<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 30, 1998
Commission File Number: 0-22303
ILLINOIS SUPERCONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-3688459
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
451 KINGSTON COURT, MOUNT PROSPECT, IL 60056
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (847) 391-9400
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 ____
As of November 13, 1998 there were outstanding 12,557,344 shares of
common stock, par value $.001, of the registrant.
<PAGE> 2
ILLINOIS SUPERCONDUCTOR CORPORATION
QUARTER ENDED SEPTEMBER 30, 1998
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C>
Item 1. Financial Statements .............................................................. 3
Condensed Balance Sheets as of September 30, 1998 (unaudited) and December 31, 1997 .. 3
Condensed Statements Of Operations (unaudited) for the three
months ended September 30, 1998 and 1997, and the nine
months ended September 30, 1998 and 1997............................................ 4
Condensed Statements Of Cash Flows (unaudited) for the nine
months ended September 30, 1998 and 1997............................................ 5
Notes To Condensed Financial Statements .............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................................. 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk ....................... 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................................ 11
Item 6. Exhibits and Reports on Form 8-K ................................................. 13
</TABLE>
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ILLINOIS SUPERCONDUCTOR CORPORATION
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 5,262,275 $ 2,766,886
Investments - 500,313
Inventories 3,262,166 1,726,141
Accounts receivable 955,063 586,501
Prepaid expenses and other 113,103 471,928
----------- -----------
Total current assets 9,592,607 6,051,769
Property and equipment:
Property and equipment 8,230,928 8,177,293
Less: accumulated depreciation 4,478,020 3,654,239
----------- -----------
Net property and equipment 3,752,908 4,523,054
Other assets:
Restricted certificates of deposit 400,418 380,000
Deferred financing costs, net 87,098 -
Patents and trademarks, net 660,268 579,486
----------- -----------
1,147,784 959,486
----------- -----------
Total assets $14,493,299 $11,534,309
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 1,030,054 $ 717,425
Accrued liabilities 265,123 587,285
Current portion of other long-term debt 26,654 78,077
----------- -----------
Total current liabilities 1,321,831 1,382,787
Other long term debt, less current portion - 13,541
Senior Convertible Notes 10,350,000 -
Discount on Senior Convertible Notes (2,587,751) -
Deferred occupancy costs 91,262 91,412
Stockholders' equity:
Series B Convertible Preferred Stock at liquidation
value: 0 and 95 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively - 488,534
Series C Convertible Preferred Stock at liquidation
value: 0 and 600 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively - 3,038,424
Series G Convertible Preferred Stock at liquidation
value: 0 and 700 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively - 3,530,206
Common stock ($.001 par value); 30,000,000 and
15,000,000 shares authorized and 12,557,344 and 6,001,925 issued
and outstanding at September 30, 1998 and December 31,
1997, respectively 12,557 6,002
Additional paid-in capital 60,057,991 41,991,941
Notes receivable from stockholders (693,508) (698,508)
Accumulated deficit (54,059,083) (38,310,030)
----------- -----------
Total stockholders' equity 5,317,957 10,046,569
----------- -----------
Total liabilities and stockholders' equity $14,493,299 $11,534,309
=========== ===========
</TABLE>
NOTE: The condensed balance sheet at December 31, 1997 has been derived from
the audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
See Accompanying notes to Condensed Financial Statements.
<PAGE> 4
ILLINOIS SUPERCONDUCTOR CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------- ------------------------------------------
1998 1997 1998 1997
-------------------- ------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Net revenues $ 226,732 $ 216,750 $ 1,738,433 $ 755,750
Costs and expenses:
Cost of revenues 1,016,977 996,668 3,465,070 3,071,428
Research and development 643,315 982,385 1,981,698 3,383,807
Selling and marketing 418,685 487,464 1,248,273 1,509,107
General and administrative 843,265 708,404 2,338,090 2,188,361
------------ ------------ ------------ ------------
Total costs and expenses 2,922,242 3,174,921 9,033,131 10,152,703
------------ ------------ ------------ ------------
Operating loss (2,695,510) (2,958,171) (7,294,698) (9,396,953)
Other income (expense):
Investment income 123,735 49,150 191,721 187,472
Noncash interest expense on Senior
Convertible Notes (Note 6) (5,405,708) - (8,561,000) -
Other interest expense (79,068) (2,843) (85,076) (13,605)
------------ ------------ ------------ ------------
(5,361,041) 46,307 (8,454,355) 173,867
------------ ------------ ------------ ------------
Net loss $(8,056,551) $(2,911,864) $(15,749,053) $ (9,223,086)
============ ============ ============ ============
Preferred Stock dividends $ - $ (55,625) $ (61,834) $ (55,625)
Net loss plus Preferred Stock dividends $(8,056,551) $(2,967,489) $(15,810,887) $ (9,278,711)
============ ============ ============ ============
Basic and diluted loss per common share $ (0.64) $ (0.58) $ (1.45) $ (1.83)
============ ============ ============ ============
Weighted average number of
common shares outstanding 12,557,313 5,133,953 10,937,339 5,069,634
============ ============ ============ ============
</TABLE>
See Accompanying Notes to Condensed Financial Statements
4
<PAGE> 5
