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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
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
of incorporation) Identification No.)
451 KINGSTON COURT
MT. PROSPECT, ILLINOIS 60056
(847) 391-9400
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
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Common Stock, par value $0.001 per share
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
On March 25, 1999, 12,557,344 shares of the registrant's Common Stock were
outstanding. The aggregate market value on March 25, 1999 of the registrant's
Common Stock held by non-affiliates of the registrant was $14,127,012.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive proxy statement for the
annual meeting of stockholders to be held on June 9, 1999 are incorporated by
reference in Part III of this Form 10-K.
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TABLE OF CONTENTS
PART I
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Item 1. Business........................................................................................... 1
Item 2. Properties......................................................................................... 19
Item 3. Legal Proceedings.................................................................................. 19
Item 4. Submission of Matters to a Vote of Security Holders................................................ 21
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............................. 22
Item 6. Selected Financial Data............................................................................ 24
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 25
Item 7a. Quantitative and Qualitative Disclosures About Market Risk......................................... 28
Item 8. Financial Statements and Supplementary Data........................................................ 29
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............... 49
PART III
Item 10. Directors and Executive Officers of the Registrant................................................. 50
Item 11. Executive Compensation............................................................................. 50
Item 12. Security Ownership of Certain Beneficial Owners and Management..................................... 50
Item 13. Certain Relationships and Related Transactions..................................................... 50
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................... 51
</TABLE>
Because the Company wants to provide investors with more meaningful and useful
information, this Annual Report on Form 10-K ("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 history of net
losses and the lack of assurance that the Company's earnings will be sufficient
to cover fixed charges in the future; the degree to which the Company is
leveraged and the restrictions imposed on the Company under its existing debt
instruments which may adversely affect the Company's ability to finance its
future operations, to compete effectively against better capitalized competitors
and to withstand downturns in its business or the economy generally; the
Company's current inability to satisfy the minimum maintenance requirements for
the continued listing of its shares of Common Stock for trading on the Nasdaq
National Market which may have a material adverse effect on the liquidity of the
Common Stock and the Company's ability to obtain additional funding as needed if
such shares are delisted; demand for, and acceptance of, the Company's products;
continued downward pressure on the prices charged for the Company's products due
to competition of rival manufacturers of filters for the wireless
telecommunications market; the timing and receipt of customer orders; the
Company's ability to attract and retain key personnel; the effects of legal
proceedings and other factors described in this Form 10-K, including those
described under the heading "Risk Factors," or in other filings of the Company
with the Securities and Exchange Commission. 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.
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PART I
ITEM 1. BUSINESS
GENERAL
Illinois Superconductor Corporation (the "Company") uses its patented and
proprietary high temperature superconductor ("HTS") materials, radio frequency
("RF") filter designs and cryogenic technologies to develop, manufacture and
market high performance products designed to enhance the quality, capacity,
coverage and flexibility of cellular, Personal Communications Services ("PCS")
and other wireless telecommunications services. Superconductor materials, when
cooled below a critical temperature, are able to transmit an electric current
with either no or minimal loss of energy. Because of this minimal energy loss,
superconductors are attractive for a wide range of commercial applications.
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 highest performing RF filters have more than 30
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 primarily 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. The Company also believes that its thick-film superconductor
technology is unique in its ability to handle high-powered transmit applications
while maintaining very low levels of intermodulation distortion. In addition,
thick-film technology does not require "clean" rooms for manufacturing, which
reduces the cycle time and cost of production. Superconductors become
superconducting at temperatures of roughly -200(Degree) C. These temperature
levels can be maintained using commercially available mechanical cooling
systems. The Company has developed cryogenic packaging systems for its RF
filters which are highly reliable over longer durations and minimize operating
costs.
The Company was founded in 1989 by ARCH Development Corporation, an
affiliate of the University of Chicago, to commercialize superconductor
technologies initially developed by Argonne National Laboratory. The Company was
incorporated in Illinois on October 18, 1989 and reincorporated in Delaware on
September 24, 1993. The Company's facilities and principal executive offices are
located at 451 Kingston Court, Mt. Prospect, Illinois 60056 and its telephone
number is (847) 391-9400.
BUSINESS STRATEGY
The Company's objective is to be the global leader in supplying high
performance RF filter products to the growing wireless telecommunications
market. Key elements of the Company's strategy include the following:
- Offering the Highest Performance RF Filter Systems in the Industry. The
Company's proprietary thick-film and RF filter design technology
permits the Company to build RF filters with a high level of adjacent
band interference rejection coupled with a low level of desired signal
loss. The Company believes that its success will depend upon
maintaining its technological leadership.
- Supplying Price Competitive Products. The Company has been able to
continually reduce its product cost, which has permitted the Company to
competitively price its products. Currently, the price for the
Company's superconducting filters is approaching that of conventional
filters. The Company's lowest price product currently sells for less
than $10,000 per cell site. The Company believes that with superior
performance and competitive pricing it can become the dominant RF
filter manufacturer in the world. In 1997, the Company reduced product
costs by 50%, and in 1998
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the Company reduced product costs by an additional 40%. The Company
believes that it can continue to achieve further cost reductions in the
coming years.
- Providing Solutions for Different Market Needs. The Company has
successfully expanded its product line in response to a wide variety of
customer needs in a cost-effective manner. For rural markets, the
Company currently offers a rural range extension product for under
$10,000, while for urban markets, it offers a 24 pole brick wall RF
filter which it believes is superior to the other RF filters currently
available on the market. The Company has achieved this broad product
portfolio through flexible designs which can quickly be adapted to
different customer needs. By addressing the varied needs of the market
at a reasonable price, the Company aims to provide real value to its
customers.
- Superior Customer Support The Company strives to exceed its customers'
expectations for quality and responsiveness by minimizing service
interruptions. Because of its superior quality and customer support,
the Company was awarded Motorola's superior quality award in 1998.
- Best in Class Reliability. To insure maximum customer retention, the
Company aims to provide the highest level of reliability to its
customers. To achieve this, the Company introduced its proprietary
ATP(TM) technology which insures that its RF filters continue to
operate even when there is a cooling system or power failure. In
addition, the Company has chosen its cooler vendor based on superior
reliability and offers such features as redundant alarms and remote
diagnostics.
- Focusing on Fast Growing Commercial Markets. The Company has focused on
the fast growing wireless telecommunications market and has deferred at
this time pursuing other commercial applications of its proprietary
technology. This focus has minimized overhead costs and allowed the
Company to be first to market with new RF products and a broader
product portfolio than its competitors.
- Building Long-Term Relationships with Customers. Becoming the preferred
RF filter vendor with customers will allow the Company to focus on
expanding its business with new customers and in new markets. To date,
the Company has established strong relationships with six of the
largest wireless operators in the United States. These customers have
placed repeated orders in multiple markets. The Company's largest
customer purchased equipment for over 50 cell sites in the fourth
quarter of 1998.
The Company has received orders from multiple wireless telecommunications
service providers located in the United States, Canada and Asia, including many
of the largest wireless operators in the United States. The Company's RF filters
are now installed in over 100 cell sites in market areas across the United
States. In 1997, commercial orders from wireless service providers were
generally for one or two operational cell sites, with the largest order having
been for five cell sites. In 1998, commercial orders significantly increased
with several wireless service providers deploying the Company's products in tens
of cell sites. The Company's newest product line, the PowerMaster(TM) line of
transmit filters, has generated interest from several major original equipment
manufacturers ("OEMs") that supply cellular and PCS systems equipment to the
wireless service providers.
The Company is an approved vendor for one of the world's largest cellular
system equipment manufacturers and is pursuing similar relationships with other
OEMs. Being an approved vendor allows cellular and PCS service providers in the
U.S. and abroad to purchase the Company's products directly from the OEM, for
use in both new and existing cell sites.
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RISK FACTORS
The following factors, in addition to the other information contained
elsewhere herein, should be considered carefully in evaluating the Company and
its business.
Uncertain Market Acceptance of Superconducting Telecommunications Products
The Company's RF filter products, which are based on the Company's HTS
technology, have not been sold in very large quantities and a sufficient market
may not develop for the Company's products. The Company's customers establish
demanding specifications for performance and reliability. The Company's RF
filter products may not continue to meet product performance and reliability
criteria set by cellular and PCS service providers. Also, the Company's products
may not operate reliably on a long-term basis, the Company may be unable to
manufacture adequate quantities of any products it develops at commercially
acceptable costs or on a timely basis, or the Company's current or future
products may not achieve market acceptance. The Company has experienced, and may
continue to experience, quarterly fluctuations in its results of operations as
its RF filter products attempt to gain market acceptance while being subject to
the lengthy purchase processes of customers. Failure to successfully develop,
manufacture and commercialize products on a timely and cost-effective basis will
have a material adverse effect on the Company's business, operating results and
financial condition.
Limited Operating History; History of Losses; and Uncertainty of Financial
Results
The Company was founded in October 1989 and through 1996 was engaged
principally in research and development ("R&D"), product testing, manufacturing,
marketing and sales activities. The Company has only recently begun to generate
significant revenues from the sale of its RF filter products. Prior to the
commencement of these sales, the majority of the Company's revenues were derived
from R&D contracts, primarily from the U.S. government. The Company does not
expect revenues to increase dramatically until it ships a significantly larger
amount of its RF products. Accordingly, the Company has only a limited operating
history upon which an evaluation of the Company and its prospects can be based.
The Company must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stages of product
commercialization.
The Company has incurred substantial net losses in each year since its
inception. The Company expects to continue to incur operating losses through at
least the end of 1999 as it continues to devote significant financial resources
to its product development, manufacturing, marketing and sales efforts. Even if
the Company is able to overcome the significant remaining manufacturing and
marketing hurdles necessary to sell large quantities of its RF filter products,
the Company may never achieve a profitable level of operations or, if
profitability is achieved, it may not be sustained.
The Company's customers are highly concentrated. The loss of an individual
customer may have a material adverse effect on the Company's business. The
wireless telecommunications market is currently experiencing an increasing rate
of consolidation among the largest wireless operators which may cause a
significant disruption and/or delay in the sales of the Company's products. In
order to continue to grow revenues, the Company may be required to further
reduce the prices of its products. In the event of further price reductions, the
Company may not be able to reduce product costs sufficiently to achieve
acceptable product margins.
Future Capital Needs and Delisting of Common Stock
To date, the Company has financed its operations primarily through public
and private equity and debt financings. Although the Company recently completed
a private placement of $3.3 million in aggregate initial principal amount of
convertible debt securities, the Company believes that it will require
substantial additional funds during the third quarter of 1999 to finance its
product development, manufacturing, marketing and sales activities. In addition,
the Company's outstanding debt instruments contain certain restrictions which
may adversely impair the Company's ability to obtain additional financing. See
"Substantial Leverage; Restrictions Contained in Debt Instruments" below. If
additional funds are raised by issuing other equity or convertible debt
securities, further dilution to existing or future stockholders is likely to
result. If adequate funds are not available on acceptable terms when needed, the
Company would be required to substantially delay, scale-back or eliminate the
manufacturing, marketing or sales of one or more of its products or research and
development programs, or may be required to obtain funds through arrangements
with collaborative partners or others that may require the Company to relinquish
rights to certain of its technologies,
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product candidates or potential products that the Company would not otherwise
relinquish. This would materially adversely affect the Company's business
operating results and financial condition. Inadequate funding also could impair
the Company's ability to compete in the marketplace.
The Company regularly examines opportunities to expand its technology base
and product line through means such as licenses, joint ventures and acquisitions
of assets or ongoing businesses, and may issue securities in connection with
such transactions. However, no commitments to enter into or pursue any such
transactions have been made at this time, and any such discussions may not
result in any such transaction being concluded.
In addition, the Company currently has a limited number of unreserved
authorized shares of its Common Stock, $.001 par value per share (the
"Common Stock"), available for future issuance in connection with financings.
The Company plans to request that its stockholders approve an increase in the
number of authorized shares at the next annual meeting of the Company's
stockholders. Failure to obtain this approval would limit the Company's ability
to raise sufficient funds to support its business plans.
The Company is currently unable to maintain a level of net tangible assets
required to maintain the listing of the Common Stock for trading on the Nasdaq
National Market, and the Common Stock may be delisted for trading on the Nasdaq
National Market in the near future. Such delisting could have a material adverse
effect on the liquidity of the Common Stock and could have a material adverse
effect on the Company's ability to obtain additional funding as needed,
especially if the Company is unable to list the Common Stock for trading on
another securities market or exchange.
Substantial Leverage; Restrictions Contained in Debt Instruments
The Company is substantially leveraged. The degree to which the Company is
leveraged may adversely affect the Company's ability to finance its future
operations, to compete effectively against better capitalized competitors and to
withstand downturns in its business or the economy generally. Although the
Company's outstanding Notes (as defined below under "Substantial Number of
Shares Eligible for Future Sale; Dilution") currently permit, subject to certain
restrictions, the Company to pay accrued interest on such securities in shares
of Common Stock, the Company may be unable to continue to be permitted to do so
in the future. If the Company is no longer permitted to pay accrued interest on
the Notes in shares of Common Stock, the Company may not be successful in
raising additional equity or debt financing sufficient to enable it to pay such
interest in cash. In addition, the Company's outstanding Notes contain
restrictions that may adversely affect the Company's ability to raise additional
equity or debt financing. Under the Notes, the Company is not permitted, without
the prior approval of the holders of the Notes, (i) to incur any additional
indebtedness (other than pursuant to a working capital line of credit in an
amount not to exceed $1 million or to trade creditors in the ordinary course of
business) or to create any lien, pledge, or encumbrance, subject to certain
exceptions, on any assets of the Company, (ii) for so long as a significant
portion of the Notes remain outstanding, to engage in certain sale or merger
transactions, or to engage in certain other transactions which require the
approval of the Company's stockholders, or (iii) to redeem, purchase or
otherwise acquire any equity or debt securities of the Company which are junior
in rights or preferences to the Notes, or to pay any dividend (other than in
shares of Common Stock) with respect to such securities. In addition, in the
event that the Company fails to achieve break-even or positive operating income
during the second quarter of 2000, the Notes may become immediately due and
payable unless the holders thereof agree to modify or waive such provision.
Furthermore, for so long as the amount of Common Stock issuable upon conversion
of the Notes represents 5% or more of the total then outstanding shares of the
Common Stock, the holders of the Notes have the right to designate two members
for election to the Company's Board of Directors.
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Volatility of Common Stock Price
The market price of the Common Stock, like that of many other
high-technology companies, has fluctuated significantly and is likely to
continue to fluctuate in the future. Since January 1, 1998, the closing price of
the Common Stock has ranged from a low of $0.84 per share to a high of $3.31 per
share. Announcements by the Company or others regarding the receipt of customer
orders, quarterly variations in operating results, additional equity or debt
financings, changes in recommendations of securities analysts, results of
customer field trials, scientific discoveries, technological innovations,
litigation, product developments, patent or proprietary rights, government
regulation and general market conditions may have a significant impact on the
market price of the Common Stock. In addition, if in the future the closing
price of the Common Stock as reported on the Nasdaq National Market remains
below $1.00 per share for 30 consecutive days, the Common Stock could be
delisted for trading on the Nasdaq National Market. Such delisting could have a
material adverse effect on the liquidity of the Common Stock.
Limited Experience in Manufacturing, Marketing and Sales
For the Company to be financially successful, it must manufacture its
products in substantial quantities, at acceptable costs and on a timely basis.
Although the Company to date has produced limited quantities of its products for
commercial installations and for use in development and customer field trial
programs, production of large quantities at competitive costs presents a number
of technological and engineering challenges for the Company. The Company may be
unable to manufacture such products in sufficient volume. The Company has
limited experience in manufacturing, and substantial costs and expenses may be
incurred in connection with attempts to manufacture larger quantities of the
Company's products. The Company may be unable to make the transition to large
scale commercial production successfully.
The Company's marketing and sales experience to date is very limited. The
Company will be required to further develop its marketing and sales force in
order to effectively demonstrate the advantages of its products over more
traditional products, as well as competitive superconductive products. The
Company may also elect to enter into agreements or relationships with third
parties regarding the commercialization or marketing of its products. If the
Company enters into such agreements or relationships, it will be substantially
dependent upon the efforts of others in deriving commercial benefits from its
products. The Company may be unable to establish adequate sales and distribution
capabilities, it may be unable to enter into marketing agreements or
relationships with third parties on financially acceptable terms, and any third
parties with whom it enters into such arrangements may not be successful in
marketing the Company's products.
To date, the Company's products have been installed in over 100 cell sites
with a wide geographic dispersion. Although the Company's products have not
experienced any significant reliability problems to date, the Company's products
may develop quality problems in the future. Repeated or widespread quality
problems could result in significant warranty expenses and/or the loss of
customer confidence. The occurrence of such quality problems could have a
material adverse effect on the Company's business, operating results and
financial condition.
Competition
The wireless telecommunications equipment market is very competitive. The
Company's products compete directly with products which embody existing and
future competing commercial technologies. In particular, in cellular and PCS
telecommunications applications, the Company competes with conventional RF
component manufacturers whose products are currently in use by the Company's
potential customers. Many of these companies have substantially greater
financial resources, larger R&D staffs and greater manufacturing and marketing
capabilities than the Company. Other emerging wireless technologies, including
"smart antennas" and tower mounted amplifiers, may also provide protection from
RF interference and offer enhanced range to cellular and PCS service providers
at lower prices and/or superior performance, and may therefore compete with the
Company's products. High performance RF filters may not become a preferred
technology to address the needs of cellular and PCS service providers. Failure
of the Company's products to improve performance sufficiently, reliably, or at
an acceptable price or to achieve commercial acceptance or otherwise compete
with conventional and new technologies will have a material adverse effect on
the Company's business, operating results and financial condition.
Although the market for superconductive electronics currently is small and
in the early stages of development, the Company believes it will become
intensely competitive, especially if products with significant market potential
are successfully developed. In addition, if the superconducting industry
develops, additional competitors with significantly greater resources are likely
to enter
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the field. In order to compete successfully, the Company must continue
to develop and maintain technologically advanced products, reduce production
costs, attract and retain highly qualified personnel, obtain additional patent
or other protection for its technology and products and manufacture and market
its products, either alone or with third parties. The Company may be unable to
achieve these objectives. Failure to achieve these objectives would have a
material adverse effect on the Company's business, operating results and
financial condition.
During the fourth quarter of 1998, the Company implemented a new pricing
strategy pursuant to which it reduced the prices for all of its products.
Although sales of the Company's products increased significantly during the
fourth quarter of 1998, such sales growth may not be sustained over subsequent
periods. Similarly, the Company may not be able to continue to reduce product
costs sufficiently to achieve and maintain acceptable product margins.
Management of Growth
The Company's growth to date has caused, and will continue to cause, a
significant strain on its management, operational, financial and other
resources. The Company's ability to manage its growth effectively will require
it to implement and improve its operational, financial, manufacturing and
management information systems and expand, train, manage and motivate its
employees. These demands may require the addition of new management personnel
and the development of additional expertise by management. Any increase in
resources devoted to product development and marketing and sales efforts could
have an adverse effect on the Company's financial performance in the next
several fiscal quarters. If the Company were to receive substantial orders, the
Company may have to expand its current facility, which could cause an additional
strain on the Company's management personnel and development resources. The
failure of the Company's management team to effectively manage growth could have
a material adverse effect on the Company's business, operating results and
financial condition.
Rapid Technological Change; Possible Pursuit of Other Market Opportunities
The field of superconductivity is characterized by rapidly advancing
technology. The success of the Company will depend in large part upon its
ability to keep pace with advancing superconducting technology, high performance
RF filter design and efficient, low cost cryogenic technologies. Rapid changes
have occurred, and are likely to continue to occur, in the development of
superconducting materials and processes. The Company will have to continue to
improve its ability to fabricate thick-film HTS devices, design high performance
RF filters and efficient cryogenic subsystems and produce significant quantities
of products based on these improvements. The Company's development efforts may
be rendered obsolete by the adoption of alternative solutions to current
wireless operator problems or by technological advances made by others. In
addition, other materials or processes, including other superconducting
materials or fabrication processes, may prove more advantageous for the
commercialization of high performance wireless products than the materials and
processes selected by the Company.
Because HTS product development is a new and emerging field, there may in
the future be new opportunities that are more attractive than those initially
identified by the Company for its targeted markets. As a result, the Company may
elect in the future to commit its resources to such other potentially more
attractive market opportunities. Such election may require the Company to limit
or abandon its current focus on developing, manufacturing, marketing and selling
HTS products for cellular, PCS and other telecommunications markets. The risks
associated with other markets may be different from the risks associated with
the cellular, PCS and other wireless telecommunications markets.
Focus on Wireless Telecommunications Market; Current and Future
Competitive Technologies
The Company has selected the wireless telecommunications market, in
particular the cellular and PCS markets, as the first principal target market
for its superconductor-based products. The devotion of substantial resources to
the wireless telecommunications market makes the Company vulnerable to adverse
changes in this market. Adverse developments in the wireless telecommunications
market, which could come from a variety of sources, including future
competition, new technologies or regulatory decisions, could affect the
competitive position of wireless systems. Any adverse developments in the
wireless telecommunications market during the foreseeable future would have a
material adverse effect on the Company's business, operating results and
financial condition.
The Federal Communications Commission ("FCC") has adopted rules that
provide preferential licensing treatment for parties that develop new
communications services and technologies. These developments and further
technological advances may make
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available other alternatives to cellular or PCS service, thereby creating
additional sources of competition. Competition to cellular or PCS technologies
could adversely affect the market for the Company's products, or result in
changes in the Company's development and manufacturing programs.
Dependence on a Limited Number of Customers
To date, the Company's marketing and sales efforts have focused on major
cellular service providers in retrofit applications and, to a lesser extent, on
PCS operators and cellular and PCS original equipment manufacturers. During
1998, sales to three of the Company's customers accounted for over 88% of the
Company's total revenues for 1998. The Company expects that if its RF filter
products achieve market acceptance, a limited number of wireless service
providers and OEMs will account for a substantial portion of its revenue during
any period. Sales of many of the Company's RF filter products depend in
significant part upon the decision of prospective customers and current
customers to adopt and expand their use of the Company's products. Wireless
service providers and the Company's other customers are significantly larger
than, and are able to exert a high degree of influence over, the Company.
Customers' orders are affected by a variety of factors such as new product
introductions, regulatory approvals, end user demand for wireless services,
customer budgeting cycles, inventory levels, customer integration requirements,
competitive conditions and general economic conditions. The loss of one or more
of the Company's customers or the failure to attract new customers would have a
material adverse effect on the Company's business, operating results and
financial condition.
Lengthy Sales Cycles
Wireless service providers, wireless equipment OEMs and the Company's other
customers are significantly larger than, and are able to exert a high degree of
influence over, the Company. Prior to selling its products to these customers,
the Company must generally undergo lengthy approval and purchase processes.
Technical and business evaluation by potential customers can take up to a year
or more for products based on new technologies such as HTS. The length of the
approval process is affected by a number of factors, including, among others,
the complexity of the product involved, priorities of the customers, budgets and
regulatory issues affecting customers. The Company may not obtain the necessary
approvals or ensuing sales of such products may not occur. The length of the
Company's customers' approval process or delays could have a material adverse
effect on the Company's business, operating results and financial condition.
Dependence on Limited Sources of Supply
Certain parts and components used in the Company's RF filter products,
including substrates, vacuum components, and cryogenic refrigerators, are only
available from a limited number of sources. The Company's reliance on these
limited source suppliers exposes the Company to certain risks and uncertainties,
including the possibility of a shortage or discontinuation of certain key
components and reduced control over delivery schedules, manufacturing
capabilities, quality and costs. Any reduced availability of such parts or
components when required could materially impair the Company's ability to
manufacture and deliver its products on a timely basis and result in the
cancellation of orders, which could have material adverse effect on the
Company's business, operating results and financial condition. In addition, the
purchase of certain key components involves long lead times and, in the event of
unanticipated increases in demand for the Company's products, the Company may be
unable to manufacture products in a quantity sufficient to meet its customers'
demand in any particular period. The Company has no guaranteed supply
arrangements with its limited source suppliers, does not maintain an extensive
inventory of parts or components, and customarily purchases parts and components
pursuant to purchase orders placed from time to time in the ordinary course of
business.
To satisfy customer requirements, the Company may be required to stock
certain long lead time parts in anticipation of future orders. The failure of
such orders to materialize as forecasted could limit resources available for
other important purposes or accelerate the Company's requirement for additional
funds. In addition, such excess inventory could become obsolete which would
adversely affect the Company's financial performance. Business disruption,
production shortfalls or financial difficulties of a limited source supplier
could materially and adversely effect the Company by increasing product costs or
reducing or eliminating the availability of such parts or components. In such
events, the inability of the Company to develop alternative sources of supply
quickly and on a cost-effective basis could materially impair the Company's
ability to manufacture and deliver its products on a timely basis and could have
a material adverse effect on its business, operating results and financial
condition.
Intellectual Property and Patents
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The Company's success will depend in part on its ability to obtain patent
protection for its products and processes, to preserve its trade secrets and to
operate without infringing upon the patent or other proprietary rights of others
and without breaching or otherwise losing rights in the technology licenses upon
which any Company products are based. As of December 31, 1998, the Company has
been issued 20 U.S. patents, has filed and is actively pursuing applications for
16 other U.S. patents, and is the licensee of 10 U.S. patents and patent
applications held by others. One of the Company's patents is jointly owned with
Lucent Technologies, Inc. The Company believes that, since the discovery of HTS
materials in 1986, a large number of patent applications have been filed
worldwide and many patents have been granted in the U.S. relating to HTS
materials. The claims in those patents often appear to overlap and there are
interference proceedings pending in the United States Patent and Trademark
Office (not currently involving the Company) regarding rights to inventions
claimed in some of the HTS materials patent applications. The Company also
believes there are a large number of patents and patent applications covering RF
filter products and other products and technologies that the Company is
pursuing. Accordingly, the patent positions of companies using HTS materials
technologies and RF technologies, including the Company, are uncertain and
involve complex legal and factual questions. The patent applications filed by
the Company or by the Company's licensors may not result in issued patents or
the scope and breadth of any claims allowed in any patents issued to the Company
or its licensors may not exclude competitors or provide competitive advantages
to the Company. In addition, patents issued to the Company or its licensors may
not be held valid if subsequently challenged or others may claim rights in the
patents and other proprietary technologies owned or licensed by the Company.
Others may have developed or may in the future develop similar products or
technologies without violating any of the Company's proprietary rights.
Furthermore, the Company's loss of any license to technology that it now has or
acquires in the future may have a material adverse effect on the Company's
business, operating results and financial condition.
Some of the patents and patent applications owned or licensed by the
Company are subject to non-exclusive, royalty-free licenses held by various
governmental units. These licenses permit these U.S. government units to select
vendors other than the Company to produce products for the U.S. Government which
would otherwise infringe the Company's patent rights which are subject to the
royalty-free licenses. In addition, the U.S. Government has the right to require
the Company to grant licenses (including exclusive licenses) under such patents
and patent applications or other inventions to third parties in certain
instances.
Patent applications in the U.S. are currently maintained in secrecy until
patents are issued. In foreign countries, this secrecy is maintained for a
period of time after filing. Accordingly, publication of discoveries in the
scientific literature or of patents themselves or laying open of patent
applications in foreign countries tends to lag behind actual discoveries and
filing of related patent applications. Due to this factor and the large number
of patents and patent applications related to HTS materials, RF technologies and
other products and technologies that the Company is pursuing, comprehensive
patent searches and analyses associated with HTS materials, RF technologies and
other products and technologies that the Company is pursuing are often
impractical or not cost-effective. As a result, the Company's patent and
literature searches cannot fully evaluate the patentability of the claims in the
Company's patent applications or whether materials or processes used by the
Company for its planned products infringe or will infringe upon existing
technologies described in U.S. patents or may infringe upon claims in patent
applications made available in the future. Because of the volume of patents
issued and patent applications filed relating to HTS materials, RF technologies
and other products and technologies that the Company is pursuing, the Company
believes there is a significant risk that current and potential competitors and
other third-parties have filed or will file patent applications for, or have
obtained or will obtain, patents or other proprietary rights relating to
materials, products or processes used or proposed to be used by the Company. In
any such case, to avoid infringement, the Company would have to either license
such technologies or design around any such patents. The Company may be unable
to obtain licenses to such technologies or, if obtainable, such licenses may not
be available on terms acceptable to the Company or the Company may be unable to
successfully design around these third-party patents.
Participation in litigation or patent office proceedings in the U.S. or
other countries, which could result in substantial cost to and diversion of
effort by the Company, may be necessary to enforce patents issued or licensed to
the Company, to defend the Company against infringement claims made by others or
to determine the ownership, scope or validity of the proprietary rights of the
Company and others. The parties to such litigation may be larger, better
capitalized than the Company and better able to support the cost of litigation.
An adverse outcome in any such proceedings could subject the Company to
significant liabilities to third parties, require the Company to seek licenses
from third parties and/or require the Company to cease using certain
technologies, any of which could have a material adverse effect on the Company's
business, operating results and financial condition.
The Company believes that a number of patent applications, including
applications filed by International Business Machines
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<PAGE> 11
Corporation, Lucent Technologies, Inc., and other potential competitors of the
Company are pending that may cover the useful compositions and uses of certain
HTS materials including yttrium barium copper oxide ("YBCO"), the principal HTS
material used by the Company in its present and currently proposed products.
Therefore, there is a substantial risk that one or more third parties may be
granted patents covering YBCO and other HTS materials and their uses, in which
case the Company could not use these materials without an appropriate license.
As with other patents, the Company has no assurance that it will be able to
obtain licenses to any such patents for YBCO or other HTS materials or their
uses or that such licenses would be available on commercially reasonable terms.
Any of these problems would have a material adverse effect on the Company's
business, operating results and financial condition.
Government Regulations
Although the Company believes that its wireless telecommunications products
themselves would not be subject to licensing by, or approval requirements of,
the 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 wireless telecommunications products is dependent on the ability of wireless
base station equipment manufacturers and wireless base station operators to
obtain and retain the necessary FCC approvals and licenses. In order for them 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. Any failure
to meet such standards or delays by base station equipment manufacturers and
wireless base station operators in obtaining the necessary approvals or licenses
could have a material adverse effect on the Company's business, operating
results and financial condition. In addition, HTS RF filters are on the U.S.
Department of Commerce's export regulation list. Therefore, exportation of such
RF filters to certain countries may be restricted or subject to export licenses.
The Company is subject to governmental labor, safety and discrimination
laws and regulations with substantial penalties for violations. In addition,
employees and others may bring suit against the Company for perceived violations
of such laws and regulations. Defense against such complaints could result in
significant legal costs for the Company. Although the Company endeavors to
comply with all applicable laws and regulations, it may be the subject of
complaints in the future which could have material adverse effect on the
Company's business, operating results and financial condition.
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, the operations, business or assets of the Company could 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.
Dependence on Key Personnel
The Company's success will depend in large part upon its ability to attract
and retain highly qualified management, administrative, manufacturing,
marketing, sales and R&D personnel. Due to the specialized nature of the
Company's business, it may be difficult to locate and hire qualified personnel.
The loss of services of one of its executive officers or other key personnel, or
the failure of the Company to attract and retain other executive officers or key
personnel, could have a material adverse effect on the Company's business,
operating results and financial condition.
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Business Interruptions and Dependence on a Single U.S. Facility
The Company's primary operations, including engineering, manufacturing,
research, distribution and general administration, are housed in a single
facility in Mt. Prospect, Illinois. Any material disruption in the Company's
operations, whether due to fire, flooding, natural disaster, power loss or
otherwise, would have a material adverse effect on the Company's business,
operating results and financial condition.
Substantial Number of Shares Eligible for Future Sale; Dilution
On March 31, 1999, the Company privately issued an aggregate of $3.3
million initial principal amount of senior convertible notes due May 15, 2002
(the "New Notes"). The New Notes accrue interest at the rate of 6% per annum,
payable in cash or shares of Common Stock at the Company's option, and are
convertible into an aggregate of 2,933,334 shares of Common Stock. In connection
with the issuance of the New Notes, warrants exercisable for an aggregate of
1,320,000 shares of Common Stock at an exercise price of $1.4625 per share (the
"New Warrants") were also issued. The New Warrants expire on March 31, 2002.
