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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, 1997
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
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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. x
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 27, 1998 was $15,888,263.
The number of shares outstanding of the registrant's Common Stock, par
value $.001, as of March 27, 1998 was 11,392,543.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Definitive Proxy Statement in connection with the
registrant's 1998 Annual Meeting Of Stockholders', scheduled to be held on June
11, 1998, are incorporated by reference into Part III of this Annual Report on
Form 10-K.
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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 Section 21E
of the Securities Exchange Act of 1934, as amended) that reflect the Company's
current expectations regarding the future results of operations, performance and
achievements of the Company. These forward-looking statements are made
pursuant to the safe harbor provisions of 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 "anticipates",
"believes", "estimates", "expects", "plans", "intends" 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 contingencies, which could cause
the Company's actual results, performance or achievements to differ materially
from those expressed in, or implied by, such statements. These factors include,
among others, the following: the Company's ability to obtain additional
financing; demand for, and acceptance of, the Company's products; the timing
and receipt of customer orders; the Company's ability to manufacture commercial
quantities on an efficient and cost-effective basis; business conditions in the
wireless telephony industry; the effects of legal proceedings and other factors
described in this Form 10-K or in other filings of the Company with the
Securities and Exchange Commission, including those described under the heading
"Risk Factors" in the Company's Registration Statement on Form S-3 filed in
December 1997. 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 front-end
equipment products for wireless telephony base stations based upon its
proprietary multi-pole cavity radio frequency ("RF") filter designs which
utilize the Company's proprietary high temperature superconductor ("HTS")
materials and cryogenic packaging technologies to attain superior filter
performance.
RF filters refine the radio signals by passing radio waves through a
series of resonators (poles) which allow certain frequencies to pass while
rejecting other frequencies. The more poles in the RF filter, the more
effective the RF filter. Each pole, however, has electrical resistance which
causes the loss (insertion loss) of desired radio waves. Therefore, the more
poles in a conventional RF filter, the greater the insertion loss. The
advantage of using superconductors in RF filters is that more poles can be
added without significant increases in insertion loss. Adding superconductors
does not, however, change the fundamental fact that filter performance depends
upon the number of poles. The Company's RF filters have up to 24 poles which
the Company believes is significantly greater than any other commercially
available filter.
Filters can be designed with a variety of structures including
stripline, microstrip, cavity, dielectric, and waveguide. The Company is able
to produce RF filters using any of these technologies, but has focused on
cavity filters because of their high performance and tuning flexibility. The
Company uses its proprietary thick-film superconducting technology for its RF
filters. The Company believes that relative to other superconducting materials
technologies, thick-film provides for higher RF filter performance and lower
distortion levels. In addition, thick-film technology does not require clean
rooms for manufacturing. Superconductors become superconducting at
temperatures of roughly -200 degrees celcius. These temperature levels can be
maintained using commercially available mechanical cooling systems. The
Company has developed packaging systems which are highly reliable over longer
durations and minimize operating costs.
The wireless telephony industry has experienced significant growth in
recent years which has led to rapid growth in base station installations and
increased competition among service providers. Intensifying competition has
challenged operators to minimize capital expenditures per subscriber, enhance
quality, and improve coverage. The Company's RF front-end equipment products
address these needs by improving system quality, decreasing the number of cell
sites needed, and allowing more flexible placement of new cell sites.
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The Company's ultra-high performance RF front-end products, which utilize
multi-pole cavity filter technology, offer the following system 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;
- capital expenditure per subscriber is reduced because operators attain
improved coverage with fewer base stations. Coverage gaps between base
stations are also reduced because the radio range of these base stations
is frequently extended on the uplink (receive) communications path;
- network capacity is often increased because channels which were previously
unusable now because available and efficient channel utilization is
improved;
- locating new cell sites is simplified because wireless telephony operators
can better tolerate RF interference from nearby transmitters;
- power amplifier design is expected to be simplified because of high
performance, low loss filtering; and
- the Company expects improved transmit path range and capacity through the
use of high performance combiners, which are currently being developed by
the Company.
The Company currently markets three product lines to address the needs
of wireless telephony service providers. The SpectrumMaster(R) product line
improves the RF performance of cellular and Personal Communications Services
("PCS") systems in high interference environments, including urban areas and
airport properties. SpectrumMaster(R) is available with up to 24 poles
depending upon specific customer needs. The RangeMaster product line combines
the superior filtering of SpectrumMaster(R) RF filters with super-cooled low
noise amplifiers ("LNA"). RangeMasterTM extends system range for more cost
effective coverage in suburban, rural, or small city systems. The
PowerMasterTM product line brings the benefits of ultra high performance
filtering to the downlink (transmit) side of the communications path.
PowerMasterTM duplexer is designed to improve system range, improve system
quality, and allow co-location with other service providers. The Company is
developing the PowerMasterTM combiner, which it expects to improve the range and
capacity of multi-carrier Code Division Multiple Access ("CDMA") systems. All
of the Company's currently offered products are available in both domestic and
international frequencies and are offered in a variety of mounting
configurations.
The Company has received orders from ten wireless telephony service
providers which are located in the United States, Canada and Asia, including
six of the top ten cellular operators in the United States. The Company has
also sold its products to two smaller U.S. operators. Its filters are now
installed in 36 cell sites in 20 different market areas across the United
States. In 1997, commercial orders from service providers were generally for
one or two operational cell sites, with the largest order having been for five
cell sites. The Company expects that the average size of its commercial orders
will increase. The Company's newest product line, the PowerMasterTM line of
transmit filters, has generated significant interest from the Original
Equipment Manufacturers ("OEM") that supply cellular and PCS systems to the
service providers. Laboratory testing and discussion of specifications are
ongoing with several major OEMs. The Company believes its thick-film
superconductor technology is unique in its ability to handle high powered
transmit applications while maintaining very low levels of intermodulation
distortion.
INDUSTRY BACKGROUND
The wireless telephony industry has experienced significant growth, both
domestically and internationally, in recent years. This growth appears to be
due to the increasing popularity of wireless telephony, the entry of new
service providers into the market as governments open up new RF spectrum, the
continuing decline in the price of service and wireless telephones, and the
introduction of new service features. Rapid growth has intensified RF
interference while increasing operators' demand for improved system quality,
lower capital expenditures per subscriber, and co-location of antennas with
other RF transmitters.
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In the United States, subscribers to wireless telephony services now
frequently have a choice of at least four service providers who are competing
for their allegiance. New digital technologies such as Global System for
Mobile Telecommunications ("GSM"), CDMA, and Time Division Multiple Access
("TDMA") allow operators to offer such advanced features as short message
service, fax and Internet access. Wireless systems are also starting to be
marketed as a convenient and economical alternative to regular wireline
telephone service. In addition, service providers are also trying to
differentiate themselves on the basis of quality, price, coverage, and advanced
service features.
Industry statistics demonstrate the rapid growth of the wireless
telephony industry. The Cellular Telecommunications Industry Association
("CTIA") reports that as of March 1998 there were over 55 million wireless
subscribers in the United States. Industry publications indicate that the
worldwide wireless telephony market was approximately three times the size of
such market in the United States at the end of 1997 for an estimated total
worldwide wireless subscriber base of approximately 150 million subscribers.
CTIA reports that there were over 36,000 base stations in the United States at
the end of 1997 and the Company believes there are approximately 90,000 base
stations world wide. The Company further believes that this number is growing
at a rate of over 35% per year. For example, industry sources estimate that
over 100,000 new base stations will be built in the United States over the
next four years. The Company estimates that the need to provide improved
service on a cost effective basis in an increasingly congested environment will
lead service providers to invest in new infrastructure technologies such as
high performance RF filters.
The rapid growth and increased competition experienced by the wireless
telephony industry have increased the difficulty of providing quality wireless
services. Wireless service providers face the challenge of providing quality
services in an environment 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.
Many communities are objecting to the proliferation of new towers to provide
wireless services. Base stations which provide the link between a wireless
user and the telecommunications network are being positioned closer together
and 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. 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, new PCS service
providers need to deploy coverage quickly and with the lowest possible capital
investment.
The Company believes that in order to improve quality and manage
growth, system providers will invest in new infrastructure technologies, such
as high performance RF filters or transmitters. 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 creates opportunities for
new equipment suppliers.
THE COMPANY'S SOLUTION
The Company's products are designed to address the high performance RF
front-end needs of domestic and international commercial wireless telephony
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 and
all installations in urban cellular locations, the Company's RF filter
products have 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 and commercial installations, the Company's
RF filter products have also demonstrated a similar 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.
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- IMPROVED BASE STATION RANGE. The Company's RF front-end systems (high
performance filter and super-cooled LNA) extend the uplink range of a
wireless system by up to 30%. Greater range can reduce a service
operator's capital expenditure per subscriber in lower density areas by
filling in coverage gaps in existing systems or by reducing the number of
required cell sites for new system deployments.
- GREATER NETWORK CAPACITY AND UTILIZATION. The Company's RF
front-end 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 because of lower levels 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 IN LOCATING BASE STATIONS. The Company's RF
front-end products allow wireless telephony service providers to co-locate
base stations near other RF transmitters. The Company's products allow
the base station radio to better tolerate RF interference while reducing
out-of-band signals that could interfere with other nearby wireless
telephony operators.
- SIMPLER TRANSMITTER SYSTEM DESIGNS. The Company believes that its line of
RF transmit filters can allow for simpler less costly transmitters,
particularly for digital systems. This should improve performance while
diminishing system costs.
- IMPROVED DIGITAL SYSTEM CAPACITY. The Company believes that the line
of transmit combiners currently under development should allow increased
capacity and range in CDMA systems as system loading increases. CDMA
systems appear unable to offer multi-carrier systems without the use of a
combiner, but traditional combiners reduce the power transmitted from the
base station antenna. The Company's high power filter technology should
allow operators to use combiners with lower loss of desired signals.
PRODUCTS
The Company currently offers three products lines, SpectrumMaster(R),
RangeMasterTM, and PowerMasterTM to serve a variety of system challenges
faced by wireless telephony system operators. Each product line is available
in a variety of performance levels to meet the varying needs of different
operators and in several mounting configurations to fit specific customer
situations. All of the Company's currently offered products can be supplied in
domestic and international frequencies for both cellular (800 Mhz) and PCS
(1.9 Ghz) applications.
The Company believes that SpectrumMaster(R) is the world's highest
performance commercial receive pre-select RF filter for wireless telephony cell
sites. SpectrumMaster(R) improves the performance of cellular and PCS systems
in high interference environments such as urban areas and airport properties.
SpectrumMaster(R) is available in two models. SpectrumMaster(R) Ultra is a very
high performance filter with 24 filter poles for extremely congested RF
environments. Ultra provides 10,000 times better rejection of unwanted signals
then conventional filters, while losing very little of the desired signal.
SpectrumMaster(R) Classic is a 16 pole filter and provides 1,000 times better
rejection then conventional filters while having very low loss of desired
signals and extremely linear filter response. Both SpectrumMaster(R) models
meet all analog and digital protocol specifications for cellular and PCS
systems in the United States. SpectrumMaster's(R) modular design allows rapid
design modification to meet other customer requirements. The Company sold its
first SpectrumMaster(R) product to cellular service providers in the second
half of 1996 and continued sales of SpectrumMaster(R) in 1997.
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RangeMasterTM combines a high performance superconducting cavity filter
with a high performance super-cooled LNA to lower noise resulting from
interference and thermal noise. Lowering noise extends radio propagation range
by up to 30%. RangeMasterTM is available in two models. RangeMasterTM Classic
combines the 16 pole SpectrumMaster Classic with a high performance
super-cooled LNA to reduce signal noise resulting from both interference and
amplifier thermal noise. RangeMasterTM Omega combines a high performance eight
pole superconducting filter with the Company's high performance super-cooled
LNA to provide range extension for rural locations at an economical price.