ILLINOIS SUPERCONDUCTOR CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(15,749,053) $(9,223,086)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 837,552 1,151,439
Noncash interest expense on Senior Convertible Notes 8,561,000 -
Changes in operating assets and liabilities (1,575,866) (1,449,785)
------------ ---------------
Net cash used in operating activities (7,926,367) (9,521,432)
------------ ---------------
INVESTING ACTIVITIES:
Sales of available-for-sale securities 500,313 -
Payment of patent costs (87,403) (149,536)
Acquisition of property and equipment (53,635) (267,421)
------------ ---------------
Net cash provided by (used in) investing activities 359,275 (416,957)
------------ ---------------
FINANCING ACTIVITIES:
Payments of financing costs (94,247) -
Proceeds from Senior Convertible Notes 10,350,000 -
Proceeds from issuance of preferred stock - net
of offering costs (140,633) 4,071,120
Proceeds from issuance of common stock - net of
offering costs - (8,537)
Exercise of stock options 7,325 66,361
Exercise of warrants - 780,973
Collection of notes receivable from stockholders 5,000 444,246
Payments on other long-term debt (64,964) (60,628)
------------ ---------------
Net cash provided by financing activities 10,062,481 5,293,535
------------ ---------------
Increase (decrease) in cash and cash equivalents 2,495,389 (4,644,854)
Cash and cash equivalents at beginning of period 2,766,886 5,188,047
------------ ---------------
Cash and cash equivalents at end of period $ 5,262,275 $ 543,193
============ ===============
</TABLE>
See accompanying notes to condensed financial statements
5
<PAGE> 6
ILLINOIS SUPERCONDUCTOR CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three and
nine months ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998. For
further information, refer to the financial statements and footnotes thereto
included in Illinois Superconductor Corporation's Annual Report on Form 10-K
for the year ended December 31, 1997.
NOTE 2 - NET LOSS PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Basic
and diluted net loss per common share is computed based on 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 the earnings per
share amounts for all periods have been presented and, where appropriate,
restated to conform to the Statement 128 requirements.
NOTE 3 - COMPREHENSIVE INCOME
As of January 1, 1998 the Company adopted Financial Accounting Standards
Board's Statement No.130, Reporting Comprehensive Income . Statement 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's net loss or stockholders' equity.
During the three and nine months ended September 30, 1998 total
comprehensive loss amounted to $(8,056,551) and $(15,810,887), respectively,
compared to $(2,967,489) and $(9,278,711) for the same respective periods in
1997.
NOTE 4 - CAPITAL STOCK
During the first quarter of 1998, $475,000 (95 shares) of Series B
Convertible Preferred Stock were converted into 270,671 shares of Common Stock.
Accrued dividends thereon of $13,794 were also converted into 7,860 shares of
Common Stock. In addition, $2,475,000 (495 shares) of Series C Convertible
Preferred Stock were converted into 2,133,331 shares of Common Stock. Accrued
dividends thereon of $50,885 were also converted into 43,797 shares of Common
Stock. In addition, $3,240,000 (648 shares) of Series G Convertible Preferred
Stock were converted into 3,248,447 shares of common stock. Accrued dividends
thereon of $61,913 were also converted into 62,075 shares of Common Stock.
During the second quarter of 1998, $525,000 (105 shares) of Series C
Convertible Preferred Stock were converted into 477,968 shares of Common Stock.
Accrued dividends thereon of $11,916 were also converted into 10,849 shares of
Common Stock. In addition, $260,000 (52 shares) of Series G Convertible
Preferred Stock were converted into 260,678 shares of Common Stock. Accrued
dividends thereon of $5,490 were also converted into 5,504 shares of Common
Stock. Currently, no shares of Series B, Series C or Series G Convertible
Preferred Stock remain outstanding.
On April 22, 1998, the stockholders of the Company approved an increase in
the number of shares of authorized Common Stock from 15,000,000 to 30,000,000.
6
<PAGE> 7
NOTE 5 - INVENTORIES
Inventories at September 30, 1998 consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Raw materials.............................. $1,551,354
Work in process............................ 1,118,205
Finished product........................... 592,607
----------
$3,262,166
==========
</TABLE>
NOTE 6 - SECURITIES PURCHASE AGREEMENT
On May 15, 1998 the Company entered into a Securities Purchase Agreement
("Agreement") with various parties. Under the terms of the Agreement, the
Company issued and sold $10,350,000 aggregate principal amount of Senior
Convertible Notes ("Notes") and issued warrants to purchase 4,140,000 shares of
the Company's common stock (Warrants). The Notes bear interest at 2% per annum,
payable in cash or in shares of the Company's common stock at the Company's
option, and are due on May 15, 2002. Holders of the Notes may convert the
principal amount, plus accrued and unpaid interest, if any, into shares of the
Company's common stock at a conversion price of $1.50 per share. Conversions
are not permitted during the first 90 days following the issuance of the Notes
and are limited to one-half of the original principal amount during the period
from 91 to 180 days after the issuance of the Notes. The Company may redeem all
or a portion of the Notes at a redemption price equal to the principal amount
plus accrued interest thereon, if any, under certain conditions. The Warrants
have an exercise price of $3.75 per share and expire on May 15, 2001. The
Agreement contains several covenants which limit the Company's ability to incur
additional indebtedness and to create any lien, pledge, or encumbrance on any
assets of the Company.