Concurrently with the issuance of the New Notes, the Company amended certain
terms of $5.5 million in aggregate principal amount of the Company's senior
convertible notes due May 15, 2002 (the "Amended Notes") and the warrants
exercisable for an aggregate of 2,200,000 shares of Common Stock (the "Amended
Warrants") issued in connection therewith. The Amended Notes accrue interest at
the rate of 6% per annum, payable in cash or shares of Common Stock at the
Company's option, and are convertible into an aggregate of 4,888,889 shares of
Common Stock. The Amended Warrants expire on May 15, 2001 and are exercisable at
an exercise price of $1.4625 per share. In addition, as of March 31, 1999, $4.85
million in aggregate principal amount of the Company's senior convertible notes
due May 15, 2002 issued in May 1998 (the "1998 Notes," and together with the New
Notes and the Amended Notes, the "Notes"), and the warrants exercisable for an
aggregate of 1,940,000 shares of Common Stock issued in connection therewith
(the "1998 Warrants," and together with the New Warrants and the Amended
Warrants, the "Warrants"), remain outstanding. The 1998 Notes accrue interest at
the rate of 2% per annum, which interest is payable in cash or Common Stock at
the Company's option, and are convertible into an aggregate of 3,233,333 shares
of Common Stock. The 1998 Warrants expire on May 15, 2001 and are exercisable at
an exercise price of $3.75 per share. An aggregate of 16,515,556 shares of
Common Stock are issuable upon conversion of the Notes and exercise of the
Warrants which is equal to approximately 132% of the Common Stock outstanding as
of March 31, 1999.
The sale of a substantial number of shares of Common Stock by the Company
or any of its significant stockholders upon the conversion of a substantial
portion of the Notes or the exercise of a substantial portion of the Warrants,
or the perception that such sales could occur, could adversely affect the
prevailing market price of the Common Stock. In addition, any such sale or such
perception could make it more difficult for the Company to sell equity
securities in the future at a time and price that the Company deems appropriate.
As of December 31, 1998, the Company had, including to the 1998 Warrants
and the Amended Warrants, outstanding warrants to purchase 4,678,688 shares of
Common Stock at a weighted average exercise price of $4.33 per share and options
to purchase 1,193,977 shares of Common Stock at a weighted average exercise
price of $6.71 per share (827,321 of which have not yet vested) issued to
employees, directors and consultants pursuant to the Company's Amended and
Restated 1993 Stock Option Plan, as amended, and individual agreements with
management and directors of the Company. In order to attract and retain key
personnel, the Company may issue additional securities, including stock options,
in connection with its employee benefit plans. During the terms of the Notes and
such options and warrants (including the Warrants), the holders thereof are
given the opportunity to benefit from a rise in the market price of the Common
Stock.
The conversion of the Notes into, or the exercise of options and warrants
(including the Warrants) for, Common Stock, as well as the sale or issuance by
the Company of additional shares of Common Stock and/or rights to purchase
Common Stock, would likely have an adverse or dilutive effect on the market
value of the Common Stock. The Company also may in the future offer equity
participation in connection with the obtaining of non-equity financing, such as
debt or leasing arrangements accompanied by warrants to purchase equity
securities of the Company. This could also have a dilutive effect upon the
holders of Common Stock.
Anti-Takeover Provisions
The Company has certain provisions which may be deemed to have a potential
"anti-takeover" effect in that such provisions
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may delay, defer or prevent a change of control of the Company. In February
1996, the Board of Directors of the Company (the "Board of Directors") adopted a
stockholders rights plan (the "Rights Plan"). By causing substantial dilution to
a person or group that attempts to acquire the Company on terms not approved by
the Board of Directors, the Series A Rights and Series B Rights of the Rights
Plan may interfere with certain acquisitions, including acquisitions that may
offer a premium over market price to some or all of the Company's stockholders.
Further discussion of the Rights Plan is set forth herein under the heading
"Market for Registrant's Common Equity and Related Stockholder Matters-Rights
Plan." In addition, the Company's Certificate of Incorporation and By-Laws
contain provisions that include (i) a requirement that stockholder action may be
taken only at stockholders meetings; (ii) the authority of the Board of
Directors to issue series of the Company's preferred stock with such voting
rights and other powers as the Board of Directors may determine; (iii) notice
requirements in the Bylaws relating to nominations to the Board of Directors and
to the raising of business matters at stockholders meetings; and (d) the
classification of the Board of Directors into three classes, each serving for
staggered three-year terms. In addition, the Company's outstanding debt
instruments contain provisions which may be deemed to have a potential
"anti-takeover" effect. The interests of the holders of such debt instruments
could conflict with the interests of the Company's stockholders. See
"Substantial Leverage; Restrictions Contained in Debt Instruments" above.
WIRELESS TELECOMMUNICATIONS INDUSTRY BACKGROUND
The wireless telecommunications industry has experienced significant
growth, both domestically and internationally, in recent years. This growth
appears to be due to the increasing popularity of wireless telecommunications,
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 wireless operators' demand for
improved system quality, lower capital expenditures per customer, and
co-location of multiple antennas with other RF transmitters at a single cell
site.
In the United States, wireless telecommunications services customers now
frequently have a choice of at least four wireless service providers. Digital
technologies such as Global System for Mobile Telecommunications ("GSM"), Code
Division Multiple Access ("CDMA"), and Time Division Multiple Access ("TDMA")
allow operators to offer such advanced features as short message service, fax,
three-way conferencing and call waiting. Wireless systems are also marketed as a
convenient and economical substitute for 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. The rapid
growth in competition in wireless telecommunications services is forcing
operators to reduce costs and to seek out new cost effective solutions such as
high performance filters which can reduce capital costs while increasing network
capacity. Already, manufacturers and operators are beginning to plan a new and
more advanced form of wireless telecommunications called Third Generation
cellular or "3G." 3G is expected to provide full Internet access and video
teleconferencing services. The first 3G network is expected to become commercial
in Japan in 2001 and in Europe soon thereafter.
Industry statistics demonstrate the rapid growth of the wireless
telecommunications industry. The Cellular Telecommunications Industry
Association ("CTIA") reports that as of June 1998 there were over 60 million
wireless customers in the United States. Industry publications, as well as other
industry sources, have estimated a total worldwide wireless customer base of
approximately 207 million at the end of 1997. Several industry sources have
estimated the customer base will exceed 830 million by the end of 2003. CTIA
reports that there were over 57,000 base stations in the United States as of
June 1998 and, based on industry sources, the Company believes that there are
approximately 205,000 base stations worldwide. The Company further believes that
this worldwide number is growing at a rate of over 35% per year. The Company
anticipates that the need to provide improved service on a cost effective basis
in an increasingly congested environment will lead wireless service providers to
invest in new infrastructure technologies such as high performance RF filters.
The rapid growth and increased competition experienced by the wireless
telecommunications industry has 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 a dramatic proliferation in the use of portable hand held phones
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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. To lower costs, many cellular and
PCS operators are sharing antenna sites with other cellular and PCS operators,
and with television stations, paging operators and two-way radio transmitters.
Such close proximity of radio transmitters can cause RF interference problems
which degrade the quality and capacity of wireless telecommunications systems.
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.
Recently, several wireless system operators have sold their antenna towers
to third party management companies which then lease space for base stations and
their antennas back to the system operator. In addition to managing the site for
the existing system operator, these management companies lease additional space
at the tower site to other wireless providers, including television stations,
paging operators and two-way radio transmitters. The Company believes that the
activities of these management companies will facilitate an increase in the
co-location of multiple wireless providers over time. The Company believes that
this trend may lead to an increase in the demand for high performance filters as
concerns over RF interference and congestion increase.
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
telecommunication systems by providing the following advantages:
- GREATER NETWORK CAPACITY AND UTILIZATION. The Company's RF front-end
products can increase the capacity and utilization of a wireless base
station by up to 18%. 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. In CDMA systems, increased capacity frequently results
from lowering the system's noise floor.
- REDUCED CDMA CELL SITE BREATHING. Coverage for CDMA digital systems
decreases as the number of users increases. To maintain network
coverage, an operator can increase the number of cell sites, add radio
carriers, or use the Company's high performance RF filters with cooled
low noise amplifiers ("LNAs").
- IMPROVED BASE STATION RANGE. Based upon comparative field trials in
multiple rural locations in the United States, and as confirmed by
computer propogation models conducted by customers of the Company, the
Company's RF front-end systems (high performance filter and
cryogenically-cooled LNA) can extend the uplink range of a wireless
system by up to 30%. Greater range can reduce a service operator's
capital expenditure per customer 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. This is true for both analog and
digital systems.
- IMPROVED FLEXIBILITY IN LOCATING BASE STATIONS. The Company's RF
front-end products can allow wireless telecommunications 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 telecommunications operators.
- IMPROVED CALL QUALITY. The Company's RF filter products improve call
quality by reducing dropped and blocked calls. During commercial
installations and field trials, the Company's RF filter products have
frequently demonstrated a 20 to 40 percent reduction in dropped calls
caused by out-of-band interference and base station front-end
overloading. During these commercial installations and field trials,
the Company's RF filter products have also demonstrated a similar
reduction in blocked calls experienced in urban cellular locations. The
Company's RF filter products also frequently improve audio fidelity by
reducing noise and interference.
- 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. These RF transmit filters should
improve system performance while diminishing system costs.
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- IMPROVED DIGITAL SYSTEM CAPACITY. The Company believes that its
recently introduced line of transmit combiners 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 filter technology allows
operators to use combiners with lower loss of desired signals.
PRODUCTS
The Company currently offers three product lines to address the needs of
cellular and PCS service providers. The SpectrumMaster(R) product line is
designed primarily to improve the RF performance of cellular and PCS systems in
high interference environments, including urban areas and near airports. The
RangeMaster(R) product line combines the interference rejection advantages of a
superconducting filter with a cooled LNA. RangeMaster(R) is designed to serve
the range extension needs of rural, suburban, or small city cellular and PCS
operators. The PowerMaster(TM) product line incorporates the Company's filter
technologies into RF transmitter products. The PowerMaster(TM) duplexer is
designed to improve and allow the co-location of multiple wireless service
providers at a single cell site. The PowerMaster(TM) combiner is designed to
improve the range and capacity of multi-carrier CDMA systems. 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's proprietary RF filter designs
allow the Company to quickly provide new product offerings with minimal
additional engineering and limited manufacturing complexity.
The Company believes that SpectrumMaster(R) is the world's highest
performance commercial receive pre-select RF filter for wireless
telecommunications 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 high performance filter with 24 filter poles for
extremely congested RF environments. SpectrumMaster(R) Ultra provides 10,000
times better rejection of unwanted signals than 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 of unwanted signals than
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. In addition, the Company has developed an even higher performance filter
for Third Generation (3G) systems and has shipped a prototype of this product
for testing in Japan. This new product, the SpectrumMaster(R) Extreme filter,
provides 10,000 times better performance than the SpectrumMaster(R) Ultra. The
SpectrumMaster(R)'s 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 sales of
SpectrumMaster(R) have continued to grow in 1997 and 1998.
RangeMaster(R) combines a high performance superconducting cavity filter
with a high performance cryogenically-cooled LNA to lower noise resulting from
interference and thermal noise. RangeMaster(R) is available in four models, from
the economical RangeMaster(R) Omega 150 which is targeted at low interference
rural environments to the 16 pole RangeMaster(R) Classic which provides superior
interference protection for more congested locations. The Company has also
developed a prototype RangeMaster(R) Extreme for Third Generation (3G) systems.
In late 1998, the Company introduced All Temperature Performance (ATP(TM)),
a new function for the RangeMaster(R) product line. This series of
superconducting filters provide HTS high performance front-end functions when
cryogenically cooled. However, in the event of power or cooling system failure,
these products continue to provide the filtering of good quality filters using
conventional technology. In addition, these products resume superconducting
performance automatically when power is restored which eliminates the need for
bypass circuitry.
PowerMaster(TM) is a family of high performance transmit filter systems for
use in the base stations of wireless telecommunications operators. The Company
began marketing two models of PowerMaster(TM) products, a transmitter filter and
a duplexer, in February 1997. These 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. The
PowerMaster(TM) duplexer improves system quality,
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extends range and simplifies the location of cell sites for both cellular and
PCS systems. PowerMaster(TM) technology provides an ultra-high performance
duplexer, which handles continuous power levels of up to 70 watts at 800 Mhz.
The PowerMaster(TM) duplexer allows an 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 PowerMaster(TM) combiner,
which is a low-loss transmit combiner with superior separation, improves
downlink coverage, and minimizes the number of required antennas and feedlines,
thereby lowering a system operator's capital expense.
International Cellular Products Offerings. The Company is adapting its
SpectrumMaster(R), RangeMaster(R), and PowerMaster(TM) 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 leased two SpectrumMaster(R) units
to a major Asian cellular operator for testing as a basis for potential system
deployment in the operator's Third Generation (3G) networks. A third unit, a
SpectrumMaster(R) Ultra, was leased to this operator in September 1998. In
addition, the Company has leased a RangeMaster(R) unit to a major European
OEM for testing in May 1999.
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 low 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 over 30 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 relatively inexpensive to manufacture
and offers superconducting yields consistently above 96%. The Company believes
the electrical performance of the Company's products are superior to any
alternative superconducting technology currently available for RF filters. The
Company's thick-film superconducting technology can handle up to 70 watts of
continuous power at 800 Mhz.
High-temperature superconductors become superconducting at -200(Degree) 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 advantage over its
competitors.
SALES AND MARKETING
The Company has focused its sales and marketing effort on U.S. wireless
service providers for retrofit applications. To date, the Company has sold its
products to many of the largest cellular operators in the United States as well
as to numerous mid-size and smaller U.S. wireless operators. The Company has
also sold or leased filters to two major international operators and has
successfully tested its PCS RangeMaster(R) product with two of the largest U.S.
PCS operators. The Company has also tested its PowerMaster(TM) line with two
major OEMs and is discussing specifications with others. The Company has been
named as an approved vendor to one of the largest OEMs, allowing cellular and
PCS operators throughout the world the opportunity to purchase the Company's
products directly from the OEM. The Company primarily uses a direct sales force
to sell its products.
14
<PAGE> 17
The Company believes that it has reached the stage of volume deployment
with certain of its customers placing larger orders for the Company's products
than before. For example, one of the Company's largest customers purchased
equipment for over 50 cell sites in the fourth quarter of 1998. The Company's
success has been facilitated by the establishment of corporate purchase
agreements with two of the largest operators in the United States under which
the separate operating regions of the operators can place orders directly with
the Company. In the fourth quarter of 1998, the Company implemented a new
pricing structure pursuant to which it reduced and simplified pricing on all of
its products.
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 has continued technical discussions
with multiple PCS OEM's regarding integrating the Company's RF filter products
into such OEM's PCS product line. To date, the Company's PowerMaster(TM) PCS
transmit filter/duplexer has been tested in the laboratories of two PCS
equipment OEMs.
During 1998, sales to three of the Company's customers, ALLTEL Corporation,
Bell Atlantic Mobile and Southwestern Bell Corporation, accounted for
approximately 59%, 15% and 14% of the Company's total revenues, respectively,
for the year ended December 31, 1998.
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 96%, with low scrap
levels. Manufacturing costs were reduced by 50% during 1997 due to volume,
design and yield efficiencies, and reduced by another 40% in 1998 due to
redesign and resourcing efforts. The Company expects further cost reductions in
1999. 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 Mt. Prospect,
Illinois, which began operations during 1996. The Company believes that the
manufacture 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.
RESEARCH AND DEVELOPMENT
The Company's R&D efforts have been focused on developing and improving RF
filter products for wireless telecommunications systems. As a result of such
efforts, filter performance has been improved, product size has been reduced,
production costs have been lowered, product reliability has been increased, and
product 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 filter design, superconducting
materials, and cryogenic cooling systems.
The Company's total R&D expenses during 1996, 1997 and 1998 were
approximately $6,423,000, $4,132,000, and $2,935,000, respectively. R&D costs
reimbursed under government contracts and cooperative agreements during 1996,
1997 and 1998 were approximately $200,000, $0, and $0, respectively.
15
<PAGE> 18
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 non-disclosure
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 December 31, 1998, the Company has been issued 20 U.S. patents, has
filed and is actively pursuing applications for 16 other U.S. patents, and is
the licensee of 10 patents and patent applications held by others. Such patents
and patent applications relate to various aspects of the Company's
superconductor technology, the design of HTS filters, methods for packaging and
cooling, and system implementation techniques. One of the Company's patent
applications has been filed jointly with Lucent Technologies, Inc. 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 funded in part by Small Business Innovation
Research and other government contracts. Although the U.S. Government has or
will have certain rights in the technology developed with this funding, the
Company does not believe that these rights will have a material impact on the
Company's current RF filter products.
COMPETITION
The market for wireless telecommunications products is very competitive.
The Company views its competition as (i) conventional RF filter products, (ii)
RF products 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.
Other competitive RF products based on other 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. Furthermore, various vendors
are offering tower mounted amplifiers ("TMAs") which provide similar range
extension benefits to the Company's filters with cooled LNAs. TMAs are generally
less expensive than the Company's products but require greater maintenance costs
due to their location on top of the operator's antenna tower.
16
<PAGE> 19
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 marketing superconducting filters to the wireless
telecommunications marketplace. 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 telecommunications marketplace.
These companies 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. None of these filters are expected to be commercially implemented in
the near future. 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,
price, breadth of product portfolio, customer support, 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.
EMPLOYEES
As of March 10, 1999, the Company had a total of 63 employees, 14 of whom
hold advanced degrees. Of the employees, 26 are engaged in manufacturing and
production, 16 are engaged in research, development and engineering, and 21 are
engaged in general management, marketing, sales, 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 Mt. 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.
17
<PAGE> 20
ITEM 3. LEGAL PROCEEDINGS
Siegler Litigation
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 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.
Note Litigation
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' 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
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 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 December 10, 1997, the Company's motion to strike
the Borrowers' fraud defense and dismiss their counterclaim was granted with
leave to amend.
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 claim 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 other
Borrowers and the Guarantor under the promissory notes and the guarantee.
Lipman Litigation
On January 6, 1998, Jerome H. Lipman, individually and on behalf of all
others similarly situated, filed a complaint
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<PAGE> 21
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. Smith and Paul G. Yovovich (collectively, the
"Named Directors") in the Circuit Court of Cook County, Illinois, County
Department, Chancery Division. The complaint alleged that the Named 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 Common Stock price. The
complaint also alleged that the Named Directors breached their 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 Common Stock during the period from June
6, 1997 through November 21, 1997, excluding the Named Directors and Sheldon
Drobny. The complaint also seeks an unspecified amount of compensatory and
punitive damages, and attorneys' fees.
The Company and the Named Directors regard the suit as without factual or
legal merit. Accordingly, on February 17, 1998, the Company and the Named
Directors 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 Named Directors. Prior to a
hearing on the Company's and the Named Directors' 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 Named Directors'
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 Named Directors but excluding the
Company itself as a defendant. The amended complaint alleges that the Named
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 the financing. The amended complaint seeks certification
of a class consisting of all owners of the Common Stock during the period from
May 15, 1997 through December 31, 1997, excluding the Named Directors. Mr.
Lipman's amended complaint alleges that the stock owned by the putative class
lost $61 million due to the financing the Named Directors selected, and seeks an
unspecified amount of compensatory and punitive damages. The Company and the
Named Directors regard the amended complaint as without factual or legal merit.
Accordingly, the Named Directors filed a motion to dismiss Mr. Lipman's amended
complaint on July 29, 1998. The court granted the motion to dismiss in December
1998, finding that Mr. Lipman still had failed to fulfill the prerequisites for
maintaining a shareholder derivative action against the Named Directors. On
January 12, 1999, Mr. Lipman and two added former stockholders filed a second
amended complaint against the Named Directors and again including the Company
itself as a defendant.
The second amended complaint alleges that the Named Directors breached
their duties of loyalty and due care to the putative class and further alleges
that the purported devaluation of the plaintiff's stock resulting from the June
1997 financing was an improper "assessment" on the plaintiffs' shares for which
they seek an unspecified amount of compensatory and punitive damages. In
February 1999, the Company and the Named Directors filed a motion to dismiss the
second amended complaint. A hearing on the motion is scheduled for April 1999.
Greenwald Litigation
On June 24, 1998, Jonathan Greenwald, derivatively on behalf of the
Company, filed a complaint against the Company and the Named Directors in the
court of Chancery of the State of Delaware in and for New Castle County. Mr.
Greenwald's complaint alleges that the Named Directors breached their 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 Named Directors. The complaint seeks an unspecified amount of
compensatory damages, various equitable relief and attorney's fees.
The Company and the Named Directors regard the suit as without factual or
legal merit. Accordingly, in January 1999, the Company and the Named Directors
filed a motion to dismiss the complaint arguing that the complaint is barred by
the business judgment rule and the plaintiffs' failure to fulfill the
prerequisites for maintaining a shareholder derivative action against the Named
Directors. A hearing on the motion has not been scheduled.
19
<PAGE> 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1998.
20
<PAGE> 23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The outstanding shares of the Company's Common Stock are listed on the
Nasdaq National Market and trade under the symbol ISCO. The following table sets
forth for the periods indicated the range of high and low closing sale prices
for the Common Stock:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
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
FISCAL YEAR ENDING DECEMBER 31, 1998
First Quarter................................. $ 3.31 $ 0.88
Second Quarter................................ $ 3.25 $ 1.25
Third Quarter................................. $ 1.94 $ 1.00
Fourth Quarter................................ $ 1.66 $ 0.84
</TABLE>
On March 25, 1999, there were approximately 284 holders of record of the
Common Stock.
The Company has never paid cash dividends on the Common Stock and the
Company does not expect to pay any dividends on its Common Stock in the
foreseeable future. In addition, the Company's existing debt instruments limit
the Company's ability to pay dividends. See "Risk Factors - Substantial
Leverage; Restrictions Contained in Debt Instruments."
RIGHTS PLAN
In February 1996, the Board of Directors of the Company adopted a
stockholders rights plan (the "Rights Plan"). In connection with the adoption of
the Rights Plan, the Board of Directors created one series of Preferred Stock,
consisting of 10,000 shares of Series A Junior Participating Preferred Stock
(the "Series A Preferred"). Each share of the Series A Preferred, when and if
issued, entitles the holder thereof to receive dividends equal to 1,000 times
the dividends per share declared with respect to the Common Stock. Holders of
the Series A Preferred are entitled to exercise 1,000 votes per share on all
matters submitted to a vote of stockholders and, except as otherwise required by
law, vote together with the holders of Common Stock as a single class. 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 Common Stock. In
general, each share of the Series A Preferred is intended to have a value and
voting rights equal to 1,000 shares of Common Stock, and appropriate
anti-dilutive adjustments will be made in accordance with the terms of such
Series A Preferred in the event of certain changes in Common Stock.
Pursuant to the Rights Plan, a Series A Right is associated with, and
trades with, each share of Common Stock outstanding. The record date for
distribution of such Series A Rights was February 22, 1996 (the "Record Date")
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 one Series A
Right.
Each Series A Right will entitle its holder to purchase one-thousandth of a
share of Series A Preferred of the Company for $200 (subject to adjustment). The
Series A Rights are not exercisable until the earlier of (i) ten days after any
person or group becomes the beneficial owner of 15% or more of the 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 Common Stock.
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<PAGE> 24
If any person or group acquires 15% or more of the Common Stock outstanding
(the "Shares Acquisition Date"), each holder of a Series A Right (except the
acquiring party) has the right to receive, upon exercise, (i) shares of Common
Stock of the Company having a market value of 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 both (i) one share of Common
Stock (or one-thousandth of a share of preferred stock) and (ii) one Series B
Right, for each Series A Right (other than Series A Rights held by an 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, each Series A
Right and Series B Right then outstanding (other than Rights held by an
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 the Series A Rights for $.01 per Series A
Right (the "Redemption Price") prior to the Shares Acquisition Date. The Series
B Rights, once issued, are not redeemable. The Rights expire on February 9,
2006.
The Rights have certain anti-takeover effects. The Rights should not
interfere with any merger or business combination approved by the Board of
Directors since the Series A Rights may be redeemed by the Company at the
Redemption Price prior to the time that a person or group has acquired
beneficial ownership of 15% or more of the Common Stock. However, by causing
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the Board of Directors, the Rights may interfere with
certain acquisitions, including acquisitions that may offer a premium over
market price to some or all of the Company's shareholders. The Rights are not
intended to prevent an acquisition of the Company on terms that are favorable
and fair to all shareholders. See "Risk Factors - Anti-Takeover Provisions."
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<PAGE> 25
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, 1994, 1995, 1996, 1997 and
1998. The selected financial data for each of the years in the audited five-year
period ended December 31, 1998 have been derived from the 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>
<CAPTION>
----------- ----------- ------------ ------------ ------------
1994 1995 1996 1997 1998
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Revenues.......................... $ 208,168 $ 27,830 $ 209,822 $ 1,038,134 $ 3,242,930
Costs and expenses:
Cost of revenues.................... 194,098 19,286 49,534 4,401,077 7,047,347
Research and development.......... 1,962,678 4,554,946 6,422,921 4,132,019 2,934,784
Selling and marketing............... 454,968 469,600 1,834,640 1,918,044 1,847,680
General and administrative.......... 2,199,597 2,763,615 3,290,810 2,772,274 3,370,058
----------- ----------- ------------ ------------ ------------
(4,603,173) (7,779,617) (11,388,083) (12,185,280) (11,956,939)
Other income (expense):
Investment income .................. 496,392 487,543 503,911 254,781 354,738
Interest expense.................... (8,582) (39,600) (29,602) (17,969) (10,247,919)
----------- ----------- ------------ ------------ ------------
487,810 447,943 474,309 236,812 (9,893,181)
----------- ----------- ------------ ------------ ------------
Net loss................................ $(4,115,363) $(7,331,674) $(10,913,774) $(11,948,468) $(21,850,120)
Preferred Stock dividends............... - - - (143,302) (61,834)
----------- ----------- ------------ ------------ ------------
Net loss plus Preferred Stock dividends. $(4,115,363) $(7,331,674) $(10,913,774) $(12,091,770) $(21,911,954)
=========== =========== ============ ============ ============
Basic and diluted loss per common share. $ (1.15) $ (2.01) $ (2.41) $ (2.34) $ (1.93)
Weighted average number of
common shares outstanding........... 3,578,485 3,641,196 4,536,034 5,156,663 11,345,540
<CAPTION>
----------- ----------- ------------ ------------ ------------
1994 1995 1996 1997 1998
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 90,362 $ 953,093 $ 5,188,047 $ 2,766,886 $ 2,152,595
Working capital....................... 9,806,670 5,458,474 5,207,923 4,668,982 4,143,558
Total assets.......................... 14,732,501 11,105,766 13,388,496 11,534,309 10,028,088
Long-term debt/capital lease
obligations, less current portion.. 8,355 509,079 91,618 13,541 9,302,651
Stockholders' equity (net capital
deficiency)........................ 12,821,746 9,185,379 11,520,128 10,046,569 (772,968)
</TABLE>
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<PAGE> 26
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 language on the introductory page of this Form 10-K.
RESULTS OF OPERATIONS
Years Ended December 31, 1998 and 1997
The Company's net revenues increased $2,204,796 from $1,038,134 in 1997 to
$3,242,930 in 1998, as a result of increased sales of the Company's radio
frequency ("RF") front-end products. Net revenues in the fourth quarter of 1998
were $1,504,497, as compared to $282,384 for the fourth quarter of 1997. This
revenue growth was the result of the increased acceptance of the Company's
products by operators, price reductions that the Company implemented in October
1998 and a large scale deployment of the Company's products by one of the
largest cellular operators in the U.S. However, the Company anticipates
significantly lower revenues in the first quarter of 1999 as compared to the
fourth quarter of 1998. 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. All of the net revenues in 1997 and
1998 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 significantly
larger amount of its commercial products.
Cost of product sales was $7,047,347 for the year ended December 31, 1998,
as compared to $4,401,077 for the year ended December 31, 1997. The cost of net
product sales for 1998 and 1997 consisted of direct material, labor and overhead
costs associated with the products that were shipped during the year, plus
approximately $375,000 and $529,000, respectively, of costs, which consisted
primarily of allocated overhead costs, incurred to produce units in ending
finished goods inventory that exceed net realizable value. Due to low
utilization levels and excess capacity in the Company's manufacturing facility,
cost of net product sales exceeded net revenues for the years ended December 31,
1998 and 1997. The Company expects the cost of net product sales 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
$1,197,235 from $4,132,019 in 1997 to $2,934,784 in 1998. Research and
development costs were reduced during 1998, as compared to 1997, primarily due
to a reduction in personnel and operating costs during 1998. The Company expects
to continue reducing its research and development expenses during 1999.
Selling and marketing expenses decreased to $1,847,680 in 1998 from
$1,918,044 in 1997. This decrease was due to lower advertising, recruiting and
consulting expenses during 1998 as compared to 1997. The decrease was partially
offset by increased salary and freight expenses in 1998.
General and administrative expenses increased $597,784 from $2,772,274 in
1997 to $3,370,058 in 1998. The increase in general and administrative expenses
was due primarily to higher consultant, legal and office expenses during 1998 as
compared to 1997.
Investment income increased $99,957 from $254,781 in 1997 to $354,738 in
1998. This increase was due to a higher average cash, cash equivalent and
investment balance during 1998.
Interest expense increased $10,229,950 from $17,969 in 1997 to $10,247,919
in 1998. This increase was primarily due to $10,101,401 of non-cash interest
charges related to the Company's Senior Convertible Notes due May 15, 2002,
issued in May 1998.
24
<PAGE> 27
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.
Cost of net product sales was $4,401,077 for the year ended 1997, as
compared to $0 for the year ended 1996. The cost of net product sales 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 introduction of the SpectrumMaster(R) Ultra product into the Company's
product line, management determined that there was little marketability for an
early SpectrumMaster(R) filter product model. Management decided, therefore, to
write down the costs associated with this early SpectrumMaster(R) inventory.
Consequently, a total of $309,000 was charged to cost of net product sales in
the fourth quarter of 1997. Due to low utilization levels and excess capacity in
the Company's manufacturing facility, cost of net product sales exceeded net
revenues for the year ended December 31, 1997.
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 product sales. 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 1997 as compared to
1996 are due to reductions in personnel, materials and other operating costs.
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 during 1997 as compared to
1996. 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 general and administrative expenses
was due primarily to lower administrative personnel, consultant and legal
expenses during 1997 as compared to 1996.
Investment income decreased $249,130 from $503,911 in 1996 to $254,781 in
1997. This decrease was due to a lower average cash equivalent and investment
balance during 1997.
Interest expense 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.
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.
25
<PAGE> 28
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 compliant.
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 communicating orally and in writing with suppliers
of these systems and based on such conversations believes the manufacturing
applications are year 2000 compliant.
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 communicating orally and in writing 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 event
such 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, the
Company's results of operations or relationships with customers and suppliers
may be materially adversely affected. There can 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 December 31, 1998, the Company's cash, cash equivalents and investments,
including certain restricted investments, were $2,489,942, reflecting a decrease
of $1,157,257 from $3,647,199 at December 31, 1997. $680,696 in principal amount
of promissory notes, plus $138,355 of accrued interest thereon, from certain
stockholders is outstanding as of December 31, 1998. These notes were 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 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 ability of the Company to improve product
margins, the cost of additional plant and equipment for manufacturing and the
costs involved in protecting the Company's patents or other intellectual
property.
On May 15, 1998 the Company entered into a Securities Purchase Agreement
(the "Agreement") with various parties. Under the terms of the Agreement, the
Company issued and sold $10,350,000 in aggregate principal amount of Senior
Convertible Notes due May 15, 2002 (the "Notes") and issued warrants to purchase
4,140,000 shares of the Company's Common Stock (the "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 mature 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 fixed conversion price of $1.50 per
share. Conversions were not permitted during the first 90 days following the
issuance of the Notes and were limited to one-half of the original principal
amount during the period from 91 to 180 days after the issuance of the Notes. On
and after
26
<PAGE> 29
May 15, 2000, 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.