RangeMasterTM meets all analog and digital protocol specifications for
cellular and PCS systems in the United States RangeMaster'sTM modular design
allows rapid design modification to meet other customer requirements. The
Company shipped its first RangeMasterTM product to cellular service providers
in the first quarter of 1997. The Company field tested a PCS version of
RangeMasterTM with a major U.S. PCS operator in the fourth quarter of 1997.
PowerMasterTM is a family of high performance transmit filter systems
for use in the base stations of wireless telephony operators. The Company began
marketing its two models of PowerMasterTM products -- a transmitter filter and
a duplexer -- in February 1997. These PowerMasterTM products, which incorporate
the Company's new power handling technology, are used in transmit applications.
Unique to the Company, this technology extends the Company's filter
applications to include transmit, in addition to the receive applications
already in commercial use. PowerMasterTM duplexer is expected to improve system
quality, extend range and simplify the location of cell sites for both cellular
and PCS systems. PowerMasterTM technology provides an ultra-high performance
duplexer, which handles continuous power levels of up to 30 watts and is
designed for use in 1.9Ghz PCS service. The PowerMasterTM duplexer allows a
PCS operator to obtain the benefits of very high performance filtering on both
the forward and reverse paths in a system. These benefits include improved
call quality, extended range, improved transmit/receive isolation, and a
reduction in the transmit amplifier output power required to achieve forward
path coverage. The Company is currently developing a PowerMasterTM combiner,
which is a low-loss transmit combiner with superior separation. The Company
expects to begin OEM customer testing of the PowerMasterTM combiner in the
first half of 1998.
International Cellular Products Offerings. The Company is adapting its
SpectrumMaster(R), RangeMasterTM, and PowerMasterTM product lines for
international wireless markets to address their specific interference rejection
and range extension needs. The Company is developing products for both Asian
and European cellular and PCS markets, including GSM filters in various
configurations. In December 1997, the Company sold two SpectrumMaster(R) units
to its first international customer, a major Asian cellular operator, as a
basis for potential nationwide deployment in the operator's CDMA networks.
TECHNOLOGY
The Company possesses proprietary technology in three areas: the design of
high performance RF cavity filters, thick-film superconducting materials
fabrication and cryogenic packaging.
The Company's products are based on its proprietary RF cavity filter
designs. The Company believes that cavity filter technology provides superior
filter performance with lower intermodulation distortion when compared with
alternative technologies, such as RF stripline filter technology (which the
Company is also capable of using). The Company has been able to use its cavity
filter technology to offer filters with up to 24 poles. The more poles in a
filter, the better its rejection of unwanted signals. The Company believes
its products are superior to other RF filters with regard to rejection of
unwanted signals.
The Company is able to offer RF cavity filters with superior filtering,
low loss of unwanted signals, and high power handling because of its
proprietary thick-film superconducting fabrication technology. The Company's
thick-film fabrication technology allows the Company to utilize a variety of
filter technologies including cavity and strip line designs. The Company's
superconducting technology is simple and inexpensive to manufacture and offers
superconducting yields well above 90%. The Company believes the electrical
performance of the Company's products are superior to any alternative
superconducting technology currently being developed for RF devices today. The
Company's thick-film superconducting technology can handle up to 30 watts of
continuous power at PCS frequencies.
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High temperature superconductors become superconducting at -200 C. This
temperature can be attained using widely available mechanical refrigerators.
The Company has developed proprietary technologies which provide an efficient,
low cost cryogenic package with a long life cycle and minimum power
consumption. Together, the Company believes that its technological excellence
in filter design, superconducting materials and cryogenic packaging provide it
with a unique and well-protected technology lead over its competitors.
SALES AND MARKETING
The Company has focused its sales and marketing effort on U.S. cellular
service providers for retrofit applications. To date, the Company has sold its
products to six of the top ten cellular operators in the U.S. as well as to
two smaller United States operators. The Company has also sold filters to two
major international operators and has successfully tested its PCS RangeMasterTM
product with one of the largest U.S. PCS operators. The Company has also
tested its PowerMasterTM line with two major OEMs and is discussing
specifications with other large OEMs. The Company primarily uses a direct
sales force to sell its products.
The Company has recently emerged from the development stage and
believes it has entered the volume purchase stage of commercial development.
Until recently, most purchases were for one or two cell sites, with the largest
order having been for five cell sites. At the end of 1997, the Company began to
see an increase in order size. The Company has begun the stage of
commercialization with a new structure for achieving system-wide orders for its
products, whereby customers, through a corporate purchase agreement, give
direct purchase capabilities to their operating regions. One major operator
recently placed an order for fifteen cell sites worth of the Company's
products. Another major operator, Bell Atlantic Mobile, executed a corporate
purchase agreement. The Company is currently negotiating a second corporate
purchase agreement with another major U.S. operator, and, based on indications
from other major operators, the Company believes it will enter into corporate
purchase agreements with other major operators in the future. The Company
believes that it has reached this stage of sales development by a systematic
process of testing, small-scale implementation, and growing relationships with
its customers.
The Company also believes that the sales cycle of its RF products
shortened dramatically at the end of 1997. Previously, a period of six to
nine months was required to complete the sales cycle to first orders. By the
end of 1997, however, the Company's sales cycle began shortening, in some
cases, to less than two months from first discussions to the receipt of
commercial orders. The Company believes that this improvement is due to
increasing customer confidence in the Company's technology and customer
support.
The Company's marketing and sales personnel work directly with both PCS
service providers and PCS OEMs to enhance the probability of sales success in
this rapidly growing market. The Company is undergoing technical discussions
with two PCS OEM's regarding integrating the Company's RF filter products into
such OEM's PCS product line. To date, the Company's PowerMasterTM PCS
transmit filter/duplexer has been tested in the laboratories of two PCS
equipment OEMs.
MANUFACTURING
The Company's state-of-the-art manufacturing process provides
predictable product yields and can be easily expanded to meet increased
customer demand. Superconducting component yields are now consistently above
90%, with low scrap levels. Manufacturing costs were reduced by 50% during
1997 due to volume, design and yield efficiencies, and the Company expects
further cost reductions in 1998 and beyond. 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 and quality verification
of the Company's products. All of these activities occur at the Company's
manufacturing facility in Mount Prospect, Illinois, which began operations
during 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 for its filter products, except for superconducting components,
from third party suppliers. The Company believes it has access to adequate
supplies of these purchased components, most of which are produced according 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.
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RESEARCH AND DEVELOPMENT
The Company's research and development ("R&D") efforts have been focused
on developing and improving RF filter products for wireless telephony systems.
Filter performance has been improved, product size has been reduced, costs have
been lowered, reliability has been increased, and packaging has been
streamlined. The Company expects to continue to invest in R&D to further
improve and adapt its filter products to meet and exceed market expectations.
The Company also intends to develop related products that are synergistic with
its core filter offerings and which utilize the Company's core technical
competencies in RF design, superconducting materials, and cryogenic cooling
systems.
The Company's total R&D expenses during 1995, 1996 and 1997 were
approximately, $5,205,000, $6,623,000 and $4,132,000, respectively. R&D costs
reimbursed under government contracts and cooperative agreements during 1995,
1996 and 1997 were approximately $650,000 $200,000, and $0, respectively.
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, 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 National
Laboratory ("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 16, 1998, the Company has been issued seven U.S.
patents and has filed and is actively pursuing applications for 26 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
Technologies 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
Yttrium Barium Copper Oxide (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 United States 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 Development Corporation 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 Small
Business Innovation Research ("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.
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STRATEGIC RELATIONSHIPS
During 1997, the Company retained Salomon Brothers to advise and assist it
in establishing strategic industry relationships with one or more major
electronics companies. The Company believes that such strategic industry
relationships will benefit it by (i) providing the Company with access to the
technical and financial resources of its partner(s); (ii) providing the Company
with international distribution channels, and (iii) offering the Company
greater credibility with potential customers. To date, no such relationship
has been entered into by the Company.
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.
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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 RF filter products, other companies including Hazeltine
Corp., Metawave Communications Corporation, Allen Telecom Group, Inc., Repeater
Technologies, Inc. and Array Com, Inc., among others, are developing products
based on "smart" antenna, digital signal processing technologies, microcells
and repeaters 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.
Various filter companies appear to be experimenting with cooled dielectric
filters or with filters that combine dielectric materials and superconducting
technology. K&L Microwave, Inc. has been experimenting with a cooled
dielectric filter design. In addition, COM DEV International, Ltd. a Canadian
corporation, has published research in which a dielectric material is mounted
on a superconducting ground plane. The Company does not believe that either of
these efforts currently pose a competitive threat but cannot exclude them as
competition to the Company's product lines at some point in the future.
Two other companies, Conductus, Inc. and Superconducting Technologies,
Inc. are currently attempting to market superconducting filters to the wireless
telephony marketplace. A previous competitor, Superconducting Core
Technologies, Inc. recently ceased commercial operations. In addition, a number
of large multinational companies are engaged in R&D programs that could lead to
the commercialization of superconducting filters for the wireless telephony
marketplace. These include, among others, E.I. DuPont de Nemours & Co.,
Fujitsu Corporation, NEC Corporation, Kyocera Corporation, and Matsushita
Electric Industrial Co., Ltd. The Company believes that all of these companies
are working on RF stripline filters using epitaxial thin film superconducting
technology. The Company believes that RF stripline superconducting filters,
while smaller, are technically unable to provide equivalent rejection of
unwanted signals, competitively low levels of intermodulation distortion, as
large a number of filter poles, or similar levels of power handling.
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 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.
10
<PAGE> 11
EMPLOYEES
As of February 28, 1998, the Company had a total of 63 employees, 13 of
whom hold advanced degrees. Of the employees, 21 are engaged in manufacturing
and production, 21 are engaged in research, development and engineering, and 21
are engaged in general management, marketing, finance and administration. The
Company also periodically 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.
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 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 10, 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 the parties are in the midst of discovery. 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.
On July 10, 1997, the Company filed a complaint against Sheldon Drobny;
Howard L. "Buzz" Simons, joint tenant with Aric and Corey Simons; Aaron
Fischer; Stewart Shiman; Sharon D. Gonsky, d/b/a SDG Associates; Gregg
Rosenberg; Stacey Rosenberg; Merrill Weber & Co., Inc.; Drobny/Fischer
Partnership, an Illinois general partnership; and Rueben Rosenberg
(collectively, the "Borrowers"), and Paradigm Venture Investors, L.L.C. (the
"Guarantor") in the Circuit Court of Cook County, Illinois, County Department,
Law Division. The complaint seeks to enforce the terms of loans made to the
Borrowers by the Company and evidenced by promissory notes dated December 12,
1996, in the aggregate principal amount of $698,508 and the guarantee by the
Guarantor of the Borrowers' obligations under these promissory notes. The
Borrowers' notes were issued to the Company in connection with the Borrowers'
exercise of warrants to purchase shares of the Company's common stock (the
"Common Stock") in December 1996.
11
<PAGE> 12
On September 30, 1997, the Borrowers and the Guarantor responded to the
Company's complaint and filed a counterclaim alleging that they exercised the
warrants in reliance on the Company's alleged fraudulent representations to one
of the Borrowers concerning a third-party's future underwriting of a secondary
public offering of the Common Stock. The counterclaim sought an amount of
damages which the Borrowers allege "cannot currently be determined." On
October 21, 1997, the Company filed a motion to strike the Borrowers' fraud
defense and dismiss their counterclaim.