Since the Notes were issued with a non-detachable conversion feature that
was "in-the-money" at the date of issuance, a portion of the proceeds equal to
the intrinsic value of the conversion feature (equal to $9,918,750 and
calculated as the difference between the conversion price and the quoted market
price of the Company's Common stock on the date of issuance multiplied by the
number of shares into which the Notes are convertible) was allocated to
additional paid-in capital, thus creating a discount to the debt. This discount
will be recognized as a charge to interest expense using the effective
interest method over the period from the date of issuance to the date the Notes
first become convertible, resulting in $5,333,045 and $8,451,588 of charges for
the three and nine months, respectively, ended September 30,1998.
In addition, a portion of the proceeds equal to the fair value of the
Warrants issued in conjunction with the Notes (equal to $1,230,000 and
calculated using the Black-Scholes Approximation Formula) was allocated to
additional paid-in capital, thus creating a discount to the debt. This discount
will be recognized as a charge to interest expense using the effective interest
method over the four year term of the Notes, resulting in $72,663 and $109,412
of charges for the three and nine months, respectively, ended September 30,
1998.
NOTES 7 - LEGAL PROCEEDINGS
See Part II - Other Information, Item 1 - Legal Proceedings for a complete
description of outstanding matters. The Company believes that the resolution of
the matters discussed therein will not have a material adverse effect on the
financial condition, results of operations or cash flows of the Company.
.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Because ILLINOIS SUPERCONDUCTOR Corporation ("the Company") wants to provide
investors with more meaningful and useful information, this Quarterly Report on
Form 10-Q contains certain "forward-looking statements" (as such term is
defined in Section 21E of the Securities and 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. Such 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 for 1998
and beyond to differ materially from those expressed in, or implied by such
statements. These important factors include, without limitation, demand for,
and acceptance of, the Company's products; the Company's ability to
manufacture commercial quantities of the Company's products on an efficient and
cost-effective basis; competition by rival manufacturers of filters for the
wireless telecommunications market; the Company's ability to obtain additional
financing when needed; changes in technology; the Company's ability to attract
and retain key personnel; costs and other effects of legal proceedings and
claims; general business conditions of, and growth in, the wireless telecophony
industry; and general economic conditions. A more complete description of
these risks, uncertainties and assumptions, are included in the Company's
filings with the Securities and Exchange Commission, including those described
under the heading "Risk Factors" in the Company's Registration Statement on
Form S-3, as amended, initially filed in June 1998. The Company undertakes no
obligation to update or revise these forward-looking statements to reflect new
events or uncertainties.
The Company was founded in 1989 by ARCH Development Corporation, an
affiliate of the University of Chicago, to commercialize superconducting
technologies primarily for the wireless telecommunications industry. The
Company uses its patented and proprietary high temperature superconductor
(HTS) materials technologies to develop and manufacture radio frequency (RF)
front-end products which are designed to enhance the quality, capacity,
coverage and flexibility of cellular , personal communications services (PCS) ,
and other wireless telephony services.
The Company began commercial sales of its RF filter products in 1996. All
revenues during the first nine months of 1998 and 1997 were from commercial
sales of the Company's RF front-end products. In October 1998, the Company
reduced the prices for its products in order to increase market penetration. To
date in the fourth quarter of 1998, the Company has received purchase orders for
approximately $1,100,000 of products, which it expects to ship in the fourth
quarter of 1998. There is no assurance that this rate of order flow will
continue through the remainder of the fourth quarter or beyond.
RESULTS OF OPERATIONS
The Company's net revenues increased $9,982 and $982,683 to $226,732 and
$1,738,433 for the three and nine month periods, respectively, ended September
30, 1998 compared to $216,750 and $755,750 for the same prior year periods. Net
revenues for the periods represent gross product shipments less reserves for
potential product returns. Such reserves are based on the Company's historical
product return rates. The increases in net revenues were a result of increased
sales of the Company's RF front-end products.
Cost of revenues increased to $1,016,977 and $3,465,070 for the three and
nine month periods, respectively, ended September 30, 1998 from $996,668 and
$3,071,428 in the comparable prior year periods primarily as a result of higher
volumes of product sales and an increase in inventory reserves. Cost of
revenues as a percentage of net revenues was the same for three month period
ended September 30, 1998 compared to the same prior year period primarily due
to improvements in direct materials cost per unit, greater labor efficiencies,
and reduced manufacturing overhead costs, offset by an increase in the
adjustment necessary to reduce ending inventories from cost to market value.
Cost of revenues as a percentage of net revenues decreased for the nine month
period ended September 30, 1998 compared to the same prior year period due to
improvements in direct materials cost per unit, greater labor efficiencies, and
reduced manufacturing overhead costs. The Company expects these improvements to
continue during the rest of 1998. The Company, however, expects the cost of
revenues to exceed net revenues until it manufactures and ships a more
significant amount of its commercial products.