On March 31, 1999, the Company privately issued an aggregate of $3.3
million initial principal amount of Senior Convertible Notes due May 15, 2002
(the "New Notes") and issued warrants to purchase 1,320,000 shares of the
Company's Common Stock (the "New Warrants"). The New Notes bear interest at the
rate of 6% per annum, payable in cash or shares of Common Stock at the Company's
option, and mature on May 15, 2002. Holders of the New Notes may convert the
principal amount, plus accrued and unpaid interest, if any, into shares of the
Company's Common Stock at a fixed conversion price of $1.125 per share. On and
after May 15, 2000, the Company may redeem all or a portion of the New Notes at
a redemption price equal to the principal amount plus accrued interest thereon,
if any, under certain conditions. The New Warrants have an exercise price of
$1.4625 per share and expire on March 31, 2002. In the event that the Company
fails to achieve break-even or positive operating income during the second
quarter of 2000, the New Notes, together with the Notes, may become immediately
due and payable unless the holders thereof agree to modify or waive such
provision. Concurrently with the issuance of the New Notes, the Company amended
certain terms of $5.5 million in aggregate principal amount of the Notes (the
"Amended Notes") and the Warrants exercisable for an aggregate of 2,200,000
shares of the Company's Common Stock (the "Amended Warrants") issued in
connection therewith. The Amended Notes were amended to bear interest at the
rate of 6% per annum, payable in cash or shares of the Company's Common Stock at
the Company's option, and the fixed conversion price for the Amended Notes was
reduced from $1.50 to $1.125 per share. The exercise price of the Amended
Warrants was reduced from $3.75 to $1.4625 per share.
Despite the recently completed issuance and sale of New Notes, the Company
believes that during the third quarter of 1999 it will require substantial
additional funds to finance its product development, manufacturing and marketing
activities. The Company's strategy to generate sufficient working capital to
fund its operations and cash requirements in the future includes advancing
market penetration with OEMs and customers in overseas markets, building strong
and enduring relationships with existing customers and expanding product
offerings to meet varying customer needs, reducing product costs through
economies of scale in material purchases, refinement of the manufacturing
processes, and the further implementation of an overhead reduction program. The
Company is actively seeking financing in order to obtain working capital to
continue its operations according to its current operating plan through the
third quarter of 1999 and beyond. If the Company is unable to obtain adequate
funds when needed in the future, the Company would be required to substantially
delay, scale-back or eliminate the manufacturing, marketing or sales of one or
more of its products or research and development programs, or may be required to
obtain funds through arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain of its technologies, product
candidates or potential products that the Company would not otherwise
relinquish.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any material market risk sensitive instruments.
27
<PAGE> 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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, 1998 and 1997, and the related statements of
operations, stockholders' equity (net capital deficiency), and cash flows for
each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, 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 1999. 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.
Ernst & Young LLP
Chicago, Illinois
February 26, 1999, except
for Note 3, as to which
the date is March 31, 1999
28
<PAGE> 31
ILLINOIS SUPERCONDUCTOR CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,152,595 $ 2,766,886
Investments - 500,313
Inventories 1,424,427 1,726,141
Accounts receivable, net of allowance for doubtful
accounts of $87,990 and $68,775 at December 31, 1998 and
1997, respectively 1,494,418 586,501
Prepaid expenses and other 479,311 471,928
----------- -----------
Total current assets 5,550,751 6,051,769
Property and equipment:
Leasehold improvements 4,218,511 4,215,011
Lab equipment 1,694,840 1,689,381
Manufacturing equipment 983,426 945,081
Office equipment 759,443 709,324
Furniture and fixtures 629,490 618,496
----------- -----------
8,285,710 8,177,293
Less: Accumulated depreciation (4,761,599) (3,654,239)
----------- -----------
3,524,111 4,523,054
Restricted certificates of deposit 337,347 380,000
Patents and trademarks, net 615,879 579,486
----------- -----------
Total assets $10,028,088 $11,534,309
=========== ===========
</TABLE>
See the accompanying Notes which are an integral part of the financial
statements.
29
<PAGE> 32
ILLINOIS SUPERCONDUCTOR CORPORATION
BALANCE SHEETS
(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable $ 464,752 $ 717,425
Accrued liabilities 799,569 587,285
Accrued interest 129,375 -
Current portion of other long-term debt 13,497 78,077
------------- ------------
Total current liabilities 1,407,193 1,382,787
Senior convertible notes, net of discount 9,302,651 -
Other long-term debt, less current portion - 13,541
Deferred occupancy costs 91,212 91,412
Stockholders' equity (net capital deficiency):
Preferred Stock:
Series B Convertible Preferred Stock at liquidation value: 95
shares issued and outstanding at December 31,1997 (none at
December 31, 1998) - 488,534
Series C Convertible Preferred Stock at liquidation value: 600
shares issued and outstanding at December 31,1997 (none at
December 31, 1998) - 3,038,424
Series G Convertible Preferred Stock at liquidation value: 700
shares issued and outstanding at December 31,1997 (none at
December 31, 1998) - 3,530,206
Common stock ($.001 par value); 30,000,000 and 15,000,000
shares authorized and 12,557,045 and 6,001,925 shares
issued and outstanding at December 31, 1998 and 1997,
respectively 12,557 6,002
Additional paid-in capital 60,055,321 41,991,941
Notes receivable from stockholders (680,696) (698,508)
Accumulated deficit (60,160,150) (38,310,030)
------------ ------------
Total stockholders' equity (net capital deficiency) (772,968) 10,046,569
------------ ------------
Total liabilities and stockholders' equity (net capital deficiency)
$ 10,028,088 $ 11,534,309
============ ============
</TABLE>
See the accompanying Notes which are an integral part of the financial
statements.
30
<PAGE> 33
ILLINOIS SUPERCONDUCTOR CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
------------- ------------ -----------
<S> <C> <C> <C>
Net revenues:
Net product sales $ 3,242,930 $ 1,038,134 $ 156,700
Government contracts - - 53,122
------------- ------------ -------------
Total net revenues 3,242,930 1,038,134 209,822
Costs and expenses:
Cost of product sales 7,047,347 4,401,077 -
Cost of government contract revenue - - 49,534
Research and development 2,934,784 4,132,019 6,422,921
Selling and marketing 1,847,680 1,918,044 1,834,640
General and administrative 3,370,058 2,772,274 3,290,810
------------- ------------ -------------
Total costs and expenses 15,199,869 13,223,414 11,597,905
------------- ------------ -------------
(11,956,939) (12,185,280) (11,388,083)
Other income and (expense):
Investment income 354,738 254,781 503,911
Non-cash interest expense on Senior
convertible notes (Note 8) (10,101,401) - -
Other interest expense (146,518) (17,969) (29,602)
------------- ------------ -------------
(9,893,181) 236,812 474,309
------------- ------------ -------------
Net loss (21,850,120) (11,948,468) (10,913,774)
Preferred Stock dividends (61,834) (143,302) -
------------- ------------ -------------
Net loss plus Preferred Stock dividends $( 21,911,954) $(12,091,770) $(10,913,774)
============= ============ =============
Basic and diluted loss per common share $ (1.93) $ (2.34) $ (2.41)
============= ============ =============
Weighted average number of common shares
outstanding 11,345,540 5,156,663 4,536,034
============= ============ =============
</TABLE>
See the accompanying Notes which are an integral part of the financial
statements.
31
<PAGE> 34
ILLINOIS SUPERCONDUCTOR CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
SERIES B CONVERTIBLE SERIES C CONVERTIBLE SERIES G CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
----------------------------------------------------------------------------------------
NUMBER NUMBER NUMBER NUMBER
OF SHARES AMOUNT OF SHARES AMOUNT OF SHARES AMOUNT OF SHARES AMOUNT
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 - - - - - - 565,993 566
per share
Forfeiture of stock options - - - - - - - -
Issuance of common stock - Private
placement, net of offering costs; - - - - - - 408,526 408
$21.80 per share
Amortization of deferred compensation - - - - - - - -
Net loss - - - - - - - -
----------------------------------------------------------------------------------------
Balance as of December 31, 1996 - - - - - - 5,023,352 5,023
Exercise of stock options; $.184 - $18.25 - - - - - - 17,821 18
per share
Exercise of warrants; $1.4679 - $13.50 - - - - - - 138,820 139
per share
Payment of stockholder notes receivable - - - - - - - -
Issuance of preferred stock, net of 600 3,000,000 600 3,000,000 700 3,500,000 - -
offering costs
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
Additional offering costs related to - - - - - - - -
issuance of preferred stock
Exercise of stock options; $. 18 - $.23 - - - - - - 33,942 34
per share
Payment of stockholder notes - - - - - - - -
receivable
Preferred stock dividends - 260 - 24,377 - 37,197 - -
Conversion of preferred stock to (95) (488,794) (600) (3,062,801) (700) (3,567,403) 6,521,178 6,521
common stock
Discount on senior convertible notes - - - - - - - -
(Note 8)
Net loss - - - - - - - -
========================================================================================
Balance as of December 31, 1998 - $ - - $ - - $ - 12,557,045 $12,557
========================================================================================
</TABLE>
See the accompanying Notes which are an integral part of the
financial statements.
32
<PAGE> 35
ILLINOIS SUPERCONDUCTOR CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(CONTINUED)
<TABLE>
<CAPTION>
ADDITIONAL DEFERRED NOTES RECEIVABLE ACCUMULATED
PAID-IN CAPITAL COMPENSATION FROM STOCKHOLDERS DEFICIT TOTAL
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 - 5,738,150 - (1,142,754) - 4,595,962
$13.50 per share
Forfeiture of stock options (5,438) 5,438 - - -
Issuance of common stock - Private
placement, net of offering costs; 8,333,246 - - - 8,333,654
$21.80 per share
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 - 70,170 - - - 70,188
$18.25 per share
Exercise of warrants; $1.4679 - 796,908 - - - 797,047
$13.50 per share
Payment of stockholder notes - - 444,246 - 444,246
receivable
Issuance of preferred stock, net of (336,572) - - - 9,163,428
offering costs
Preferred stock dividends (82,184) - - - -
Conversion of preferred stock to 2,524,178 - - - -
common stock
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
Additional offering costs related to (143,400) - - - (143,400)
issuance of preferred stock
Exercise of stock options; $. 18 - 7,387 - - - 7,421
$.23 per share
Payment of stockholder notes - - 17,812 - 17,812
receivable
Preferred stock dividends (61,834) - - - -
Conversion of preferred stock to 7,112,477 - - - -
common stock
Discount on senior convertible notes 11,148,750 - - - 11,148,750
(Note 8)
Net loss - - - (21,850,120) (21,850,120)
---------------------------------------------------------------------------------
Balance as of December 31, 1998 $60,055,321 $ - $ (680,696) $(60,160,150) $ (772,968)
=================================================================================
</TABLE>
See the accompanying Notes which are an integral part of the
financial statements.
33
<PAGE> 36
ILLINOIS SUPERCONDUCTOR CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(21,850,120) $(11,948,468) $(10,913,774)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 1,107,360 1,533,705 1,157,561
Amortization 76,214 6,994 6,639
Non-cash interest expense on senior
convertible notes (Note 8) 10,101,401 - -
Loss (gain) on available-for-sale securities 4,963 - (43,171)
Other - - (939)
Stock compensation expense - - 35,954
Changes in operating assets and liabilities:
Accounts receivable (907,917) (455,749) 179,777
Inventories 301,714 (1,072,445) (653,696)
Prepaid expenses and other (7,383) (35,876) 29,246
Accounts payable (252,673) (411,584) 249,640
Accrued liabilities 341,659 92,778 113,201
Deferred occupancy costs (200) 15,599 18,760
------------- ------------- -------------
Net cash used in operating activities (11,084,982) (12,275,046) (9,820,802)
INVESTING ACTIVITIES
Purchases of available-for-sale securities - - (30,945,246)
Sales of available-for-sale securities 495,350 - 2,500,000
Maturities of available-for-sale securities - - 33,072,852
(Increase) decrease in restricted certificates of
deposit 42,653 (30,000) 512,500
Payments of patent costs (112,607) (199,647) (156,711)
Acquisitions of property and equipment (108,417) (310,956) (3,706,588)
------------- ------------- -------------
Net cash provided by (used in) investing 316,979 (540,603) 1,276,807
activities
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock - net
of offering costs (143,400) 9,163,428 -
Proceeds from issuance of common stock - net of
offering costs - - 8,333,654
Exercise of stock options 7,421 70,188 282,953
Exercise of warrants - 797,047 4,595,962
Payments on stockholder notes receivable 17,812 444,246 -
Proceeds from issuance of senior convertible notes 10,350,000 - -
Proceeds from issuance of other long-term debt - - 92,182
Payments on other long-term debt (78,121) (80,421) (525,802)
------------- ------------- -------------
Net cash provided by financing activities 10,153,712 10,394,488 12,778,949
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents (614,291) (2,421,161) 4,234,954
Cash and cash equivalents at beginning of period 2,766,886 5,188,047 953,093
------------- ------------- -------------
Cash and cash equivalents at end of period $ 2,152,595 $ 2,766,886 $ 5,188,047
============= ============= =============
Supplemental cash flow information:
Cash paid for interest $ 8,994 $ 17,969 $ 29,602
============= ============= =============
</TABLE>
See the accompanying Notes which are an integral part of the
financial statements.
34
<PAGE> 37
ILLINOIS SUPERCONDUCTOR CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Illinois Superconductor Corporation (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
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
telecommunications services located primarily in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
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. 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.
Inventories
Inventories are stated at the lower of cost (determined on a first in,
first out basis) or market.
Patents and Trademarks
Patents and trademarks represent costs, primarily legal fees and expenses,
incurred in order to prepare and file patent applications related to various
aspects of the Company's superconductor technology and to its current and
proposed products. 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. During 1998, the Company wrote-off $61,333 of
patent-related costs. Total capitalized patent and trademark costs are $655,678
and $604,404 at December 31, 1998 and 1997, respectively. Capitalized patent
costs related to pending patents are $315,177 and $471,933 at December 31, 1998
and 1997, respectively. Patents and trademarks are net of accumulated
amortization of $39,799 and $24,918 at December 31, 1998 and 1997, respectively.
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:
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
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
35
<PAGE> 38
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Revenue Recognition and Product Warranty
Revenues from product sales are generally recognized at the time of
shipment and are recorded net of estimated returns and allowances. The Company
has, under certain conditions, granted customers the right to return product
during a specified period of time after shipment. In these situations, the
Company establishes a liability for estimated returns and allowances at the time
of shipment. The Company has established a program which, in certain situations,
allows customers or prospective customers to field test the Company's products
for a specified period of time. Revenues from field test arrangements is
recognized upon customer acceptance of the products. The Company warrants its
products against defects in materials and workmanship typically for a one year
period from the date of shipment, except for superconducting materials contained
in the products, which are warranted for ten years from the date of shipment. A
provision for estimated future costs related to warranty expenses is recorded
when revenues are recognized. Returns and allowances and warranty costs were not
significant in any period reported.
Advertising Costs
Advertising costs are charged to expense in the period incurred.
Advertising expense for the years ended December 31, 1998, 1997 and 1996, was
approximately $18,000, $176,000 and $135,000, 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
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 the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Description of Certain Concentrations and Risks
The Company operates in a highly competitive and rapidly changing industry.
Product revenues are currently concentrated with a limited number of customers
and the supply of certain materials is concentrated among a few providers. The
development and commercialization of new technologies by any competitor could
adversely affect the Company's results of operations.
36
<PAGE> 39
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Long Lived Assets
The Company records impairment losses 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.
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 1999. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's strategy to generate sufficient working capital to fund its
operations and cash requirements in the future includes advancing market
penetration with original equipment manufacturers ("OEMs") 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 further implementation of an
overhead reduction program.
As a result of its funding requirements, on March 31, 1999, the Company
privately issued an aggregate of $3.3 million initial principal amount of Senior
Convertible Notes due May 15, 2002 (the "New Notes") and issued warrants to
purchase 1,320,000 shares of the Company's Common Stock (the "New Warrants").
The New Notes bear interest at the rate of 6% per annum, payable in cash or
shares of Common Stock at the Company's option, and mature on May 15, 2002.
Holders of the New Notes may convert the principal amount, plus accrued and
unpaid interest, if any, into shares of the Company's Common Stock at a fixed
conversion price of $1.125 per share. On and after May 15, 2000, the Company may
redeem all or a portion of the New Notes at a redemption price equal to the
principal amount plus accrued interest thereon, if any, under certain
conditions. The New Warrants have an exercise price of $1.4625 per share and
expire on March 31, 2002. In the event that the Company fails to achieve
break-even or positive operating income during the second quarter of 2000, the
New Notes, together with the Notes (See Note 8), may become immediately due and
payable unless the holders thereof agree to modify or waive such provision.
Concurrently with the issuance of the New Notes, the Company amended certain
terms of $5.5 million in aggregate principal amount of the Notes (the "Amended
Notes") and the Warrants exercisable for an aggregate of 2,200,000 shares of the
Company's Common Stock (the "Amended Warrants") issued in connection therewith.
The Amended Notes were amended to bear interest at the rate of 6% per annum,
payable in cash or shares of the Company's Common Stock at the Company's option,
and the fixed conversion price for the Amended Notes was reduced from $1.50 to
$1.125 per share. The exercise price of the Amended Warrants was reduced from
$3.75 to $1.4625 per share.
Despite the recently completed issuance and sale of New Notes, the Company
believes that during the third quarter of 1999 it will require substantial
additional funds to finance its product development, manufacturing and marketing
activities. The Company is actively seeking financing in order to obtain working
capital to continue its operations according to its current operating plan
through the third quarter of 1999 and beyond.
If the Company is unable to obtain adequate funds when needed in the
future, the Company would be required to substantially delay, scale-back or
eliminate the manufacturing, marketing, or sales of one or more of its products
or research and development programs, or may be required to obtain funds through
arrangements with collaborative partners or others that may require the Company
to relinquish rights to certain of its technologies, product candidates or
potential products that the Company would not otherwise relinquish. This would
materially and adversely affect the Company's business, financial condition,
results of operations and cash flows.
37
<PAGE> 40
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
---------- ----------
<S> <C> <C>
Raw materials $1,083,605 $ 704,626
Work-in-process 60,456 345,956
Finished product 280,366 675,559
========== ==========
$1,424,427 $1,726,141
========== ==========
</TABLE>
Cost of product sales for the years ending December 31, 1998 and 1997
includes approximately $375,000 and $529,000, respectively, of costs in
excess of the net realizable value of finished goods inventory.
5. INVESTMENTS
Investments at December 31, 1997 consisted of a U.S. government security,
due March 2001, with a cost and fair value of $500,313. During 1998, this
security was sold. The gross realized loss on such sale was $4,963.
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 shareholder rights
plan (the "Rights Plan"). In conjunction with the adoption of the Rights Plan,
the Company 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.
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
38
<PAGE> 41
6. CAPITAL STOCK (CONTINUED)
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 warrants were redeemed by the Company on December 23, 1996. In
conjunction with the redemption, the Company issued 340,773 shares of its common
stock in exchange for $3,287,304 in cash plus $1,142,754 of notes. The notes
bear interest at 8.25% per annum, were due on April 30, 1997, and are guaranteed
by an affiliate of a stockholder. Payments made during 1998 and 1997 on the
notes receivable totaled $17,812 and $444,246, respectively. The remaining
balance due of $680,696 is currently being disputed by the issuers and is in
litigation (Note 12).
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 the 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 for
the above issuances, net of related expenses, was $9,020,028. None of the
Preferred Stock has voting rights. The Series B Stock was 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 the conversion. The Series C Stock and Series G Stock was convertible
into common stock at a conversion price equal to the lessor 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 proceeding the
date of conversion. The conversion ratio was subject to adjustment. Dividends on
the Series B, Series C and Series G Convertible Preferred Stock were payable at
the rate of 5% per annum, and were payable in cash or shares of common stock, at
the option of the Company.
During the fourth quarter of 1997, $2,525,000 (505 shares) of Series B
Convertible Preferred Stock were converted into 801,992 shares of common stock.
Accrued dividends thereon of $61,138 were also converted into 19,940 shares of
common 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 of $5,490 were also converted into 5,502 shares of common stock.
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.
At December 31, 1998, authorized but unissued shares of common stock have
been reserved for future issuance as
39
<PAGE> 42
follows:
<TABLE>
<CAPTION>
<S> <C>
Warrants outstanding (Note 7) 4,678,688
Options outstanding (Note 7) 1,193,977
Options reserved for future issuance under the 1993
Stock Option Plan (Note 7) 485,145
Shares issuance upon conversion of senior
convertible notes (Note 8) 6,900,000
----------
13,257,810
==========
</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 Company's 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 Company's 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). 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 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 the 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
40
<PAGE> 43
determined as if the Company had accounted for its stock options granted
subsequent to December 31, 1994, under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the years ended December 31, 1998, 1997 and 1996: risk-free
interest rate of 5.6%, 6.3% and 6.2%, respectively; a dividend yield of 0%;
volatility factor of the expected market price of the Company's common stock of
.96, .74 and .75, respectively; and expected life of the options of 4.0, 4.0 and
4.1 years, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
-------------- ------------ ------------
<S> <C> <C> <C>
Pro forma net loss $(22,863,252) $(13,063,962) $(11,590,957)
Pro forma basic and diluted loss per common
share $ (2.02) $ (2.53) $ (2.56)
</TABLE>
Because FASB 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1999.
41
<PAGE> 44
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
The table below summarizes all option activity during the period from
January 1, 1996 to December 31, 1998:
<TABLE>
<CAPTION>
EXERCISE
OPTIONS PRICE
OUTSTANDING PER SHARE
-------------------------------
<S> <C> <C>
Outstanding at December 31, 1995 525,268 $ .18 - 19.25
Granted 346,907 17.00 - 27.00
Exercised (49,881) .18 - 15.25
Forfeited (26,036) .23 - 26.50
--------------
Outstanding at December 31, 1996 796,258 .18 - 27.00
Granted 121,000 2.00 - 19.00
Exercised (17,821) .18 - 18.25
Forfeited (216,104) 6.75 - 27.00
--------------
Outstanding at December 31, 1997 683,333 .18 - 26.50
Granted 780,900 1.03 - 2.00
Exercised (33,942) .18 - .23
Forfeited (236,314) .23 - 26.50
--------------
Outstanding at December 31, 1998 1,193,977 $ .18 - 26.50
==============
</TABLE>
The weighted-average exercise price of options outstanding at December 31,
1998, 1997 and 1996, was $6.71, $12.92 and $13.40, respectively. The
weighted-average exercise price of options granted, exercised, and forfeited
during 1998 was $1.55, $0.22 and $6.69, respectively. The weighted-average fair
value of options granted during 1998, 1997 and 1996 was $1.09, $7.94, $11.35,
respectively.
Following is additional information with respect to options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
EXERCISE EXERCISE EXERCISE EXERCISE EXERCISE
PRICE FROM PRICE FROM PRICE FROM PRICE FROM PRICE FROM
$0.18 TO $1.03 TO $10.125 TO $15.50 TO $19.00 TO
$0.23 $9.75 $14.75 $18.50 $26.50
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OUTSTANDING AT DECEMBER 31, 1998:
Number of options 18,975 808,250 102,189 211,548 53,015
Weighted-average exercise price $ 0.22 $ 2.48 $ 10.92 $ 17.56 $ 22.07
Weighted-average remaining
contractual life in years 3.77 8.73 5.62 7.40 7.23
EXERCISABLE AT DECEMBER 31, 1998:
Number of options 18,975 84,769 93,185 133,185 36,542
Weighted-average exercise price $ 0.22 $7.40 $ 10.93 $17.47 $ 21.99
</TABLE>
The total number of unvested options outstanding at December 31, 1998 was
827,321, all of which will vest based on employees' continued service to 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
during 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
42
<PAGE> 45
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
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 issued warrants to purchase 470,589 shares of common stock in
connection with the July 1993 issuance of Series C Preferred Stock. These
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 were exercisable through October 26, 1998. Warrants for 10,000 of
these shares were exercised in 1996. The remaining 90,000 warrants expired
unexercised on October 26, 1998.
On June 6, 1997, the Company issued warrants to purchase 62,500 shares of
common stock in connection with the issuance of Series B Convertible Preferred
Stock (Note 6). These warrants have an exercise price of $14.8125 per share and
expire on June 6, 2001.
On October 29, 1997, the Company issued warrants to purchase 34,782 shares
of common stock in connection with the issuance of Series G Convertible
Preferred Stock (Note 6). These warrants have an exercise price of $10.0625 per
share and expire on October 29, 2001.
On May 15, 1998, the Company issued warrants to purchase 4,140,000 shares
of common stock in connection with the issuance of Senior Convertible Notes
(Note 8). These warrants have an exercise price of $3.75 per share and expire on
May 15, 2001.
8. LONG-TERM DEBT
On May 15, 1998, the Company entered into a Securities Purchase Agreement
(the "Agreement") with various parties. Under the terms of the Agreement, the
Company issued and sold $10,350,000 in aggregate principal amount of Senior
Convertible Notes due May 15, 2002 (the "Notes") and issued warrants to purchase
4,140,000 shares of the Company's Common Stock (the "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 mature 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 fixed conversion price of $1.50 per
share. Conversions were not permitted during the first 90 days following the
issuance of the Notes and were 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
was 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
became convertible (August 15, 1998 for up to one-half of the original principal
amount and November 15, 1998 for the remaining principal amount). 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)
8. LONG-TERM DEBT (CONTINUED)
was allocated to additional paid-in capital, thus creating an additional
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. The Company recognized
43
<PAGE> 46
$10,101,401 of non-cash interest charges during 1998 as a result of the
amortization of the discount on the Notes. As a result of the additional
interest expense from amortization of the debt discount described above, the
effective interest rate on the Notes is approximately 73.9%.
It is not practicable to estimate the fair value of the Notes at December
31, 1998 because a quoted market price for such securities is not available, the
Company has not yet developed a valuation model necessary to make such an
estimate, and the cost of obtaining an independent valuation would be
prohibitive.
9. INCOME TAXES
The Company has net operating loss and research and development credit
carryforwards for tax purposes of approximately $50,369,000 and $1,050,000,
respectively, at December 31, 1998. The net operating loss carryforwards expire
in the following years:
YEAR AMOUNT
-----------------------------------------------------------------
2005 $ 7,000
2006 638,000
2007 974,000
2008 1,659,000
2009 3,973,000
2010 8,199,000
2011 11,953,000
2012 11,922,000
2013 11,044,000
------------
$50,369,000
============
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
-----------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 19,140,000 $15,210,000
Research and development tax credit
carryforwards 1,050,000 881,000
Deferred compensation 27,000 79,000
Accounts receivable 33,000 -
Inventories 223,000 -
-----------------------------------
Total deferred tax assets 20,473,000 16,170,000
Deferred tax liabilities:
Patent costs (234,000) (215,000)
Property and equipment (101,000) (130,000)
-----------------------------------
(335,000) (345,000)
-----------------------------------
Net deferred tax assets 20,138,000 15,825,000
Valuation allowance (20,138,000) (15,825,000)
-----------------------------------
Net deferred tax assets $ - $ -
===================================
</TABLE>
9. INCOME TAXES (CONTINUED)
The valuation allowance increased during 1998 and 1997 by $4,313,000 and
$4,815,000, respectively, due primarily to the increase in the net operating
loss carryforward. Based on the Internal Revenue Code and changes in the
ownership of the
44
<PAGE> 47
Company, utilization of the net operating loss carryforwards will be subject to
annual limitations.
10. 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
($250,000 at December 31, 1998) 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, 1998:
YEAR AMOUNT
------------------------------------------------------------------
1999 $ 227,500
2000 231,300
2001 249,900
2002 249,900
2003 249,900
Thereafter 208,300
----------
$1,416,800
==========
Rent expense totaled $229,786, $226,938 and $227,334, for the years ended
December 31, 1998, 1997, and 1996, respectively.
11. 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, 1998, 1997, and 1996.
12. LITIGATION
Siegler Litigation
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 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
12. LITIGATION (CONTINUED)
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.
45
<PAGE> 48
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.
Note Litigation
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' 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
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 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 December 10, 1997, the Company's motion to strike
the Borrowers' fraud defense and dismiss their counterclaim was granted with
leave to amend.
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 claim 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 other
Borrowers and the Guarantor under the promissory notes and the guarantee.
Lipman Litigation
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. Smith and
Paul G. Yovovich (collectively, the "Named Directors") in the Circuit Court of
Cook County, Illinois, County Department, Chancery Division. The complaint
alleged that the Named 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 Common Stock
price. The complaint also alleged that the Named Directors breached their 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 Common Stock during the period from
June 6, 1997 through November 21, 1997, excluding the Named Directors and
Sheldon
12. LITIGATION (CONTINUED)
Drobny. The complaint also seeks an unspecified amount of compensatory and
punitive damages, and attorneys' fees.
The Company and the Named Directors regard the suit as without factual or
legal merit. Accordingly, on February 17, 1998, the Company and the Named
Directors 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 Named Directors. Prior to a
hearing on the Company's and the Named Directors' 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.
46
<PAGE> 49
On June 1, 1998, the court granted the Company's and the Named Directors'
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 Named Directors but excluding the
Company itself as a defendant. The amended complaint alleges that the Named
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 the financing. The amended complaint seeks certification
of a class consisting of all owners of the Common Stock during the period from
May 15, 1997 through December 31, 1997, excluding the Named Directors. Mr.
Lipman's amended complaint alleges that the stock owned by the putative class
lost $61 million due to the financing the Named Directors selected, and seeks an
unspecified amount of compensatory and punitive damages. The Company and the
Named Directors regard the amended complaint as without factual or legal merit.
Accordingly, the Named Directors filed a motion to dismiss Mr. Lipman's amended
complaint on July 29, 1998. The court granted the motion to dismiss in December
1998, finding that Mr. Lipman still had failed to fulfill the prerequisites for
maintaining a shareholder derivative action against the Named Directors. On
January 12, 1999, Mr. Lipman and two added former stockholders filed a second
amended complaint against the Named Directors and again including the Company
itself as a defendant.
The second amended complaint alleges that the Named Directors breached
their duties of loyalty and due care to the putative class and further alleges
that the purported devaluation of the plaintiff's stock resulting from the June
1997 financing was an improper "assessment" on the plaintiffs' shares for which
they seek an unspecified amount of compensatory and punitive damages. In
February 1999, the Company and the Named Directors filed a motion to dismiss the
second amended complaint. A hearing on the motion is scheduled for April 1999.
Greenwald Litigation
On June 24, 1998, Jonathan Greenwald, derivatively on behalf of the
Company, filed a complaint against the Company and the Named Directors in the
court of Chancery of the State of Delaware in and for New Castle County. Mr.
Greenwald's complaint alleges that the Named Directors breached their 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 Named Directors. The complaint seeks an unspecified amount of
compensatory damages, various equitable relief and attorney's fees.
The Company and the Named Directors regard the suit as without factual or
legal merit. Accordingly, in January 1999, the Company and the Named Directors
filed a motion to dismiss the complaint arguing that the complaint is barred by
the business judgment rule and the plaintiffs' failure to fulfill the
prerequisites for maintaining a shareholder derivative action against the Named
Directors. A hearing on the motion has not been scheduled.
The Company intends to defend itself vigorously in the matters described
above and believes that the resolution of these matters will not have a material
adverse effect on the financial condition, results of operations, or cash flows
of the Company.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
47
<PAGE> 50
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
1999 Annual Meeting of Stockholders, scheduled to be held on June 9, 1999 (the
"1999 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this item is incorporated by reference from
the section of the 1999 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 1999 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 1999 Proxy Statement captioned "Executive Compensation and
Certain Transactions."
