounts at least monthly
-2-
<PAGE> 3
on the Company's regular pay cycle for professional employees and (if the last
day of the Severance Period is not the last day of a pay period) on the last
day of the Severance Period.
For purposes of this Agreement: (i) the term "SEVERANCE PAYMENT"
means, for the period of 180 days from the commencement of the Severance
Period, an amount equal to Smith's base salary in effect on the day prior to
the date on which the Severance Period commences, and thereafter during the
Severance Period an amount equal to 50% of Smith's base salary in effect at the
time the Severance Period commenced; and (ii) the term "SEVERANCE PERIOD" means
the period commencing on the day following the date of termination of Smith's
employment with the Company and ending on the second anniversary of the date of
termination, subject to earlier termination as of the date that Smith commences
full time employment with any other person or entity.
(c) TERMINATION FOR ANY OTHER REASON. If the Company ends the Term
for Cause, or if the Term ends as a result of Smith's death, then the Company
shall have no obligation to pay Smith any amount, whether for salary, benefits,
bonuses, or other compensation or expense reimbursements of any kind, accruing
after the end of the Term, and such rights shall, except as otherwise required
by law, be forfeited immediately upon the end of the Term.
8. CONFIDENTIALITY, OWNERSHIP, AND COVENANTS OF NON-COMPETITION AND
NON-SOLICITATION.
(a) "COMPANY INFORMATION" AND "INVENTIONS" DEFINED. "COMPANY
INFORMATION" means all information, knowledge or data of or pertaining to (i)
the Company, and (ii) any other person, firm, corporation or business
organization with which the Company may do business during the Term, that is
not in the public domain (and whether relating to methods, processes,
techniques, discoveries, pricing, marketing or any other matters).
"INVENTIONS" collectively refers to any and all inventions, trade secrets,
ideas, processes, formulas, source and object codes, data, programs, other
works of authorship, know-how, improvements, discoveries, developments,
designs, and techniques regarding any of the foregoing.
(b) CONFIDENTIALITY. Except as provided in the next two
sentences, Smith covenants and agrees that all Company Information shall be
kept secret and confidential at all times during and after the end of the Term
and shall not be used or divulged by him outside the scope of his employment as
contemplated by this Agreement, except as the Company may otherwise expressly
authorize by action of the Board. In the event that Smith is requested in a
judicial, administrative or governmental proceeding to disclose any of the
Company Information, Smith will promptly so notify the Company so that the
Company may seek a protective order or other appropriate remedy and/or waive
compliance with this Agreement. If disclosure of any of the Company
Information is required, Smith may furnish the material so required to be
furnished, but Smith will furnish only that portion of the Company Information
that legally is required.
- 3 -
<PAGE> 4
(c) OWNERSHIP. Smith hereby assigns to the Company all of Smith's
right (including patent rights, copyrights, trade secret rights, and all other
rights throughout the world), title and interest in and to Inventions, whether
or not patentable or registrable under copyright or similar statutes, made or
conceived or reduced to practice or learned by Smith, either alone or jointly
with others, during the course of the performance of services for the Company.
Smith shall also assign to, or as directed by, the Company, all of Smith's
right, title and interest in and to any and all Inventions, the full title to
which is required to be in the United States government by a contract between
the Company and the United States government or any of its agencies. The
provisions of Sections 8(a), 8(b) and this Section 8(c) are not intended to
supersede or limit the effect of any prior confidentiality or proprietary
rights agreements previously executed by Smith.
(d) PERIOD DEFINED. "NON-COMPETITION PERIOD" means the period
beginning on the day following the date of termination of Smith's employment
with the Company and ending on the second anniversary of the date of
termination of Smith's employment with the Company.
(e) COVENANTS OF NON-COMPETITION AND NON-SOLICITATION. Smith
acknowledges that his services pursuant to this Agreement are unique and
extraordinary, that the Company will be dependent upon Smith for the
development and growth of its business and related functions, and that he will
continue to develop personal relationships with significant customers of the
Company and to have control of confidential information concerning, and lists
of customers of, the Company. Smith further acknowledges that the business of
the Company is international in scope and cannot be confined to any particular
geographic area. For the foregoing reasons, Smith covenants and agrees that
during the Non- Competition Period Smith shall not, directly or indirectly,
engage in, be financially interested in, represent, render any advice or
services to, or be employed by, any other business (conducted for profit or not
for profit) that is engaged in the development or production of (i) high
temperature superconducting materials, (ii) radio frequency filter devices, or
(iii) fault current limiter devices, in any such case for or related to uses
which are or could reasonably deemed to be competitive with the current or
currently contemplated business of the Company in the world. For the reasons
acknowledged by Smith at the beginning of this Section 8(e), Smith additionally
acknowledges, covenants, and agrees that, during the Non-Competition Period,
Smith shall not, directly or indirectly, whether on his own behalf or on behalf
of any other person or entity, in any manner (A) solicit the business of or
otherwise contact in any commercial capacity any person or entity that was a
customer, supplier, or contractor of the Company for the purpose of obtaining
business of the type performed by the Company, or (B) solicit for employment
any persons who were officers or employees of the Company upon the date of
termination of his employment hereunder or at any time during a ninety-day
period preceding such date, or aid any competitive business organization in any
attempt to hire any such officers or employees of the Company.