8
<PAGE> 9
The Company's research and development expenses decreased to $643,315 and
$1,981,698 for the three and nine month periods, respectively, ended September
30, 1998, from $982,385 and $3,383,807 for the same periods in 1997. These
decreases were due to a reduction in personnel, engineering material, and other
operating costs. The Company expects that its research and development expenses
during the remainder of 1998 will continue to be reduced from 1997 levels.
Selling and marketing expenses decreased to $418,685 and $1,248,273 for
the three and nine month periods, respectively, ended September 30,1998 from
$487,464 and $1,509,107 for the same periods in 1997., These decreases were
due to reduced marketing personnel costs and related expenses, reduction in
field trial consulting services, and lower advertising costs.
General and administrative expenses increased to $843,265 and $2,338,090
for the three and nine month periods, respectively, ended September 30, 1998,
from $708,404 and $2,188,361 for the same periods in 1997. These increases were
primarily attributable to increased legal and consulting expenses, which were
partially offset by reduced financial services expenses and personnel costs.
Interest expense, net of interest income increased to $5,361,041 and
$8,454,355 for the three and nine month periods, respectively, ended September
30, 1998 from $46,307 and $173,867 of investment income, net of interest
expense for the same periods in 1997. The increases in interest expense were
primarily due to a $5,405,708 charge in the third quarter of 1998 and a
$8,561,000 charge for the nine month period ended September 30, 1998 to
amortize the discount on the Senior Convertible Notes issued on May 15, 1998.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Computer programs
that have time-sensitive software may recognize a date using "00" as the year
1990 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
The Company has established a task force comprised of several employees to
evaluate the Company's status with respect to the Year 2000 Issue. The task
force has identified the following areas as possibly being affected by the Year
2000 issue: (1) IT and non-IT systems, (2) manufacturing applications and (3)
third-party relationships. For each of these areas, the Company is in the
process of identifying and assessing specific software, equipment and systems
which are potentially susceptible to the Year 2000 Issue. The Company expects
to develop and implement corrective actions to ensure that by September 30,
1999 its software, equipment and systems will function properly with respect to
dates in the year 2000 and thereafter. The Company believes the total cost of
such year 2000 compliance activities will not be material. The Company believes
that it has no material exposure to contingencies related to the Year 2000
Issue for the products that it has sold to date.
The Company processes its transactions and applications utilizing a
network of personal computers. In addition, the Company's telephone system, fax
machines, payroll, alarm systems and other miscellaneous systems utilize
computer equipment and software. The Company is identifying which software and
equipment needs to be upgraded. Based on its assessment to date, the Company
does not believe that significant modifications or replacement of its software
systems will be required to be year 2000 compliant. Most of the software used
by the Company in operational applications has been acquired within the past 18
months and is year 2000 complaint.
The Company's manufacturing activities rely on machine tools and test
stations, each of which contain embedded technology. The Company has identified
the particular hardware and software systems used in such manufacturing
applications.. The Company is orally communicating with suppliers of these
systems and based on such conversations believes the manufacturing applications
are year 2000 compliant.
9
<PAGE> 10
The Company relies on third party suppliers for raw materials, utilities
and other key supplies and services. The Company, therefore, recognizes that it
is vulnerable to third party suppliers that fail to remediate their own Year
2000 Issues. The Company is orally communicating with its significant suppliers
to determine their year 2000 compliance status. The Company is also dependent
upon its customers for sales and cash flow. The Company does not currently have
any formal information concerning the year 2000 compliance status of its
customers, but has received indications that most of the Company's customers
are working on year 2000 compliance.
The Company's most reasonably likely worst case scenario with respect to
the Year 2000 Issue is that (1) its manufacturing applications may malfunction
and (2) third party suppliers of raw materials and utilities and customers may
be unable to remediate their own Year 2000 Issues. In such scenario, the
Company could experience manufacturing interruptions, delays in distribution of
its products and reduced sales. This would have a material adverse effect on
the Company's operations. The Company currently has no contingency plan in the
event such most reasonably likely worst case scenario occurs.
The Company currently believes that the Year 2000 Issue will not pose
significant operational problems for the Company. However, if all Year 2000
Issues are not properly identified or remediated on a timely basis, there can
be no assurance that the Company's results of operations or relationships with
customers and suppliers will not be materially adversely affected. There can
also be no guarantee that the systems of other companies on which the Company
relies will be timely converted or that their failure to do so would not have a
material adverse effect on the Company's operations.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company's cash, cash equivalents and
investments, including certain restricted investments, was $5,662,693
reflecting an increase of $2,015,494 from $3,647,199 at December 31, 1997
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 $26,654 was outstanding at September 30, 1998.
This remaining balance is due in monthly installments through May 1999 and
bears interest at 8.5% per annum. Approximately $694,000 in principal amount of
promissory notes, plus approximately $124,000 of accrued interest thereon from
certain stockholders was outstanding as of September 30, 1998. These notes were
due on April 30, 1997. The Company has filed a lawsuit to collect the
outstanding balance, but there can be no assurance when and if such promissory
notes will be repaid. (See "Part II - Other Information, Item 1. Legal
Proceedings")
The Company to date has generated limited revenues from product sales. The
continuing development and expansion in the 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 the Company's 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.