48
<PAGE> 51
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, 1998 and 1997
Statements of Operations for the Years Ended December 31, 1998, 1997,
and 1996
Statements of Stockholders' Equity (Net Capital Deficiency) for the
Years Ended December 31, 1998, 1997, and 1996
Statements of Cash Flows for the Years Ended December 31, 1998, 1997
and 1996
Notes to Financial Statements
2. The following financial statement schedules of the Company are
filed as part of this Form 10-K:
Schedule II N Valuation and Qualifying Accounts
All other financial schedules are omitted because such schedules are
not required or the information required has been presented in
the aforementioned financial statements.
3. Exhibits are listed in the Exhibit Index to this Form 10-K.
(b) Reports on Form 8-K:
None.
49
<PAGE> 52
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, 1999.
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, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------ ---------------------------------------------------------
<S> <C>
Chairman of the Board, President, Chief Executive Officer
/s/ EDWARD W. LAVES (Principal Executive Officer)
- ------------------------------------
Edward W. Laves
Controller and Treasurer
/s/ KENNETH E. WOLF (Principal Financial and Accounting Officer)
- ------------------------------------
Kenneth E. Wolf
/s/ HOWARD HOFFMANN Director
- ------------------------------------
Howard Hoffmann
/s/ ROBERT D. MITCHUM Director
- ------------------------------------
Robert D. Mitchum
/s/ TERRY S. PARKER Director
- ------------------------------------
Terry S. Parker
/s/ THOMAS L. POWERS Director
- ------------------------------------
Thomas L. Powers
</TABLE>
50
<PAGE> 53
ILLINOIS SUPERCONDUCTOR CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Balance at
beginning of Additions Deductions Balance at end
year of year
--------------- ------------ ---------- --------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
Deducted from asset accounts:
Valuation allowance on deferred tax assets...... $15,825,000 $4,580,000 $ 0 $20,405,000
Allowance for doubtful accounts $ 68,775 $ 19,215 $ 0 $ 87,990
Reserve for obsolete inventory $ 0 $ 587,000 $ $ 587,000
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 doubtful 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
</TABLE>
<PAGE> 54
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
3.1 Certificate of Incorporation of the Company, incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement
on Form S-3/A, filed with the Securities and Exchange Commission
("SEC") on August 13, 1998, Registration No. 333-56601 (the
"August 1998 S-3").
3.2 By-Laws of the Company, incorporated by reference to Exhibit 3.2
to Amendment No. 3 to the Company's Registration Statement on Form
S-1, filed with the SEC on October 26, 1993, Registration No.
33-67756 (the "IPO Registration Statement").
3.3 Certificate of Amendment of Certificate of Incorporation of the
Company, 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 B 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 with the SEC on 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, filed with the SEC
on June 23, 1997, Registration No. 333-29797 (the "June 1997
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 the June 1997
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, filed with the SEC on September 22, 1997,
Registration 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, filed with the SEC on December 8, 1997, Registration
No. 333-41731 (the "December 1997 S-3").
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 the December 1997 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
the December 1997 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 the
<PAGE> 55
December 1997 S-3.
4.14 Form of 2% Senior Convertible Note due May 15, 2002, incorporated
by reference to Exhibit 4.2 to the August 1998 S-3.
4.15 Form of Warrant dated May 15, 1998, incorporated by reference to
Exhibit 4.3 to the August 1998 S-3.
4.16 Securities Purchase Agreement dated as of May 15, 1998, by and
between the Company and Elliott Associates, L.P., Westgate
International, L.P., Alexander Finance, LP, State Farm Mutual
Automobile Insurance Company, Spring Point Partners, L.P. and
Spring Point Offshore Fund, incorporated by reference to Exhibit
4.5 to the August 1998 S-3.
4.17 Registration Rights Agreement dated as of May 15, 1998, by and
between the Company and Elliott Associates, L.P., Westgate
International, L.P., Alexander Finance, LP, State Farm Mutual
Automobile Insurance Company, Spring Point Partners, L.P. and
Spring Point Offshore Fund, incorporated by reference to Exhibit
4.6 to the August 1998 S-3.
4.18 Form of 6% Senior Convertible Note due May 15, 2002.
4.19 Form of Warrant dated March 31, 1999.
4.20 Securities Purchase Agreement dated as of March 31, 1999, by and
between the Company and Elliott Associates, L.P., Westgate
International, L.P., Alexander Finance, LP and State Farm Mutual
Automobile Insurance Company.
4.21 Registration Rights Agreement dated as of March 31, 1999, by and
between the Company and Elliott Associates, L.P., Westgate
International, L.P., Alexander Finance, LP and State Farm Mutual
Automobile Insurance Company.
4.22 Amendment to Securities Purchase Agreement dated as of March 31,
1999, by and between the Company and Elliott Associates, L.P.,
Westgate International, L.P., Alexander Finance, LP, State Farm
Mutual Automobile Insurance Company, Spring Point Partners, L.P.
and Spring Point Offshore Fund.
10.1 1993 Amended and Restated Stock Option Plan, as amended,
incorporated by reference to Exhibit B to the Company's Proxy
Statement filed with the SEC on May 6, 1997.*
10.2 Form of Amended and Restated Director Indemnification Agreement,
incorporated by reference to Exhibit 10 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September 30,
1998. *
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.
<PAGE> 56
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.
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 Form of Officer Indemnification Agreement.*
10.17 Employment Agreement dated July 1, 1998 between the Company and
Edward W. Laves, Ph.D.*
10.18 Employment Agreement dated November 9, 1998 between the Company
and Dennis Craig.*
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 Company's Form
10-Q for the quarterly 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.
<PAGE> 1
EXHIBIT 4.18
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE, IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS.
THE SECURITIES REPRESENTED BY THIS NOTE ARE SUBJECT TO CERTAIN RESTRICTIONS ON
TRANSFER SET FORTH IN SECTION 3.1 OF A SECURITIES PURCHASE AGREEMENT, DATED AS
OF MARCH 31, 1999, BETWEEN ILLINOIS SUPERCONDUCTOR CORPORATION (THE "COMPANY")
AND THE PURCHASERS LISTED THEREIN, INCLUDING THE ORIGINAL HOLDER HEREOF. A COPY
OF THAT AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY.
6% SENIOR CONVERTIBLE NOTE
--------------------------
Mt. Prospect, Illinois Note No.:___
March 31, 1999 Original Principal Amount: $______
FOR VALUE RECEIVED, ILLINOIS SUPERCONDUCTOR CORPORATION, a Delaware
corporation (the "Company"), hereby promises to pay to the order of [NAME OF
HOLDER] or its registered assigns ("Holder") the Principal Amount (as defined in
Section 3(a)(i) below), together with all accrued but unpaid cash interest
thereon, if any, on May 15, 2002 (the "Maturity Date") to the extent such
Principal Amount and cash interest has not been converted into the Company's
Common Stock, $.001 par value per share (the "Common Stock"), in accordance with
the terms hereof, and to pay interest on the unpaid principal balance hereof at
the rate of 6% per annum from March 31, 1999 (the "Issuance Date") until the
same becomes due and payable on the Maturity Date, or such earlier date upon
acceleration or by conversion or redemption in accordance with the terms hereof.
Interest on this Note shall commence accruing on the Issuance Date and shall be
computed on the basis of a 360-day year, 30-day months and actual days elapsed
and shall be payable in accordance with Section 3(a)(ii) hereof. Notwithstanding
anything contained herein, this Note shall bear interest from and after the
occurrence and during the continuance of a default pursuant to Section 5(a), at
the rate equal to the lower of fifteen percent (15%) per annum or the highest
rate permitted by law. Unless otherwise agreed or required by applicable law,
payments will be applied first to any unpaid collection costs, then to unpaid
interest and fees and any remaining amount to principal.
All payments of principal and interest on this Note (to the extent such
principal and/or interest is not converted into Common Stock or interest is not
paid in-kind in accordance with the terms hereof) shall be made in lawful money
of the United States of America by wire transfer of immediately available funds
to
<PAGE> 2
such account as the Holder may from time to time designate by written notice in
accordance with the provisions of this Note or by Company check. Whenever any
amount expressed to be due by the terms of this Note is due on any day which is
not a Business Day (as defined below), the same shall instead be due on the next
succeeding day which is a Business Day. For purposes of this Note, "Business
Day" shall mean any day other than a Saturday, Sunday or a day on which
commercial banks in the City of New York are authorized or required by law or
executive order to remain closed. Each capitalized term used herein, and not
otherwise defined, shall have the meaning ascribed thereto in the Securities
Purchase Agreement, dated March 31, 1999, pursuant to which this Note was
originally issued (the "Purchase Agreement"). This Note and the other senior
convertible notes issued or amended by the Company on the Issuance Date pursuant
to the Purchase Agreement are collectively referred to in this Note as the
"Notes."
The following terms and conditions shall apply to this Note:
Section 1. Voting Rights. The rights of holders of Notes to
elect or designate directors to the Company's Board of Directors is limited to
the provisions of Section 1 of the Amendment to Note Purchase Agreement, dated
as of the date hereof, by and among the Company, the Holder and the other
holders of Notes (the "Amendment to Note Agreement"). So long as any principal
amount of Notes is outstanding, the Company shall not, without the affirmative
vote of the holders of at least 75% of the principal amount of the Notes then
outstanding, authorize or create any class of debt securities or capital stock
ranking as to dividends, interest or distribution of assets upon a Liquidation
payment at maturity, if applicable, (as defined in Section 2 hereof) senior to,
prior to or pari passu with the Notes.
Section 2. Liquidation. Upon any liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary (a "Liquidation"),
the holders of Notes shall be entitled to receive in cash out of the assets of
the Company, whether such assets are capital or surplus, an amount equal to the
outstanding principal thereon plus all accrued but unpaid interest thereon
before any distribution or payment shall be made to the holders of any Junior
Securities (as defined in Section 6 hereof), and if the assets of the Company
shall be insufficient to pay in full the amounts due to the holders of the Notes
and holders of other classes or series of debt securities of the Company that
rank pari passu with the Notes as to distributions of assets, then the entire
assets to be distributed to the holders of Notes and the holders of such debt
securities ranking pari passu shall be distributed among the holders of Notes
and the holders of such debt securities ranking pari passu ratably in accordance
with the respective amounts that would be payable on the Notes and such debt
securities if all amounts payable thereon were paid in full. A sale, conveyance
or disposition (either singly or in the aggregate) of all or substantially all
of the assets of the Company or the effectuation by the Company or a third party
of a transaction or series of related transactions in which more than 50% of the
voting power of the Company is disposed of, or a consolidation or merger of the
Company with or into any other company or companies shall not be treated as a
Liquidation, but instead shall be subject to the provisions of Section 3 hereof.
The Company shall mail written notice of any such Liquidation, not less than 45
days prior to the payment date stated therein, to each record holder of Notes.
Section 3. Conversion. The Holder shall have the right, at the
Holder's option, to convert this Note into shares of Common Stock on the
following terms and conditions:
(a)(i) Any part of the Principal Amount (as defined below) of
this Note shall be convertible into shares of Common Stock (subject to reduction
pursuant to Section 3(i) below) at the Conversion Ratio at the option of the
Holder in whole or in part at any time following the Issuance Date up to and
including the day that all of the Principal Amount and cash interest accrued but
unpaid thereon, if any, are paid in full.
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<PAGE> 3
Each conversion by the Holder shall be for at least $10,000 in Principal Amount,
or such lesser Principal Amount as shall remain unpaid and outstanding at the
time of conversion. The Holder shall effect conversions by surrendering to the
Company a fully executed notice of conversion in the form of conversion notice
attached hereto as Exhibit A (the "Conversion Notice"), which may be transmitted
by facsimile, and this Note. Each Conversion Notice shall specify the
outstanding Principal Amount of this Note to be converted and the date on which
such conversion is to be effected, which date may not be prior to the date such
Conversion Notice is received by the Company hereunder (the "Conversion Date");
provided, however, that if this Note is not received by the Company (other than
by facsimile) within two (2) Trading Days of the date specified in the
Conversion Notice as the date on which such conversion is to be effected, then
the Conversion Date shall be the date on which this Note is received by the
Company (other than by facsimile). If no Conversion Date is specified in a
Conversion Notice, the Conversion Date shall be the date that the Conversion
Notice is deemed delivered pursuant to Section 3(h) hereof; provided, however,
that if this Note is not received (other than by facsimile) by the Company
within two (2) Trading Days of such date, then the Conversion Date shall be the
date on which this Note is received by the Company (other than by facsimile).
Subject to Section 3(b) hereof and Section 3(i) hereof, each Conversion Notice,
once given, shall be irrevocable. If the Holder is converting less than all of
the outstanding Principal Amount tendered by the Holder with the Conversion
Notice, or if a conversion hereunder cannot be effected in full for any reason,
the Company shall promptly deliver to the Holder (in the manner and within the
time set forth in Section 3(b) hereof) a Note for such Principal Amount as has
not been converted. As used herein, "Principal Amount" shall refer to the sum of
(i) the original principal amount of $__________; (ii) all accrued but unpaid
in-kind interest payments added thereto as provided in paragraph 3(a)(ii) below;
and (iii) any payments which Holder has elected to add to the Principal Amount
following the occurrence of an "Event," pursuant to paragraph 3(c)(i) below.
(ii) Interest. Interest on this Note shall be payable in-kind,
unless the Company shall, on thirty (30) days' irrevocable prior written notice,
have informed the holders of the Notes of its election to pay cash interest. If
paid in-kind, then interest on this Note shall accrue on, and be automatically
added to the Principal Amount on a daily basis and shall compound quarterly on
each March 31, June 30, September 30 and December 31. Following notice of
payment of cash interest by the Company, all payments of interest on this Note
shall be made in cash, until such time as the Company provides thirty (30) days'
irrevocable prior written notice to the Holder of its election to pay interest
on this Note in-kind. If the Company elects to pay accrued interest in cash,
interest shall be paid quarterly in arrears on each March 31, June 30, September
30 and December 31 and shall compound quarterly. Notwithstanding the foregoing,
accrued but unpaid cash interest on any portion of the Principal Amount which is
converted into Common Stock hereunder shall be converted at the same time as
such Principal Amount. Accrued but unpaid cash interest on any portion of the
Principal Amount which is redeemed or repurchased hereunder shall be paid in
cash concurrently with such redemption or repurchase.
Notwithstanding anything to the contrary contained herein, the
Company may not pay interest in-kind (and must deliver cash in respect thereof)
on the Notes if:
(i) the number of shares of Common Stock at the time
authorized, unissued and unreserved for all purposes, or held as treasury stock,
is insufficient to issue such interest upon conversion of all Notes;
(ii) such shares are not registered for resale
pursuant to an effective registration statement and covered by a current related
prospectus, the use of which has not been suspended (except during periods,
permitted by the Registration Rights Agreement (as defined in Section 6 below),
that such
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<PAGE> 4
registration statement is not required to be effective or such prospectus is not
required to be available pursuant to the Registration Rights Agreement), that
names the recipient of such dividend as a selling stockholder thereunder and may
not be sold without restrictions pursuant to Rule 144 promulgated under the
Securities Act of 1933, as amended (the "Securities Act"), as determined by
counsel to the Company pursuant to a written opinion letter, addressed to the
Company's transfer agent, in the form and substance reasonably acceptable to the
holder;
(iii) such shares are not listed on the Nasdaq
National Market, The Nasdaq SmallCap Market, the New York Stock Exchange, the
American Stock Exchange or any other exchange or quotation system on which the
Common Stock is then listed for trading; or
(iv) the Company shall have failed to pay any cash
interest payments when due (unless waived by holders of 75% in outstanding
principal amount of the Notes).
(b) Not later than three (3) Trading Days after the Conversion
Date, the Company will deliver to the Holder (i) a certificate or certificates
which shall be free of restrictive legends and trading restrictions (other than
those required by Section 3.1(b) of the Purchase Agreement) representing the
number of shares of Common Stock being acquired upon the conversion of this
Note, and (ii) a Note representing the remaining Principal Amount of this Note
not converted, if any, provided, however, that the Company shall not be
obligated to issue certificates evidencing the shares of Common Stock issuable
upon conversion of this Note until this Note is either delivered for conversion
(other than by facsimile) to the Company, or the Holder notifies the Company
that such Note has been lost, stolen or destroyed and provides a bond (or other
adequate security reasonably acceptable to the Company) reasonably satisfactory
to the Company to indemnify the Company from any loss incurred by it in
connection therewith. The Company shall, upon request of the Holder, use its
best efforts to deliver any certificate or certificates required to be delivered
by the Company under this Section 3(b) electronically through The Depository
Trust Corporation or another established clearing corporation performing similar
functions. If in the case of any Conversion Notice, such certificate or
certificates, including for purposes hereof, any shares of Common Stock to be
issued on the Conversion Date on account of accrued interest hereunder, are not
delivered to or as directed by the Holder by the third Trading Day after the
Conversion Date, the Holder shall be entitled by written notice to the Company
at any time on or before its receipt of such certificate or certificates
thereafter, to rescind such conversion, in which event the Company shall
immediately return this Note tendered for conversion. If the Company fails to
deliver to the Holder such certificate or certificates pursuant to this Section
3(b), including for purposes hereof, any shares of Common Stock to be issued on
the Conversion Date on account of accrued interest hereunder, prior to the fifth
Trading Day after the Conversion Date, the Company shall pay to the Holder, in
cash, an amount equal to the actual damages which the Holder can prove it has
suffered as a direct result of the Company's failure to deliver to the Holder
such certificate or certificates prior to the fifth Trading Day after the
Conversion Date. If the Company fails to deliver to the Holder such certificate
or certificates pursuant to this Section prior to the 20th day after the
Conversion Date, the Company shall (i) deliver notice of such failure to all
holders of the Notes and (ii) at the option of any holder of the Notes, and upon
such holder's written notice to the Company, redeem all or a portion of the
outstanding Principal Amount of the Notes held by such holder, as requested by
such holder. The aggregate redemption price shall be equal to the greater of (i)
the outstanding Principal Amount being redeemed plus accrued and unpaid cash
interest thereon, if any, and (ii) the product of (x) the average of the Per
Share Market Value for the five (5) Trading Days preceding the Conversion Date
and (y) the Conversion Ratio. If a holder has requested that the Company redeem
such holder's Notes pursuant to this Section 3(b) and the Company fails for any
reason to pay the redemption price above within seven (7) days after such notice
is deemed delivered pursuant to Section 3(b), the
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<PAGE> 5
Company will pay interest on the redemption price at a rate of 15% per annum, in
cash to such holder, accruing from such seventh day until the redemption price
and any accrued interest thereon is paid in full; provided, however, if any
portion of the redemption price under this Section 3(b) shall not be paid by the
Company within seven (7) days of such notice of redemption being delivered, the
applicable holder by written notice given to the Company within 30 days of such
7th day, may elect to invalidate ab initio such redemption and the Company
shall, within three (3) Trading Days of receipt of such notice, return to such
holder that portion of this Note for which the redemption price has not been
paid.
(c) (i) The conversion price ("Conversion Price") applicable
to conversions of the Principal Amount of this Note into Common Stock hereunder
shall be $1.125, subject to adjustment as provided herein. Notwithstanding the
foregoing, if (a) the registration statement contemplated by the Registration
Rights Agreement, which among other things, requires the Company to register the
resale of the shares of Common Stock issuable upon conversion of the Notes,
including a registration statement covering additional shares of Common Stock
issuable upon conversion of the Notes but not included in a prior registration
statement (the "Underlying Shares Registration Statement") is not filed on or
prior to the 30th day after the Issuance Date in the case of the initial
Underlying Shares Registration Statement, and with respect to any other
Underlying Shares Registration Statement, the 30th day following the date
additional shares of Common Stock became issuable upon conversion of the Notes,
or (b) the Company fails to file with the Commission a request for acceleration
in accordance with Rule 12d1-2 promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), within five (5) days of the date that the
Company is notified (orally or in writing, whichever is earlier) by the
Commission that an Underlying Shares Registration Statement will not be
"reviewed" or is advised that such Registration Statement is not subject to
further review or comment, or (c) if the Underlying Shares Registration
Statement is not declared effective by the Commission on or prior to the 90th
day after the Issuance Date, in the case of the initial Underlying Shares
Registration Statement, and with respect to the other Underlying Shares
Registration Statements, the 60th day following the date additional shares of
Common Stock became issuable upon conversion of the Notes, or (d) if such
Underlying Shares Registration Statement is filed with and declared effective by
the Commission but thereafter ceases to be effective as to all Registrable
Securities (as such term is defined in the Registration Rights Agreement) at any
time prior to the expiration of the "Effectiveness Period" (as such term as
defined in the Registration Rights Agreement), without being succeeded within
ten (10) Business Days by a subsequent Underlying Shares Registration Statement
filed with and declared effective by the Commission, or (e) if trading in the
Common Stock shall be suspended for any reason for more than three (3)
consecutive Trading Days or five (5) Trading Days in the aggregate or if the
Common Stock shall be delisted from the Nasdaq National Market (unless such
delisting shall be due to failure comply with the maintenance criteria set forth
in NASD Rule 4450 (or any successor rule) with respect to: (i) minimum bid price
or (ii) net tangible assets, or unless the Common Stock is listed for trading on
The Nasdaq SmallCap Market, the New York Stock Exchange or the American Stock
Exchange within three (3) Trading Days), or (f) if the conversion rights of the
Holder are suspended for any reason, or (g) the Company postpones or suspends
the filing or effectiveness of any Registration Statement in excess of 20
consecutive days or 60 days in the aggregate during any twelve month period, or
(h) a holder of Registrable Securities must discontinue disposition of its
Registrable Securities pursuant to the fourth paragraph of Section 3(o) of the
Registration Rights Agreement, or (i) if during the Effectiveness Period (as
defined in the Registration Rights Agreement), the Registrable Securities shall
not be exempt from qualification under the state securities laws of all 50
states and the District of Columbia and (1) the Company shall not have, within
14 days of such occurrence, applied to have the Registrable Securities qualified
under all such laws; or (2) within 45 days of such occurrence, such Registrable
Securities shall not be so qualified (any such occurrence in clauses (a) through
(i) above being referred to as an "Event," and for purposes of clauses (a), (c),
(f) and (h) the date on which such Event occurs, or for purposes of clause (b)
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<PAGE> 6
the date on which such five (5) day period is exceeded, or for purposes of
clause (d) the date which such 10 Business Day-period is exceeded, or for
purposes of clause (e) the date on which such three Trading Day period is
exceeded, or for purposes of clause (g) the date on which such 20 consecutive
day or 60 aggregate day period is exceeded, or for purposes of clause (i) the
date on which such14 or 45 day period is exceeded being referred to as an "Event
Date"), the Conversion Price for all of the Notes shall be decreased by 2.5% for
each monthly anniversary of an Event Date until the earlier to occur of the
second month anniversary after the Event Date and such time as the applicable
Event is cured (e.g. if an Event has not been cured on the first month
anniversary of its Event Date, the Conversion Price for all of the Notes shall
be reduced to $1.096875; if the Event has not been cured on the second month
anniversary of its Event Date, the Conversion Price for all of the Notes in
effect on a Conversion Date shall be further reduced to $1.0694532). Commencing
the second month anniversary after the Event Date, at the option of any holder
of the Notes, to be exercised by written notice, for each applicable monthly
period either (a) the Company shall pay to such holder 2.5% of the outstanding
Principal Amount of such holder's Notes, which amount such holder may elect by
written notice to the Company delivered at least 5 Trading Days prior to the
date such amount is payable to have added to the Principal Amount or (b) the
Conversion Price for such Notes shall be decreased by 2.5% for each such
additional month (to be effective in full on the monthly anniversary of an
applicable Event Date) as liquidated damages, and not as a penalty, on the first
day of each monthly anniversary of the Event Date, in either case until such
time as the applicable Event is cured. Any decreased Conversion Price in effect
pursuant to this Section 3(c)(i) shall continue notwithstanding the fact that
the Event causing such decrease has been subsequently cured. If an Event is not
cured by the third month anniversary of an Event Date (or the second week
anniversary of an Event Date for the purpose of clause (f)), then each holder of
Notes shall have the option by written notice to require the Company to redeem
such holder's Notes, in whole or in part, at an aggregate redemption price equal
to the greater of (i) the Principal Amount (plus accrued and unpaid cash
interest thereon, if any) and (ii) the product of (x) the average of the Per
Share Market Value for the five (5) Trading Days immediately preceding such
holder's redemption notice and (y) the Conversion Ratio. If the Holder has
requested that the Company redeem this Note pursuant to this Section 3.1(c)(i)
and the Company fails for any reason to pay the redemption price within seven
(7) days after the notice of redemption is deemed delivered pursuant to Section
3(h), the Company will pay interest on such redemption price in cash at a rate
of 15% per annum to the applicable holder, accruing from the date the notice of
redemption is deemed delivered until the redemption price plus any accrued
interest thereon is paid in full; provided, however, if any portion of the
redemption price under this Section 3.1(c)(i) shall not be paid by the Company
within seven (7) days of such notice of redemption being delivered, such holder
by written notice given to the Company within 30 days of such 7th day, may elect
to invalidate ab initio such redemption and the Company shall, within three (3)
Trading Days of receipt of such notice, return to such holder the portion of
this Note for which the redemption price has not been paid. The provisions of
this Section 3(c)(i) are not exclusive and shall in no way limit the Company's
obligations under the Registration Rights Agreement.
(ii) If the Company, at any time while any
Principal Amount of this Note is outstanding, (a) shall pay a stock dividend or
otherwise make a distribution or distributions on shares of its Junior
Securities payable in shares of Common Stock, (b) subdivide outstanding shares
of Common Stock into a larger number of shares, (c) combine outstanding shares
of Common Stock into a smaller number of shares, or (d) issue by
reclassification of shares of Common Stock any shares of capital stock of the
Company, the Conversion Price shall be multiplied by a fraction of which the
numerator shall be the number of shares of Common Stock (excluding treasury
shares, if any) outstanding before such event and of which the denominator shall
be the number of shares of Common Stock outstanding after such event. Any
adjustment made pursuant to this Section 3(c)(ii) shall become effective
immediately after the record
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<PAGE> 7
date for the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision, combination or re-classification.
(iii) If the Company, at any time while any Principal
Amount of this Note is outstanding, shall distribute to all holders of Common
Stock evidences of its indebtedness or assets or rights or warrants to subscribe
for or purchase any security (excluding those referred to in Section 3(c)(ii)
above), then in each such case the Conversion Price shall be determined by
multiplying the Conversion Price in effect immediately prior to the record date
fixed for determination of stockholders entitled to receive such distribution by
a fraction of which the denominator shall be the Per Share Market Value of
Common Stock determined as of the record date mentioned above, and of which the
numerator shall be such Per Share Market Value of the Common Stock on such
record date less the then fair market value at such record date of the portion
of such assets or evidence of indebtedness so distributed applicable to one
outstanding share of Common Stock as determined by the Company's Board of
Directors in good faith; provided, however, that if the holders of a majority of
the outstanding principal of the Notes dispute such amount, such holders may
select a nationally recognized or major regional investment banking firm or firm
of independent certified public accountants of recognized standing (an
"Appraiser") paid for by the holders of the outstanding principal of the Notes
then outstanding, in which case the fair market value shall be equal to the
average of the determinations by the Company's Board of Directors and such
Appraiser. In either case the adjustments shall be described in a statement
provided to the holders of the Notes of the portion of assets or evidences of
indebtedness so distributed or such subscription rights applicable to one share
of Common Stock. Such adjustment shall be made whenever any such distribution is
made and shall become effective immediately after the record date mentioned
above.
(iv) All calculations under this Section 3 shall
be made to the nearest cent or the nearest 1/100th of a share, as the case may
be.
(v) Whenever the Conversion Price is adjusted
pursuant to Section 3(c)(ii) or (iii) above, the Company shall promptly mail to
each holder of the Notes, a notice setting forth the Conversion Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment.
(vi) In case of (i) an acquisition after the date
hereof by an individual, legal entity or "group" within the meaning of Section
13(d) under the Exchange Act of voting securities of the Company pursuant to
which, after giving effect to such acquisition, such individual, legal entity or
group will beneficially own in excess of 50% of the issued and outstanding
voting securities of the Company, (ii) a replacement of more than one-half of
the members of the Company's Board of Directors which is not approved by those
individuals who are members of the Company's Board of Directors on the date
thereof in one or a series of related transactions, (iii) the merger of the
Company with or into another entity, consolidation or sale, transfer or
disposition of all or substantially all of the assets of the Company in one or a
series of transactions or (iv) the execution by the Company of an agreement to
which the Company is a party or which it is bound providing for an event set
forth in (i), (ii) or (iii) above, pursuant to which the Common Stock is
converted into other securities, cash or property (each, a "Business
Combination"), the Holder shall have the right thereafter to, at its option, (A)
convert this Note, in whole or in part, only into the shares of stock and other
securities, cash and/or property receivable upon or deemed to be held by holders
of Common Stock following such Business Combination, and the Holder shall be
entitled upon such event to receive such amount of securities, cash or property
as the shares of the Common Stock of the Company into which this Note could have
been converted immediately prior to such Business Combination would have been
entitled, subject to such further applicable adjustments set forth in this
Section 3 or (B)
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<PAGE> 8
require the Company to redeem this Note, in whole or in part, at a redemption
price equal to the greater of (i) the outstanding Principal Amount being
redeemed plus any accrued and unpaid cash interest thereon and (ii) the product
of (x) the average of the Per Share Market Value for the five (5) Trading Days
immediately preceding the Purchaser's election to have its Notes redeemed and
(y) the Conversion Ratio. If any portion of the applicable redemption price
under this Section 3.1(c)(vi) shall not be paid by the Company within seven (7)
days after the date due, interest shall accrue thereon at the rate of 15% per
annum until the redemption price plus all such interest is paid in full (which
amount shall be paid as liquidated damages and not as a penalty). In addition,
if any portion of such redemption price remains unpaid for more than seven (7)
days after the date due, the Holder of this Note being subject to such
redemption may elect, by written notice to the Company given within 30 days
after the date due, to either (i) demand conversion in accordance with the
formula and the time frame therefor set forth in Section 3 of the portion of
this Note for which such redemption price, plus accrued liquidated damages
thereof, has not been paid in full (the "Unpaid Redemption Notes") or (ii)
invalidate ab initio such redemption, notwithstanding anything herein contained
to the contrary. If the Holder elects option (i) above, the Company shall within
three (3) Trading Days of its receipt of such election deliver to the holder the
shares of Common Stock issuable upon conversion of the Unpaid Redemption Notes
subject to the Holder's conversion demand and otherwise perform its obligations
hereunder with respect thereto; or, if the Holder elects option (ii) above, the
Company shall promptly, and in any event not later than three (3) Trading Days
from receipt of the Holder's notice of such election, return to the Holder all
of the Unpaid Redemption Notes. The terms of any such Business Combination shall
include such terms so as to continue to give to the Holders the right to receive
the amount of securities, cash and/or property upon any conversion or redemption
following such Business Combination to which a holder of the number of shares of
Common Stock deliverable upon such conversion would have been entitled in such
Business Combination. This provision shall similarly apply to successive
reclassifications, consolidations, mergers, sales, transfers or share exchanges.
(vii) If:
A. the Company shall declare a
dividend (or any other
distribution) on its Common Stock;
or
B. the Company shall declare a special
nonrecurring cash dividend on or a
redemption of its Common Stock; or
C. the Company shall authorize the
granting to all holders of the
Common Stock rights or warrants to
subscribe for or purchase any
shares of capital stock of any
class or of any rights; or
D. the approval of any stockholders of
the Company shall be required in
connection with any
reclassification of the Common
Stock of the Company, any
consolidation or merger to which
the Company is a party, any sale or
transfer of all or substantially
all of the assets of the Company,
of any compulsory share of exchange
whereby the Common Stock is
converted into other securities,
cash or property; or
E. the Company shall authorize the
voluntary or involuntary
dissolution, liquidation or winding
up of the affairs of the Company.
then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion
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<PAGE> 9
of this Note, and shall cause to be mailed to the Holder at its last address as
it shall appear upon the books of the Company, at least 30 calendar days prior
to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not to
be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; provided, however, that
the failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice.