Following the submission of briefs, the court granted the Company's motion
to dismiss at a hearing on December 10, 1997. On January 14, 1998, the
Borrowers filed amended defenses and counterclaims based on substantially
similar allegations of supposed fraud by the Company. The Company regards the
amended fraud claim as without factual or legal merit and the Company intends
to vigorously pursue this litigation. Accordingly, on January 29, 1998, the
Company filed a motion to strike the Borrowers' amended fraud defense and
dismiss their amended counterclaims. Following the submission of briefs, the
court scheduled a hearing on the Company's motion for April 2, 1998.
On November 21, 1997, a stockholder, Sheldon Drobny, sued the Company and
seven of its former or current directors: Edward W. Laves, Leonard A.
Batterson, Paul G. Yovovich, Peter S. Fuss, Steven Lazarus, Tom L. Powers and
Ora E. Smith (collectively, the "Directors") in the Circuit Court of Cook
County, Illinois, County Department, Law Division. The complaint alleged that
the Directors breached their duties of loyalty and due care to Mr. Drobny by
selecting financing for the Company in June 1997 which supposedly entrenched
the Directors, eroded the Common Stock price and diluted Mr. Drobny's equity in
the Company. Mr. Drobny's complaint sought an unspecified amount of
compensatory damages in excess of $50,000.
The Company and the Directors regard the suit as without factual or legal
merit. Accordingly, on January 16, 1998, the Company and the Directors filed a
motion to dismiss Mr. Drobny's complaint. The motion presented arguments that
Mr. Drobny's claims are barred by the business judgment rule, Mr. Drobny lacks
standing to assert his claims against the Directors and the complaint has
various technical pleading defects. To date, Mr. Drobny has not responded to
the Company's and the Directors' motion to dismiss. Instead, Mr. Drobny filed
a motion seeking voluntary dismissal of his complaint on February 25, 1998.
Mr. Drobny's motion alleges that he "wishes to become part of the class action"
filed by Mr. Lipman (as described below), "instead of prosecuting [his]
separate but parallel case." On March 11, 1998, the court continued Mr.
Drobny's motion for voluntary dismissal and then scheduled a further hearing on
that motion for May 1, 1998.
On January 6, 1998, Jerome H. Lipman, individually and on behalf of all
others similarly situated, filed a complaint against the Company and eight of
its former or current directors: Leonard A. Batterson, Michael J. Friduss,
Peter S. Fuss, Edward W. Laves, Steven Lazarus, Tom L. Powers, Ora E. Smith and
Paul G. Yovovich (collectively, the "Board") in the Circuit Court of Cook
County, Illinois, County Department, Chancery Division. The complaint alleged
that the Board breached its duty of loyalty and due care to the putative class
of stockholders by selecting financing for the Company in June 1997 which
supposedly entrenched the Board and reduced the Common Stock price. The
complaint also alleged that the Board breached its duty of disclosure by not
informing the stockholders that the selected financing would erode the Common
Stock price. Mr. Lipman's complaint sought certification of a class consisting
of all owners of the Company's Common Stock during the period from June 6, 1997
through November 21, 1997, excluding the Board and Sheldon Drobny. The
complaint also seeks an unspecified amount of compensatory and punitive
damages, and attorneys' fees.
The Company and the Board regard the suit as without factual or legal
merit. Accordingly, on February 17, 1998, the Company and the Board filed a
motion to dismiss Mr. Lipman's complaint. The motion presented arguments that
the claims of Mr. Lipman and the putative class are barred by the business
judgment rule and the plaintiff's failure to fulfill the legal prerequisites
for filing an action against the Board. Following the completion and filing of
briefs, the Company's and the Board's motion to dismiss will be decided at a
hearing scheduled by the court for May 1, 1998.
12
<PAGE> 13
On March 16, 1998, Mr. Lipman filed a motion seeking both to amend his
proposed putative class to include Mr. Drobny and to certify the class. That
motion is set for an initial hearing on March 30, 1998, at which time the court
may schedule further proceedings on Mr. Lipman's motion to amend and certify
the proposed putative class.
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 1997.
[THIS SPACE IS INTENTIONALLY LEFT BLANK]
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<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's 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:
<TABLE>
<S> <C> <C>
HIGH LOW
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
FISCAL YEAR ENDING DECEMBER 31, 1997
First Quarter...................... $18.24 $15.48
Second Quarter..................... $12.40 $ 8.00
Third Quarter...................... $ 9.48 $ 7.24
Fourth Quarter..................... $ 3.32 $ 1.24
</TABLE>
On March 27, 1998, the last reported sale price for the Common Stock was
$1.40625 and there were approximately 278 holders of record of the Common Stock.
The Company has never 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. Dividends on the Company's outstanding shares of Series B
Convertible Preferred Stock ("Series B Stock"), Series C Convertible Preferred
Stock ("Series C Stock") and Series G Convertible Preferred Stock ("Series G
Stock") are payable at the rate of 5% per annum and are payable in cash or
shares of Common Stock at the Company's option. To date, all dividends paid by
the Company on its Series B Stock, Series C Stock and Series G Stock have been
in the form of shares of Common Stock. As of March 23, 1998, the Company's
Series B Stock is no longer outstanding. While the Series C or Series G Stock
is outstanding, the Company is limited in its ability to pay dividends on
Common Stock.
On October 29, 1997, the Company issued 290 additional shares of Series C
Stock to Southbrook International Investments, Ltd. ("Southbrook"), 10 shares
of Series C Stock to Brown Simpson Strategic Growth Fund, L.P. ("Brown
Simpson"), and 350 shares of Series G Stock to each of Elliott Associates, L.P.
and Westgate International, L.P. for $5,000 per share, or a total of $5
million. Dividends on the Series C Stock and Series G Stock are payable at the
rate of 5% per annum and are payable in cash or shares of Common Stock at the
option of the Company. The Series C Stock and Series G Stock are convertible
into Common Stock at a conversion price equal to the lesser of (a) $8.05 or (b)
101% of the average of the lowest per share market value for the five
consecutive trading days during the 60 trading days immediately preceding the
date of conversion. This conversion ratio is subject to adjustment.
The sales of the Series C Stock and Series G Stock were exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Act"), pursuant to Section 4 (2) of the Act and/or Regulation D promulgated
thereunder as transactions by an issuer not involving a public offering, in
that the transactions involved the issuance and sale by the Company of its
securities to financially sophisticated institutions, which represented that
they were aware of the Company's activities and business and financial
condition, and which represented that they acquired such securities for
investment purposes for their own accounts and not for distribution. All
certificates representing the Series C Stock and Series G Stock have been
legended. The Company registered for resale under the Act the shares of Common
Stock into which the Series C Stock and Series G Stock issued on October 29,
1997 are convertible, which registration statement was declared effective by
the Securities and Exchange Commission on December 19, 1997.
14
<PAGE> 15
As of March 27, 1998, (i) all 600 shares of Series B Stock (including
dividends accrued thereon) were converted into an aggregate of 1,100,462
shares of Common Stock, (ii) 495 shares of Series C Stock, (including
dividends accrued thereon), including all shares of Series C Stock held by
Brown Simpson, were converted into an aggregate of 2,177,127 shares of
Common Stock and (iii) 568 shares of Series G stock (including dividends
accrued thereon) were converted into an aggregate of 2,901,290 shares of
Common Stock.
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, 1993, 1994, 1995, 1996
and 1997. The selected financial data for each of the years in the five-year
period ended December 31, 1997 have been derived from the audited financial
statements of the Company. The information set forth below should be read in
conjunction with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations", and the financial statements, related
notes and other financial information included elsewhere in this Form 10-K.
<TABLE>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ------------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................. $ 251,977 $ 208,168 $ 27,830 $ 209,822 $ 1,038,134
Costs and expenses:
Cost of revenues........................ 234,191 194,098 19,286 49,534 4,401,077
Research and development................ 608,373 1,962,678 4,554,946 6,422,921 4,132,019
Selling and marketing................... 48,587 454,968 469,600 1,834,640 1,918,044
General and administrative.............. 1,102,576 2,199,597 2,763,615 3,290,810 2,772,274
----------- ------------- ----------- ------------ -------------
(1,741,750) (4,603,173) (7,779,617) (11,388,083) (12,185,280)
Other income (expense):
Investment income....................... 102,260 496,392 487,543 503,911 254,781
Interest expense........................ (10,136) (8,582) (39,600) (29,602) (17,969)
----------- ------------- ----------- ------------ -------------
92,124 487,810 447,943 474,309 236,812
----------- ------------- ----------- ------------ -------------
Net loss ................................. $(1,649,626) $ (4,115,363) $(7,331,674) $(10,913,774) $ (11,948,468)
=========== ============= =========== ============ =============
Preferred Stock dividends................. - - - - (143,302)
Net loss plus Preferred Stock dividends... $(1,649,626) $ (4,115,363) $(7,331,674) $(10,913,774) $( 12,091,770)
=========== ============= =========== ============ =============
Basic and diluted loss per common share... $ (1.15) $ (2.01) $ (2.41) $ (2.34)
Weighted average number of
common shares outstanding................ 3,578,485 3,641,196 4,536,034 5,156,663
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ------------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $16,739,861 $ 90,362 $ 953,093 $ 5,188,047 $ 2,766,886
Working capital........................... 16,597,042 9,806,670 5,458,474 5,207,923 4,668,982
Total assets.............................. 17,632,020 14,732,501 11,105,766 13,388,496 11,534,309
Long-term debt/capital lease
obligations, less current portion........ 47,971 8,355 509,079 91,618 13,541
Stockholders' equity...................... 16,843,855 12,821,746 9,185,379 11,520,128 10,046,569
</TABLE>
15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in this Form 10-K contains forward-looking
statements which involve certain risks, uncertainties and contingencies which
could cause the Company's actual results, performance or achievements to differ
materially from those expressed, or implied, by such statements. See the
italicized introductory language in "Item 1. Business."
The Company was founded in 1989 by ARCH Development Corporation, an
affiliate of The University of Chicago, to commercialize superconducting
technologies developed initially at Argonne. The Company uses its patented
and proprietary HTS materials technologies to develop and manufacture RF
front-end products designed to enhance the quality, capacity, coverage and
flexibility of cellular, PCS and other wireless telephony services. The
Company has incurred cumulative losses of $38,310,030 from inception to
December 31, 1997.
During the second half of 1996, the Company made the first commercial
sales of its RF filter products. The Company continued to sell its RF filter
products during 1997 and into 1998. Product revenues in 1997 were derived from
commercial sales of the Company's RF front-end products. The Company expects
sales of its RF front-end products to continue to increase in 1998.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
The Company's net revenues increased $828,312 from $209,822 in 1996 to
$1,038,134 in 1997, as a result of increased sales of the Company's RF
front-end products. Net revenues from product sales represent gross product
shipments less reserves for potential returns. Such reserves are based on the
Company's historical product return rates. A government contract accounted for
$53,122 of the Company's net revenues in 1996, while all of the net revenues in
1997 were from commercial product sales. 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 revenue was $4,401,077 for the year ended 1997, as compared to
$49,534 for the year ended 1996. The cost of revenue for 1997 consisted of
direct material, labor and overhead costs associated with the products that
were shipped during the year, plus approximately $529,000 of costs which
consist primarily of allocated overhead costs, incurred to produce units in
ending finished goods inventory that exceed net realizable value. With the
recent introduction of the SpectrumMaster(R) Ultra product into the Company's
product line, management has determined that there is little marketability for
an early SpectrumMaster(R) filter product model. Management has decided,
therefore, to write down the costs associated with this early SpectrumMaster(R)
inventory. Consequently, a total of $309,000 has been charged to cost of
revenue in the fourth quarter of 1997. The cost of revenue for the year ended
1996 consisted primarily of research and development, material and overhead
expenses associated with a government contract. Due to low utilization levels
and excess capacity in the Company's manufacturing facility, cost of revenue
exceeded total revenue for the year ending 1997. The Company expects the cost
of revenues to exceed net revenues until it manufactures and ships a
significantly higher amount of its commercial products.