Without consideration of proceeds from additional financings, the Company
believes that its available cash, cash equivalents and investments is
sufficient to finance the Company's current operating plans through at least
March 31, 1999. The Company's strategy to generate sufficient working capital
to fund its operations and cash requirements in the future includes advancing
market penetration with OEM's and customers in overseas markets, building
strong and enduring relationships with existing customers, expanding product
offerings to meet varying customer needs, and reducing product costs through
economies of scale in material purchases, refinement of the manufacturing
processes, and the further implementation of an overhead reduction program.
10
<PAGE> 11
The Company is evaluating its needs for capital and expects to pursue
additional sources of capital it considers appropriate based upon the Company's
requirements and market conditions. If the Company is unable obtain adequate
funds when needed in the future, the Company will be required to delay,
substantially scale back or eliminate the manufacturing, marketing or sales of
its products or its research and development programs. This would materially
and adversely affect the Company's business, financial condition and
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK -
Not Applicable
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed in the Company's Quarterly Reports on Form 10-Q
for the quarters ended March 31, and June 30, 1998, on June 5, 1996, Craig M.
Siegler filed a complaint against the Company in the Circuit Court of Cook
County, Illinois, County Department, Chancery Division. The complaint alleged
that, in connection with the Company's private placement of securities in
November 1995, the Company breached and repudiated an oral contract with Mr.
Siegler for the issuance and sale by the Company to Mr. Siegler of 370,370.37
shares of the Company's common stock, plus warrants (immediately exercisable
at $12.96 per share) to purchase an additional 370,370.37 shares of the Common
Stock, for a total price of $4,000,000. The remedy sought by Mr. Siegler was a
sale to him of such securities on the terms of the November 1995 private
placement. On August 16, 1996, the Company's motion to dismiss Mr. Siegler's
complaint was granted with leave to amend. On September 19, 1996, Mr. Siegler's
motion for reconsideration was denied.
On October 9, 1996, Mr. Siegler filed his First Amended Verified Complaint
and Jury Demand, seeking a jury trial and money damages equal to the difference
between $8,800,000 (370,370.37 shares at $10.80 per share and 370,370.37 shares
at $12.96 per share) and 740,740.74 multiplied by the highest price at which
the Common Stock traded on The Nasdaq Stock Market between November 20, 1995
and the date of judgment. Mr. Siegler also preserved his claim for specific
performance for purposes of appeal. On November 1, 1996, the case was
transferred to the Circuit Court of Cook County, Illinois, County Department,
Law Division. The Company's Answer was filed on November 21, 1996 and 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.
As previously disclosed in the Company's Quarterly Reports on Form 10-Q
for the quarters ended March 31, and June 30, 1998 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 Ruben 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 13, 1996, in the aggregate principal amount of $698,508
and the guarantee by the Guarantor of the Borrowers' obligation 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.
On September 30, 1997, the Borrowers and the Guarantor responded to the
Company's complaint. Concurrently, the Borrowers filed a counterclaim alleging
that they exercised the warrants in reliance on the Company's alleged
fraudulent representations to certain 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 damage which the Borrowers allege
"cannot currently be determined." On December 10, 1997, the Company's motion to
strike the Borrowers' fraud defense and dismiss their counterclaim was granted
with leave to amend.
11
<PAGE> 12
On January 14, 1998, the Borrowers filed amended defenses and
counterclaims based on substantially similar allegations of supposed fraud by
the Company. The Company's answer was filed on April 30, 1998 and the parties
are proceeding with discovery. The Company regards the amended fraud defense
and counterclaim as without factual or legal merit. Effective July 23, 1998,
one of the Borrowers, Merrill Weber & Co., Inc., and the Company reached a
settlement of their respective claims. The Company intends to vigorously pursue
recovery of the moneys owed by the Borrowers and the Guarantor under the
promissory notes and the guarantee.
As previously disclosed in the Company's Quarterly Reports on Form 10-Q
for the quarters ended March 31, and June 30, 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, 1988 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. Mr.Drobny did not respond to the Company's
and the Directors' motion to dismiss. Instead, Mr. Drobny filed a motion
seeking voluntary dismissal of his complaint, alleging 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 July 20, 1998, the
court granted Mr. Drobny's motion for voluntary dismissal and the case was
dismissed without prejudice.
As previously disclosed in the Company's Quarterly Reports on Form 10-Q
for the quarters ended March 31, and June 30, 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 L. Lazarus, Tom L. Powers, Ora E. Smithand Paul 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 sought 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
judgement rule and the plaintiff's failure to fulfill the legal prerequisites
for filing an action against the Board. Prior to a hearing on the Company's and
the Board's motion to dismiss, Mr. Lipman filed a motion on March 16, 1998,
seeking both to amend his proposed putative class to include Mr. Drobny and to
certify the class.
On June 1, 1998, the court granted the Company's and the Board's motion to
dismiss the complaint. Concurrently, Mr. Lipman withdrew his motion to amend
the proposed putative class and certify the class. On June 30, 1998, Mr.