- 4 -
<PAGE> 5
(f) EQUITABLE REMEDIES. Smith acknowledges, covenants and agrees
that, in the event he shall violate any provisions of this Section 8, the
Company will not have an adequate remedy at law and will therefore be entitled
to enforce each such provision by temporary or permanent injunctive or
mandatory relief obtained in an action or proceeding, without the necessity of
proving damage or posting of any bond of any kind whatsoever, and without
prejudice to any other remedies that may be available at law or in equity. The
foregoing restrictions shall not preclude Smith from the ownership of not more
than three percent (3%) of the voting securities of any corporation whose
voting securities are registered under Section 12(g) of the Securities Exchange
Act of 1934, even if its business competes with that of the Company.
9. SUCCESSORS AND ASSIGNS.
(a) SMITH. This Agreement is a personal contract, and the rights
and interests that the Agreement accords to Smith may not be sold, transferred,
assigned, pledged, encumbered, or hypothecated by him. Smith shall not have
any power of anticipation, alienation or assignment of the payments
contemplated by this Agreement, all rights and benefits of Smith shall be for
the sole personal benefit of Smith, and no other person shall acquire any
right, title or interest under this Agreement by reason of any sale,
assignment, transfer, claim or judgment or bankruptcy proceedings against
Smith. Except as so provided, this Agreement shall inure to the benefit of and
be binding upon Smith and his personal representatives, distributees and
legatees.
(b) THE COMPANY. This Agreement shall be binding upon the Company
and inure to the benefit of the Company and of its successors and assigns,
including (but not limited to) any corporation that may acquire all or
substantially all of the Company's assets or business or into or with which the
Company may be consolidated or merged. This Agreement shall continue in full
force and effect in the event that the Company sells all or substantially all
of its assets, merges or consolidates, otherwise combines or affiliates with
another business, dissolves and liquidates, or otherwise sells or disposes of
substantially all of its assets. The Company's obligations under this
Agreement shall cease, however, if the successor to, the purchaser or acquiror
either of the Company or of all or substantially all of its assets, or the
entity with which the Company has affiliated, shall assume in writing the
Company's obligations under this Agreement (and deliver an executed copy of
such assumption to Smith), in which case such successor or purchaser, but not
the Company, shall thereafter be the only party obligated to perform the
obligations that remain to be performed on the part of the Company under this
Agreement.
10. ENTIRE AGREEMENT. Except as specifically set forth in a
separate letter agreement concerning certain matters related to the
relationship between Smith and the Company following the end of the Term, this
Agreement represents the entire agreement between the parties concerning
Smith's employment with the Company during the Term and supersedes all prior
negotiations, discussions, understandings and agreements, whether
- 5 -
<PAGE> 6
written or oral, between Smith and the Company relating to the subject matter
of this Agreement. The prior employment agreement between the Company and
Smith with respect to the period through December 31, 1996, shall remain in
full force and effect with respect to all matters addressed in such prior
employment agreement occurring on or before the effective date of this
Agreement.
11. AMENDMENT OR MODIFICATION, WAIVER. No provision of this
Agreement may be amended or waived unless such amendment or waiver is agreed to
in writing signed by Smith and by a duly authorized officer of the Company
other that Smith. No waiver by any party to this Agreement of any breach by
another party of any condition or provision of this Agreement to be performed
by such other party shall be deemed a waiver of a similar or dissimilar
condition or provision at the same time, any prior time or any subsequent time.
12. NOTICES. All notices, demands or other communications of any
kind to be given or delivered under this Agreement shall be in writing and
shall be deemed to have been properly given if (a) delivered by hand, (b)
delivered by a nationally recognized overnight courier service, (c) sent by
registered or certified United States Mail, return receipt requested and first
class postage prepaid, or (d) facsimile transmission followed by a confirmation
copy delivered by a nationally recognized overnight courier service. Such
communications shall be sent to the parties at their respective addresses as
follows:
If to Smith: Ora E. Smith
921 Fisher Lane
Winnetka, Illinois 60093
If to the Company: Illinois Superconductor Corporation
451 Kingston Court
Mt. Prospect, Illinois 60056
Attention: Chairman of the Board
with a copy to: Bruce A. Zivian, Esq.