The Company's internally funded research and development expenses
decreased $2,290,902 from $6,422,921 in 1996 to $4,132,019 in 1997. Research
and development costs were reduced during 1997, as compared to 1996, primarily
due to the initiation of full-scale manufacturing activities during 1997. Costs
associated with manufacturing activities during 1997 were recorded as
manufacturing overhead expenses and were charged as cost of revenue. Costs
associated with the development of manufacturing activities and processes
during 1996 were recorded as research and development expenses during that
period. Additional reductions of research and development costs in 1977 as
compared to 1996 are due to reductions in personnel, materials and other
operating costs. The
16
<PAGE> 17
Company expects to continue reducing its research and development expenses
during 1998.
Selling and marketing expenses increased to $1,918,044 in 1997 from
$1,834,640 in 1996. This increase was due to the addition of sales personnel
and expanded product marketing and advertising efforts. The increase was
partially offset by reduced consulting costs during 1997.
General and administrative expenses decreased $518,536 from $3,290,810 in
1996, to $2,772,274 in 1997. The decrease in the general and administrative
expenses was due primarily to lower administrative personnel, consultant and
legal expenses during 1997 as compared to 1996.
Other income, which consisted of investment income, decreased $249,130
from $503,911 in 1996 to $254,781 in 1997. This decrease was due to a lower
average investment portfolio during the year.
Other expenses, which included interest expense on long-term debt,
decreased $11,633 from $29,602 in 1996, to $17,969 in 1997. The decrease is
primarily due to a lower average outstanding debt balance during 1997.
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.
Cost of government contract revenue was $49,534 in 1996, as compared to
$19,286 for 1995. The increase of these costs resulted from increased activity
under government contracts. Costs associated with RF filter products sales
during 1996 were associated with development stage production and were
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 was offset
against the related research and development costs, as compared to $649,660 for
1995.
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
increased outside service provider costs.
Investment income for 1996 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.
17
<PAGE> 18
Interest expense decreased to $29,602 from $39,600 in 1995 primarily due
to a lower average debt balance outstanding in 1996 as compared to 1995.
IMPACT OF YEAR 2000
Based on a recent assessment, the Company has determined that it will
require very little modification to its software to comply with Year 2000
transition requirements. Most of the software used by the Company in
operational applications has been acquired within the past 18 months and such
software already addresses Year 2000 issues. The Company expects to complete
any other modifications that may be necessary by December 31, 1998, which is
prior to any anticipated impact to the Company's operating systems. The
Company realizes, however, that the failure by it or those with which it
transacts business to address the Year 2000 issue could adversely affect the
Company.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company's cash, cash equivalents and
investments, including certain restricted investments, were $3,647,000,
reflecting a decrease of $2,391,000 from $6,038,000 at December 31, 1996.
During 1995 and 1996, the Company financed a portion of its leasehold
improvements and capital equipment additions through various borrowings
approximating $743,000, of which $92,000 was outstanding at December 31,
1997. This remaining balance is due in monthly installments through May 1999
and bears interest at 8.5% per annum. Approximately $699,000 in principal
amount of promissory notes, plus approximately $87,000 of accrued interest
thereon, from certain stockholders is outstanding as of March 23, 1998. This
receivable was due on April 30, 1997. The Company has filed a lawsuit to
collect on the outstanding balance, but there can be no assurance when and if
such promissory notes will be repaid. (See "Item 3. Legal Proceedings").
The Company to date has generated limited revenues from product sales. The
continuing development of and expansion in sales of the Company's RF filter
product lines will require continued commitment of substantial funds to
undertake continued product development and manufacturing activities and to
market and sell its RF front-end products. 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
to support the Company's commercialization plans, 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. As a result of its funding requirements, on June
6, 1997, the Company entered into a Preferred Stock Purchase Agreement for up
to an aggregate of $15 million, which is available in up to five tranches (two
of which have been received to date). Under this Preferred Stock Purchase
Agreement, (i) on June 6, 1997 the Company issued 600 shares of Series B Stock
for $3 million; and (ii) on August 29, 1997 and October 29, 1997 the Company
issued an aggregate of 600 shares of Series C Stock for a total of $3 million.
Cumulative dividends, which are payable in cash or Common Stock, accrued at the
rate of 5% per annum on outstanding Series B Stock and Series C Stock from
their respective dates of issuance through December 31, 1997 were $113,096.
Also, as a result of its funding requirements, on October 29, 1997, the Company
entered into another Preferred Stock Purchase Agreement whereby it issued an
aggregate of 700 shares of Series G Stock for $3.5 million. The Series G Stock
also accrues dividends, which are payable in cash or Common Stock, at the rate
of 5% per annum and from its date of issuance through December 31, 1997,
cumulative accrued dividends on the Series G Stock equaled $30,206. (See "Item
5. Market for Registrant's Common Equity and Related Stockholder Matters".)
Without consideration of further proceeds from financings, the Company
believes that its available cash, cash equivalents and investments are
sufficient to finance the Company's current operating plans through the end of
May 1998. Pursuant to the June 6, 1997 Preferred Stock Purchase Agreement, the
Company has the option to issue up to $9 million of additional convertible
preferred stock in up to three additional tranches, if certain conditions,
including, without limitation,
18
<PAGE> 19
maintaining certain price levels for its Common Stock, are satisfied by the
Company, or waived by the purchaser. The Company does not currently expect to
issue any additional convertible preferred stock under the June 6, 1997
Preferred Stock Purchase Agreement. The Company is actively seeking financing
in order to obtain working capital to continue its operations according to its
current operating plan and is currently contemplating several proposals from
third parties relating to a near-term equity financing. Although there can be
no assurance as to the structure of such financing, the Company currently
expects to issue shares of Common Stock, or securities which are convertible
into shares of Common Stock at a fixed conversion price.
The Company has called a Special Meeting of Stockholders to be held on
April 22, 1998 to approve an amendment to the Company's Certificate of
Incorporation, as amended, to increase the Company's authorized capital stock
and the number of authorized shares of Common Stock. If the Company's
stockholders fail to approve the proposed amendment to the Certificate of
Incorporation, the Company will be limited in its ability to act promptly with
respect to potential financing opportunities which are presented to it. If the
Company cannot obtain adequate funds 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 some of all of its research and development
programs. Inadequate funding also could impair the Company's ability to compete
in the marketplace. In particular, if the Company is unable to secure
adequate financing by early May 1998, it will have to begin substantially
reducing its operating plans in order to continue operations.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
19
<PAGE> 20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this item is incorporated by reference from the
"Election of Directors", "Executive Officers", and "Section 16(a) Beneficial
Ownership Compliance" sections of the Company's Definitive Proxy Statement to
be filed with Securities and Exchange Commission in connection with the
Company's 1998 Annual Meeting of Stockholders, scheduled to be held on June 11,
1998 (the "1998 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this item is incorporated by reference from the
section of the 1998 Proxy Statement captioned "Executive Compensation and
Certain Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this item is incorporated by reference from the
section of the 1998 Proxy Statement captioned "Security Ownership of Management
and Principal Stockholders."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this item is incorporated by reference from the
section of the 1998 Proxy Statement captioned "Executive Compensation and
Certain Transactions."
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, 1997 and 1996
Statements of Operations for the Years Ended December 31, 1997,
1996, and 1995
Statements of Stockholders' Equity for the Years
Ended December 31, 1997, 1996, and 1995
Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995
Notes 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.
20
<PAGE> 21
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.
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.
4.6 Convertible Preferred Stock Purchase Agreement dated as of June 6,
1997, by and between the Company and Southbrook International
Investments, Ltd., incorporated by reference to Exhibit 4.3 to the
Company's Registration Statement on Form S-3 dated June 23, 1997, Reg
No. 333-29797 ("June S-3").
4.7 Registration Rights Agreement dated as of June 6, 1997, by and
between the Company and Southbrook International Investments, Ltd.,
incorporated by reference to Exhibit 4.5 to June S-3.
4.8 Warrant dated June 6, 1997 issued to Southbrook International
Investments, Ltd., incorporated by reference to Exhibit 4.5 to June
S-3.
4.9 Certificate of Designation, Preferences and Rights relating to the
Company's Series C Convertible Preferred Stock, incorporated by
reference to Exhibit 4.9 to the Company's Registration Statement on
Form S-3 dated September 22, 1997, Reg. No. 333-36089.
4.10 Certificate of Designation, Preferences and Rights relating to the
Company's Series G Convertible Preferred Stock, incorporated by
reference to Exhibit 4.8 to the Company's Registration Statement on
Form S-3 dated December 8, 1997, Reg. No. 333-41731 ("December S-3").
21
<PAGE> 22
4.11 Convertible Preferred Stock Purchase Agreement dated as of October
29, 1997, by and between the Company and Elliott Associates, L.P. and
Westgate International, L.P., incorporated by reference to Exhibit 4.9
to December S-3.
4.12 Registration Rights Agreement dated as of October 29, 1997, by and
between the Company and Elliott Associates, L.P. and Westgate
International, L.P., incorporated by reference to Exhibit 4.10 to
December S-3.
4.13 Agreement dated as of October 29, 1997, by and between the Company
and Brown Simpson Strategic Growth Fund, L.P. and Southbrook
International Investments, Ltd., incorporated by reference to Exhibit
4.11 to December S-3.
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, 1997.*
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.
10.10 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.
22
<PAGE> 23
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.
10.16 Employment Agreement dated July 7, 1997 between the Company and
Stephen G. Wasko.*
10.17 Employment Agreement dated July 7, 1997 between the Company and
Edward W. Laves, Ph.D.*
10.18 Employment Agreement dated July 7, 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.
23. Consent of Ernst & Young LLP
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 filed a Current Report on Form 8-K dated October 31, 1997,
reporting Items 5 and 7.
23
<PAGE> 24
Financial Statements
Illinois Superconductor Corporation
Years ended December 31, 1997, 1996, and 1995
with Report of Independent Auditors
<PAGE> 25
Illinois Superconductor Corporation
Financial Statements
Years ended December 31, 1997, 1996, and 1995
CONTENTS
Report of Independent Auditors........................................... 1
Financial Statements
Balance Sheets as of December 31, 1997 and 1996.......................... 2
Statements of Operations for the Years Ended December
31, 1997, 1996, and 1995................................................ 4
Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996, and 1995....................................... 5
Statements of Cash Flows for the Years Ended
December 31, 1997, 1996, and 1995 ...................................... 6
Notes to Financial Statements............................................ 7
<PAGE> 26
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, 1997 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, 1997. 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 and
schedule 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, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, 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.