(d) The Company covenants that it will at all times reserve
and keep available out of its authorized and unissued Common Stock solely for
the purpose of issuance upon conversion of this Note, free from preemptive
rights or any other actual contingent purchase rights of persons other than the
holders of the Notes, not less than such number of shares of Common Stock as
shall (subject to any additional requirements of the Company as to reservation
of such shares set forth in the Purchase Agreement) be issuable (taking into
account the adjustments and restrictions of Section 3(c) above) upon the
conversion of this Note hereunder. The Company covenants that all shares of
Common Stock that shall be so issuable shall, upon issue, be duly authorized,
validly issued, fully paid, nonassessable and freely tradeable.
(e) Upon a conversion hereunder the Company shall not be
required to issue stock certificates representing fractions of shares of Common
Stock, but may if otherwise permitted, make a cash payment in respect of any
final fraction of a share based on the Per Share Market Value at such time. If
the Company elects not, or is unable, to make such a cash payment, the Holder
shall be entitled to receive, in lieu of the final fraction of a share, one
whole share of Common Stock.
(f) The issuance of certificates for shares of Common Stock on
conversion of this Note shall be made without charge to the Holder for any
documentary stamp or similar taxes that may be payable in respect of any
transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the Holder and the Company shall not be
required to issue or deliver such certificates unless or until the person or
persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the Company
that such tax has been paid.
(g) After all of the Principal Amount and accrued but unpaid
cash interest at any time owed on this Note have been paid in full or converted
into Common Stock, this Note shall automatically be deemed be canceled.
(h) Any and all notices or other communications or deliveries
to be provided by the Holder hereunder, including, without limitation, any
Conversion Notice, shall be in writing and delivered personally, by facsimile,
or by a nationally recognized overnight courier service to the attention of the
General Counsel of the Company at the facsimile telephone number or address of
the principal place of business of the Company as set forth in the Purchase
Agreement. Any and all notices or other communications or deliveries to be
provided by the Company hereunder shall be in writing and delivered personally,
by facsimile, or by a nationally recognized overnight courier service addressed
to the Holder at the facsimile telephone number or address of the Holder
appearing on the books of the Company, or if no such facsimile telephone number
or address appears, at the principal place of business of the Holder. Any
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<PAGE> 10
notice or other communication or deliveries hereunder shall be deemed delivered
(i) upon receipt, when delivered personally, (ii) when sent by facsimile, upon
receipt if received on a Business Day prior to 5:00 p.m. (Central Time), or on
the first Business Day following such receipt if received on a Business Day
after 5:00 p.m. (Central Time) or (iii) upon receipt, when deposited with a
nationally recognized overnight courier service.
(i) Notwithstanding anything to the contrary herein, the
Holder may not use its ability to convert this Note if such conversion would
result in the total number of shares of Common Stock deemed beneficially owned
by the Holder (other than by virtue of the ownership of this Note or ownership
of other securities that have limitations on a holder's right to convert or
exercise similar to those limitations set forth herein), together with all
shares of Common Stock deemed beneficially owned by the Holder's Affiliates (as
defined in the Purchase Agreement) that would be aggregated for purposes of
determining a group under Section 13(d) of the Exchange Act, exceeding 9.9% of
the total issued and outstanding shares of the Company's Common Stock (the
"Restricted Ownership Percentage"); provided that (w) the Holder shall have the
right, at any time and from time to time, to reduce the Restricted Ownership
Percentage applicable to it immediately upon written notice to the Company, (x)
the Holder shall have the right at any time and from time to time, to increase
its Restricted Ownership Percentage and otherwise waive in whole or in part the
restrictions of this Section 3(i) immediately upon written notice to the Company
in the event of an occurrence or notice of an intended or pending Change of
Control (as defined in the Purchase Agreement)(a "Change of Control Notice") or
the delivery by the Company of a notice of a redemption of the Notes or the
Company's 2% Senior Convertible Notes (the "2% Notes") by the Company (a
"Redemption Notice") and, (y) the Holder can make subsequent adjustments
pursuant to (w) or (x) any number of times (which adjustment shall be effective
immediately). The delivery of a Conversion Notice by the Holder shall be deemed
a representation by the Holder that it is in compliance with this Section 3(i).
Section 4. Redemption. (a) The Company shall have the right,
exercisable at any time upon thirty (30) days' notice to the holders of the
Notes given at any time on or after May 15, 2000 to redeem all or any portion of
the Notes which have not previously been converted or redeemed, at a redemption
price equal to the outstanding Principal Amount (plus accrued and unpaid cash
interest thereon), provided the Per Share Market Value for the Common Stock has
been at least $3.375 per share for each of the twenty (20) consecutive Trading
Days preceding the date on which the Company delivers a redemption notice
pursuant to this Section 4(a). The entire redemption price plus all interest
accrued thereon (as set forth below) shall be paid in cash. Holders of the Notes
may convert the Notes, including those subject to a redemption notice given
under this Section 4(a), during the period from the date of such redemption
notice through the date on which the redemption price for such Notes is paid by
the Company and the Company shall honor all properly tendered Conversion Notices
during such period. Any redemption notice under this Section 4(a) shall indicate
the Principal Amount of Notes to be redeemed and the date (subject to the terms
hereof) on which such redemption is to occur. The holders of the Notes to be
redeemed shall tender by overnight mail, the Notes subject to such redemption on
the date prior to the redemption date. If the Company intends to redeem less
than all of the then outstanding Notes, it shall do so on a pro rata basis among
such holders in accordance with this Section 4(a). If any portion of the
applicable redemption price under this Section shall not be paid by the Company
within seven (7) days after the date due, interest shall accrue thereon at the
rate of 15% per annum until the redemption price plus all such interest is paid
in full (which amount shall be paid as liquidated damages and not as a penalty).
In addition, if any portion of such redemption price remains unpaid for more
than seven (7) days after the date due, the holder of this Note subject to such
redemption may elect, by written notice to the Company given within 30 days
after the date due, to either (i) demand conversion of the Unpaid Redemption
Notes in accordance with the formula and the time frame therefor set forth in
Section 3 or (ii) invalidate ab initio
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<PAGE> 11
such redemption, notwithstanding anything herein contained to the contrary. If
the Holder elects option (i) above, the Company shall within three (3) Trading
Days of its receipt of such election deliver to the Holder the shares of Common
Stock issuable upon conversion of the Unpaid Redemption Notes subject to such
holder conversion demand and otherwise perform its obligations hereunder with
respect thereto; or, if the Holder elects option (ii) above, the Company shall
promptly, and in any event not later than three (3) Trading Days from receipt of
the Holder's notice of such election, return to the Holder all of the Unpaid
Redemption Notes. Failure by the Company to redeem this Note on a timely basis
after notifying the holders of its intent to redeem the Notes pursuant to this
Section 4(a) shall result in the Company being prohibited from exercising such
right pursuant to this Section 4(a) again.
(b) Notwithstanding anything to the contrary herein, the
Company shall be prohibited from exercising its right to redeem the Notes
pursuant to Section 4(a) if at the time of such redemption and for the 30 days
preceding the Company's notice of such redemption and at all times between the
date of such notice and the redemption (i) an Underlying Shares Registration
Statement is not effective, (ii) the Common Stock is not listed on the Nasdaq
National Market, The Nasdaq SmallCap Market, the New York Stock Exchange or the
American Stock Exchange or trading on such market or exchange is suspended
(other than for a period of not more than one Trading Day to allow for
dissemination of material information regarding the Company) or (iii) the use of
a Prospectus (as defined in the Registration Rights Agreement) is suspended.
Section 5. Defaults and Remedies.
(a) Events of Default. An "Event of Default" is: (i) default
in payment of the Principal Amount or accrued but unpaid cash interest thereon
of any of the Notes on or after the date such payment is due (to the extent such
principal and/or amount has not been converted into Common Stock in accordance
with the terms hereof or thereof, as applicable); (ii) any principal payment
under the 2% Notes shall have been accelerated, (iii) failure by the Company for
ten (10) days after notice to it to comply with any other material provision of
any of the Notes, the Purchase Agreement, the Amendment to Note Agreement, the
Registration Rights Agreement (other than an Event) or the common stock purchase
warrants of the Company issued to the Holder pursuant to the Purchase Agreement;
(iv) a material breach by the Company of its representations or warranties in
the Purchase Agreement or Registration Rights Agreement; (v) any event
identified as an "Event of Default" shall have occurred pursuant to Section 3.22
of the Purchase Agreement; (vi) any default under or acceleration prior to
maturity of any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any indebtedness for money
borrowed by the Company or for money borrowed the repayment of which is
guaranteed by the Company, whether such indebtedness or guarantee now exists or
shall be created hereafter, provided that the Company's obligation with respect
to any such borrowed or accelerated amount exceeds, in the aggregate, $500,000;
(vii) if the Company pursuant to or within the meaning of any Bankruptcy Law;
(A) commences a voluntary case; (B) consents to the entry of an order for relief
against it in an involuntary case; (C) consents to the appointment of a
Custodian of it or for all or substantially all of its property; (D) makes a
general assignment for the benefit of its creditors; or (E) admits in writing
that it is generally unable to pay its debts as the same become due; or (viii) a
court of competent jurisdiction enters an order or decree under any Bankruptcy
Law that: (1) is for relief against the Company in an involuntary case; (2)
appoints a Custodian of the Company or for all or substantially all of its
property; or (3) orders the liquidation of the Company or any subsidiary, and
the order or decree remains unstayed and in effect for ninety (90) days. The
Term "Bankruptcy Law" means Title 11, U.S. Code, or any similar Federal or State
Law for the relief of debtors. The term "Custodian" means any receiver, trustee,
assignee, liquidator or similar official under any Bankruptcy Law.
-11-
<PAGE> 12
(b) Remedies. If an Event of Default occurs and is continuing
with respect to any of the Notes, the Holder may declare all of the then
outstanding Principal Amount of this Note and all other Notes held by the
Holder, including any interest due thereon, to be due and payable immediately,
except that in the case of an Event of Default arising from events described in
clauses (vii) and (viii) of Section 5(a), this Note shall become due and payable
without further action or notice. In the event of such acceleration, the amount
due and owing to the Holder shall be the greater of (1) the outstanding
Principal Amount of the Notes held by the Holder (plus all accrued and unpaid
cash interest, if any) and (2) the product of (A) the product of the average of
Per Share Market Value for the five (5) Trading days immediately preceding the
Holder's redemption notice and (B) the Conversion Ratio. In either case the
Company shall pay interest on such redemption price in cash at a rate of 15% per
annum to the Holder if such redemption price is not paid within 7 days of
receipt of the Holder's written notice. The remedies under this Note shall be
cumulative.
Section 6. Definitions. For the purposes hereof, the following
terms shall have the following meanings:
"Conversion Ratio" means, at any time, a fraction, of which
the numerator is the Principal Amount of this Note (and any accrued but unpaid
cash interest thereon, if any) to be converted in such conversion, and of which
the denominator is the Conversion Price at such time.
"Junior Securities" means the Company's capital stock and all
other equity securities and all debt securities of the Company which are junior
in rights and liquidation preference to the Notes.
"Per Share Market Value" means on any particular date (a) the
closing bid price per share of the Common Stock on such date on the Nasdaq
National Market or other stock exchange or quotation system on which the Common
Stock is then listed or if there is no such price on such date, then the closing
bid price on such exchange or quotation system on the date nearest preceding
such date, or (b) if the Common Stock is not listed then on the Nasdaq National
Market or any stock exchange or quotation system, the closing bid price for a
share of Common Stock in the over-the-counter market, as reported by The Nasdaq
Stock Market, Inc. or by the National Quotation Bureau Incorporated or similar
organization or agency succeeding to its functions of reporting prices at the
close of business on such date, or (c) if the Common Stock is not then reported
by the National Quotation Bureau Incorporated (or similar organization or agency
succeeding to its functions of reporting prices), then the average of the "Pink
Sheet" quotes for the relevant conversion period, as determined in good faith by
the holder, or (d) if the Common Stock is not then publicly traded the fair
market value of a share of Common Stock as determined by an Appraiser selected
in good faith and paid for by the holders of a majority in Principal Amount of
the Notes; provided, however, that the Company, after receipt of the
determination by such appraiser, shall have the right to select an additional
Appraiser (which may be the firm of independent accountants that regularly
reviews the Company's financial statements), in which case, the fair market
value shall be equal to the average of the determinations by each such
Appraiser.
"Person" means a corporation, an association, a partnership, a
limited liability company, an organization, a business, an individual, a
government or political subdivision thereof or a governmental agency.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of March 31, 1999, between the Company and the original
holders of the Notes.
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<PAGE> 13
"Trading Day" means a day on which the Common Stock is traded
on The Nasdaq National Market or other stock exchange or market on which the
Common Stock has been listed.
"Underlying Shares" means the number of shares of Common Stock
into which the Notes are convertible in accordance with the terms hereof and the
Purchase Agreement.
Section 7. General
(a) Payment of Expenses. The Company agrees to pay all
reasonable debts and expenses, including attorneys' fees and expenses, which may
be incurred by the Holder in successfully enforcing this Note and/or collecting
any amount due under this Note.
(b) Savings Clause. In case any provision of this Note is held
by a court of competent jurisdiction to be excessive in scope or otherwise
invalid or unenforceable, such provision shall be adjusted rather than voided,
if possible, so that it is enforceable to the maximum extent possible, and the
validity and enforceability of the remaining provisions of this Note will not in
any way be affected or impaired thereby. In no event shall the amount of
interest paid hereunder exceed the maximum rate of interest on the unpaid
principal balance hereof allowable by applicable law. If any sum is collected in
excess of the applicable maximum rate, the excess collected shall be applied to
reduce the principal debt. If the interest actually collected hereunder is still
in excess of the applicable maximum rate, the interest rate shall be reduced so
as not to exceed the maximum allowable under law.
(c) Amendment. Neither this Note nor any term hereof may be
amended, waived, discharged or terminated other than by a written instrument
signed by the Company and Holder.
(d) Assignment, Etc. The Holder may assign or transfer this
Note to any transferee; provided, however, that if such transferee is not
already a holder of the Notes or the 2% Notes or an Affiliate of any holder of
the Notes or the 2% Notes then such transferee shall not have the ability to
participate in the nomination of directors pursuant to Section 1 of the
Amendment to Note Agreement. This Note shall be binding upon the Company and its
successors and shall inure to the benefit of the Holder and its successors and
assigns.
(e) No Waiver. No failure on the part of the Holder to
exercise, and no delay in exercising any right, remedy or power hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise by the
Holder of any right, remedy or power hereunder preclude any other or future
exercise of any other right, remedy or power. Each and every right, remedy or
power hereby granted to the Holder or allowed it by law or other agreement shall
be cumulative and not exclusive of any other, and may be exercised by the Holder
from time to time.
(f) Governing Law; Jurisdiction.
(i) THIS NOTE WILL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO ANY
CONFLICTS OF LAWS PROVISIONS THEREOF THAT WOULD OTHERWISE REQUIRE THE
APPLICATION OF THE LAW OF ANY OTHER JURISDICTION.
(ii) The Company irrevocable submits to the exclusive
jurisdiction of any State
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<PAGE> 14
or Federal Court sitting in the State of New York over any suit, action, or
proceeding arising out of or relating to this agreement. The Company irrevocably
waives, to the fullest extent permitted by law, any objection which it may now
or hereafter have to the laying of the venue of any such suit, action, or
proceeding brought in such a court and any claim that suit, action, or
proceeding has been brought in an inconvenient forum.
The Company agrees that the service of process upon it mailed by certified or
registered mail (and service so made shall be deemed complete five days after
the same has been posed as aforesaid) or by personal service shall be deemed in
every respect effective service of process upon it in any such suit or
proceeding. Nothing herein shall affect Holder's right to serve process in any
other manner permitted by law. The Company agrees that a final non-appealable
judgement in any such suit or proceeding shall be conclusive and may be enforced
in other jurisdictions by suit on such judgment or in any other lawful manner.
(iii) The Company hereto knowingly and voluntarily
waives any and all rights it may have to a trial by jury with respect to any
litigation based on, or arising out of, under, or in connection with, this Note.
(g) Replacement Notes. This Note may be exchanged by Holder at
any time and from time to time for a Note or Notes with different denominations
representing an equal aggregate Principal Amount, as reasonably requested by
Holder, upon surrendering the same. No service charge will be made for such
registration or exchange. In the event that Holder notifies the Company that
this Note has been lost, stolen or destroyed, a replacement Note identical in
all respects to the original Note (except for registration number and Principal
Amount, if different than that shown on the original Note), shall be issued to
the Holder, provided that the Holder executes and delivers to the Company an
agreement reasonably satisfactory to the Company to indemnify the Company from
any loss incurred by it in connection with the Note.
<PAGE> 15
IN WITNESS WHEREOF, the Company has caused this Note to be
signed by Edward W. Laves, its President and Chief Executive Officer, on the day
and in the year first above written.
ILLINOIS SUPERCONDUCTOR CORPORATION
By: /S/ Edward W. Laves
-----------------------------------------
Name: Edward W. Laves
Title: President and Chief Executive
Officer
<PAGE> 16
EXHIBIT A
---------
FORM OF NOTICE OF CONVERSION
(To be Executed by the Holder
in order to Convert a Note)
The undersigned hereby elects to convert the aggregate Principal Amount (as
defined in the Note), together with any accrued but unpaid cash interest thereon
indicated below of Note No. ___, into shares of Common Stock, par value $.001
per share (the "Common Stock"), of Illinois Superconductor Corporation (the
"Company") according to the conditions hereof, as of the date written below. If
shares are to be issued in the name of a person other than undersigned, the
undersigned will pay all transfer taxes payable with respect thereto and is
delivering herewith such certificates and opinions as reasonably requested by
the Company in accordance therewith. No fee will be charged to the holder for
any conversion, except for such transfer taxes, if any.
The undersigned hereby represents that the number of shares of Common Stock
issuable pursuant to this Notice of Conversion does not violate or breach the
restrictions on conversions contained in Section 3(i) of the Note.
Conversion calculations:
---------------------------------------------------
Date to Effect Conversion
Note No.:
---------------------------------------------------
Aggregate Principal Amount of Note Being Converted
---------------------------------------------------
Number of shares of Common Stock to be Issued
---------------------------------------------------
Applicable Conversion Price
---------------------------------------------------
Signature
---------------------------------------------------
Name
---------------------------------------------------
Address
<PAGE> 17
EXHIBIT A
---------
FORM OF NOTICE OF CONVERSION
(To be Executed by the Holder
in order to Convert a Note)
The undersigned hereby elects to convert the aggregate Principal Amount (as
defined in the Note), together with any accrued but unpaid cash interest thereon
indicated below of Note No. ___, into shares of Common Stock, par value $.001
per share (the "Common Stock"), of Illinois Superconductor Corporation (the
"Company") according to the conditions hereof, as of the date written below. If
shares are to be issued in the name of a person other than undersigned, the
undersigned will pay all transfer taxes payable with respect thereto and is
delivering herewith such certificates and opinions as reasonably requested by
the Company in accordance therewith. No fee will be charged to the holder for
any conversion, except for such transfer taxes, if any.
The undersigned hereby represents that the number of shares of Common Stock
issuable pursuant to this Notice of Conversion does not violate or breach the
restrictions on conversions contained in Section 3(i) of the Note.
Conversion calculations:
---------------------------------------------------
Date to Effect Conversion
Note No.:
---------------------------------------------------
Aggregate Principal Amount of Note Being Converted
---------------------------------------------------
Number of shares of Common Stock to be Issued
---------------------------------------------------
Applicable Conversion Price
---------------------------------------------------
Signature
---------------------------------------------------
Name
---------------------------------------------------
Address
<PAGE> 1
EXHIBIT 4.19
NEITHER THIS WARRANT NOR THE SECURITIES INTO WHICH THIS WARRANT IS EXERCISABLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
ILLINOIS SUPERCONDUCTOR CORPORATION
WARRANT
-------
Warrant No. WCN-00_ Dated March 31, 1999
Illinois Superconductor Corporation, a Delaware corporation (the
"Company"), hereby certifies that, for value received,
__________________________, or its registered assigns (the "Holder"), is
entitled, subject to the terms set forth below, to purchase from the Company up
to a total of _______ shares of Common Stock, $.001 par value per share (the
"Common Stock"), of the Company (each such share, a "Warrant Share" and all such
shares, the "Warrant Shares") at an exercise price equal to $1.4625 per share
(as adjusted from time to time as provided in Section 8, the "Exercise Price"),
at any time and from time to time from the date hereof through and including
March 31, 2002 (the "Expiration Date"), and subject to the following terms and
conditions:
1. Registration of Warrant. The Company shall register this Warrant,
upon records to be maintained by the Company for that purpose (the "Warrant
Register"), in the name of the record Holder hereof from time to time. The
Company may deem and treat the registered Holder of this Warrant as the absolute
owner hereof for the purpose of any exercise hereof or any distribution to the
Holder, and for all other purposes, and the Company shall not be affected by
notice to the contrary.
2. Registration of Transfers and Exchanges.
(a) The Company shall register the transfer of any portion of this
Warrant in the Warrant Register, upon surrender of this Warrant, with the Form
of Assignment attached hereto duly completed and signed and a written opinion of
Holder's counsel that such transfer is exempt from registration under the
Securities Act, to the Company at the office specified in or
<PAGE> 2
pursuant to Section 3(b); provided, however that the Holder shall not make any
transfers to any transferee pursuant to this Section for the right to acquire
less than 1,000 Warrant Shares. Upon any such registration or transfer, a new
warrant to purchase Common Stock, in substantially the form of this Warrant (any
such new warrant, a "New Warrant"), evidencing the portion of this Warrant so
transferred shall be issued to the transferee and a New Warrant evidencing the
remaining portion of this Warrant not so transferred, if any, shall be issued to
the transferring Holder. The acceptance of the New Warrant by the transferee
thereof shall be deemed the acceptance of such transferee of all of the rights
and obligations of a holder of a Warrant. If this Warrant is duly assigned in
accordance with the terms hereof, then the Company agrees, upon the request of
the assignee, to amend or supplement promptly any effective registration
statement covering the Warrant Shares so that the direct assignee of the
original Holder is added as a selling stockholder thereunder.
(b) This Warrant is exchangeable, upon the surrender hereof by the
Holder to the office of the Company specified in or pursuant to Section 3(b) for
one or more New Warrants in the name of such Holder, evidencing in the aggregate
the right to purchase the number of Warrant Shares which may then be purchased
hereunder. Any such New Warrant will be dated the date of such exchange.
3. Duration and Exercise of Warrants.
(a) This Warrant shall be exercisable by the registered Holder on any
business day before 5:30 P.M., New York time, at any time and from time to time
up to and including the Expiration Date. At 5:30 P.M., New York time on the
Expiration Date, the portion of this Warrant not exercised prior thereto shall
be and become void and of no value.
(b) Upon surrender of this Warrant, with the Form of Election to
Purchase attached hereto duly completed and signed, to the Company at its office
at 451 Kingston Court, Mt. Prospect, Illinois 60056, Attention: General Counsel,
or at such other address as the Company may specify in writing to the then
registered Holder, and upon payment of the Exercise Price multiplied by the
number of Warrant Shares that the Holder intends to purchase hereunder, in
lawful money of the United States of America, in cash or by certified or
official bank check or checks or wire transfer of immediately available funds,
all as specified by the Holder in the Form of Election to Purchase, the Company
shall promptly (but in no event later than three (3) trading days after the Date
of Exercise (as defined herein)) issue or cause to be issued and cause to be
delivered to or upon the written order of the Holder and in such name or names
as the Holder may designate, a certificate for the Warrant Shares issuable upon
such exercise, free of restrictive legends other than as required by the
Securities Purchase Agreement, dated as of March 31, 1999, between the Company
and the Purchasers listed therein, including the initial Holder of this Warrant
(the "Purchase Agreement"). Any person so designated by the Holder to receive
Warrant Shares shall be deemed to have become holder of record of such Warrant
Shares as of the Date of Exercise of this Warrant.
A "Date of Exercise" means the date on which the Company shall have
received (i) this Warrant (or any New Warrant, as applicable), with the Form of
Election to Purchase attached hereto (or attached to such New Warrant)
appropriately completed and duly signed, and (ii)
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<PAGE> 3
payment of the Exercise Price for the number of Warrant Shares so indicated by
the Holder hereof to be purchased.
(c) This Warrant shall be exercisable, either in its entirety or, from
time to time, for a portion of the number of Warrant Shares so long as at least
1,000 Warrant Shares are purchased in any one exercise, unless such exercise
would result in the Holder holding less than 1,000 Warrant Shares. If less than
all of the Warrant Shares which may be purchased under this Warrant are
exercised at any time, the Company shall issue or cause to be issued to the
Holder, at its expense, a New Warrant evidencing the right to purchase the
remaining number of Warrant Shares for which no exercise has been evidenced by
this Warrant.
(d) If and while the Warrant Shares issuable upon the exercise of this
Warrant are not registered for public resale pursuant to an effective
registration statement with a current available prospectus, then upon exercise
of this Warrant the aggregate Exercise Price may be paid by the Holder notifying
the Company that it should subtract from the number of Warrant Shares issuable
to the Holder upon such exercise an amount of Warrant Shares, the aggregate Per
Share Market Value (as defined in the Purchase Agreement) of which, as
determined on the date immediately preceding the date of the Form of Election to
Purchase, equals such aggregate Exercise Price of the Warrant Shares for which
this Warrant is being exercised.
(e) Notwithstanding anything to the contrary herein, the Holder may not
use its ability to exercise this Warrant if such exercise would result in the
total number of shares of Common Stock deemed beneficially owned by the Holder
(other than by virtue of the ownership of this Warrant or ownership of other
securities that have limitations on a holder's right to convert or exercise
similar to those limitations set forth herein), together with all shares of
Common Stock deemed beneficially owned by the Holder's Affiliates (as defined in
the Purchase Agreement) that would be aggregated for purposes of determining a
group under Section 13(d) of the Exchange Act, exceeding 9.9% of the total
issued and outstanding shares of the Company's Common Stock (the "Restricted
Ownership Percentage"); provided that (w) the Holder shall have the right, at
any time and from time to time, to reduce the Restricted Ownership Percentage
applicable to it immediately upon written notice to the Company, (x) the Holder
shall have the right to increase its Restricted Ownership Percentage and
otherwise waive in whole or in part the restrictions of this Section 3(e)
immediately upon written notice to the Company in the event of an occurrence or
notice of an intended or pending Change of Control (as defined in the Purchase
Agreement)(a "Change of Control Notice") or the delivery by the Company of a
notice of a redemption of the Company's 6% Convertible Notes or the Company's 2%
Senior Convertible Notes by the Company (a "Redemption Notice") and, (y) the
Holder can make subsequent adjustments pursuant to (w) or (x) any number of
times (which adjustment shall be effective immediately). The delivery of an
exercise notice by the Holder shall be deemed a representation by the Holder
that it is in compliance with this paragraph.
4. [INTENTIONALLY OMITTED]
5. Payment of Taxes. The Company will pay all documentary stamp taxes
attributable to the issuance of Warrant Shares upon the exercise of this
Warrant; provided,
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<PAGE> 4
however, that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the registration of any
certificates for Warrant Shares or Warrants in a name other than that of the
Holder, and the Company shall not be required to issue or cause to be issued or
deliver or cause to be delivered the certificates for Warrant Shares unless or
until the person or persons requesting the issuance thereof shall have paid to
the Company the amount of such tax or shall have established to the satisfaction
of the Company that such tax has been paid. The Holder shall be responsible for
all other tax liability that may arise as a result of holding or transferring
this Warrant or receiving Warrant Shares upon exercise hereof.
6. Replacement of Warrant. If this Warrant is mutilated, lost, stolen
or destroyed, the Company may in its discretion issue or cause to be issued in
exchange and substitution for and upon cancellation hereof, or in lieu of and
substitution for this Warrant, a New Warrant, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction and
indemnity. Applicants for a New Warrant under such circumstances shall also
comply with such other reasonable regulations and procedures and pay such other
reasonable charges as the Company may prescribe.
7. Reservation of Warrant Shares. The Company covenants that it shall
comply with the provisions of Section 3.13 of the Purchase Agreement. Subject to
Section 3.13 of the Purchase Agreement, the Company covenants that, following
its June 9, 1999 stockholder meeting, it will at all times reserve and keep
available out of the aggregate of its authorized but unissued Common Stock,
solely for the purpose of enabling it to issue Warrant Shares upon exercise of
this Warrant as herein provided, the number of Warrant Shares which are then
issuable and deliverable upon the exercise of this entire Warrant, free from
preemptive rights or any other actual contingent purchase rights of persons
other than the Holders (taking into account the adjustments and restrictions of
Section 8). The Company covenants that all Warrant Shares that shall be so
issuable and deliverable shall, upon issuance and the payment of the applicable
Exercise Price in accordance with the terms hereof, be duly authorized, validly
issued, fully paid and nonassessable.
8. Certain Adjustments. The Exercise Price and number of Warrant Shares
issuable upon exercise of this Warrant are subject to adjustment from time to
time as set forth in this Section 8. Upon each such adjustment of the Exercise
Price pursuant to this Section 8, the Holder shall thereafter prior to the
Expiration Date be entitled to purchase, at the Exercise Price resulting from
such adjustment, the number of Warrant Shares obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares issuable upon exercise of this Warrant immediately prior to such
adjustment and dividing the product thereof by the Exercise Price resulting from
such adjustment.
(a) If the Company, at any time while this Warrant is outstanding, (i)
shall pay a stock dividend (except scheduled dividends paid on outstanding
preferred stock as of the date hereof which contain a stated divided rate) or
otherwise make a distribution or distributions on shares of its Common Stock (as
defined below) (or on any other class of capital stock and not the Common Stock)
payable in shares of Common Stock, (ii) subdivide outstanding shares of Common
Stock into a larger number of shares, or (iii) combine outstanding shares of
Common
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<PAGE> 5
Stock into a smaller number of shares, the Exercise Price shall be
multiplied by a fraction of which the numerator shall be the number of shares of
Common Stock (excluding treasury shares, if any) outstanding before such event
and of which the denominator shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding after such event. Any adjustment
made pursuant to this Section shall become effective immediately after the
record date for the determination of stockholders entitled to receive such
dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision or combination, and shall apply to
successive subdivisions and combinations.
(b) In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person, the sale or
transfer of all or substantially all of the assets of the Company or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or property, then the Holder shall have the right
thereafter to exercise this Warrant only into the shares of stock and other
securities and property receivable upon or deemed to be held by holders of
Common Stock following such reclassification, consolidation, merger, sale,
transfer or share exchange, and the Holder shall be entitled upon such event to
receive such amount of securities or property equal to the amount of Warrant
Shares such Holder would have been entitled to had such Holder exercised this
Warrant immediately prior to such reclassification, consolidation, merger, sale,
transfer or share exchange, subject to such further adjustments as set forth in
this Section 8. The terms of any such consolidation, merger, sale, transfer or
share exchange shall include such terms so as to continue to give to the Holder
the right to receive the securities or property set forth in this Section 8(b)
upon any exercise following any such reclassification, consolidation, merger,
sale, transfer or share exchange.
(c) If the Company, at any time while this Warrant is outstanding,
shall distribute to all holders of Common Stock evidences of its indebtedness or
assets or rights or warrants to subscribe for or purchase any security
(excluding those referred to in Section 8(a) and (b)), then in each such case
the Exercise Price shall be determined by multiplying the Exercise Price in
effect immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of which the
denominator shall be the Exercise Price determined as of the record date
mentioned above, and of which the numerator shall be such Exercise Price on such
record date less the then fair market value at such record date of the portion
of such assets or evidence of indebtedness so distributed applicable to one
outstanding share of Common Stock as determined by the Board of Directors of the
Company acting in good faith.