Lipman filed an amended complaint against the Company's eight former or current
directors but excluding the Company itself as a defendant. The amended
complaint alleges 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 and thereafter drawing two tranches of that financing. The
amended complaint seeks certification of a class consisting of all owners of
the Company's Common Stock during the period from May 15, 1997 through December
31, 1997, excluding the directors. Mr. Lipman's amended complaint alleges that
the stock owned by the putative class lost $61 million due to the financing the
directors selected, and seeks an unspecified amount of compensatory and
punitive damages. The Company and the Board of Directors regard the amended
complaint as without factual or legal merit. Accordingly, the Board of
Directors filed a motion to dismiss Mr. Lipton's amended complaint on July 29,
1998. The court recently scheduled a hearing on the Board's motion to dismiss
for December 1998.
12
<PAGE> 13
As previously disclosed in the Company's Quarterly Reports on Form 10-Q for
the quarters ended March 31, and June 30, 1998, on June 24, 1998, Jonathan
Greenwald, derivatively on behalf of the Company, filed a complaint against the
Company and the Board in the court of Chancery of the State of Delaware in and
for New Castle County. Mr. Greenwald's complaint alleges that the Board breached
its duties of good faith, loyalty, due care, and candor by selecting financing
for the Company in 1997 which purportedly reduced the stock price and was
supposedly accepted to entrench the Board. The complaint seeks an unspecified
amount of compensatory damages, various equitable relief and attorney's fees.
To date, no court proceedings have been held on Mr. Greenwald's suit.
The Company and the Board regard the suit as without factual or legal
merit. Accordingly, at such time as a response to Mr. Greenwald's complaint is
required under Delaware law, the Company and the Board anticipate filing an
appropriate motion contesting the complaint.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS.
Exhibit 10 Form of Directors Indemnification Agreement
Exhibit 27 Financial Data Schedules
B. REPORTS ON FORM 8-K
The Company did not file any Current Reports on Form 8-K
during the third quarter of 1998.
13
<PAGE> 14
<PAGE> 15
SIGNATURES
Pursuant to the requirements 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.
ILLINOIS SUPERCONDUCTOR CORPORATION
Registrant
Date: November 13, 1998 By: /s/Edward W. Laves
------------------------------------
Edward W. Laves
President and Chief Executive Officer
Date: November 13, 1998 By: /s/Kenneth E. Wolf
------------------------------------
Kenneth E. Wolf
Controller
14
<PAGE> 1
EXHIBIT 10
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (the "Agreement") is entered into as of the
[NUMBER] day of [MONTH, YEAR], by and between Illinois Superconductor
Corporation, a Delaware corporation (the "Company"), and [PERSON'S NAME]
("Indemnitee").
RECITALS
Indemnitee has been asked to serve as a director of the Company (service in
such a capacity shall hereafter be described as service as an "Agent").
Section 145 of the General Corporation Law of Delaware ("Section 145")
empowers the Company to indemnify its Agents and expressly provides that the
indemnification that it authorizes is not exclusive.
The Company now maintains Directors' and Officers' Liability Insurance ("D
& O Insurance") covering certain liabilities that may be incurred by certain of
its Agents and others in the performance of their duties for the Company.
Developments with respect to the terms and availability of D & O Insurance,
however, have raised questions concerning the adequacy and reliability of the
protection afforded thereby. The Company is aware that, as a result, competent
and experienced persons have become increasingly reluctant to serve as directors
or officers of corporations.
To induce Indemnitee to serve as an Agent, the Company is prepared to
provide Indemnitee with the protections described in this Agreement.
NOW, THEREFORE, in consideration of the willingness of Indemnitee to serve
as an Agent, the Company hereby agrees as follows:
1. INDEMNIFICATION GENERALLY. The Company agrees to hold harmless and to
indemnify Indemnitee to the fullest extent authorized or permitted by Section
145, or, to the extent that any amendment to Section 145 or to other applicable
law may expand indemnification rights, to the fullest extent authorized or
permitted by Section 145 or such other applicable law as may be in effect.
However, such indemnification shall not apply to expenses that Indemnitee has
incurred in a suit brought by Indemnitee against the Company, except for
expenses that Indemnitee has incurred in an action brought to enforce rights or
to collect sums due under this Agreement in which Indemnitee is the prevailing
party.
2. MAINTENANCE OF LIABILITY INSURANCE.
2.1 The Company agrees that, so long as Indemnitee shall continue to serve
as an Agent and, thereafter, for so long as Indemnitee shall potentially be
subject to any threatened, pending, or completed action, suit, or proceeding,
whether civil, criminal, administrative, or investigative (a "Proceeding"), by
reason of the fact that Indemnitee is or was an Agent of the Company, the
Company, subject to Section 3 of this Agreement, shall maintain in amounts
reasonably available to the Company D & O Insurance from established and
reputable insurers.
2.2 Notwithstanding the Company's agreement in Section 2.1 above, the
Company shall have no obligation to maintain D & O Insurance if the Company
determines in good faith and in its reasonable business judgment that such
insurance is not reasonably available, the premium costs for such insurance are
disproportionate to the amount of coverage provided, or the coverage
<PAGE> 2
provided by such insurance is limited by exclusions so as to provide an
insufficient benefit, or Indemnitee is covered adequately by similar insurance
maintained by an affiliate of the Company.