The accompanying financial statements have been prepared assuming that Illinois
Superconductor Corporation will continue as a going concern. As more fully
described in Note 3, Illinois Superconductor Corporation has incurred ongoing
operating losses and does not currently have financing commitments in place to
meet expected cash requirements through 1998. These conditions raise
substantial doubt about Illinois Superconductor Corporation's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 3. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Chicago, Illinois
February 27, 1998
1
<PAGE> 27
Illinois Superconductor Corporation
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $2,766,886 $5,188,047
Investments 500,313 500,3l3
Inventories 1,726,141 653,696
Accounts receivable, net of allowance
for doubtful accounts of $68,775 at
December 31, l997 586,501 130,752
Prepaid expenses and other 471,928 436,052
--------------------------
Total current assets 6,051,769 6,908,860
Property and equipment:
Leasehold improvements 4,215,011 4,172,694
Lab equipment 1,689,381 1,606,594
Manufacturing equipment 945,081 864,059
Office equipment 709,324 626,029
Furniture and fixtures 618,496 593,961
--------------------------
8,177,293 7,863,337
Less: Accumulated depreciation (3,654,239) (2,120,533)
--------------------------
4,523,054 5,742,804
Restricted certificates of deposit 380,000 350,000
Patents and trademarks, net 579,486 386,832
----------------------------
Total assets $11,534,309 $13,388,496
============================
</TABLE>
See notes to financial statements
2
<PAGE> 28
Illinois Superconductor Corporation
Balance Sheets (continued)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-----------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 717,425 $ 1,126,009
Accrued liabilities 587,285 494,507
Current portion of long-term debt 78,077 80,421
-----------------------------
Total current liabilities 1,382,787 1,700,937
Long-term debt, less current portion 13,541 91,618
Deferred occupancy costs 91,412 75,813
Stockholders' equity:
Capital stock:
Preferred stock:
Series B Convertible Preferred Stock at liquidation
value; 95 shares issued and outstanding at
December 31, 1997 (none at December 31, 1996) 488,534 --
Series C Convertible Preferred Stock at liquidation
value; 600 shares issued and outstanding at
December 31, 1997 (none at December 31, 1996) 3,038,424 --
Series G Convertible Preferred Stock at liquidation
value; 700 shares issued and outstanding at
December 31, 1997 (none at December 31, 1996) 3,530,206 --
Common stock ($.001 par value); 15,000,000 shares
authorized and 6,001,925 and 5,023,352 shares
issued and outstanding at December 31, 1997 and
1996, respectively 6,002 5,023
Additional paid-in capital 41,991,941 39,019,421
Notes receivable from stockholders (698,508) (1,142,754)
Accumulated deficit (38,310,030) (26,361,562)
-----------------------------
Total stockholders' equity 10,046,569 11,520,128
-----------------------------
Total liabilities and stockholders' equity $11,534,309 $13,388,496
=============================
</TABLE>
See notes to financial statements.
3
<PAGE> 29
Illinois Superconductor Corporation
Statements of Operations
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Product sales $ 1,038,134 $ 156,700 $ 5,998
Government contracts - 53,122 21,832
-------------------------------------------------------------
Total revenues 1,038,134 209,822 27,830
Costs and expenses:
Cost of product sales 4,401,077 - -
Cost of government contract revenue - 49,534 19,286
Research and development 4,132,019 6,422,921 4,554,946
Selling and marketing 1,918,044 1,834,640 469,600
General and administrative 2,772,274 3,290,810 2,763,615
-------------------------------------------------------------
Total costs and expenses 13,223,414 11,597,905 7,807,447
-------------------------------------------------------------
(12,185,280) (11,388,083) (7,779,617)
Other income and (expense):
Investment income 254,781 503,911 487,543
Interest expense (17,969) (29,602) (39,600)
-------------------------------------------------------------
236,812 474,309 447,943
-------------------------------------------------------------
Net loss $(11,948,468) $(10,913,774) $(7,331,674)
=============================================================
Preferred Stock dividends (143,302) - -
-------------------------------------------------------------
Net loss plus Preferred Stock dividends $(12,091,770) $(10,913,774) $(7,331,674)
=============================================================
Basic and diluted loss per common share $ ( 2.34) $ (2.41) $ (2.01)
=============================================================
Weighted average number of common
shares outstanding 5,156,663 4,536,034 3,641,196
=============================================================
</TABLE>
See notes to financial statements.
4
<PAGE> 30
Illinois Superconductor Corporation
Statements of Stockholders' Equity
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
SERIES B CONVERTIBLE SERIES C CONVERTIBLE SERIES G CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
-------------------------------------------------------------------------------
NUMBER OF NUMBER OF NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
===============================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1994 - $ - - $ - - $ - 3,578,724 $ 3,579
Exercise of stock options; $.184 - $11.25 per share - - - - - - 50,130 50
Exercise of warrants; $1.4679 per share - - - - - - 13,625 14
Forfeiture of stock options - - - - - - - -
Issuance of Common Stock - Private placement, net of - - - - - -
offering costs; $10.80 per share - - - - - - 356,473 356
Amortization of deferred compensation - - - - - - - -
Net loss - - - - - - - -
-------------------------------------------------------------------------------
Balance as of December 31, 1995 - - - - - - 3,998,952 3,999
Exercise of stock options; $.184 - $15.25 per share - - - - - - 49,881 50
Exercise of warrants; $1.4679-$13.50 per share - - - - - - 565,993 566
Forfeiture of stock options - - - - - - - -
Issuance of Common Stock - Private placement, net of - - - - - -
offering costs; $21.80 per share - - - - - - 408,526 408
Amortization of deferred compensation - - - - - - - -
Net loss - - - - - - - -
-------------------------------------------------------------------------------
Balance as of December 31, 1996 - - - - - - 5,023,352 5,023
Exercise of stock options; $.184 - $15.25 per share - - - - - - 17,821 18
Exercise of warrants; $1.4679 - $13.50 per share - - - - - - 138,820 139
Payment of stockholder notes receivable - - - - - - - -
Issuance of Preferred Stock - net of offering costs 600 3,000,000 600 3,000,000 700 3,500,000 - -
Preferred Stock dividends - 13,534 - 38,424 - 30,206 19,940 20
Conversion of Preferred Stock to Common Stock (505) (2,525,000) - - - - 801,992 802
Net loss - - - - - - - -
-------------------------------------------------------------------------------
Balance as of December 31, 1997 95 $ 488,534 600 $3,038,424 700 $3,530,206 6,001,925 $6,002
===============================================================================
<CAPTION>
NOTES
ADDITIONAL RECEIVABLE
PAID-IN DEFERRED FROM ACCUMULATED
CAPITAL COMPENSATION SHAREHOLDERS DEFICIT TOTAL
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1994 $21,096,412 $(162,131) $ - $ (8,116,114) $ 12,821,746
Exercise of stock options; $.184 - $11.25 per share 105,536 - - - 105,586
Exercise of warrants; $1.4679 per share 19,986 - - - 20,000
Forfeiture of stock options (132,300) 74,164 - - (58,136)
Issuance of Common Stock - Private placement, net of
offering costs; $10.80 per share 3,580,926 - - - 3,581,282
Amortization of deferred compensation - 46,575 - - 46,575
Net loss - - - (7,331,674) (7,331,674)
-----------------------------------------------------------------------------
Balance as of December 31, 1995 24,670,560 41,392 - (15,447,788) 9,185,379
Exercise of stock options; $.184 - $15.25 per share 282,903 - - - 282,953
Exercise of warrants; $1.4679-$13.50 per share 5,738,150 - (1,142,754) - 4,595,962
Forfeiture of stock options (5,438) 5,438 - - -
Issuance of Common Stock - Private placement, net of
offering costs; $21.80 per share 8,333,246 - - - 8,333,654
Amortization of deferred compensation - 35,954 - - 35,954
Net loss - - - (10,913,774) (10,913,774)
-----------------------------------------------------------------------------
Balance as of December 31, 1996 39,019,421 - (1,142,754) (26,361,562) 11,520,128
Exercise of stock options; $.184 - $15.25 per share 70,170 - - - 70,188
Exercise of warrants; $1.4679 - $13.50 per share 796,908 - - - 797,047
Payment of stockholder notes receivable - - 444,246 - 444,246
Issuance of Preferred Stock - net of offering costs (336,572) - - - 9,163,428
Preferred Stock dividends (82,184) - - - -
Conversion of Preferred Stock to Common Stock 2,524,198 - - - -
Net loss - - - (11,948,468) (11,948,468)
-----------------------------------------------------------------------------
Balance as of December 31, 1997 $41,991,941 $ - $ (698,508) $(38,310,030) $ 10,046,569
=============================================================================
</TABLE>
See notes to financial statements
5
<PAGE> 31
Illinois Superconductor Corporation
Statements of Cash Flows
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $(11,948,468) $(10,9l3,774) $(7,331,674)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 1,533,705 1,157,561 668,859
Amortization 6,994 6,639 7,541
Loss on disposal of property and equipment - - 499
Gain on sale of available-for-sale securities - (43,171) (54,065)
Net amortization of bond premiums - (939) (11,454)
Payments of patent costs (199,647) (156,711) (97,005)
Stock compensation expense - 35,954 46,575
Cancellation of stock options - - (58,136)
Changes in operating assets and liabilities:
Accounts receivable (455,749) 179,777 (28,936)
Inventories (1,072,445) (653,696) -
Prepaid expenses and other (35,876) 29,246 306,527
Accounts payable (411,584) 249,640 (818,844)
Accrued liabilities 42,778 113,201 252,159
Deferred occupancy costs 15,599 18,760 18,486
-------------------------------------------
Net cash used in operating activities (12,474,693) (9,977,513) (7,099,468)
INVESTING ACTIVITIES
Purchases of available-for-sale securities - (30,945,246) (8,060,495)
Sales of available-for-sale securities - 2,500,000 4,566,564
Maturities of available-for-sale securities - 33,072,852 9,002,364
(Increase) decrease in restricted certificates of deposit (30,000) 512,500 137,500
Acquisitions of property and equipment (310,956) (3,706,588) (1,888,694)
-------------------------------------------
Net cash provided by (used in) investing activities (340,956) 1,433,518 3,757,239
FINANCING ACTIVITIES
Net proceeds from issuances of preferred stock 9,163,428 - -
Net proceeds from issuances of common stock - 8,333,654 3,581,282
Exercise of stock options 70,188 282,953 105,586
Exercise of warrants 797,047 4,595,962 20,000
Payments on stockholder notes receivable 444,246 - -
Proceeds from issuance of long-term debt - 92,182 650,518
Payments on long-term debt (80,421) (525,802) (44,859)
Payments on capital lease obligations - - (107,567)
-------------------------------------------
Net cash provided by financing activities 10,394,488 12,778,949 4,204,960
-------------------------------------------
Increase (decrease) in cash and cash equivalents (2,421,161) 4,234,954 862,731
Cash and cash equivalents at beginning of period 5,188,047 953,093 90,362
-------------------------------------------
Cash and cash equivalents at end of period $ 2,766,886 $ 5,188,047 $ 953,093
===========================================
Supplemental cash flow information:
Cash paid for interest $ 17,969 $ 29,602 $ 39,600
===========================================
Capital leases $ - $ - $ 59,739
===========================================
</TABLE>
See notes to financial statements
6
<PAGE> 32
Illinois Superconductor Corporation
Notes to Financial Statements
1. DESCRIPTION OF BUSINESS
Illinois Superconductor Corporation (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
National Laboratory. The Company uses its patented and proprietary
high-temperature superconducting materials technologies to develop and
manufacture radio frequency front-end products designed to enhance the quality,
capacity, coverage and flexibility of cellular, PCS and other wireless
telephony services located primarily in the United States. In prior years, the
Company was in the developmental stage.
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 stockholders'
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.
7
<PAGE> 33
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 are stated at cost, less accumulated depreciation, and
are 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 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 an ongoing basis. Patents and trademarks are net of accumulated
amortization of $91,230 and $98,223 at December 31, 1997 and 1996,
respectively. Capitalized patent costs related to pending patents are $471,933
and $270,779 at December 31, 1997 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.
8
<PAGE> 34
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
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, 1997, 1996, and 1995 was approximately
$176,000, $135,000, and $87,000, respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs related to both present and future products are
charged to expense in the period incurred.