(d) For the purposes of this Section 8, the following clauses shall
also be applicable:
(i) Record Date. In case the Company shall take a record of
the holders of its Common Stock for the purpose of entitling them (A)
to receive a dividend or other distribution payable in Common Stock or
in securities convertible or exchangeable into shares of Common Stock,
or (B) to subscribe for or purchase Common Stock or securities
convertible or exchangeable into shares
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<PAGE> 6
of Common Stock, then such record date shall be deemed to be the date
of the issue or sale of the shares of Common Stock deemed to have been
issued or sold upon the declaration of such dividend or the making of
such other distribution or the date of the granting of such right of
subscription or purchase, as the case may be.
(ii) Treasury Shares. The number of shares of Common Stock
outstanding at any given time shall not include shares owned or held by
or for the account of the Company, and the disposition of any such
shares shall be considered an issue or sale of Common Stock.
(e) All calculations under this Section 8 shall be made to the nearest
cent or the nearest 1/100th of a share, as the case may be.
(f) Whenever the Exercise Price is adjusted pursuant to Section 8(c)
above, the Holders of Warrants representing a majority in interest of the
Warrant Shares, after receipt of the determination by the Company's Board of
Directors (the "Board"), shall have the right to select an appraiser at the
Holder's cost and expense (which shall be a nationally recognized accounting
firm), in which case the adjustment shall be equal to the average of the
adjustments recommended by each of the Board and such appraiser. The Holders
shall promptly mail or cause to be mailed to the Company, a notice setting forth
the Exercise Price after such adjustment and setting forth a brief statement of
the facts requiring such adjustment. Such adjustment shall become effective
immediately after the record date mentioned above.
(g) If:
(i) the Company shall declare a dividend (or any other
distribution) on its Common Stock; or
(ii) the Company shall declare a special nonrecurring cash
dividend on or a redemption of its Common Stock; or
(iii) the Company shall authorize the granting to all holders
of the Common Stock rights or warrants to subscribe for or purchase any
shares of capital stock of any class or of any rights; or
(iv) the approval of any stockholders of the Company shall be
required in connection with any reclassification of the Common Stock of
the Company, any consolidation or merger to which the Company is a
party, any sale or transfer of all or substantially all of the assets
of the Company, or any compulsory share exchange whereby the Common
Stock is converted into other securities, cash or property; or
(v) the Company shall authorize the voluntary dissolution,
liquidation or winding up of the affairs of the Company,
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<PAGE> 7
then the Company shall cause to be mailed to each Holder at their last
addresses as they shall appear upon the Warrant Register, at least 30 calendar
days prior to the applicable record or effective date hereinafter specified, a
notice stating (x) the date on which a record is to be taken for the purpose of
such dividend, distribution, redemption, rights or warrants, or if a record is
not to be taken, the date as of which the holders of Common Stock of record to
be entitled to such dividend, distributions, redemption, rights or warrants are
to be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution, liquidation
or winding up; provided, however, that the failure to mail such notice or any
defect therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice.
9. Fractional Shares. The Company shall not be required to issue or
cause to be issued fractional Warrant Shares on the exercise of this Warrant.
The number of full Warrant Shares which shall be issuable upon the exercise of
this Warrant shall be computed on the basis of the aggregate number of Warrant
Shares purchasable on exercise of this Warrant so presented. If any fraction of
a Warrant Share would, except for the provisions of this Section 9, be issuable
on the exercise of this Warrant, the Company shall, at its option, (i) pay an
amount in cash equal to the Exercise Price multiplied by such fraction or (ii)
round the number of Warrant Shares issuable, up to the next whole number.
10. Notices. Any and all notices or other communications or deliveries
hereunder shall be in writing and shall be deemed to have been delivered (i)
upon receipt, when delivered personally; (ii) when sent by facsimile, upon
receipt if received on a Business Day prior to 5:00 p.m. (Central Time), or the
first Business Day following such receipt if received on a Business Day after
5:00 p.m. (Central Time); or (iii) upon receipt, when deposited with a
nationally recognized overnight express courier service, fully prepaid, in each
case properly addressed to the party to receive the same. The addresses and
facsimile number for such communications shall be: (1) if to the Company, to
Illinois Superconductor Corporation, 451 Kingston Court, Mt. Prospect, Illinois
60056, Attention: General Counsel, or to facsimile no. (847) 391-5015, or (ii)
if to the Holder, to the Holder at the address or facsimile number appearing on
the Warrant Register or such other address or facsimile number as the Holder may
provide to the Company in accordance with this Section 10.
11. Warrant Agent.
(a) The Company shall serve as warrant agent under this Warrant. Upon
thirty (30) days' notice to the Holder, the Company may appoint a new warrant
agent.
(b) Any corporation into which the Company or any new warrant agent may
be merged or any corporation resulting from any consolidation to which the
Company or any new warrant agent shall be a party or any corporation to which
the Company or any new warrant agent transfers substantially all of its
corporate trust or shareholders services business shall be a successor warrant
agent under this Warrant without any further act. Any such
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<PAGE> 8
successor warrant agent shall promptly cause notice of its succession as warrant
agent to be mailed (by first class mail, postage prepaid) to the Holder at the
Holder's last address as shown on the Warrant Register.
12. Miscellaneous.
(a) This Warrant shall be binding on and inure to the benefit of the
parties hereto and their respective successors and permitted assigns. This
Warrant may be amended only in writing signed by the Company and the Holder.
(b) Subject to Section 12(a), above, nothing in this Warrant shall be
construed to give to any person or corporation other than the Company and the
Holder any legal or equitable right, remedy or cause under this Warrant; this
Warrant shall be for the sole and exclusive benefit of the Company and the
Holder.
(c) This Warrant shall be governed by and construed and enforced in
accordance with the internal laws of the State of New York without regard to the
principles of conflicts of law thereof.
(d) The headings herein are for convenience only, do not constitute a
part of this Warrant and shall not be deemed to limit or affect any of the
provisions hereof.
(e) In case any one or more of the provisions of this Warrant shall be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Warrant shall not in any way be affected
or impaired thereby and the parties will attempt in good faith to agree upon a
valid and enforceable provision which shall be a commercially reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Warrant.
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<PAGE> 9
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its authorized officer as of the date first indicated above.
ILLINOIS SUPERCONDUCTOR CORPORATION
By: /s/ Edward W. Laves
--------------------------------------
Name: Edward W. Laves
Title: President
<PAGE> 10
FORM OF ELECTION TO PURCHASE
(To be executed by the Holder to exercise the right to purchase shares of Common
Stock under the foregoing Warrant)
To Illinois Superconductor Corporation:
In accordance with the Warrant enclosed with this Form of Election to
Purchase, the undersigned hereby irrevocably elects to purchase _____________
shares of Common Stock ("Common Stock"), $.001 par value per share, of Illinois
Superconductor Corporation (the "Company") and encloses herewith $________ in
cash or certified or official bank check or checks or by wire transfer of
immediately available funds or (to the extent permitted by the terms of the
Warrant) hereby notifies the Company to effect a "cashless" exercise by
subtracting ___________ shares of Common Stock valued at $________ per share
from the shares of Common Stock issuable hereby, which sum represents the
aggregate Exercise Price (as defined in the Warrant) for the number of shares of
Common Stock to which this Form of Election to Purchase relates, together with
any applicable taxes payable by the undersigned pursuant to the Warrant. The
undersigned represents that the number of shares of Common Stock issuable
pursuant to this Form of Election to Purchase does not violate or breach the
restrictions on exercise contained in Section 3(e) of the Warrant.
The undersigned requests that certificates for the shares of Common
Stock issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
--------------------------------
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
If the number of shares of Common Stock issuable upon this exercise
shall not be all of the shares of Common Stock which the undersigned is entitled
to purchase in accordance with the enclosed Warrant, the undersigned requests
that a New Warrant (as defined in the Warrant) evidencing the right to purchase
the shares of Common Stock not issuable pursuant to the exercise evidenced
hereby be issued in the name of and delivered to:
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
<PAGE> 11
- --------------------------------------------------------------------------------
Dated: Name of Holder:
-----------------
(Print)
--------------------------
(By:)
--------------------------
(Name:)
(Title:)
(Signature must conform in all respects to name of holder as specified on the
face of the Warrant)
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<PAGE> 12
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________ the right represented by the within
Warrant to purchase ____________ shares of Common Stock of Illinois
Superconductor Corporation to which the within Warrant relates and appoints
________________ attorney to transfer said right on the books of Illinois
Superconductor Corporation with full power of substitution in the premises.
Dated:
- ---------------, ----
---------------------------------------
(Signature must conform in all respects to name
of holder as specified on the face of the Warrant)
---------------------------------------
Address of Transferee
---------------------------------------
---------------------------------------
In the presence of:
- --------------------------
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<PAGE> 1
Exhibit 4.20
SECURITIES PURCHASE AGREEMENT
by and among
ILLINOIS SUPERCONDUCTOR CORPORATION
and
ELLIOTT ASSOCIATES, L.P.,
WESTGATE INTERNATIONAL, L.P.,
ALEXANDER FINANCE, LP
and
STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY
Dated as of March 31, 1999
______________________________
<PAGE> 2
SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of March 31,
1999, by and among Elliott Associates, L.P., a limited partnership organized
and existing under the laws of Delaware, Westgate International, L.P., a
limited partnership organized and existing under the laws of the Cayman
Islands, Alexander Finance, LP, a limited partnership organized and existing
under the laws of the State of Illinois , and State Farm Mutual Automobile
Insurance Company, an insurance company organized and existing under the laws
of the State of Illinois (each, a "Purchaser" and collectively, the
"Purchasers"), and Illinois Superconductor Corporation, a corporation organized
and existing under the laws of Delaware (the "Company").
WHEREAS, subject to the terms and conditions set forth in this Agreement,
the Company desires to issue and sell to the Purchasers, and the Purchasers
desires to acquire from the Company, $3,300,000 principal amount of the
Company's 6% Senior Convertible Notes due May 15, 2002 (the "6% Notes"), in the
form of Exhibit A attached hereto, on the terms and conditions set forth
herein;
WHEREAS, subject to the terms and conditions set forth in this Agreement,
the Purchasers and the Company desire that the terms and provisions of
$5,500,000 principal amount of the Company's 2% Senior Convertible Notes due
May 15, 2002, which were issued on May 15, 1998 and which are held by the
Purchasers (the "2% Notes"), be amended, as set forth below; and
WHEREAS, subject to the terms and conditions set forth in this Agreement,
in connection with the transactions set forth above, the Purchasers and the
Company desire that the Purchasers: (i) acquire warrants, substantially in the
form of Exhibit B attached hereto ("6% Note Warrants") to purchase an aggregate
of 1,320,000 shares of the Company's Common Stock, par value $ .001 per share
(the "Common Stock"), at an exercise price of $1.4625 per share; and (ii) amend
the terms of certain existing warrants issued to the Purchasers to purchase
2,200,000 shares of Common Stock at $3.75 per share and expiring on May 15,
2001 (the "2% Note Warrants"), as set forth below.
IN CONSIDERATION of the mutual covenants contained in this Agreement, the
Company and the Purchasers agree as follows:
ARTICLE I
PURCHASE AND SALE OF NOTES AND WARRANTS; AMENDMENT
1.1 Purchase and Sale. Subject to the terms and conditions set forth
herein, the Company shall issue and sell to the Purchasers, and the Purchasers
shall purchase from the Company, (i) $3,300,000 in aggregate principal amount
of 6% Notes, in the respective amounts set forth opposite each Purchaser's name
on the Schedule of Purchasers attached hereto, and (ii) 6% Note Warrants to
purchase an aggregate of 1,320,000 shares of Common Stock, at an exercise price
of $1.4625 per share, subject to adjustment as therein provided, at any time
during the period beginning on the Closing Date (as hereinafter defined) and
ending on the third
2
<PAGE> 3
anniversary of the Closing Date, in the respective amounts set forth opposite
each Purchaser's name on the Schedule of Purchasers.
For purposes of this Agreement, "Conversion Ratio", "Trading Day,
"Business Day" and "Per Share Market Value" shall have the meanings set forth
in the 6% Notes.
1.2 Amendment of 2% Notes and 2% Note Warrants.
(a) Subject to the terms and conditions set forth herein, the terms and
provisions of $5,500,000 principal amount of 2% Notes held by the Purchasers
shall be amended as set forth in the Amendment, in the form of Exhibit C
attached hereto (the "Amendment to Note Agreement"), to the Securities Purchase
Agreement, dated as of May 15, 1998, by and among the Company, the Purchasers,
Spring Point Partners, L.P. and Spring Point Offshore Fund (the "2% Note
Agreement"). The 2% Notes amended pursuant to the terms of the Amendment to
Note Agreement shall hereinafter be referred to as the "Amended 2% Notes."
(b) Subject to the terms and provisions herein, the terms and provisions
of 2% Note Warrants to purchase 2,200,000 shares of Common Stock shall be
amended, as set forth in the Amendment to Note Agreement. The 2% Note Warrants
amended pursuant to the terms of the Amendment to Note Agreement shall
hereinafter be referred to as the "Amended 2% Note Warrants."
1.3 Purchase Price and Amendment Amount. The purchase price of the 6%
Notes and 6% Note Warrants purchased herein and the amounts of 2% Notes and 2%
Note Warrants to be amended shall be set forth opposite each Purchaser's name
on the Schedule of Purchasers.
1.4 The Closing.
(a) Time and Place. The closing of the purchase and sale of the 6% Notes
and the 6% Note Warrants and the amendment of the 2% Notes and the 2% Note
Warrants (the "Closing") shall take place at the offices of Kleinberg, Kaplan,
Wolff & Cohen, P.C., 551 Fifth Avenue, New York, New York on March 31, 1999, or
such later date as the parties shall agree, but not prior to the date that the
conditions set forth in Section 4 have been satisfied or waived by the
appropriate party. The date of the Closing is hereinafter referred to as the
"Closing Date." At the Closing, the Company shall sell and issue to the
Purchasers, and the Purchasers shall purchase, 6% Notes and 6% Note Warrants
for an aggregate purchase price of $3,300,000 and the Company shall also amend
the amount of 2% Notes and 2% Note Warrants with respect to each Purchaser, all
as set forth in the Schedule of Purchasers.
(b) Closing Deliveries. At the Closing, (i) the Company shall deliver to
each Purchaser, in such denominations as are requested by such Purchaser, (A)
(1) 6% Notes in the principal amount which such Purchaser is then buying (as
indicated opposite such Purchaser's name on the Schedule of Purchasers) and (2)
Amended 2% Notes in the principal amount indicated opposite such Purchaser's
name on the Schedule of Purchasers) and (B) (1) 6% Note Warrants to purchase
such number of shares of Common Stock as indicated opposite such
3
<PAGE> 4
Purchaser's name on the Schedule of Purchasers and (2) Amended 2% Note Warrants
to purchase such number of shares of Common Stock as indicated opposite such
Purchaser's name on the Schedule of Purchasers, each registered in the name of
such Purchaser, and (C) all other documents, instruments and writings required
to have been delivered at or prior to the Closing by the Company pursuant to
this Agreement, including the Amendment to Note Agreement and the Registration
Rights Agreement by and between the Company and the Purchasers, substantially
in the form of Exhibit D attached hereto (the "Registration Rights Agreement"),
and (ii) each Purchaser shall deliver to the Company (A) that portion of
$3,300,000 which represents the purchase price for the 6% Notes and 6% Note
Warrants to be issued and sold to such Purchaser (as indicated opposite such
Purchaser's name on the Schedule of Purchasers), in United States dollars in
immediately available funds by wire transfer to an account designated in
writing by the Company and (B) those 2% Notes and 2% Note Warrants to be
amended (as indicated opposite such Purchaser's name on the Schedule of
Purchasers), and (C) all documents, instruments and writings required to have
been delivered at or prior to the Closing by such Purchaser pursuant to this
Agreement, including the Amendment to Note Agreement and the Registration
Rights Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 Representations, Warranties and Agreements of the Company. The
Company hereby makes the following representations and warranties to each
Purchaser:
(a) Organization and Qualification. The Company is a corporation, duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware, with the requisite corporate power and authority to own and use
its properties and assets and to carry on its business as currently conducted.
The Company has no subsidiaries. The Company is duly qualified to do business
and is in good standing as a foreign corporation in each jurisdiction in which
the nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in good
standing, as the case may be, could not, individually or in the aggregate, (x)
adversely affect the legality, validity or enforceability of any of the
Transaction Documents (as defined below) in any material respect, (y) have a
material adverse effect on the results of operations, assets, prospects, or
financial condition of the Company or (z) adversely impair in any material
respect the Company's ability to perform fully on a timely basis its
obligations under the Transaction Documents (a "Material Adverse Effect").
(b) Authorization; Enforcement. The Company has the requisite corporate
power and authority to enter into and to consummate the transactions
contemplated hereby and by the 6% Notes, the 6% Note Warrants, the Amendment to
Note Agreement, the Registration Rights Agreement, the Amended 2% Notes and the
Amended 2% Note Warrant, and otherwise to carry out its obligations hereunder
and thereunder. This Agreement, the 6% Notes, the Amendment to Note Agreement,
the Registration Rights Agreement, the 6% Note Warrants, the Amended 2% Notes
and the Amended 2% Note Warrants are collectively referred to as the
4
<PAGE> 5
"Transaction Documents." The execution and delivery of each of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated thereby have been duly authorized by all requisite corporate
action on the part of the Company. At the Closing, each of the Transaction
Documents will be duly executed and delivered by the Company and when delivered
in accordance with the terms hereof, will constitute the valid and binding
obligation of the Company enforceable against the Company in accordance with
its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally the enforcement of, creditors' rights and
remedies or by other equitable principles of general application. The Company
is not in violation of any of the provisions of its Certificate of
Incorporation, as amended (the "Certificate of Incorporation"), or By-Laws (the
"By-Laws"). Attached as Exhibit 2.1(b) are copies of the Company's Certificate
of Incorporation and By-laws.
(c) Capitalization. The authorized, issued and outstanding capital stock
of the Company is set forth in Schedule 2.1(c). No shares of Common Stock are
entitled to preemptive or similar rights, nor is any holder of the Common Stock
entitled to preemptive or similar rights arising out of any agreement or
understanding with the Company by virtue of any of the Transaction Documents.
Except as disclosed in Schedule 2.1(c), there are no outstanding options,
warrants, script rights to subscribe to, calls or commitments of any character
whatsoever relating to, or, except as a result of the issuance of the 6% Notes
and the 6% Note Warrants and the amendment of the 2% Notes and 2% Note Warrants
hereunder, securities, rights or obligations convertible into or exchangeable
for, or giving any person any right to subscribe for or acquire any shares of
Common Stock, or contracts, commitments, understandings, or arrangements by
which the Company is or may become bound to issue additional shares of Common
Stock, or securities or rights convertible or exchangeable into shares of
Common Stock. To the knowledge of the Company, except as specifically
disclosed in the SEC Documents (as defined below) or Schedule 2.1(c), no Person
beneficially owns (as determined pursuant to Rule 13d-3 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") or has the
right to acquire by agreement with or by obligation binding upon the Company
beneficial ownership of in excess of 5% of the Common Stock currently issued
and outstanding.
(d) Underlying Shares. As of the date hereof, the Company has a
sufficient number of shares of Common Stock authorized and duly reserved for
issuance upon conversion of the 6% Notes and the 2% Amended Notes
(collectively, the "Transaction Notes"). As of the date hereof, the Company
has a sufficient number of shares of Common Stock authorized and duly reserved
for exercise of the 6% Note Warrants and the Amended 2% Warrants (collectively,
the "Transaction Warrants") except for a shortfall of 1,320,000 shares of
Common Stock underlying the 6% Note Warrants (the "Shortfall"). The Shortfall
can be reduced to zero shares of Common Stock upon consent of the holders of
warrants to purchase shares of Common Stock at exercise prices in excess of
$1.4625 on the date hereof to waive the Company's representation and obligation
to reserve shares of Common Stock issuable upon exercise thereof; provided,
however, that with respect to any such waiver, the shares of Common Stock
thereby released may only be authorized and reserved for issuance upon exercise
of Transaction Warrants held by the holder granting the waiver. Upon obtaining
stockholder approval to amend its Certificate of Incorporation pursuant to
Section 3.13 below, the Company will have, and at all times thereafter
5
<PAGE> 6
while the Transaction Notes and Transaction Warrants are outstanding will
maintain, an adequate reserve of duly authorized shares of Common Stock to
enable it to perform its obligations under this Agreement, and with respect to
the Transaction Notes and Transaction Warrants issued and outstanding at the
Closing Date and in no circumstances shall such reserved and available shares
of Common Stock be less than the sum of (i) the number of shares of Common
Stock which would be issuable upon conversion of the Transaction Notes issued
pursuant to the terms hereof (the "Underlying Shares"), and (ii) the number of
shares of Common Stock which would be issuable upon exercise in full of the
Transaction Warrants (the "Warrant Shares"). When issued in accordance with
the terms hereof and the Transaction Notes, the Underlying Shares will be duly
authorized, validly issued, fully paid and nonassessable. When issued upon
exercise of the Transaction Warrants in accordance with the terms thereof, the
Warrant Shares will be duly authorized, validly issued, fully paid and
nonassessable.
(e) No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated thereby do not and will not (i) subject to obtaining
the approval referred to in Section 3.13 below, conflict with or violate any
provision of its Certificate of Incorporation or By-laws or (ii) subject to
obtaining the consents referred to in Section 2.1(f) below, conflict with,
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Company is a party, or (iii) result in a violation of
any law, rule, regulation, order, judgment, injunction, decree or other
restriction of any court or governmental authority to which the Company is
subject (including Federal and state securities laws and regulations), or by
which any material property or asset of the Company is bound or affected,
except in the case of each of clauses (ii) and (iii), such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations as could
not, individually or in the aggregate, have or result in a Material Adverse
Effect. The business of the Company is not being conducted in violation of any
law, ordinance or regulation of any governmental authority, except for
violations which, individually or in the aggregate, do not have a Material
Adverse Effect.
(f) Consents and Approvals. Except as specifically set forth in Schedule
2.1(f), the Company is not required to obtain any consent, waiver,
authorization or order of, or make any filing or registration with, any court
or other federal, state, local or other governmental authority or other person
in connection with the execution, delivery and performance by the Company of
the Transaction Documents, except for (i) the filing of the registration
statement(s) contemplated by the Registration Rights Agreement (the "Underlying
Shares Registration Statement(s)") with the Securities and Exchange Commission
(the "Commission"), which shall be filed in the time periods set forth in the
Registration Rights Agreement, (ii) the application(s) for the listing of the
Underlying Shares and the Warrant Shares with the Nasdaq National Market, which
shall be filed in accordance with Section 3.7 hereof (and with any other
national securities exchange or market on which the Common Stock is then
listed), (iii) any filings, notices or registrations under applicable state
securities laws, and (iv) in all other cases, where the failure to obtain such
consent, waiver, authorization or order, or to give or make such notice or
filing, would not materially impair or delay the ability of the Company to
effect the Closing and to
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deliver to the Purchasers the Transaction Notes (and, upon conversion of the
Transaction Notes thereunder, the Underlying Shares) or the Transaction
Warrants (and, upon exercise of the Transaction Warrants, the Warrant Shares)
in the manner contemplated hereby and by the Registration Rights Agreement free
and clear of all liens and encumbrances of any nature whatsoever (the approvals
referred to in clauses (i) through (iii) above, together with the consents,
waivers, authorizations, orders, notices and filings referred to in Schedule
2.1(f), are hereinafter referred to as the "Required Approvals"). The Company
has no reason to believe that it will be unable to obtain the Required
Approvals.
(g) Litigation; Proceedings. Except as specifically disclosed in the
Disclosure Materials (as defined below) or set forth in Schedule 2.1(g), there
is no action, suit, notice of violation, proceeding or investigation pending
or, to the knowledge of the Company, threatened against or affecting the
Company or any of its properties before or by any court, governmental or
administrative agency or regulatory authority (Federal, state, county, local or
foreign) which (i) adversely affects the legality, validity or enforceability
of any of the Transaction Documents, (ii) could, individually or in the
aggregate, have a Material Adverse Effect or (iii) could, individually or in
the aggregate, materially impair the ability of the Company to perform fully on
a timely basis its obligations under the Transaction Documents.
(h) No Default or Violation. The Company (i) is not in default under or
in violation of any indenture, loan or credit agreement or any other agreement
or instrument to which it is a party or by which it or any of its properties is
bound, (ii) is not in violation of any order of any court, arbitrator or
governmental body, and (iii) is not in violation of any statute, rule or
regulation of any governmental authority, except as could not, in any such case
(individually or in the aggregate), (x) adversely affect the legality, validity
or enforceability of any of the Transaction Documents, (y) have a Material
Adverse Effect or (z) adversely impair the Company's ability or obligation to
perform fully on a timely basis its obligations under any of the Transaction
Documents.
(i) Schedules. The information contained in the Schedules to this
Agreement furnished by or on behalf of the Company is true and correct in all
material respects and does not omit to state any material fact necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading.
(j) Private Offering. Assuming (without any independent investigation or
verification by or on behalf of the Company) the accuracy of the
representations and warranties of the Purchasers set forth in Section 2.2, the
offer and sale of the 6% Notes, the 6% Note Warrants, the Underlying Shares and
the Warrant Shares and the amendment of the 2% Notes and the 2% Note Warrants
are exempt from registration under Section 5 of the Securities Act of 1933, as
amended (the "Securities Act"). Neither the Company nor any person acting on
its behalf has taken or will take any action which might subject the offering,
issuance or sale of such 6% Notes, the 6% Note Warrants, the Underlying Shares
or the Warrant Shares to the registration requirements of Section 5 of the
Securities Act.
(k) SEC Documents. The Company has filed all reports required to be filed
by it under the Exchange Act, including pursuant to Section 13(a) or 15(d)
thereof, for the three
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years preceding the date hereof (or such shorter period as the Company was
required by law to file such material) (the foregoing materials being
collectively referred to herein as the "SEC Documents" and, together with the
Schedules to this Agreement furnished by or on behalf of the Company, the
Company's Registration Statement on Form S-3 (File No. 333-56601) declared
effective by the Commission on August 13, 1998, and any press releases, copies
of which are attached as Exhibit 2.1(k), issued by the Company subsequent to
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997, the "Disclosure Materials") on a timely basis, or has received a valid
extension of such time of filing. As of their respective dates, the SEC
Documents complied in all material respects with the requirements of the
Securities Act and the Exchange Act and the rules and regulations of the
Commission promulgated thereunder, and none of the SEC Documents, when filed,
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of the Company included in the SEC
Documents comply in all material respects with applicable accounting
requirements and the published rules and regulations of the Commission with
respect thereto. Such financial statements have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis
during the periods involved, except as may be otherwise indicated in such
financial statements or the notes thereto, and fairly present in all material
respects the financial position of the Company as of and for the dates thereof
and the results of operations and cash flows for the periods then ended,
subject, in the case of unaudited statements, to normal year-end audit
adjustments. Since the date of the financial statements included in the
Company's last filed Annual Report on Form 10-K, there has been no event,
occurrence or development that has had a Material Adverse Effect which is not
specifically disclosed in any of the Disclosure Materials.
(l) Seniority. No obligations of the Company are senior to the 6% Notes
in right of payment, whether upon liquidation, dissolution or otherwise.
Except for the indebtedness described in Schedule 2.1(s), no obligations of the
Company are pari passu with the 6% Notes in right of payment, whether upon
liquidation or otherwise.
(m) [Intentionally Left Blank]
(n) Certain Fees. No fees or commissions will be payable by the Company to
any broker, financial advisor, finder, investment banker, or bank with respect
to the transactions contemplated by this Agreement, except for such fees to be
paid to the firm retained by the Company to render the fairness opinion with
respect to the transactions contemplated hereby, which will not exceed $80,000.
(o) Solicitation Materials. The Company has not (i) distributed any
offering materials in connection with the offering and sale of the 6% Notes,
the 6% Note Warrants, the Underlying Shares or the Warrant Shares or the
amendment to 2% Notes and 2% Note Warrants other than the Disclosure Materials
and other filings by the Company pursuant to the Exchange Act prior to the date
hereof, or (ii) solicited any offer to buy or sell the Transaction Notes, the
Transaction Warrants, the Underlying Shares or the Warrant Shares by means of
any form of general solicitation or advertising.
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(p) Form S-3 Eligibility. The Company is, and at the Closing Date will
be, eligible to register securities of selling stockholders for resale with the
Commission under Form S-3 promulgated under the Securities Act.
(q) Intellectual Property. Except as disclosed in its filings pursuant to
the Exchange Act or Securities Act, the Company (i) is aware of no patents or
trademarks ("Intellectual Property") to which the Company does not possess
rights or licenses to use, which are necessary to conduct its business as now
conducted; (ii) has no knowledge or reason to believe of infringement by the
Company of the Intellectual Property rights of others and is unaware of any
proceeding involving such infringement being brought or threatened against the
Company; (iii) has no knowledge of the material infringement of its
Intellectual Property by third parties; and (iv) has no reason to believe that
any of its Intellectual Property is unenforceable.
(r) Stockholder Rights Plan. The issuance of the 6% Notes and the 6% Note
Warrants directly from the Company to the Purchasers and the amendment of the
2% Notes and the 2% Note Warrants pursuant to the terms hereunder do not, and
the issuance of the Underlying Shares and the Warrant Shares directly from the
Company to the Purchasers, will not (together with other shares of Common Stock
deemed to be beneficially owned by such Purchasers pursuant to the Company's
issuance of convertible preferred stock and warrants under that certain
Convertible Preferred Stock Purchase Agreement dated October 29, 1997 and the
Company's issuance of senior convertible notes and warrants (including the
2% Notes and 2% Note Warrants) pursuant to the Securities Purchase Agreement,
dated May 15, 1998) in and of itself cause a Purchaser to become an Acquiring
Person as such term is defined in the Rights Agreement, dated as of February 9,
1996, by and between the Company and LaSalle National Trust, N.A., as Rights
Agent, or any amendment thereof or successor thereto.
(s) Outstanding Indebtedness. The outstanding indebtedness of the Company
as of March 25, 1999 is set forth in Schedule 2.1(s). Since March 25, 1999,
the Company has not incurred any further indebtedness, other than trade debt in
the ordinary course of business.
2.2 Representations and Warranties of the Purchaser. Each Purchaser
severally hereby represents and warrants to the Company as to itself as
follows:
(a) Organization; Authority. Such Purchaser is a limited partnership,
corporation or other entity, duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization with the
requisite legal power and authority to enter into and to consummate the
transactions contemplated hereby and by the Registration Rights Agreement and
otherwise to carry out its obligations hereunder and thereunder. The purchase
by the Purchaser of the 6% Notes and 6% Note Warrants and the amendment of the
2% Notes and 2% Note Warrants hereunder has been duly authorized by all
necessary action on the part of such Purchaser. Each of this Agreement, the
Amendment to Note Agreement and the Registration Rights Agreement has been duly
executed and delivered by such Purchaser or on its behalf and constitutes the
valid and legally binding obligation of such Purchaser, enforceable against the
Purchaser in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer,
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reorganization, moratorium and similar laws of general applicability relating
to or affecting creditors' rights generally and to general principles of
equity.
(b) Investment Intent. Such Purchaser is acquiring the 6% Notes, the 6%
Note Warrants, the Underlying Shares and the Warrant Shares for its own account
for investment purposes and without a present intention to distribute or resell
such 6% Notes, 6% Note Warrants, Underlying Shares or Warrant Shares or any
part thereof or interest therein; without prejudice, however, to such
Purchaser's right, subject to the provisions of this Agreement and the
Registration Rights Agreement, at all times to sell or otherwise dispose of all
or any part of such 6% Notes, Underlying Shares, 6% Note Warrants or Warrant
Shares pursuant to an effective registration statement under the Securities Act
under an exemption from such registration.
(c) Purchaser Status. At the time such Purchaser was offered the 6% Notes
and the 6% Note Warrants, it was, and at the date hereof, it is, and at the
Closing Date and each exercise date under the 6% Note Warrants it will be, an
"accredited investor" as defined in Rule 501 under the Securities Act.