3. SELF INSURANCE. If the Company does not maintain D & O Insurance in
accordance with Section 2.1 of this Agreement, or if the coverage provided by
such insurance is less than that provided by the D & O Insurance maintained by
the Company at the time that this Agreement is signed or the D & O Insurance
first procured by the Company after this Agreement is signed, the Company,
subject only to the exclusions contained in Section 5 of this Agreement, agrees
to hold harmless and to indemnify Indemnitee to the fullest extent of the
coverage that otherwise would have been provided to Indemnitee under the D & O
Insurance that the Company currently maintains or ultimately procures.
4. ADDITIONAL INDEMNITY. Subject only to the exclusions set forth in
Section 5 of this Agreement, the Company agrees to hold harmless and to
indemnify Indemnitee against any and all expenses (including attorneys' fees
and expenses), judgments, fines, and amounts paid in settlement that Indemnitee
actually and reasonably has incurred in connection with any Proceeding to which
Indemnitee is or was a party, or at any time either becomes a party or is
threatened to be made a party by reason of the fact that Indemnitee is or was
an Agent, subject to the same exclusion provided in the last sentence of
Section 1 of this Agreement.
5. LIMITATIONS ON SELF INSURANCE AND ADDITIONAL INDEMNITY. The Company
shall not pay any indemnity under Sections 3 or 4 of this Agreement:
5.1 to the extent that Indemnitee is indemnified in full under Sections 1
or 2 of this Agreement or under any D & O Insurance or any other insurance; or
5.2 with respect to (a) remuneration paid to Indemnitee if it shall be
determined by a final adjudication that such remuneration was in violation of
law or (b) expenses (including attorneys' fees) incurred by Indemnitee in
connection with any Proceeding relating to such remuneration, unless Indemnitee
is the prevailing party therein; or
5.3 either (a) on account of any suit in which a final, non-appealable
judgment is rendered against Indemnitee under the provisions of Section 16 of
the Securities Exchange Act of 1934 and amendments thereto or under similar
provisions of any federal or state law or (b) on account of amounts paid in
settlement of any litigation instituted or threatened under Section 16 or such
law as a result of Indemnitee's purchase or sale of securities of the Company
or of any affiliate of the Company; or
5.4 on account of Indemnitee's conduct, which finally and non-appealably
has been adjudged to have been knowingly fraudulent or deliberately dishonest
or to have involved willful misconduct; or
5.5 for expenses or other losses incurred in connection with Indemnitee's
having in fact gained any personal profit or advantage to which Indemnitee was
not legally entitled; or
5.6 if a court having jurisdiction in the matter shall finally and
non-appealably determine that such indemnification would violate public policy
or be otherwise unlawful.
6. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision
of this Agreement to indemnification by the Company for a portion of any
expenses or liabilities incurred by Indemnitee in the investigation, defense,
settlement, or appeal of a Proceeding, but is not entitled to
<PAGE> 3
indemnification for the total amount of the expenses or liabilities, the
Company shall indemnify Indemnitee for the portion of such expenses or
liabilities to which Indemnitee is entitled.
7. INDEMNIFICATION PROCEDURES.
7.1 Promptly after the receipt by Indemnitee of notice of the commencement
or the threat of commencement of any Proceeding, Indemnitee shall, if
Indemnitee believes that indemnification with respect to the Proceeding may be
sought from the Company under this Agreement, notify the Company, consistent
with Section 13 of the commencement or the threat of commencement of the
Proceeding, but the failure of the Indemnitee to so notify the Company shall
not relieve the Company from any liability it may have under this Agreement
except to the extent that it has been prejudiced in any material extent by such
failure, or from any liability which it may have otherwise.
7.2 If, at the time that the Company receives notice under Section 7.1 of
this Agreement of the commencement or the threat of commencement of any
Proceeding, the Company has D & O Insurance in effect, the Company shall give
prompt notice of the commencement or the threat of commencement of such
Proceeding to the insurer(s) in accordance with the procedures set forth in its
insurance policy or policies. The Company then shall take all appropriate
action to cause such insurer(s) immediately to pay all amounts payable as a
result of such Proceeding or threatened Proceeding in accordance with the terms
of such policy or policies, provided that the Company shall remain liable to
pay any such amount in the event the insurer(s) fail to pay such amount.
7.3 If the Company is obligated to pay to Indemnitee the expenses of any
Proceeding or threatened Proceeding, the Company, upon the delivery to
Indemnitee of written notice of its election to do so, shall be entitled to
assume Indemnitee's defense. The Company's assumption of Indemnitee's defense
shall be subject to Indemnitee's approval of the counsel who is to conduct the
defense. Counsel shall be approved or disapproved by Indemnitee within seven
(7) days after the Company notifies Indemnitee of counsel's identity and shall
be deemed approved unless Indemnitee provides the Company with notice to the
contrary. After the approval of counsel selected by the Company, the Company
will not be liable to Indemnitee under this Agreement for any attorneys' fees
that Indemnitee subsequently incurs with respect to the same Proceeding,
provided that (a) Indemnitee shall have the right to employ Indemnitee's own
counsel in any such Proceeding at Indemnitee's own expense, and (b) Indemnitee
may retain Indemnitee's own counsel, the fees and expenses of whom shall be
paid by the Company, if (i) Indemnitee shall reasonably have concluded that a
conflict or potential conflict exists between the Company and Indemnitee in the
conduct of any such defense or (ii) the Company shall not, in fact, have
employed counsel to assume the defense of such Proceeding.