NET LOSS PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. Basic and diluted net loss per common share are computed based upon the
weighted-average number of common shares outstanding. Common shares issuable
upon the exercise of options and warrants are not included in the per share
calculations since the effect of their inclusion would be antidilutive. All
earnings per share amounts for all periods have been presented and, where
appropriate, restated to conform to the Statement 128 requirements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
9
<PAGE> 35
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
LONG-LIVED ASSETS
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.
3. GOING CONCERN AND MANAGEMENT'S PLANS
The Company has incurred, and continues to incur, losses from operations and
the Company's available resources are not presently sufficient to fund its
expected cash requirements through the end of 1998. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The Company is actively seeking financing to continue its operations under its
current operating plan beyond the end of 1998. The Company is currently
contemplating several proposals from third parties to provide the resources to
execute its business plan in the form of near-term equity financing.
10
<PAGE> 36
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
----------------------
<S> <C> <C>
Raw materials $ 704,626 $ 64,524
Work-in-process 345,956 214,172
Finished product 675,559 375,000
----------------------
$1,726,141 $653,696
======================
</TABLE>
Cost of product sales for the year ending December 31, 1997, includes
approximately $529,000 of costs in excess of the net realizable value of
finished goods inventory.
5. INVESTMENTS
Investments at December 31, 1997 and 1996 consist of a U.S. government
security, due in March 2001, with a cost and fair value of $500,313. During the
year ended December 31, 1996, available-for sale debt securities with a fair
value at the date of sale of $2,500,000 were sold. The gross realized gains on
such sales were $43,171.
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.
On February 9, 1996, the board of directors adopted a rights plan (Rights Plan).
In conjunction with the adoption of the Rights Plan, 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. Pursuant to the Rights Plan, a Series A Right is
associated with, and trades with, each share of common stock outstanding.
11
<PAGE> 37
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
6. CAPITAL STOCK (CONTINUED)
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 23, 1996. The remaining 340,773
of warrants were redeemed by the Company on December 23, 1996. In conjunction
with the redemption, the Company
12
<PAGE> 38
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
6. CAPITAL STOCK (CONTINUED)
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 April 30, 1997, and are guaranteed by an affiliate of a stockholder.
Payments made during 1997 on the notes receivable totaled $444,246. The
remaining balance due of $698,508, plus accrued interest of $70,470 at December
31, 1997, is currently being disputed by the issuers and is in litigation
(Note 14).
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.
On June 6, 1997, the Company issued 600 shares of Series B Convertible
Preferred Stock(Series B Stock) for $5,000 per share, or $3,000,000. In
connection with this sale, the Company issued a warrant to purchase 62,500
shares of Common Stock at $14.8125 per share, expiring on June 6, 2001. On each
of August 29, 1997 and October 29, 1997, the Company issued 300 shares of
Series C Convertible Preferred Stock (Series C Stock) for $5,000 per share, or
$3,000,000 in aggregate. In addition, on October 29, 1997 the Company issued
700 shares of Series G Convertible Preferred Stock (Series G Stock) for $5,000
per share, or $3,500,000. In connection with the sale of Series G Stock, the
Company issued warrants to purchase an aggregate of 34,782 shares of Common
Stock at $10.0625 per share, expiring on October 29, 2001. Total proceeds from
the above issuances, net of related expenses, was $9,163,428. None of the
Preferred Stock has voting rights. The Series B Stock is convertible into
Common Stock at a conversion price equal to the lessor of (a) $11.85, or (b)
101% of the average of the lowest per share market value for the five
consecutive trading days during the 60 trading days immediately preceding the
date of conversion. The Series C Stock and Series G Stock are convertible into
Common Stock at the conversion price equal to the lesser of (a) $8.05 or (b)
101% of the average of the lowest per share market value for the five
consecutive tradings days during the 60 trading days immediately preceding the
date of conversion. The conversion ratio is subject to adjustment. Dividends on
the Series B, Series C and Series G Convertible Preferred Stock are payable at
the rate of 5% per annum, and are payable in cash or shares of Common Stock, at
the option of the Company. Accrued Preferred Stock dividends at December 31,
1997 totaled $81,164.
13
<PAGE> 39
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
6. CAPITAL STOCK (CONTINUED)
On November 19, 1997, $1,200,000 (240 shares) of Series B Stock was converted
into 259,347 shares of Common Stock. Accrued dividends of $26,958 were also
converted into 5,826 shares of Common Stock. On December 2, 1997, $700,000 (140
shares) of Series B Stock was converted into 251,446 shares of Common Stock.
Accrued dividends of $16,972 were also converted into 6,096 shares of Common
Stock. On December 23, 1997, $625,000 (125 shares) of Series B Stock was
converted into 291,199 shares of Common Stock. Accrued dividends of $17,208 were
also converted into 8,018 shares of Common Stock.
At December 31, 1997, authorized but unissued shares of common stock have been
reserved for future issuance as follows:
<TABLE>
<S> <C>
Warrants outstanding (Note 7) 628,687
Options outstanding (Note 7) 683,333
Conversion of Preferred Stock to Common
Stock 4,021,462
Options reserved for future issuance under the
1993 Stock Option Plan (Note 7) 1,034,636
-----------
6,368,118
===========
</TABLE>
7. STOCK OPTIONS AND WARRANTS
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 1997, is 1,705,000, of which 80,000 are reserved for
issuance to outside directors. The Plan is administered by a committee (the
"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 and the remaining options vest ratably each month
thereafter).
14
<PAGE> 40
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
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 and 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 common 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 each outside
director who is elected, reelected, or continues to serve as a director, shall
be granted 3,000 NSOs, 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.
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 were determined
by the Board of Directors and, for options granted through December 31, 1992,
represented estimated fair values of the Company's common stock at the grant
date.
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.
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.
15
<PAGE> 41
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
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, 1997, 1996 and 1995: risk-free
interest rate of 6.3%, 6.2% and 6.3%, respectively; a dividend yield of 0%;
volatility factor of the expected market price of the Company's common stock of
.74, .75 and .75, respectively; and expected life of the options of 4.0, 4.1
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:
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------------
Pro forma net loss $(13,063,962) $(11,590,957) $(7,428,018)
Pro forma net loss per common share $ (2.53) $ (2.56) $ (2.04)
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.
16
<PAGE> 42
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
The table below summarizes option activity during the three year period ended
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS EXERCISE PRICE
OUTSTANDING PER SHARE
<S> <C> <C>
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
Granted 121,000 2.00 - 19.00
Exercised (17,821) .184 - 18.25
Forfeited (216,104) 6.75 - 27.00
-------
Outstanding at December 31, 1997 683,333 $ .184 - 26.50
=======
</TABLE>
The weighted-average exercise price of options outstanding at December 31, 1997
and 1996, was $12.92 and $13.40, respectively. The weighted-average exercise
price of options granted, exercised, and forfeited during 1997 was $ 13.18,
$3.94, and $15.32, respectively. The weighted-average fair value of options
granted during 1997, 1996 and 1995, was $7.94, $ 11.35, and $7.08, respectively.
Following is additional information with respect to options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
EXERCISE EXERCISE EXERCISE EXERCISE EXERCISE
PRICE FROM PRICE FROM PRICE FROM PRICE FROM PRICE FROM
$0.18 TO $2.00 TO $10.125 TO $15.50 TO $19.00 TO
$0.23 $9.75 $14.75 $18.50 $26.50
Outstanding at December 31, 1997:
<S> <C> <C> <C> <C> <C>
Number of options 57,822 142,674 143,129 279,628 60,080
Weighted-average exercise price $0.22 $7.49 $10.92 $17.51 $22.35
Weighted-average remaining
contractual life in years $4.98 7.72 6.56 8.51 8.25
Exercisable at December 31, 1997:
Number of options 46,650 60,983 101,048 102,136 25,567
Weighted-average exercise price $ 0.22 $7.32 $10.97 $17.31 $22.33
</TABLE>
17
<PAGE> 43
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
The total number of unvested options outstanding at December 31, 1997 was
346,949, all of which vest based on employees' continued service to the Company.
On January 7, 1998, the Company granted an additional 355,000 options to
certain executive officers of the company.
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 19,869, 34,063 and 13,625 of these shares were exercised in
1997, 1996 and 1995, 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 during 1996.
Warrants for 54,337 of these shares (17,779 shares at $2.29 per share, 17,779
shares at $2.75 per share, and 18,779 shares at $3.21 per share) were exercised
during 1997.
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
64,614 and 69,020 of these shares were exercised during 1997 and 1996,
respectively.
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 during 1996.
As discussed in Note 6, the Company issued warrants to purchase 62,500 shares of
common stock on June 6, 1997 in connection with the issuance of Series B
Convertible Preferred Stock and warrants to purchase 34,782 shares of common
stock on October 29, 1997 in connection with the issuance of Series
G Convertible Preferred Stock.
18
<PAGE> 44
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
8. 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 $110,000 at December
31, 1997. 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 $91,618 at December 31, 1997, with aggregate debt maturities of
$78,077 in 1998, and $13,541 in 1999.
9. INCOME TAXES
The Company has net operating loss and research and development credit
carryforwards for tax purposes of approximately $40,027,000 and $881,000,
respectively, at December 31, 1997. The net operating loss carryforwards
expire in the following years:
<TABLE>
<CAPTION>
Year Amount
- ------------------------------------------
<S> <C>
2005 $ 7,000
2006 638,000
2007 974,000
2008 1,659,000
2009 3,973,000
2010 8,199,000
2011 12,186,000
2012 12,391,000
- ------------------------------------------
$40,027,000
===========
</TABLE>
19
<PAGE> 45
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
---------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $15,210,000 $10,502,000
Research and development tax credit 881,000 624,000
carryforwards
Deferred compensation 79,000 94,000
--------------------------
Total deferred tax assets 16,171,000 11,220,000
Deferred tax liabilities:
Patent costs (215,000) (142,000)
Property and equipment (130,000) (68,000)
--------------------------
(345,000) (210,000)
--------------------------
Net deferred tax assets 15,825,000 11,010,000
Valuation allowance (15,825,000) (11,010,000)
--------------------------
Net deferred tax assets $ - $ -
==========================
</TABLE>
The valuation allowance increased during 1997 and 1996 by $4,815,000 and
$4,479,000, respectfully, 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. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents, the restricted certificates of deposit,
and the stockholder 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.
20
<PAGE> 46
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
11. 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 $200,000 and $650,000 for the years ended
December 31, 1996 and 1995, respectively, has been offset against the related
research and development expenses.
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
($300,000 at December 31, 1997) 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, 1997:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -------
<S> <C>
1998 227,500
1999 227,500
2000 231,300
2001 249,900
2002 249,900
Thereafter 453,700
----------
$1,639,800
==========
</TABLE>
Rent expense totaled $226,938, $227,334, and $267,991 for the years ended
December 3l, 1997, 1996, and 1995, respectively.
21
<PAGE> 47
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
12. COMMITMENTS (CONTINUED)
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 an
annual payment of $50,000 in 1998, while the research agreement provides for
annual payments of $140,000 through 1998 with the right to renew for one
additional year at the Company's option. The research agreement was amended in
1997 and again in 1998 and expires at the end of 1998, unless renewed 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, 1997, 1996, and 1995.
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 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.
22
<PAGE> 48
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
14. LEGAL PROCEEDINGS (CONTINUED)
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.
In July 1997, the Company filed a complaint against a group of Borrowers and a
Guarantor to enforce the terms of loans made by the Company to the Borrowers and
guaranteed by the Guarantor in the aggregate principal amount of $698,508. The
Borrowers' notes were issued to the Company in connection with the Borrowers'
exercise of warrants to purchase shares of the Company's common stock in
December 1996.