(d) Experience of Purchaser. Such Purchaser, either alone or together
with its representatives, has such knowledge, sophistication and experience in
business and financial matters so as to be capable of evaluating the merits and
risks of the prospective investment in the 6% Notes, the 6% Warrants, the
Underlying Shares and the Warrant Shares, and has so evaluated the merits and
risks of such investment.
(e) Ability of Purchaser to Bear Risk of Investment. Such Purchaser is
able to bear the economic risk of an investment in the 6% Notes and the 6%
Warrants, the Underlying Shares and the Warrant Shares, and, at the present
time, is able to afford a complete loss of such investment.
(f) Access to Information. Such Purchaser acknowledges receipt of the
Disclosure Materials and further acknowledges that it has been afforded (i) the
opportunity to ask such questions as it has deemed necessary of, and to receive
answers from, representatives of the Company concerning the terms and
conditions of the offering of the 6% Notes and the 6% Note Warrants, and the
merits and risks of investing in the 6% Notes and the 6% Warrants; (ii) access
to information about the Company and the Company's financial condition, results
of operations, business, properties, management and prospects sufficient to
enable it to evaluate its investment; and (iii) the opportunity to obtain such
additional information which the Company possesses or can acquire without
unreasonable effort or expense that is necessary to make an informed investment
decision with respect to the investment and to verify the accuracy and
completeness of the information contained in the Disclosure Materials.
(g) Prohibited Transactions. The 6% Notes and the 6% Note Warrants being
purchased by such Purchaser are not being acquired, directly or indirectly,
with the assets of any "employee benefit plan" within the meaning of Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended.
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(h) Reliance. Such Purchaser understands and acknowledges that (i) the 6%
Notes and the 6% Note Warrants are being offered and sold to such Purchaser
without registration under the Securities Act in a private placement that is
exempt from the registration provisions of the Securities Act under Section
4(2) of the Securities Act or Regulation D promulgated thereunder and (ii) the
availability of such exemption, depends in part on, and the Company will rely
upon the accuracy and truthfulness of, the foregoing representations and such
Purchaser hereby consents to such reliance.
(i) Title. Such Purchaser is the legal and beneficial owner of the 2%
Notes and 2% Note Warrants being amended pursuant to this Agreement and the
Amendment to Note Agreement, free and clear of all liens, claims and
encumbrances.
The Company acknowledges and agrees that the Purchasers make no
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 2.2.
ARTICLE III
OTHER AGREEMENTS OF THE PARTIES
3.1 Transfer Restrictions.
(a) If a Purchaser should decide to dispose of 6% Notes or any portion of
the 6% Note Warrants (and upon conversion or exercise thereof, as the case may
be, any of the Underlying Shares or Warrant Shares) held by it, the Purchaser
understands and agrees that it may do so only pursuant to an effective
registration statement under the Securities Act, to the Company or pursuant to
an available exemption from the registration requirements of the Securities
Act. In connection with any transfer of any 6% Notes, any portion of the 6%
Note Warrants or any Underlying Shares or Warrant Shares other than pursuant to
an effective registration statement or to the Company, the Company may require
the transferor thereof to provide to the Company a written opinion of counsel
experienced in the area of United States securities laws selected by the
transferor, the form and substance of which opinion shall be reasonably
satisfactory to the Company, to the effect that such transfer does not require
registration of such transferred securities under the Securities Act.
(b) Each Purchaser agrees to the imprinting, so long as is required by
this Section 3.1(b), of the following legend on its 6% Notes, 6% Note Warrants,
Underlying Shares and Warrant Shares:
[NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES
ARE [CONVERTIBLE] [EXERCISABLE]] [THE SECURITIES REPRESENTED HEREBY] HAVE [NOT]
BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND,
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ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS.
[FOR 6% NOTES ONLY] THE SECURITIES REPRESENTED BY THIS NOTE ARE SUBJECT TO
CERTAIN RESTRICTIONS ON TRANSFER SET FORTH IN SECTION 3.1 OF A SECURITIES
PURCHASE AGREEMENT, DATED AS OF MARCH 31, 1999, BETWEEN ILLINOIS SUPERCONDUCTOR
CORPORATION (THE "COMPANY") AND THE PURCHASERS LISTED THEREIN, INCLUDING THE
ORIGINAL HOLDER HEREOF. A COPY OF THAT AGREEMENT IS ON FILE AT THE PRINCIPAL
OFFICE OF THE COMPANY.
The Underlying Shares issuable upon conversion of the 6% Notes and the
Warrant Shares issuable upon exercise of the 6% Note Warrants, as the case may
be, shall not contain the legend set forth above if the conversion of such 6%
Notes or exercise of the Warrants, as the case may be, occurs at any time while
the Underlying Shares Registration Statement is effective under the Securities
Act or in the event there is not an effective Underlying Shares Registration
Statement at such time, if in a written opinion of counsel reasonably
acceptable to the Company and experienced in the area of United States
securities laws, such counsel determines that such legend is not required under
applicable requirements of the Securities Act (including judicial
interpretations and pronouncements issued by the staff of the Commission). The
Company agrees that it will provide each Purchaser, upon request, with a
certificate or certificates representing Underlying Shares and Warrant Shares,
free from such legend at such time as such legend is no longer required
hereunder. Each Purchaser agrees that, in connection with any transfer of
Underlying Shares or Warrant Shares by it pursuant to an effective registration
statement under the Securities Act, it will comply with the prospectus delivery
requirements of the Securities Act provided copies of a current prospectus
relating to such effective registration statement are or have been supplied to
such Purchaser. The Company makes no representation, warranty or agreement as
to the availability of any exemption from registration under the Securities Act
with respect to any resale of 6% Notes, 6% Note Warrants, Underlying Shares or
Warrant Shares.
3.2 Stop Transfer Instruction. The Company may not make any notation on
its records or give instructions to any transfer agent of the Company which
enlarge the restrictions of transfer set forth in Section 3.1.
3.3 Furnishing of Information. As long as a Purchaser owns 6% Notes,
Underlying Shares, 6% Note Warrants or Warrant Shares, the Company covenants to
timely file (or obtain extensions in respect thereof) all reports required to
be filed by the Company after the date hereof pursuant to Section 13(a) or
15(d) of the Exchange Act and to promptly furnish the Purchaser with true and
complete copies of all such filings. If the Company or a successor to the
Company is not at the time required to file reports pursuant to such sections,
the Company will prepare and furnish to each Purchaser annual and quarterly
financial statements, together with a discussion and analysis of such financial
statements in form and substance substantially similar to those that
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would otherwise be required to be included in reports required by Section 13(a)
or 15(d) of the Exchange Act in the time period that such filings would have
been required to have been made under the Exchange Act. The Company shall use
its best efforts to at all times comply with Rule 144(c) promulgated under the
Securities Act.
3.4 Copies and Use of Disclosure Materials. The Company shall furnish
each Purchaser, without charge, as many copies of the Disclosure Materials, as
amended or supplemented, as such Purchaser may reasonably request. The Company
consents to the use of the SEC Documents, as amended and supplemented, by each
Purchaser in connection with resales of the Underlying Shares or the Warrant
Shares.
3.5 Blue Sky Laws. In accordance with the Registration Rights Agreement,
the Company shall qualify the Underlying Shares and the Warrant Shares under
the securities or Blue Sky laws of all states and the District of Columbia and
shall continue such qualification at all times through the third anniversary of
the Closing Date; provided, however, that the Company shall not be required in
connection therewith to qualify as a foreign corporation where they are not now
so qualified or to take any action that would subject the Company to general
service of process in any such jurisdiction where it is not then so subject.
3.6 Integration. The Company shall not and shall use its best efforts to
ensure that no Affiliate (as defined in Rule 405 under the Securities Act) of
the Company shall sell, offer for sale or solicit offers to buy or otherwise
negotiate in respect of any security (as such term is defined in Section 2 of
the Securities Act) that would be integrated with the offer or sale of the 6%
Notes, the 6% Note Warrants, the Underlying Shares or the Warrant Shares in a
manner that would (i) require the registration under the Securities Act of the
sale of the 6% Notes, the 6% Note Warrants, the Underlying Shares or the
Warrant Shares to the Purchaser or (ii) would violate any rule of a securities
exchange or market upon which the Common Stock is listed, which limits the
amount of capital stock that may be issued without stockholder approval.
3.7 Listing of Underlying Shares and Warrant Shares. The Company shall
(a) not later than the fifth Business Day following the Closing Date prepare
and file with the Nasdaq National Market (as well as any other national
securities exchange or market on which the Common Stock is then listed) an
additional shares listing application covering and listing (i) such number of
shares of Common Stock as are issuable upon conversion of the 6% Notes,
together with any additional shares of Common Stock issuable upon the
conversion of the Amended 2% Notes which are not covered by the prior listing
application filed by the Company with Nasdaq National Market for shares of
Common Stock issuable upon conversion of the 2% Notes; and (ii) the Warrant
Shares underlying the 6% Note Warrants, (b) take all steps necessary to cause
such shares to be approved for listing on the Nasdaq National Market (as well
as on any other national securities exchange or market on which the Common
Stock is then listed) as soon as possible thereafter and in no event later than
ten (10) Business Days after the Closing Date, and (c) provide to the
Purchasers evidence of such listing. The Company shall use its best efforts to
maintain the listing of the Common Stock on the Nasdaq National Market. If the
Common Stock is de-listed from the Nasdaq National Market, the Company shall
use its best efforts to have the Common Stock listed (and to maintain such
listing) on the Nasdaq Small Cap Market or the American Stock
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Exchange or the New York Stock Exchange. If the Common Stock is subsequently
de-listed, from, or never listed on, the Nasdaq Small Cap Market or the
American Stock Exchange or New York Stock Exchange, then the Company shall use
its best efforts to have the Common Stock listed (and to maintain such listing)
on the Nasdaq OTC Bulletin Board.
3.8 Conversion Procedures. Exhibit E attached hereto sets forth the form
of legal opinion, if necessary, that shall be rendered to the Company's
transfer agent as may be reasonably necessary to enable each Purchaser to
exercise its right of conversion in a timely and expeditious manner.
3.9 Redemption Restrictions. As of the date hereof, except as disclosed
on Schedule 3.9, the Company is not a party to any agreement which prohibits
the redemption or payment of the Transaction Notes, Transaction Warrants,
Underlying Shares or Warrant Shares otherwise required or permitted under the
Transaction Notes or the Registration Rights Agreement. The Company shall not
enter into any agreement which restricts its ability to redeem the Transaction
Notes, the Transaction Warrants, the Underlying Shares or the Warrant Shares,
without the prior written consent of the Purchasers.
3.10 Notice of Breaches. Each of the Company and the Purchasers shall
give prompt written notice to the other of any breach of any representation,
warranty or other agreement contained in this Agreement, the Amendment to Note
Agreement or in the Registration Rights Agreement, as well as any events or
occurrences arising after the date hereof and prior to the Closing Date to
which would reasonably be likely to cause any representation or warranty or
other agreement of such party, as the case may be, contained herein to be
incorrect or breached as of the Closing Date. However, no disclosure by either
party pursuant to this Section 3.10 shall be deemed to cure any breach of any
representation, warranty or other agreement contained herein, the Amendment to
Note Agreement or in the Registration Rights Agreement.
Notwithstanding the generality of the foregoing, the Company shall
promptly notify the Purchasers of any notice or claim (written or oral) that it
receives from any lender of the Company to the effect that the consummation of
the transactions contemplated hereby, by the Amendment to Note Agreement and by
the Registration Rights Agreement violates or would violate any written
agreement or understanding between such lender and the Company, and the Company
shall promptly furnish by facsimile to the Purchasers a copy of any written
statement in support of or relating to such claim or notice.
3.11 Conversion Obligations of the Company. Subject to Section 3(i) of
the Transaction Notes and Section 3(e) of the Transaction Warrants, the Company
covenants to convert the Transaction Notes and to deliver Underlying Shares in
accordance with the terms and conditions and time period set forth in the
Transaction Notes, and to deliver Warrant Shares in accordance with the terms
and conditions and time period set forth in the Transaction Warrants. Subject
to Section 3(i) of the Transaction Notes and Section 3(e) of the Transaction
Warrants, this is an independent covenant which is not subject to any offset or
other defense for any reason based upon any claim that the Company may have
against a Purchaser.
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3.12 Board Seats.
The Purchasers shall have, with respect to designation of directors to the
Company's Board of Directors, the rights set forth in Section 1 of the
Amendment to Note Agreement.
3.13 Increase of Authorized Capital. The Company shall use its best
efforts to obtain stockholder approval, on or before June 9, 1999, of an
amendment to the Certificate of Incorporation increasing the number of
authorized shares of Common Stock such that the Company shall have a sufficient
number of shares of Common Stock to reserve for issuance upon exercise of all
Transaction Warrants. In the event that such amendment has not been effected
by June 11, 1999, the Company shall immediately send notices of such failure to
amend to all holders of Transaction Notes, and unless the Company shall have
received by the earlier of 5 Trading Days of the date of such notice or June
17, 1999, a written objection from the holders of at least 75% in principal
amount of the outstanding Transaction Notes, it shall repurchase from the
holders of Transaction Notes, on the 10th Trading Day following such failure to
amend, on a pro-rata basis, such principal amount of Transaction Notes as are
convertible into the number of shares of Common Stock representing the
shortfall in the Company's authorized capital with respect to the number of
shares of Common Stock issuable upon exercise of the Transaction Warrants. The
purchase price of such redemption shall be equal to the greater of: (i) the
aggregate principal amount of Transaction Notes to be redeemed plus any accrued
and unpaid interest thereon and (ii) the product of the average Per Share
Market Value for the 5 Trading Days preceding such holder's redemption notice
and the Conversion Ratio. In addition to the foregoing, in the event that the
Company fails to effect the foregoing amendment to the Certificate of
Incorporation, any Purchaser may, at its option, decrease the shortfall of
authorized shares (and therefore decrease the principal amount of Transaction
Notes to be repurchased by the Company pursuant to this Section 3.13) by
waiving its rights to have shares of Common Stock reserved to cover the
exercise of other warrants held by such Purchaser to purchase shares of Common
Stock and instead designate that such shares be reserved for issuance upon
exercise of Transaction Warrants held by such Purchaser.
3.14 Purchaser's Rights if Trading in Common Stock is Suspended or
Delisted. In the event that at any time while the Transaction Notes are
outstanding the trading in the shares of the Common Stock is suspended on
(other than as a result of the suspension of trading in securities on such
market generally or temporary suspensions pending the release of material
information) or delisted from the Nasdaq National Market (unless such delisting
shall be due to failure to comply with the maintenance criteria set forth in
NASD Rule 4450 (or any successor rule) with respect to: (i) minimum bid price
or (ii) net tangible assets or unless the Common Stock is listed for trading on
The Nasdaq Small CapMarket, the New York Stock Exchange or the American Stock
Exchange within three Trading Days), for more than three (3) consecutive
Trading Days or five (5) Trading Days in the aggregate, at each Purchaser's
option exercisable by written notice to the Company and tender of such
Purchaser's Transaction Notes, the Company shall redeem, within seven (7) days
of receipt of such written notice, all Transaction Notes owned by such
Purchaser at an aggregate purchase price equal to (A) the outstanding aggregate
principal amount and all accrued but unpaid interest thereon and (B) interest
on such amount accruing from the 7th day after the Company's receipt of such
notice and the Transaction Notes to be redeemed until
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paid at the rate of 15% per annum; provided, however, that at any time prior to
the redemption of all or any portion of such Purchaser's Transaction Notes,
such Purchaser, by written notice to the Company delivered prior to such
redemption, may elect to invalidate ab initio the redemption of any or all of
such Purchaser's unredeemed Transaction Notes and the Company shall, within
three (3) Trading Days of receipt of such notice, return to the Purchaser the
Transaction Notes for which the redemption has been rescinded as provided
herein.
3.15 Certain Negative Covenants of the Company. The Company covenants
that from the date hereof and for so long as at least $450,000 in principal
amount of the Transaction Notes (or any amendment thereto or instrument issued
in exchange therefor) remain outstanding, it will not, without the prior
written approval of holders of at least 75% in principal amount of the then
outstanding Transaction Notes:
(a) Directly or indirectly create, incur, assume, guarantee, or otherwise
become or remain directly or indirectly liable with respect to, any
indebtedness of any kind, other than (i) indebtedness under the 6% Notes and
the 2% Notes, (ii) indebtedness pursuant to a working capital line of credit,
in an amount not to exceed $1,000,000; or (iii) indebtedness to trade creditors
in the ordinary course of business.
(b) Directly or indirectly create, incur, assume or permit to exist any
lien, pledge, charge or encumbrance on or with respect to any of its property
or assets (including any document or instrument in respect of goods or accounts
receivable) whether now owned or held or hereafter acquired, or any income or
profits therefrom, except for Permitted Liens.
As used herein, "Permitted Liens" means (i) liens on the Company's inventory
and accounts receivable to secure a working capital line of credit, in an
amount not to exceed $1,000,000; (ii) liens imposed by mandatory provisions of
law such as materialmen's, mechanic's or warehousemen's; (iii) liens for taxes,
assessments and governmental charges or levies imposed upon the Company or any
subsidiaries or their income, profits or property, if the same are not yet due
and payable or if the same are contested in good faith and as to which adequate
reserves have been provided; (iv) pledges or deposits made to secure payment of
worker's compensation insurance, unemployment insurance, pensions or social
security programs or to secure the performance of letters of credits, bids,
tenders, public or statutory obligations, surety, performance bonds and other
similar obligations; and (v) encumbrances consisting of zoning restrictions,
easements, or other restrictions on the use of real property, provided that
such do not impair the use of such property for the uses intended and none of
which is violated by existing or proposed structures or land use.
(c) Directly or indirectly, issue any note, capital stock, option,
warrant, right or other instrument which is convertible into, exchangeable for,
or confers the right to subscribe for or purchase, shares of Common Stock where
the price at which such conversion, exchange, subscription or purchase is to
occur cannot be determined at the time such instrument is issued because it is
based, in whole or in part, on the future market trading prices of the Common
Stock.
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3.16 Dividends and Distributions on Junior Securities. So long as any
Transaction Notes shall remain outstanding, the Company shall not redeem,
purchase or otherwise acquire directly or indirectly any Junior Securities (as
defined in the 6% Notes), nor shall the Company directly or indirectly pay or
declare any dividend or make any distribution (other than a dividend or
distribution described in Section 3(c)(ii) of the 6% Notes or a dividend paid
in shares of equity securities) with respect to Junior Securities.
3.17 Future Financings. The holders of Transaction Notes and Transaction
Warrants shall have the benefit of the provisions of Section 2 of the Amendment
to Note Agreement.
3.18 Certain Additional Negative Covenants. The holders of Transaction
Notes shall have the benefit of certain additional negative covenants set for
in Section 3 of the Amendment to Note Agreement.
3.19 Certain Affirmative Covenants of the Company. The Company covenants
that from the date hereof and for so long as any portion of the Transaction
Notes (or any amendment thereto or instrument issued in exchange therefor)
shall remain outstanding, it will (and will cause any subsidiaries to) observe
or perform the following:
(a) Corporate Existence. It will maintain its corporate existence in good
standing and remain qualified to do business as a foreign corporation in each
jurisdiction in which the nature of its activities or the character of the
properties it owns or leases makes such qualification necessary.
(b) Continuation of Business. It will continue to conduct its business in
compliance with all applicable rules and regulations of applicable governmental
authorities, except for such non-compliance which would not have a Material
Adverse Effect.
3.20 Future Rights Plans. None of the acquisitions of 6% Notes or 6% Note
Warrants or the amendment of 2% Notes or 2% Note Warrants nor the deemed
beneficial ownership of shares of Common Stock issuable upon, or the
acquisition of such shares pursuant to, the conversion of Transaction Notes or
the exercise of Transaction Warrants will in any event under any circumstances
in and of itself trigger the poison pill provisions of any stockholders' rights
or similar agreements, or plan having a similar effect, to which the Company is
a party.
3.21 Access to Management. The Company shall, for so long as at least
$450,000 in principal amount of Transaction Notes shall remain outstanding,
upon reasonable notice, make available to holders of the Transaction Notes,
members of the Company's senior management and/or the Company's auditors to
discuss issues relating to the Company's business and financial matters,
provided that as a condition to such access, such holders and the Company shall
have entered into a confidentiality agreement in the Form of Exhibit F hereto.
3.22 Operating Income.
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<PAGE> 18
(a) Not later than July 15, 2000, the Chief Financial Officer ( or if
there is no Chief Financial Officer, the Principal Accounting Officer) of the
Company shall deliver a certificate to all holders of Transaction Notes
indicating whether or not such officer has a good faith reasonable belief that
the Company's Operating Income (as defined below) for the fiscal quarter ended
June 30, 2000 is zero or greater. Such certificate shall include the officer's
calculation of Operating Income. Failure of such officer of the Company to
deliver such a certificate by July 15, 2000 indicating a good faith reasonable
belief that the Company's Operating Income for the quarter ended June 30, 2000
will be zero or greater shall constitute an immediate Event of Default under
the Transaction Notes.
(b) Not later than July 31, 2000, Ernst & Young LLP, the Company's
independent auditors, or such other firm as has been retained by the Company's
Board of Directors to audit the Company's financial statements filed with the
Commission (the "Independent Auditors"), shall deliver a letter to all holders
of Transaction Notes indicating whether or not the Independent Auditors can
confirm that, after a review (but not an audit) of the Company's financial
statements for the fiscal quarter ended June 30, 2000, in accordance with
generally accepted auditing standards, (i) the Company's Operating Income for
such quarter was zero or greater and (ii) the Company's calculation of
Operating Income is correct. Failure of the Independent Auditors to deliver
such a letter by July 31, 2000 confirming Operating Income for the Company of
zero or greater for the quarter ended June 30, 2000 shall constitute an
immediate Event of Default under the Transaction Notes.
(c) As used herein, "Operating Income" shall mean (a) operating income as
reported in the Company's quarterly financial statements for the quarter ended
June 30, 2000, prepared in accordance with generally accepted accounting
principles applied on a basis consistent with historic practice, but (b)
adjusted to disregard any depreciation of physical plant and equipment and
amortization of intellectual property, and (c) adjusted to disregard each
non-recurring item, and each credit or other adjustment relating to prior
periods , in either case to the extent that such item, credit or other
adjustment had the effect of increasing operating income as so reported.
ARTICLE IV
CONDITIONS
4.1 Conditions Precedent to the Obligation of the Company to Issue the 6%
Notes and 6% Note Warrants and to Amend 2% Notes and 2% Note Warrants. The
obligation of the Company to issue the 6% Notes and the 6% Note Warrants
hereunder to each Purchaser and to amend certain 2% Notes and 2% Note Warrants
of such Purchaser is subject to the satisfaction, or waiver by the Company, at
or before the Closing Date, of each of the following conditions:
(i) Accuracy of such Purchaser's Representations and Warranties. The
representations and warranties of such Purchaser shall be true and correct in
all
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<PAGE> 19
material respects as of the date when made and as of the Closing Date, as
though made on and as of such date (except for representations and warranties
that speak as of a specific date);
(ii) Performance by such Purchaser. Such Purchaser shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by this Agreement to be performed, satisfied or
complied with by the Purchaser at or prior to the Closing;
(iii) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by this
Agreement, the Amendment to Note Agreement or the Registration Rights
Agreement; and
(iv) Required Approvals. All Required Approvals shall have been obtained.
4.2 Conditions Precedent to the Obligation of Each Purchaser to Acquire
the 6% Notes and the 6% Note Warrants and to have 2% Notes and 2% Note Warrants
amended. The obligation of such Purchaser hereunder to acquire and pay for the
6% Notes and the 6% Note Warrants and to have certain of its 2% Notes and 2%
Note Warrants amended is subject to the satisfaction or waiver by such
Purchaser, at or before the Closing Date, of each of the following conditions:
(i) Accuracy of the Company's Representations and Warranties. The
representations and warranties of the Company set forth herein and in the
Registration Rights Agreement shall be true and correct in all material
respects as of the date when made and as of the Closing Date, as though made on
and as of such date (except for representations and warranties that speak as of
a specific date);
(ii) Performance by the Company. The Company shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by this Agreement and the Amendment to Note Agreement
to be performed, satisfied or complied with by the Company at or prior to the
Closing;
(iii) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by this
Agreement, the Amendment to Note Agreement, the Transaction Notes, the
Transaction Warrants or the Registration Rights Agreement;
(iv) Adverse Changes. Since the date hereof, no event which had or could
reasonably be expected to have a Material Adverse Effect, and no material
adverse change in the financial condition or prospects of the Company, shall
have occurred which is not disclosed in the Disclosure Materials;
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<PAGE> 20
(v) No Suspensions of Trading in Common Stock. The trading in the Common
Stock shall not have been suspended by the Commission or on the Nasdaq National
Market (except for any suspension of trading of not more than one Trading Day
solely to permit dissemination of material information regarding the Company
and other than a suspension of trading on the Nasdaq National Market if the
Common Stock is listed for trading, and not suspended, on The Nasdaq SmallCap
Market within one business day after such suspension);
(vi) Listing of Common Stock. The Common Stock shall have at all times
between the date hereof and the Closing Date been, and on the Closing Date be,
listed for trading on the Nasdaq National Market, The Nasdaq SmallCap Market,
the New York Stock Exchange or the American Stock Exchange;
(vii) Legal Opinion. The Company shall have delivered to such Purchaser
the opinion of Katten Muchin & Zavis, counsel to the Company, in substantially
the form of Exhibit G attached hereto;
(viii) Required Approvals. All Required Approvals (other than those
referred to in clauses (i) through (iii) of Section 2.1(f) and stockholder
approval referenced in Schedule 2.1(f)) shall have been obtained;
(ix) [intentionally omitted]
(x) Delivery of Transaction Notes. The Company shall have delivered to
Katten Muchin & Zavis in escrow, pending the Closing Date, the 6% Notes being
acquired by such Purchaser hereunder and the Amended 2% Notes being issued to
Purchaser hereunder, registered in the name of such Purchaser and in the
denominations requested by such Purchaser;
(xi) Registration Rights Agreement. The Company shall have executed and
delivered the Registration Rights Agreement;
(xii) Amendment to Note Agreement. The Company shall have executed and
delivered the Amendment to Note Agreement;
(x) Transaction Warrants. The Company shall have executed and delivered
the 6% Note Warrants being acquired by such Purchaser hereunder, and the
Amended 2% Warrants of such Purchaser being issued to Purchaser hereunder,
registered in the name of such Purchaser in accordance with the terms of the
Agreement;
(xi) Company Certificates. Such Purchaser shall have received a
certificate, dated the Closing Date, signed by the Secretary or an Assistant
Secretary of the Company and certifying (i) that attached thereto is a true,
correct and complete copy of (A) the Certificate of Incorporation, (B) the
Company's By-laws, and (C) resolutions duly adopted by the Board of Directors
of the Company authorizing the execution, delivery and (where appropriate)
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<PAGE> 21
filing of the Transaction Documents and the issuance and sale of the 6% Notes,
the 6% Note Warrants, the Underlying Shares and the Warrant Shares and the
amendment of the 2% Notes and 2% Note Warrants and (ii) the incumbency of the
officers executing the Transactions Documents; and
(xv) Change of Control. No Change of Control shall have occurred between
the date hereof and the Closing Date. "Change of Control" means the occurrence
of any of (i) an acquisition after the date hereof by an individual, legal
entity or "group" within the meaning of Section 13(d) of the Exchange Act of
voting securities of the Company pursuant to which, after giving effect to such
acquisition, such individual, legal entity or group will beneficially own in
excess of 50% of the issued and outstanding voting securities of the Company,
(ii) a replacement of more than one-half of the members of the Company's Board
of Directors which is not approved by those individuals who are members of the
Company's Board of Directors on the date thereof in one or a series of related
transactions, (iii) the merger of the Company with or into another entity,
consolidation or sale of all or substantially all of the assets of the Company
in one or a series of related transactions or (iv) the execution by the Company
of an agreement to which the Company is a party or by which it is bound,
providing for any of the events set forth above in (i), (ii) or (iii).
(xvi) Registration of Shares Underlying Amended 2% Notes and 2% Amended
Note Warrants. (a) The legal opinion referred to in paragraph (vii) shall
include an opinion that, with the exception of additional shares of Common
Stock issuable due to the decrease in the conversion price of the Amended 2%
Notes from the 2% Notes, the shares of Common Stock issuable upon conversion of
the Amended 2% Notes and upon exercise of the Amended 2% Warrants are: (i)
duly registered pursuant to the Company's Registration Statement on Form S-3
(Reg 333-56601) declared effective by the Commission on August 13, 1998 (the
"2% Note Share Registration Statement"); (ii) may be resold pursuant to the
prospectus included therein, as amended and supplemented (the "2% Note Share
Prospectus") and (iii) are duly listed, subject to issuance, on the Nasdaq
National Market.
(b) The Company shall have taken such step as may be required, including,
without limitation, amending the 2% Note Share Registration Statement, the 2%
Note Share Prospectus, or filing a prospectus supplement thereto, in order for
Company's counsel to issue the opinion referred to in Section (xvi)(a) above.
ARTICLE V
MISCELLANEOUS
5.1 Fees and Expenses. Except as provided in the Registration Rights
Agreement, the Company shall pay (i) upon submission of an itemized statement,
the reasonable fees and expenses of one legal counsel for the Purchasers, and
(ii) the expenses incurred by the Company incident to the negotiation,
preparation, execution, delivery and performance of this Agreement. Each
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<PAGE> 22
Purchaser shall be responsible for its own tax liability that may arise as a
result of the investment hereunder or the transactions contemplated by this
Agreement.
5.2 Entire Agreement; Amendments. This Agreement, together with the
Exhibits and Schedules hereto and the other Transaction Documents contain the
entire understanding of the parties with respect to the subject matter hereof
and supersede all prior agreements and understandings, oral or written, with
respect to such matters.
5.3 Notices. Any notice or other communication required or permitted to
be given hereunder shall be in writing and shall be deemed to have been
delivered (i) upon receipt, when delivered personally; (ii) when sent by
facsimile, upon receipt if received on a Business Day prior to 5:00 p.m.
(Central Time), or the first Business Day following such receipt if received on
a Business Day after 5:00 p.m. (Central Time); or (iii) upon receipt, when
deposited with a nationally recognized overnight express courier service, fully
prepaid, in each case properly addressed to the party to receive the same. The
addresses and facsimile numbers for such communications shall be:
If to the Company: Illinois Superconductor Corporation
451 Kingston Court
Mt. Prospect, Illinois 60056
Attn: General Counsel
Fax: (847) 391-5015
With copies to: Katten Muchin & Zavis
525 W. Monroe St. Suite 1600
Chicago, Illinois 60661
Attn: Lawrence D. Levin
Fax: (312) 902-1061
If to a Purchaser: Elliott Associates, L.P.
712 Fifth Avenue, 36th Floor
New York, New York 10019
Attn: Mark Brodsky
Fax: (212) 974-2092
Westgate International, L.P.
c/o Stonington Management Corp.
712 Fifth Avenue, 36th Floor
New York, New York 10019
Attn: Mark Brodsky
Fax: (212) 974-2092
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<PAGE> 23
Alexander Finance, LP
1560 Sherman Avenue
Suite 900
Evanston, Illinois 60201
Attn: Brian D. Brookover
Fax: (847) 733-0339
State Farm Mutual Automobile
Insurance Company
One State Farm Plaza
Bloomington, Illinois 61710
Attn: Common Stocks, E-9
Fax:(309) 766-7423
With copies to: Kleinberg, Kaplan, Wolff & Cohen, P.C.
551 Fifth Avenue
New York, NY 10176
Attn: Stephen M. Schultz
Fax: (212) 986-8866
or such other address or facsimile number as may be designated in writing
hereafter, in the same manner, by such person.