8. ADVANCES OF EXPENSES. Prior to a determination that this Agreement in
fact entitles Indemnitee to indemnification, expenses that Indemnitee has
incurred or for which Indemnitee might be entitled to indemnity under this
Agreement shall be advanced to Indemnitee by the Company within fifteen (15)
days after the Company's receipt of Indemnitee's written request for such an
advance, provided that Indemnitee undertakes in writing to repay such
advance(s) to the extent that Indemnitee ultimately is determined not to be
entitled to indemnification under the provisions of Section 145, this
Agreement, or otherwise.
9. NON-EXCLUSIVITY. The provisions for indemnification and advancement of
expenses contained in this Agreement shall not be deemed exclusive of any other
rights that Indemnitee may have under any provision of law, the Company's
Certificate of Incorporation or Bylaws, the vote of the Company's stockholders
or disinterested directors, other agreements, or otherwise. Indemnitee's
rights hereunder shall continue after Indemnitee has ceased acting as an Agent
of the Company and shall inure to the benefit of Indemnitee's heirs, executors,
and administrators.
<PAGE> 4
10. SEVERABILITY. If any provision or provisions of this Agreement shall
for any reason be held to be invalid, illegal, or unenforceable, (i) the
validity, legality, and enforceability of the remaining provisions of this
Agreement (including, without limitation, all portions of any paragraphs of the
Agreement containing the provision or provisions held to be invalid, illegal, or
unenforceable) shall not in any way be affected or impaired, and (ii) to the
fullest extent possible, the provisions of this Agreement (including, without
limitation, all portions of any paragraph of this Agreement held to be invalid,
illegal, or unenforceable) shall be construed so as to give effect to the intent
manifested by the provision or provisions that have been held to be invalid,
illegal, or unenforceable to the maximum extent permitted by law.
11. MODIFICATION AND WAIVER. No supplement, modification, or amendment of
this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provision hereof (whether or
not similar), and no such waiver shall constitute a continuing waiver.
12. SUCCESSORS AND ASSIGNS. The terms of this Agreement shall bind, and
shall inure to the benefit of, the successors, assigns, heirs, executors, and
administrators of the parties hereto.
13. NOTICE. All notices, consents, requests, approvals, and other
communications required or permitted under this Agreement shall be in writing
and shall be deemed to have been properly given if hand delivered or if sent by
a courier freight prepaid (in either case, effective upon receipt or when
refused), in the case of the Company, at the addresses listed below, and in the
case of Indemnitee, at Indemnitee's address of record with the Company, or to
such other addresses of which the parties may notify one another in writing.
To the Company: Illinois Superconductor Corporation
451 Kingston Court
Mount Prospect, IL 60056
with a copy to: Katten Muchin & Zavis
525 West Monroe Street
Suite 1600
Chicago, IL 60661-3693
Attn.: Lawrence Levin, Esq.
14. GOVERNING LAW. This Agreement shall be governed exclusively by and
construed according to the laws of the State of Delaware, as applied to
contracts between Delaware residents entered into and to be performed entirely
within Delaware.
15. THIRD PARTIES. This Agreement is entered into solely for the benefit
of the Company and its successors and assigns, on the one hand, and of
Indemnitee and Indemnitee's heirs, executors, and administrators, on the other
hand, and no third party shall have any rights hereunder.
16. DURATION. This Agreement shall commence and be effective immediately
upon the election of the Indemnitee as a director of the Company pursuant to a
Written Consent dated [DATE] and effective [DATE]. This Agreement shall
terminate upon the expiration of all statutes of limitations that would be
applicable to any cause of action that could arise out of Indemnitee's service
as an Agent.
<PAGE> 5
IN WITNESS WHEREOF, the parties to this Agreement have entered into this
Indemnification Agreement effective as of the date first above written.
ILLINOIS SUPERCONDUCTOR CORPORATION
By: __________________________
Its:
______________________________
(Signature)
NAME OF BOARD MEMBER
______________________________
______________________________
(Print Address)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL IN FORMATION EXTRACTED FROM
(A) IDENTIFY SPECIFIC FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
(B) IDENTIFY FILING
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,262,275
<SECURITIES> 0
<RECEIVABLES> 955,063
<ALLOWANCES> 0
<INVENTORY> 3,262,166
<CURRENT-ASSETS> 9,592,607
<PP&E> 8,230,928
<DEPRECIATION> 4,478,020
<TOTAL-ASSETS> 14,493,299
<CURRENT-LIABILITIES> 1,321,831
<BONDS> 7,762,249
<COMMON> 12,557
0
0
<OTHER-SE> 5,396,662
<TOTAL-LIABILITY-AND-EQUITY> 14,493,299
<SALES> 1,738,443
<TOTAL-REVENUES> 1,738,443
<CGS> 3,465,070
<TOTAL-COSTS> 3,465,070
<OTHER-EXPENSES> 5,568,061
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,646,076
<INCOME-PRETAX> (8,454,355)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,454,355)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,454,353)
<EPS-PRIMARY> (1.45)
<EPS-DILUTED> (1.45)
</TABLE>