In September 1997, the Borrowers and the Guarantor responded to the Company's
complaint and filed a counterclaim alleging that they exercised the warrants in
reliance on the Company's alleged fraudulent representations to one of the
Borrowers concerning a third-party's future underwriting of a secondary public
offering of the Common Stock. The counterclaim sought an amount of damages
which the Borrowers allege "cannot currently be determined." The Company
regards the fraud claim as without factual or legal merit and the Company
intends to vigorously pursue this litigation.
In November 1997, a Stockholder sued the Company and seven of its former or
current Directors for breaching their duties of loyalty and due care to the
Stockholder by selecting financing for the Company in June 1997 which allegedly
entrenched the Directors, eroded the Company's stock price and diluted the
Stockholder's equity in the Company. The Stockholder's complaint sought an
unspecified amount of compensatory damages in excess of $50,000 . The Company
and the Directors regard the suit as without factual or legal merit and intends
to defend itself vigorously in this litigation.
In January 1998, a Stockholder, individually and on behalf of all other
Stockholders similarly situated, filed a complaint against the Company and
eight of its former or current directors. The complaint alleged that the
Directors breached their duties of loyalty and due care to the putative class
of stockholders by selecting financing for the Company in June 1997 which
supposedly entrenched the Directors and reduced the Company's stock price. The
complaint also alleged that the Directors breached their duty of disclosure by
not informing the stockholders that the selected financing would erode the
Company's stock price. The Stockholder's complaint sought certification of a
class consisting of all owners of the Company's common stock during the period
from June 6, 1997 through November 21, 1997, excluding the Directors and a
Stockholder.
23
<PAGE> 49
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
14. LEGAL PROCEEDINGS (CONTINUED)
The complaint also seeks an unspecified amount of compensatory and punitive
damages, and attorneys' fees. The Company and the Directors regard the suit as
without factual or legal merit and intends to continue to defend itself
vigorously in this litigation.
15. SUBSEQUENT EVENTS
During the period from January 1, 1998 to March 23, 1998, the following
conversions of Preferred stock have taken place. Series B Convertible Preferred
Stock of $475,000 (95 shares) has been converted into 270,671 shares of common
stock. Accrued dividends of $13,794 were also converted into 7,860 shares of
common stock. Series C Convertible Preferred Stock of $2,475,000 (495 shares)
has been converted into 2,133,331 shares of common stock. Accrued dividends of
$50,885 were also converted into 43,797 shares of common stock. Series G
Convertible Preferred Stock of $2,840,000 (568 shares) has been converted into
2,847,404 shares of common stock. Accrued dividends of $53,747 were also
converted into 53,888 shares of common stock.
24
<PAGE> 50
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 31st day
of March, 1998.
ILLINOIS SUPERCONDUCTOR CORPORATION
By:/s/ EDWARD W. LAVES
----------------------------------
Edward W. Laves, Ph.D.
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 31st day of March, 1998.
SIGNATURE TITLE
/s/ EDWARD W. LAVES President, Chief Executive Officer (Principal Executive
- -------------------- Officer) and a Director
Edward W. Laves
/s/ STEPHEN G. WASKO Chief Financial Officer, Treasurer and Secretary
- -------------------- (Principal Financial and Accounting Officer)
Stephen G. Wasko
/s/ PETER S. FUSS Director
- --------------------
Peter S. Fuss
/s/ ROBERT D. MITCHUM Director
- ---------------------
Robert D. Mitchum
/s/ STEVEN LAZARUS Director
- --------------------
Steven Lazarus
/s/ TERRY S. PARKER Director
- ---------------------
Terry S. Parker
/s/ THOMAS L. POWERS Director
- --------------------
Thomas L. Powers
/s/ ORA E. SMITH Chairman of the Board and Director
- --------------------
Ora E. Smith
<PAGE> 51
ILLINOIS SUPERCONDUCTOR CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Balance at Balance at end of
beginning of year Additions Deductions year
----------------- --------- ---------- -----------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Deducted from asset accounts:
Valuation allowance on deferred tax assets.... $11,010,000 $4,815,000 $ 0 $15,825,000
Allowance for doutful accounts................ $ 0 $ 68,775 $ 0 $ 68,775
YEAR ENDED DECEMBER 31, 1996:
Deducted from asset accounts:
Valuation allowance on deferred tax assets.... $ 6,531,000 $4,479,000 $ 0 $11,010,000
YEAR ENDED DECEMBER 31, 1995:
Deducted from asset accounts:
Valuation allowance on deferred tax assets.... $ 2,894,000 $3,637,000 $ 0 $ 6,531,000
</TABLE>
S-1
<PAGE> 52
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C>
10.16 Employment Agreement dated July 7, 1997 between the Company and
Stephen G. Wasko.
10.17 Employment Agreement dated July 7, 1997 between the Company and
Edward W. Laves, Ph.D
10.18 Employment Agreement dated July 7, 1997 between the Company and
Ora E. Smith
23 Consent of Ernst & Young LLP
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 10.16
EMPLOYMENT AGREEMENT
Employment Agreement dated and effective as of July 1, 1997 (this
"AGREEMENT"), between ILLINOIS SUPERCONDUCTOR CORPORATION, a Delaware
corporation (with its successors and assigns, referred to as the "COMPANY"),
and STEPHEN G. WASKO ("WASKO").
PRELIMINARY STATEMENT
Wasko is currently employed as a vice-president, chief financial
officer, treasurer and secretary of the Company. The Company desires to
continue to employ Wasko, and Wasko wishes to continue to be employed by the
Company, upon the terms and conditions set forth below. In order to specify
such terms and conditions, Wasko and the Company agree as follows:
AGREEMENT
1. EMPLOYMENT FOR TERM. The Company hereby employs Wasko and Wasko
hereby accepts employment with the Company for the period beginning on July 1,
1997 and ending on the earlier of (i) June 30, 1998, and (ii) the day which is
the 210th day following the day on which a chief financial officer (other than
Wasko) elected to such position by the Company's Board of Directors (the
"BOARD") commences full-time employment with the Company, or upon the earlier
termination of the Term pursuant to Section below (the "TERM"). The 210 day
period described above is referred to as the "CFO TRANSITION PERIOD". The end
of the Term for any reason shall end Wasko's employment under this Agreement,
but shall not terminate Wasko's or the Company's other obligations set forth in
this Agreement.
2. POSITION AND DUTIES. Commencing at 5:00 p.m. on July 7, 1997 (the
"EFFECTIVE TIME"), and thereafter during the Term, Wasko shall serve as the
Company's senior vice-president of corporate development. Mr. Wasko shall also
continue to serve as the chief financial officer, secretary and treasurer of
the Company until such time as a chief financial officer (other than Wasko) is
elected to such position by the Board (the "CFO COMMENCEMENT DATE"), at which
time Wasko hereby agrees that he shall resign from such positions. During the
Term, Wasko shall also hold such additional positions and titles as the Board
or the president of the Company may determine from time to time, and the
Company shall provide Wasko office space, mail, telephone and voice mail
services substantially similar to those currently provided to Wasko. During
the Term and until the CFO Commencement Date, Wasko shall devote substantially
all of his business time and best efforts to his duties as an employee of the
Company. Following the CFO Commencement Date and for the remainder of the
Term, Wasko shall devote such time and attention to his duties as an employee
of the Company as the chairman of the Board may request from time to time.
<PAGE> 2
3. COMPENSATION.
(A) BASE SALARY. The Company shall pay Wasko a base salary during the
Term of not less than $115,500 per annum, payable at least monthly on the
Company's regular pay cycle for professional employees.
(B) OTHER AND ADDITIONAL COMPENSATION. Section establishes a minimum
salary during the Term, and shall not preclude the Board from awarding Wasko 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, Wasko 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 Wasko 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 Wasko's death. The
Company may end the Term at any time with "Cause" (as defined in Section 7(a)
below) in the reasonable 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 Wasko notice of the termination, including a statement of
the Cause for termination. 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 RELATED COVENANTS.
(A) "CAUSE" DEFINED. "Cause" means willful malfeasance or willful
misconduct by Wasko in connection with his employment; Wasko's gross
negligence in performing any of his duties under this Agreement; Wasko'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; Wasko's willful and continuing 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,
-2-
<PAGE> 3
or adopted pursuant to the requirements of any government contract or
regulation; or material and continuing breach by Wasko of any of his
agreements in this Agreement.
(B) TERMINATION PAYMENTS. The Company and Wasko agree that, unless
Wasko's employment with the Company is terminated for either of the reasons set
forth in Section 6(a) above, upon the earlier of (i) Wasko's resignation as an
employee and officer of the Company, or (ii) the expiration of the Term prior
to the last day of the CFO Transition Period, the Company will pay to Wasko an
amount equal to the then-current base salary which Wasko would have received
during the unexpired portion of the CFO Transition Period as if he had remained
employed with the Company for the unexpired portion of the CFO Transition
Period. If Wasko resigns as an employee and officer of the Company prior to
the CFO Commencement Date, then for purposes of the preceding sentence the CFO
Transition Period shall be deemed to be a period of 210 days. The amount
payable to Wasko pursuant to this Section 7(b) shall be paid by the Company to
Wasko within thirty (30) days of the last day of Wasko's employment with the
Company.
(C) TERMINATION FOR ANY OTHER REASON. If the Company ends the Term for
Cause, or if the Term ends as a result of Wasko's death, then the Company shall
have no obligation to pay Wasko 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.
(D) OPTION MATTERS. If the Term expires or ends for any reason other
than termination by the Company for Cause, the Company and Wasko agree that
notwithstanding any term or provision of any agreement between Wasko and the
Company to the contrary, (i) all options held by Wasko to acquire shares of the
common stock of the Company at the time of termination shall immediately become
vested, and shall be immediately exercisable by Wasko (or, in the event of his
death or disability, by his heirs, beneficiaries or personal representative),
and (ii) Wasko (or his heirs, beneficiaries or personal representative, as the
case may be) shall have the right to exercise such vested options, and all
other options previously vested in Wasko prior to the date of termination, for
a period of 365 days following such end of the Term. Wasko and the Company
agree that except as set forth above, all option agreements referred to above
shall remain in full force and effect in accordance with their terms.
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
-3-
<PAGE> 4
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,
Wasko 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 Wasko is requested in a
judicial, administrative or governmental proceeding to disclose any of the
Company Information, Wasko 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, Wasko may furnish the material so required to be
furnished, but Wasko will furnish only that portion of the Company Information
that legally is required.
(C) OWNERSHIP. Wasko hereby assigns to the Company all of Wasko'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 Wasko, either alone or jointly
with others, during the course of the performance of services for the Company.
Wasko shall also assign to, or as directed by, the Company, all of Wasko'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 Wasko.
(D) PERIOD DEFINED. "NON-COMPETITION PERIOD" means the period
beginning on the day following the date of termination of Wasko' employment
with the Company and ending on the first anniversary of the day following the
date of termination of Wasko' employment with the Company.
(E) COVENANTS OF NON-COMPETITION AND NON-SOLICITATION. Wasko
acknowledges that his services pursuant to this Agreement are unique and
extraordinary, that the Company will be dependent upon Wasko 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. Wasko 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, Wasko
covenants and agrees that during the Non-Competition Period Wasko 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
-4-
<PAGE> 5
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 Wasko at the beginning of this Section 8(e), Wasko additionally
acknowledges, covenants, and agrees that, during the Non-Competition Period,
Wasko 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. Notwithstanding
the foregoing, this Section (e) shall terminate and be of no further force or
effect if the Company fails to make any payment or otherwise perform any
obligation owed to Wasko pursuant to Sections 3, 4, 5 and 7(b) above.