Eilenberg & Zivian
30 N. LaSalle Street, Suite 2900
Chicago, Illinois 60602
Either party may change such address for delivery to the other party by
delivery of a notice in conformity with the provisions of this section
specifying such change. Notice shall be deemed to have been properly given (i)
on the date of delivery, if delivery is by hand, (ii) three (3) days after the
date of mailing if sent by certified or registered mail, (iii) one (1) day
after date of delivery to the overnight courier if sent by overnight courier,
or (iv) the next business day after the date of transmission by facsimile.
- 6 -
<PAGE> 7
13. SEVERABILITY. If any provision of this Agreement or the
application of any such provision to any party or circumstances shall be
determined by any court of competent jurisdiction to be invalid and
unenforceable to any extent, the remainder of this Agreement or the application
of such provision to such person or circumstances other than those to which it
is so determined to be invalid and unenforceable shall not be affected, and
each provision of this Agreement shall be validated and shall be enforced to
the fullest extent permitted by law. If for any reason any provision of this
Agreement containing restrictions is held to cover an area or to be for a
length of time that is unreasonable or in any other way is construed to be too
broad or to any extent invalid, such provision shall not be determined to be
entirely null, void and of no effect; instead, it is the intention and desire
of both the Company and Smith that, to the extent that the provision is or
would be valid or enforceable under applicable law, any court of competent
jurisdiction shall construe and interpret or reform this Agreement to provide
for a restriction having the maximum enforceable area, time period and such
other constraints or conditions (although not greater than those contained
currently contained in this Agreement) as shall be valid and enforceable under
the applicable law.
14. SURVIVORSHIP. The respective rights and obligations of the
parties hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
15. HEADINGS. All descriptive headings of sections and paragraphs
in this Agreement are intended solely for convenience of reference, and no
provision of this Agreement is to be construed by reference to the heading of
any section or paragraph.
16. WITHHOLDING TAXES. All salary, benefits, reimbursements and
any other payments to Smith under this Agreement shall be subject to all
applicable payroll and withholding taxes and deductions required by any law,
rule or regulation of and federal, state or local authority.
17. APPLICABLE LAW: JURISDICTION. The laws of the State of
Illinois shall govern the interpretation, validity and performance of the terms
of this Agreement, without reference to rules relating to conflicts of law.
Any suit, action or proceeding against Smith with respect to this Agreement, or
any judgment entered by any court in respect thereof, may be brought in any
court of competent jurisdiction in the State of Illinois, as the Company may
elect in its sole discretion, and Smith hereby submits to the nonexclusive
jurisdiction of such courts for the purpose of any such suit, action,
proceeding or judgment.
18. INTERPRETATION AND CONSTRUCTION. Each of the parties to this
Agreement has been represented by their own counsel, each has reviewed and
approved this Agreement as executed, and neither party shall be charged with
the responsibility of having drafted any provision of this Agreement so as to
cause any rule of strict construction to be applied against such party.
- 7 -
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first above written.
ILLINOIS SUPERCONDUCTOR CORPORATION
By: _______________________________
Steven Lazarus
Chairman of the Board
_______________________________
ORA E. SMITH
- 8 -
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-88716, Form S-8 No. 333-06003 and Form S-3 No. 333-02846) of
our report dated January 29, 1997, except for paragraph 8 of Note 6, for which
the date is March 7, 1997, with respect to the financial statements and
schedule of Illinois Superconductor Corporation included in the Annual Report
Form 10-K for the year ended December 31, 1996.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Chicago, Illinois
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,188,047
<SECURITIES> 500,313
<RECEIVABLES> 130,752
<ALLOWANCES> 0
<INVENTORY> 653,696
<CURRENT-ASSETS> 6,908,860
<PP&E> 7,863,337
<DEPRECIATION> 2,120,533
<TOTAL-ASSETS> 13,388,496
<CURRENT-LIABILITIES> 1,700,937
<BONDS> 0
0
0
<COMMON> 5,023
<OTHER-SE> 11,520,128
<TOTAL-LIABILITY-AND-EQUITY> 13,388,496
<SALES> 209,822
<TOTAL-REVENUES> 209,822
<CGS> 49,534
<TOTAL-COSTS> 49,534
<OTHER-EXPENSES> 11,548,371
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,602
<INCOME-PRETAX> (10,913,774)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,913,774)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,913,774)
<EPS-PRIMARY> (2.41)
<EPS-DILUTED> (2.41)
</TABLE>