(F) EQUITABLE REMEDIES. Wasko acknowledges, covenants and agrees that,
in the event he shall violate any provisions of this Section , 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
Wasko 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) WASKO. This Agreement is a personal contract, and the rights and
interests that the Agreement accords to Wasko may not be sold, transferred,
assigned, pledged, encumbered, or hypothecated by him. Except as contemplated
in Section 7(c) above, Wasko shall not have any power of anticipation,
alienation or assignment of the payments contemplated by this Agreement, all
rights and benefits of Wasko shall be for the sole personal benefit of Wasko,
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 Wasko. Except as so provided, this Agreement
shall inure to the benefit of and be binding upon Wasko 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
-5-
<PAGE> 6
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 Wasko), 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 Wasko's employment with the Company during the
Term and supersedes all prior negotiations, discussions, understandings and
agreements, whether written or oral, between Wasko 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 Wasko and by a duly authorized officer of the Company other
that Wasko. 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 Wasko: Stephen G. Wasko
818 17th Street
Wilmette, Illinois 60091
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
-6-
<PAGE> 7
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 Wasko 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 Wasko 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 Wasko 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 Wasko hereby submits to the nonexclusive jurisdiction
of such courts for the purpose of any such suit, action, proceeding or
judgment.
-7-
<PAGE> 8
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.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first above written.
ILLINOIS SUPERCONDUCTOR CORPORATION
By: /s/ Ora E. Smith
-----------------------------
Ora E. Smith
President
/s/ STEPHEN G. WASKO
-----------------------------
STEPHEN G. WASKO
-8-
<PAGE> 1
Exhibit 10.17
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
Amended and Restated Employment Agreement dated and effective as of July
1, 1997 (this "AGREEMENT"), between ILLINOIS SUPERCONDUCTOR CORPORATION, a
Delaware corporation (with its successors and assigns, referred to as the
"COMPANY"), and EDWARD W. LAVES ("LAVES").
PRELIMINARY STATEMENT
Pursuant to an existing Employment Agreement between the Company and Laves
dated and effective as of January 1, 1997, Laves is now employed as the
executive vice president and chief operating officer of the Company (the "PRIOR
AGREEMENT").
The Company desires to continue to employ Laves, and Laves wishes to
continue to be employed by the Company, upon certain terms and conditions not
contained in the Prior Agreement, including an extension of the term of Laves's
employment. In order to specify such terms and conditions, and extend the term
of Laves's employment with the Company, Laves and the Company agree as follows:
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 July 1, 1997
and ending on June 30, 1998 (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. Commencing at 5:00 p.m. on July 7, 1997 (the
"EFFECTIVE TIME"), and thereafter during the Term, Laves shall serve as
president and chief operating officer of the Company. Laves shall also
continue to serve as the executive vice president and chief operating officer
of the Company until the Effective Time. 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 continue to pay Laves a base salary,
beginning on the first day of the Term and ending on December 31, 1997, of not
less than $170,000 per annum, payable at least monthly on the Company's regular
pay cycle for professional employees. Effective as of January 1, 1998, and
thereafter during the remainder of the Term, Laves' base salary shall be
increased to the rate of not less than $190,000 per annum.
<PAGE> 2
(b) BONUSES. Laves shall be eligible to receive bonuses of up to fifty
percent (50%) of his base salary for calendar years 1997 and 1998 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.
(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 shall not, however, affect the validity of the Company's termination
of the Term.
7. SEVERANCE BENEFITS.
(a) "CAUSE" DEFINED. "Cause" means willful malfeasance or willful
misconduct by Laves in connection with his employment; Laves' gross negligence
in performing any of his duties under this Agreement; 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; Laves' willful and continuing 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
-2-
<PAGE> 3
pursuant to the requirements of any government contract or regulation; or (v)
material and continuing breach by Laves of any of his agreements in this
Agreement.
(b) TERMINATION WITHOUT CAUSE. If the Company ends the Term prior to June
30, 1998, 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 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. Regardless of anything in
this Agreement to the contrary, if Laves resigns as a result of a material
change, or a related series of changes taken as a whole, in the scope or nature
of his responsibilities as president and chief executive officer of the Company
after the Effective Time, such change or changes shall be deemed to be a
constructive termination of Laves' employment by the Company without Cause for
all purposes of this Agreement, including without limitation the obligation of
the Company to make the Severance Payments during 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.
Laves agrees that during the Severance Period he shall endeavor to render
reasonable advisory and consulting services to the Company with respect to
matters pertaining to the business of the Company as the Board of Directors or
the then Chairman of the Board may reasonably request in writing, provided that
the Company acknowledges and agrees that Laves shall be obligated to perform
such services only to the extent that Laves determines in his discretion that
such services shall not interfere with the conduct of Laves's then current
business and personal affairs at the time of any such request. The Company
shall pay all reasonable out-of-pocket expenses incurred by Laves in the
performance of such advisory and consulting services.
(c) TERMINATION FOR ANY OTHER REASON. If the Company ends the Term for
Cause, or, subject to the first paragraph of Section 7(b) above, 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.
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(d) OPTION MATTERS. If the Company ends the Term without Cause, the
Company and Laves agree that notwithstanding any term or provision of any
agreement between Laves and the Company to the contrary, (i) all options held
by Laves to acquire shares of the common stock of the Company at the time of
termination shall immediately become vested, and shall be immediately
exercisable by Laves or his personal representative, and (ii) Laves (or his
personal representative, as the case may be) shall have the right to exercise
such vested options, and all other options previously vested in Laves prior to
the date of termination, for a period of 365 days following such end of the
Term. Laves and the Company agree that except as set forth above, all option
agreements referred to above shall remain in full force and effect in
accordance with their terms.
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.
(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
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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 , 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. Notwithstanding
the foregoing, this Section (e) shall terminate and be of no further force or
effect if the Company fails to make any payment or otherwise perform any
obligation owed to Laves pursuant to Sections 3, 4, 5 and 7(b) above.
(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
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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. Except as contemplated
in Section 7(d) above, 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. All prior employment agreements, including the Prior
Agreement, between the Company and Laves shall remain in full force and effect
with respect all matters addressed in such prior employment agreements
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 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.
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<PAGE> 7
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 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.
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<PAGE> 8
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.
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<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first above written.
ILLINOIS SUPERCONDUCTOR CORPORATION
By: /s/ Ora E. Smith
-----------------------------------
Ora E. Smith
President
/s/ Edward K. Laves
-----------------------------------
EDWARD LAVES
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<PAGE> 1
Exhibit 10.18
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
Amended and Restated Employment Agreement dated and effective as of
July 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
Pursuant to an existing Employment Agreement between the Company and
Smith date and effective as of January 1, 1997, Smith is now employed as the
president and chief executive officer of the Company (the "PRIOR AGREEMENT").
The Company desires to continue to employ Smith, and Smith wishes to
continue to be employed by the Company, upon certain terms and conditions not
contained in the Prior Agreement, including an extension of the term of Smith's
employment. In order to specify such terms and conditions, and extend the term
of Smith's employment with the Company, Smith and the Company agree as follows:
AGREEMENT
1. EMPLOYMENT FOR TERM. The Company hereby employs Smith and Smith
hereby accepts employment with the Company for the period beginning on July 1,
1997 and ending on June 30, 1998 (the "TERM"), or upon the earlier termination
of the Term pursuant to Section 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. Commencing at 5:00 p.m. on July 7, 1997 (the
"EFFECTIVE TIME"), and thereafter during the Term, Smith shall serve as the
chairman of the board of the Company. Smith shall also continue to serve as
the president and chief executive officer of the Company until the Effective
Time. 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
<PAGE> 2
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, 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 shall not, however, affect the validity of the Company's
termination of the Term.
7. SEVERANCE BENEFITS.
(A) "CAUSE" DEFINED. "Cause" means willful malfeasance or willful
misconduct by Smith in connection with his employment; Smith's gross
negligence in performing any of his duties under this Agreement; 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; Smith's willful and continuing 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 material and
continuing breach by Smith of any of his agreements in this Agreement.
(B) TERMINATION WITHOUT CAUSE. If the Company ends the Term prior to
June 30, 1998, other than for Cause, or if Smith resigns as an employee or
officer of the Company prior to June 30, 1998, then the Company shall make the
"Severance Payments" (as defined
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<PAGE> 3
below) to Smith for and during the "Severance Period" (as defined 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 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.
Smith agrees that during the Severance Period he shall endeavor to
render reasonable advisory and consulting services to the Company with respect
to matters pertaining to the business of the Company as the Board of Directors
or the then Chairman of the Board may reasonably request in writing, provided
that the Company acknowledges and agrees that Smith shall be obligated to
perform such services only to the extent that Smith determines in his
discretion that such services shall not interfere with the conduct of Smith's
then current business and personal affairs at the time of any such request.
The Company shall pay all reasonable out-of-pocket expenses incurred by Smith
in the performance of such advisory and consulting services.
(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.
(D) OPTION MATTERS. If the Company ends the Term without Cause, the
Company and Smith agree that notwithstanding any term or provision of any
agreement between Smith and the Company to the contrary, (i) all options held
by Smith to acquire shares of the common stock of the Company at the time of
termination shall immediately become vested, and shall be immediately
exercisable by Smith or his personal representative, and (ii) Smith (or his
personal representative, as the case may be) shall have the right to exercise
such vested options, and all other options previously vested in Smith prior to
the date of termination, for a period of 365 days following such end of the
Term. Smith and the Company agree that except as set forth above, all option
agreements referred to above shall remain in full force and effect in
accordance with their terms.
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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.
(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
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<PAGE> 5
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. Notwithstanding the foregoing, this
Section (e) shall terminate and be of no further force or effect if the Company
fails to make any payment or otherwise perform any obligation owed to Smith
pursuant to Sections 3, 4, 5 and 7(b) above.
(F) EQUITABLE REMEDIES. Smith acknowledges, covenants and agrees that,
in the event he shall violate any provisions of this Section , 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. Except as contemplated
in Section 7(d) above, Smith shall not have any power of anticipation,
alienation or assignment of the payments
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<PAGE> 6
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. 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 written or oral, between Smith and the Company relating to
the subject matter of this Agreement. All prior employment agreements,
including the Prior Agreement, between the Company and Smith shall remain in
full force and effect with respect to all matters addressed in such prior
employment agreements 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
-6-
<PAGE> 7
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.
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.
-7-
<PAGE> 8
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.
*****END OF TEXT*****
-8-
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first above written.
ILLINOIS SUPERCONDUCTOR CORPORATION
By: /s/ Steven Lazarus
-------------------------
Steven Lazarus
Chairman of the Board
/s/ ORA E. SMITH
-------------------------
ORA E. SMITH
-9-
<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, Form S-3 No. 333-02846, Form S-3
No. 333-29797, Form S-3 No. 333-36089 and Form S-3 No. 333-41731 of our report
dated February 27, 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, 1997.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Chicago, Illinois
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,766,886
<SECURITIES> 500,313
<RECEIVABLES> 655,276
<ALLOWANCES> 68,775
<INVENTORY> 1,726,141
<CURRENT-ASSETS> 6,051,769
<PP&E> 8,177,293
<DEPRECIATION> 3,654,239
<TOTAL-ASSETS> 11,543,309
<CURRENT-LIABILITIES> 1,382,787
<BONDS> 0
0
7,057,164
<COMMON> 6,002
<OTHER-SE> 2,983,403
<TOTAL-LIABILITY-AND-EQUITY> 11,534,309
<SALES> 1,038,134
<TOTAL-REVENUES> 1,038,134
<CGS> 4,401,077
<TOTAL-COSTS> 4,401,077
<OTHER-EXPENSES> 8,822,337
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,969
<INCOME-PRETAX> (11,948,468)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,948,468)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,948,468)
<EPS-PRIMARY> (2.34)
<EPS-DILUTED> (2.34)
</TABLE>