5.4 Amendments; Waivers. No provision of this Agreement may be waived or
amended except in a written instrument signed, in the case of an amendment, by
both the Company and the Purchasers representing at least 75% of the then
outstanding principal amount of the Transaction Notes; or, in the case of a
waiver, by the party against whom enforcement of any such waiver is sought. No
waiver of any default with respect to any provision, condition or requirement
of this Agreement shall be deemed to be a continuing waiver in the future or a
waiver of any other provision, condition or requirement hereof, nor shall any
delay or omission of any party to exercise any right hereunder in any manner
impair the exercise of any such right accruing to it thereafter.
5.5 Headings. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
5.6 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted assigns.
Neither the Company nor any Purchaser may assign this Agreement or any rights
or obligations hereunder without the prior written consent of the other, except
that, in connection with a transfer, in whole or in part, of the Transaction
Notes or the Transaction Warrants as provided therein, a Purchaser may assign
its rights hereunder to any such transferee of the Transaction Notes or the
Transaction Warrants. The assignment by a party of this Agreement or any
rights hereunder shall not affect the obligations of such party under this
Agreement.
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<PAGE> 24
5.7 No Third-Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
5.8 Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the internal laws of the State of New York without
regard to the principles of conflicts of law thereof.
5.9 Survival. The agreements and covenants contained in Article III and
this Article V shall survive the delivery and conversion of the Transaction
Notes pursuant to this Agreement and the representations and warranties of the
Company and the Purchasers contained in Article II shall survive until a date
that is two years after the Closing Date.
5.10 Execution. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other parties, it being understood that all
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the executing party with the same force and effect as if
such facsimile signature page were an original thereof.
5.11 Publicity. The Company and the Purchasers shall consult with each
other in issuing any press releases or otherwise making public statements with
respect to the transactions contemplated hereby and neither the Company nor the
Purchasers shall issue any such press release or otherwise make any such public
statement without the prior consent of the other, which consent shall not be
unreasonably withheld or delayed, except that no prior consent shall be
required if such disclosure is required by law, in which such case the
disclosing party shall provide the other parties with prior notice of such
public statement.
5.12 Severability. In case any one or more of the provisions of this
Agreement shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Agreement shall
not in any way be affecting or impaired thereby and the parties will attempt to
agree upon a valid and enforceable provision which shall be a reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Agreement.
5.13 Like Treatment of Purchasers. Neither the Company nor any of its
Affiliates shall, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee, payment for the redemptions or
exchange of the Transaction Notes, or otherwise, to any holder of Transaction
Notes, for or as an inducement to, or in connection with the solicitation of,
any consent, waiver or amendment of any terms or provisions of the Transaction
Notes or this Agreement, the Amendment to Note Agreement or the Registration
Rights Agreement or the Transaction Warrants, unless such consideration is
required to be paid to all holders of Transaction Notes bound by such consent,
waiver or amendment whether or not such holders so consent, waive or agree to
amend and whether or not such holders tender their Transaction Notes for
redemption or exchange. The Company shall not, directly or indirectly, redeem
any
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<PAGE> 25
Transaction Notes unless such offer of redemption is made pro rata to all
holders on identical terms.
5.14 Obligation of Purchasers Several, not Joint. The obligations of the
Purchasers under this Agreement, or under any other Transaction Document are
several and not joint.
5.15 Payment of Expenses. The Company agrees to pay all costs and
expenses, including reasonable attorneys' fees and expenses, which may be
incurred by the Purchasers in successfully enforcing this Agreement or any
other Transaction Document.
5.16 Indemnification. The Company hereby agrees to indemnify, defend and
hold harmless each Purchaser and such Purchaser's partners, directors,
officers, employees or agents ("Indemnified Parties"), from and against any and
all losses, claims, damages, liabilities and costs, including reasonable legal
fees (collectively "Losses"), as incurred, involving a third-party claim and
arising out of or relating to the acquisition by such Purchaser of the 6% Notes
and 6% Note Warrants issued and sold to it by the Company pursuant to this
Agreement or arising out of the amendment of such Purchaser's 2% Notes and 2%
Warrants pursuant to this Agreement; provided, that any Indemnified Party shall
reimburse the Company for any amount paid pursuant to this Section 5.16 to the
extent a final judgment by a court or body of proper jurisdiction, which has
been fully appealed, determines that such Indemnified Party was at fault in
connection with the claim or action pursuant to which such Losses were
incurred. In connection with the foregoing, the Company may elect to assume
the defense of a claim made against an Indemnified Party, provided that if the
Company does not notify an Indemnified Party that it is assuming such defense
within ten (10) days of receipt from Indemnified Party of the notice of Loss,
it shall reimburse such Indemnified Party for its reasonable legal fees and
expenses, as incurred, on a monthly basis.
5.17 Rescission Right.
(a) Notwithstanding anything to the contrary contained herein or in any
other Transaction Document, whenever a Purchaser, pursuant to the provisions of
this Agreement or any other Transaction Document, exercises its right to have
its Transaction Notes repurchased or redeemed by the Company, whether pursuant
to a put right, acceleration or otherwise, and such repurchase or redemption is
not effected in full within the time period provided in the relevant provision,
then, except where such right is otherwise provided in such provision, such
Purchaser shall have the right to, by written notice, rescind the redemption or
repurchase of any portion of such Purchaser's Transaction Notes which have not
been repurchased or redeemed in a timely manner, and the Company shall, within
three (3) Trading Days of receipt of such notice, return to such Purchaser the
Transaction Notes for which redemption or repurchase has been rescinded as
provided herein.
(b) Notwithstanding anything to contrary contained herein or in any other
Transaction Document, whenever a Purchaser exercises its right, pursuant to the
provisions of this Agreement or any other Transaction Document, to (i) convert
Transaction Notes into Common Stock or other securities or consideration; or
(ii) exercise the Transaction Warrants for
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<PAGE> 26
Common Stock or other securities or consideration, and the delivery of the
Common Stock, securities or other consideration issuable upon such conversion
or exercise has not been effected within the time period provided in the
relevant provision, then, except were such right is otherwise provided in such
provision, such Purchaser still have the right to, upon written notice, rescind
such conversion or exercise, as the case may be, and the Company shall, within
three (3) Trading Days of receipt of such notice, return to Purchaser, any
conversion notices, Transaction Notes, exercise notices or consideration
tendered in connection with such conversion or exercise.
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<PAGE> 27
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized persons as of the date first
indicated above.
Company:
ILLINOIS SUPERCONDUCTOR CORPORATION
/s/ Edward W. Laves
By:_______________________________________
Name: Edward W. Laves
Title: President and Chief Executive Officer
Purchasers:
ELLIOTT ASSOCIATES, L.P.
/s/ Authorized Signatory
By:_______________________________________
Name:
Title:
WESTGATE INTERNATIONAL, L.P.
By: Martley International, L.P.
As Attorney-in-fact
/s/ Authorized Signatory
By:________________________________________
Name:
Title:
ALEXANDER FINANCE, LP
/s/ Authorized Signatory
By:________________________________________
Name:
Title:
STATE FARM MUTUAL AUTOMOBILE
INSURANCE COMPANY
/s/ Authorized Signatory
By:_________________________________________
Name:
Title:
27
<PAGE> 28
SCHEDULE OF PURCHASERS
<TABLE>
<CAPTION>
Purchaser's Name Purchase Price Principal Amount Number of Warrants Principal Amount Amount of 2% Note
of 6% Notes 6% Note of 2% Notes Warrants
Purchased Warrants Purchased to be Amended to be Amended
<S> <C> <C> <C> <C> <C>
Elliott Associates .$833,334 $833,334 333,334 $1,388,889 555,556
Westgate $833,333 $833,333 333,333 $1,388,889 555,555
Alexander $1,333,333 $1,333,333 533,333 $2,222,222 888,889
State Farm $300,000 $300,000 120,000 $500,000 200,000
</TABLE>
28
<PAGE> 29
SCHEDULE 2.1(C)
CAPITALIZATION
The authorized, issued and outstanding capital stock of the Company
consists of the following:
Preferred Stock, $.001 par value, 100,000 shares authorized, no shares
issued and outstanding:
Series A Preferred Stock, 10,000 shares authorized, no shares
issued and outstanding
Series B Convertible Preferred Stock, 600 shares authorized, no
shares issued and outstanding
Series C Convertible Preferred Stock, 600 shares authorized, no
shares issued and outstanding
Series G Convertible Preferred Stock, 700 shares authorized, no
shares issued and outstanding
Common Stock, $.001 par value, 30,000,000 shares authorized, 12,557,344
shares of which were issued and outstanding as of March 25, 1999.
As of March 25, 1999, the Company also has outstanding warrants (including
the 2% Note Warrants) to purchase 4,678,686 shares of Common Stock and options
to purchase 1,208,665 shares of Common Stock. The Company also has 496,335
additional shares of Common Stock reserved for issuance upon the exercise of
options which may be granted under the Company's Amended and Restated 1993
Stock Option Plan as amended. The Company has reserved for issuance upon
conversion of the 2% Notes, 6,900,000 shares of Common Stock. Holders of the
2% Notes have the right to covert such Notes (plus accrued interest payable in
shares in Common Stock) into shares of Common Stock at a conversion price equal
to $1.50 per share, subject to adjustment. As of March 25, 1999, $10,350,000
in aggregate principal amount of the 2% Notes, plus accrued interest, remain
outstanding and subject to conversion.
The Company has a stockholders rights plan (the "Rights Plan") pursuant to
which a Series A Right is associated and trades with each share of Common Stock
outstanding. Each Series A Right will entitle its holder, under certain
circumstances described in the Rights Plan, to purchase one one-thousandth of a
share of the Company's Series A Junior Participating Preferred Stock, $.001 par
value per share, for $200 (subject to adjustment) or receive shares of Common
Stock having a market value of two times the exercise of the Series A Right and
one Series B Right.
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<PAGE> 30
The Company is obligated to issue a warrant to Southbrook Investments,
Ltd. exercisable for 31,250 shares of Common Stock, which warrant has not yet
been issued.
30
<PAGE> 31
SCHEDULE 2.1(F)
REQUIRED CONSENTS
1. The approval of the Company's stockholders referred to in Section 3.13 of
the Agreement to increase the number of shares of Common Stock authorized for
issuance.
2. The consent of the holders of the 2% Notes evidenced by their execution and
delivery of the Amendment to Note Agreement.
31
<PAGE> 32
SCHEDULE 2.1(G)
LITIGATION
See Part II "Item 1. Legal Proceedings" in the Company's Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 1998.
32
<PAGE> 33
SCHEDULE 2.1(S)
OUTSTANDING INDEBTEDNESS
The outstanding indebtedness of the Company as of March 25, 1999 consisted
of the following:
nstallment Loan Note from NBD Bank, secured by certain engineering test
equipment: Account Number 0030188, $5,120.79 in principal outstanding as of
March 25, 1999, interest rate = 8.5% annually, monthly installment payments of
$2,915.61, due through May 1999
$10,350,000 in aggregate principal amount of Senior Convertible Notes due
May 15, 2002, plus accrued interest.
Equipment Lease Installment Agreement from Hewlett - Packard Company, 36
monthly installment payments of $891.85, commencing February 1999, secured by
certain engineering test equipment.
Trade debt incurred in the ordinary course of business, which equaled
$1,149,343 as of March 25, 1999.
33
<PAGE> 1
EXHIBIT 4.21
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This Registration Rights Agreement (this "Agreement") is made
and entered into as of March 31, 1999, by and among Illinois Superconductor
Corporation, a Delaware corporation (the "Company"), and Elliott Associates,
L.P., a limited partnership organized and existing under the laws of Delaware,
Westgate International, L.P., a limited partnership existing under the laws of
the Cayman Islands, Alexander Finance, LP, a limited partnership existing under
the laws of Illinois and State Farm Mutual Automobile Insurance Company, an
insurance company organized and existing under the laws of the State of Illinois
(each, a "Purchaser" and collectively, the "Purchasers").
This Agreement is made pursuant to the Securities Purchase
Agreement, dated as of March 31, 1999, between the Company and the Purchasers
(the "Purchase Agreement").
The Company and the Purchasers hereby agree as follows:
1. Definitions
Capitalized terms used and not otherwise defined herein shall
have the meanings given such terms in the Purchase Agreement. As used in this
Agreement, the following terms shall have the following meanings:
"Advice" shall have meaning set forth in Section 3(o).
"Affiliate" means, with respect to any Person, any other
Person that directly or indirectly controls or is controlled by or under common
control with such Person. For the purposes of this definition, "control," when
used with respect to any Person, means the possession, direct or indirect, of
the power to direct or cause the direction of the management and policies of
such Person, whether through the ownership of voting securities, by contract or
otherwise; and the terms of "affiliated," "controlling" and "controlled" have
meanings correlative to the foregoing.
"Business Day" means any day except Saturday, Sunday and any
day which shall be a legal holiday or a day on which banking institutions in the
state of New York generally are authorized or required by law or other
government actions to close.
"Closing Date" shall have the meaning set forth in the
Purchase Agreement.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Common Stock, par value
$.001 per share.
"Effectiveness Date" means the 90th day following the Closing
Date.
"Effectiveness Period" shall have the meaning set forth in
Section 2(a).
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
<PAGE> 2
"Filing Date" means the 30th day following the Closing Date.
"Holder" or "Holders" means the record holder or holders, as
the case may be, from time to time of Registrable Securities as reflected on the
books of the Company.
"Indemnified Party" shall have the meaning set forth in
Section 5(c).
"Indemnifying Party" shall have the meaning set forth in
Section 5(c).
"Losses" shall have the meaning set forth in Section 5(a).
"Notes" means the 6% Senior Convertible Notes due May 15, 2002
originally issued pursuant to to the Purchase Agreement.
"Person" means an individual or a corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or political
subdivision thereof) or other entity of any kind.
"Proceeding" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by the Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by reference in
such Prospectus.
"Registrable Securities" means (i) the shares of Common Stock
or other securities of the Company issuable upon (A) conversion of the Notes and
(B) exercise of the Warrants and (ii) any securities of the Company received in
exchange for, or as a distribution with respect to, the Notes or Warrants and
any securities received upon conversion or exercise of such securities received
in exchange for, or as a distribution with respect to, the Notes or Warrants;
provided that so long as the Company has securities which are registered under
the Exchange Act or publicly traded, such securities are of a class of
securities of the Company which is registered under the Exchange Act or
otherwise publicly traded.
"Registration Statement" means the registration statements
contemplated by Sections 2(a), 2(b) or 2(p) for the public resale of the
Registrable Securities including (in each case) the Prospectus, amendments and
supplements to such registration statement or Prospectus, including pre- and
post-effective amendments, all exhibits thereto, and all material incorporated
by reference or deemed to be incorporated by reference in such registration
statement.
"Rule 144" means Rule 144 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation
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<PAGE> 3
hereafter adopted by the Commission having substantially the same effect as such
Rule.
"Rule 158" means Rule 158 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 415" means Rule 415 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Securities Act" means the Securities Act of 1933, as amended.
"Special Counsel" means a single special counsel selected by
the Holders of a majority of the Registrable Securities to be covered by a
Registration Statement, for which the Holders will be reimbursed by the Company
pursuant to Section 4.
"Underwritten Registration or Underwritten Offering" means a
registration in connection with which securities of the Company are sold to an
underwriter for reoffering to the public pursuant to an effective registration
statement.
"Warrants" means the common stock purchase warrants of the
Company originally issued to the Purchasers pursuant to the Purchase Agreement.
2. Shelf Registration
(a) On or prior to the applicable Filing Date the Company
shall prepare and file with the Commission a "Shelf" Registration Statement
covering all Registrable Securities for an offering to be made on a continuous
basis pursuant to Rule 415. The Registration Statement shall be on Form S-3
(except if otherwise directed by the Holders of a majority in interest of the
applicable Registrable Securities in accordance herewith or if the Company is
not then eligible to register for resale the Registrable Securities on Form S-3,
in which case such registration shall be on another appropriate form in
accordance herewith). The Company shall (i) not permit any securities other than
the Registrable Securities to be included in the Registration Statement and (ii)
use its best efforts to cause the Registration Statement to be declared
effective under the Securities Act as promptly as possible after the filing
thereof, but in any event shall use its best efforts to cause such Registration
Statement to be declared effective prior to the Effectiveness Date, and the
Company shall keep such Registration Statement continuously effective under the
Securities Act until the date which is four years after the date that such
Registration Statement is declared effective by the Commission or such earlier
date when all Registrable Securities covered by such Registration Statement have
been sold or may be sold without restrictions pursuant to Rule 144 as determined
by the counsel to the Company pursuant to a written opinion letter, in form and
substance reasonably satisfactory to the Purchasers, addressed to the Company's
transfer agent to such effect (the "Effectiveness Period"); provided, however,
that, subject to the last paragraph of Section 3(o), the Company shall not be
deemed to have used its best efforts to keep the Registration Statement
effective during the Effectiveness Period if it voluntarily takes any action
that would result in the Holders not being able to sell the Registrable
Securities covered by such Registration Statement during the Effectiveness
Period, unless such
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<PAGE> 4
action is required under applicable law or the Company has filed a
post-effective amendment to the Registration Statement and the Commission has
not declared it effective.
(b) At any time when there is not an effective Registration
Statement, if the Holders of a majority of the Registrable Securities so elect,
an offering of Registrable Securities may be effected on no more than two
occasions in the form of an Underwritten Offering. In such event, and if the
managing underwriters advise the Company and such Holders in writing that in
their opinion the amount of Registrable Securities proposed to be sold in such
Underwritten Offering exceeds the amount of Registrable Securities which can be
sold in such Underwritten Offering, there shall be included in such Underwritten
Offering the amount of such Registrable Securities which in the opinion of such
managing underwriters can be sold, and such amount shall be allocated pro rata
among the Holders proposing to sell Registrable Securities in such Underwritten
Offering.
(c) If any of the Registrable Securities are to be sold in an
Underwritten Offering, the investment banker that will administer the offering
will be selected by the Holders of a majority of the Registrable Securities
included in such offering upon consultation with the Company. No Holder may
participate in any Underwritten Offering hereunder unless such Person (i) agrees
to sell its Registrable Securities on the basis provided in any underwriting
agreements approved by the Persons entitled hereunder to approve such
arrangements and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents required
under the terms of such arrangements.
3. Registration Procedures
In connection with the Company's registration obligations
hereunder, the Company shall:
(a) Prepare and file with the Commission on or prior to the
applicable Filing Date, a Registration Statement on Form S-3 (or such other form
if directed by the Holders in connection with an Underwritten Offering hereunder
or if the Company is not then eligible to register for resale the Registrable
Securities on Form S-3, in which case such registration shall be on another
appropriate form in accordance herewith) in accordance with the method or
methods of distribution thereof as specified by the Holders, and cause the
Registration Statement to become effective and remain effective as provided
herein; provided, however, that, not less than five (5) Business Days prior to
the filing of the Registration Statement or any related Prospectus or any
amendment or supplement thereto, the Company shall (i) furnish to the Holders
whose Registrable Securities are covered by such Registration Statement, their
Special Counsel and any managing underwriters, copies of all such documents
proposed to be filed, which documents (other than those incorporated or deemed
to be incorporated by reference) will be subject to the review of such Holders,
their Special Counsel and such managing underwriters, and (ii) cause its
officers and directors, counsel and independent certified public accountants to
respond to such inquiries as shall be necessary, in the reasonable opinion of
Special Counsel to such Holders and counsel to such underwriters, to conduct a
reasonable investigation within the meaning of the Securities Act. The Company
shall not file the Registration Statement or any such Prospectus or any
amendments or supplements thereto to which the Holders of a majority of the
Registrable Securities covered by such Registration Statement, their Special
Counsel, or any managing
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<PAGE> 5
underwriters, shall reasonably object in writing within three (3) Business Days
of their receipt thereof.
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement as may be
necessary to keep the Registration Statement continuously effective as to the
applicable Registrable Securities for the Effectiveness Period and prepare and
file with the Commission such additional Registration Statements in order to
register for resale under the Securities Act all of the Registrable Securities;
(ii) cause the related Prospectus to be amended or supplemented by any required
Prospectus supplement, and as so supplemented or amended to be filed pursuant to
Rule 424 (or any similar provisions then in force) promulgated under the
Securities Act; (iii) respond as promptly as practicable to any comments
received from the Commission with respect to the Registration Statement or any
amendment thereto and promptly provide the Holders true and complete copies of
all correspondence from and to the Commission relating to the Registration
Statement; and (iv) comply with the provisions of the Securities Act and the
Exchange Act with respect to the disposition of all Registrable Securities
covered by the Registration Statement during the applicable period in accordance
with the intended methods of disposition by the Holders thereof set forth in the
Registration Statement as so amended or in such Prospectus as so supplemented.
(c) Notify the Holders of Registrable Securities to be sold,
their Special Counsel and any managing underwriters immediately (and, in the
case of (i)(A) below, not less than five (5) days prior to such filing) and (if
requested by any such Person) confirm such notice in writing no later than one
(1) Business Day following the day (i)(A) when a Prospectus or any Prospectus
supplement or post-effective amendment to the Registration Statement is proposed
to be filed (which for purposes of this subparagraph (A) shall not include the
filings of the Company made under the Exchange Act and incorporated by reference
in the Registration Statement); (B) when the Commission notifies the Company
whether there will be a "review" of such Registration Statement and whenever the
Commission comments in writing on such Registration Statement and (C) with
respect to the Registration Statement or any post-effective amendment, when the
same has become effective; (ii) of any request by the Commission or any other
Federal or state governmental authority for amendments or supplements to the
Registration Statement or Prospectus or for additional information; (iii) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement covering any or all of the Registrable Securities or the
initiation of any Proceedings for that purpose; (iv) if at any time any of the
representations and warranties of the Company contained in any agreement
(including any underwriting agreement) contemplated hereby ceases to be true and
correct in all material respects; (v) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and (vi) of the occurrence of any event that makes any statement made
in the Registration Statement or Prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect or
that requires any revisions to the Registration Statement, Prospectus or other
documents so that, in the case of the Registration Statement or the Prospectus,
as the case may be, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
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<PAGE> 6
(d) Use its best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of (i) any order suspending the effectiveness of
the Registration Statement or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practicable moment.
(e) If requested by any managing underwriter or the Holders of
a majority in interest of the Registrable Securities to be sold in connection
with an Underwritten Offering, (i) promptly incorporate in a Prospectus
supplement or post-effective amendment to the Registration Statement such
information as such managing underwriters and such Holders reasonably agree
should be included therein and (ii) make all required filings of such Prospectus
supplement or such post-effective amendment as soon as practicable after the
Company has received notification of the matters to be incorporated in such
Prospectus supplement or post-effective amendment; provided, however, that the
Company shall not be required to take any action pursuant to this Section 3(e)
that would, in the opinion of counsel for the Company, violate applicable law or
be materially detrimental to the business prospects of the Company.
(f) Furnish to each Holder, their Special Counsel and any
managing underwriters, without charge, at least one conformed copy of each
Registration Statement and each amendment thereto, including financial
statements and schedules, all documents incorporated or deemed to be
incorporated therein by reference, and all exhibits to the extent requested by
such Person (including those previously furnished or incorporated by reference)
promptly after the filing of such documents with the Commission.
(g) Promptly deliver to each Holder, their Special Counsel,
and any underwriters, within two business days after a Registration Statement is
declared effective by the Commission, without charge, as many copies of the
Prospectus or Prospectuses (including each form of prospectus) and, within two
business days after being filed with the Commission, each amendment or
supplement thereto as such Holder may reasonably request; and the Company hereby
consents to the use of such Prospectus and each amendment or supplement thereto
by each of the selling Holders and any underwriters in connection with the
offering and sale of the Registrable Securities covered by such Prospectus and
any amendment or supplement thereto.
(h) Prior to any public offering of Registrable Securities,
use its best efforts to register or qualify or cooperate with the selling
Holders, any underwriters and their Special Counsel in connection with the
registration or qualification (or exemption from such registration or
qualification) of such Registrable Securities for offer and sale under the
securities or Blue Sky laws of such jurisdictions within the United States as
any Holder or underwriter requests in writing, to keep each such registration or
qualification (or exemption therefrom) effective during the Effectiveness Period
and to do any and all other acts or things necessary or advisable to enable the
disposition in such jurisdictions of the Registrable Securities covered by a
Registration Statement; provided, however, that the Company shall not be
required to qualify generally to do business in any jurisdiction where it is not
then so qualified or to take any action that would subject it to general service
of process in any such jurisdiction where it is not then so subject or subject
the Company to any material tax in any such jurisdiction where it is not then so
subject.
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<PAGE> 7
(i) Cooperate with the Holders and any managing underwriters
to facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold pursuant to a Registration Statement, which
certificates shall be free of all restrictive legends, and to enable such
Registrable Securities to be in such denominations and registered in such names
as any such managing underwriters or Holders may request at least two Business
Days prior to any sale of Registrable Securities.
(j) Upon the occurrence of any event contemplated by Section
3(c)(vi), as promptly as practicable, prepare a supplement or amendment,
including a post-effective amendment, to the Registration Statement or a
supplement to the related Prospectus or any document incorporated or deemed to
be incorporated therein by reference, and file any other required document so
that, as thereafter delivered, neither the Registration Statement nor such
Prospectus will contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. Such supplement or amendment may take the form of a document
filed by the Company under the Exchange Act and incorporated by reference into
the Registration Statement.
(k) Use its best efforts to cause all Registrable Securities
relating to such Registration Statement to be listed on the Nasdaq National
Market or any other securities exchange, quotation system, market or
over-the-counter bulletin board, if any, on which similar securities issued by
the Company are then listed as and when required pursuant to the Purchase
Agreement.
(l) Enter into such agreements (including an underwriting
agreement in form, scope and substance as is customary in underwritten public
offerings) and take all such other actions in connection therewith (including
those reasonably requested by any managing underwriters and the Holders of a
majority of the Registrable Securities being sold) in order to expedite or
facilitate the disposition of such Registrable Securities, and whether or not an
underwriting agreement is entered into, (i) make such representations and
warranties to such Holders and such underwriters as are customarily made by
issuers to underwriters in underwritten public offerings, and confirm the same
if and when requested; (ii) in the case of an Underwritten Offering obtain and
deliver copies thereof to the managing underwriters, if any, of opinions of
counsel to the Company and updates thereof addressed to each such underwriter,
in form, scope and substance reasonably satisfactory to any such managing
underwriters covering the matters customarily covered in opinions requested in
Underwritten Offerings and such other matters as may be reasonably requested by
such underwriters; (iii) immediately prior to the effectiveness of the
Registration Statement, and, in the case of an Underwritten Offering, at the
time of delivery of any Registrable Securities sold pursuant thereto, obtain and
deliver copies to the Holders and the managing underwriters, if any, of "cold
comfort" letters and updates thereof from the independent certified public
accountants of the Company (and, if necessary, any other independent certified
public accountants of any subsidiary of the Company or of any business acquired
by the Company for which financial statements and financial data is, or is
required to be, included in the Registration Statement), addressed to each
selling Holder and each of the underwriters, if any, in form and substance as
are customary in connection with Underwritten Offerings; (iv) if an underwriting
agreement is entered into, the same shall contain indemnification provisions and
procedures no less favorable to the selling Holders and the under-
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<PAGE> 8
writers, if any, than those set forth in Section 6 (or such other provisions and
procedures acceptable to the managing underwriters, if any, and holders of a
majority of Registrable Securities participating in such Underwritten Offering);
and (v) deliver such documents and certificates as may be reasonably requested
by the Holders of a majority of the Registrable Securities being sold, their
Special Counsel and any managing underwriters to evidence the continued validity
of the representations and warranties made pursuant to clause 3(l)(i) above and
to evidence compliance with any customary conditions contained in the
underwriting agreement or other agreement entered into by the Company.
(m) In the event that (i) Holders of at least a majority of
the Registrable Securities or (ii) their Special Counsel, determine in good
faith that it is necessary or highly advisable to establish a due diligence
defense because such Holders may be deemed to be underwriters with respect to
the resale of Registrable Securities, make available for inspection by the
selling Holders, a representative of such Holders, an underwriter participating
in any disposition of Registrable Securities, and an attorney or accountant
retained by such selling Holders or underwriters, at the offices where normally
kept, during reasonable business hours, all financial and other records,
pertinent corporate documents and properties of the Company and its
subsidiaries, if any, and cause the officers, directors, agents and employees of
the Company and its subsidiaries, if any, to supply all information in each case
reasonably requested by any such Holder, representative, underwriter, attorney
or accountant in connection with the Registration Statement; provided, however,
that any information that is determined in good faith by the Company in writing
to be of a confidential nature at the time of delivery of such information shall
be kept confidential by such Persons, unless (i) disclosure of such information
is required by court or administrative order or is necessary to respond to
inquiries of regulatory authorities; (ii) disclosure of such information, in the
opinion of counsel to such Person, is required by law; (iii) such information
becomes generally available to the public other than as a result of a disclosure
or failure to safeguard by such Person; or (iv) such information becomes
available to such Person from a source other than the Company and such source is
not known by such Person to be bound by a confidentiality agreement with the
Company.
(n) Comply with all applicable rules and regulations of the
Commission and make generally available to its security holders earning
statements satisfying the provisions of Section 11(a) of the Securities Act and
Rule 158 not later than 45 days after the end of any 12-month period (or 90 days
after the end of any 12-month period if such period is a fiscal year) (i)
commencing at the end of any fiscal quarter in which Registrable Securities are
sold to underwriters in a firm commitment or best efforts Underwritten Offering
and (ii) if not sold to underwriters in such an offering, commencing on the
first day of the first fiscal quarter of the Company after the effective date of
the Registration Statement, which statement shall cover said 12-month period, or
end shorter periods as is consistent with the requirements of Rule 158.
(o) The Company may require each selling Holder to furnish to
the Company such information regarding such Holder and the distribution of such
Registrable Securities as is required by law to be disclosed in the Registration
Statement and the Company may exclude from such registration the Registrable
Securities of any such Holder who unreasonably fails to furnish such information
within a reasonable time after receiving such request. The Company shall also
disclose in the Registration Statement such other information regarding each
Holder
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<PAGE> 9
and its plan of distribution of the Registrable Securities as such Holder shall
reasonably request, except where such inclusion of information would violate
applicable law.
If the Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such Holder shall
have the right to require (if such reference to such Holder by name or otherwise
is not required by the Securities Act or any similar Federal statute then in
force) the deletion of the reference to such Holder in any amendment or
supplement to the Registration Statement filed or prepared subsequent to the
time that such reference ceases to be required.
Each Holder by its acquisition of the Registrable Securities
covenants and agrees that (i) such Holder will not offer or sell any Registrable
Securities under the Registration Statement until it has received copies of the
Prospectus as then amended or supplemented as contemplated in Section 3(g) and
notice from the Company that such Registration Statement and any post-effective
amendments thereto have become effective as contemplated by Section 3(c) and
(ii) such Holder and its officers, directors or Affiliates, if any, will comply
with the prospectus delivery requirements of the Securities Act as applicable to
them in connection with sales of Registrable Securities pursuant to the
Registration Statement.
Each Holder agrees by its acquisition of such Registrable
Securities that, upon receipt of a notice from the Company of the occurrence of
any event of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(v) or
3(c)(vi), such Holder will forthwith discontinue disposition of such Registrable
Securities until such Holder's receipt of the copies of the supplemented
Prospectus and/or amended Registration Statement contemplated by Section 3(j),
or until it is advised in writing (the "Advice") by the Company that the use of
the applicable Prospectus may be resumed, and, in either case, has received
copies of any additional or supplemental filings that are incorporated or deemed
to be incorporated by reference in such Prospectus or Registration Statement.
If (a) there is material non-public information regarding the
Company which the Company's Board of Directors (the "Board") reasonably
determines not to be in the Company's best interest to disclose and which the
Company is not otherwise required to disclose, or (b) there is a significant
business opportunity (including but not limited to the acquisition or
disposition of assets (other than in the ordinary course of business) or any
merger, consolidation, tender offer or other similar transaction) available to
the Company which the Board reasonably determines not to be in the Company's
best interest to disclose, then the Company may postpone or suspend filing or
effectiveness of a Registration Statement for a period not to exceed 20
consecutive days, provided that the Company may not postpone or suspend its
obligation under this Section for more than 60 days in the aggregate during any
12 month period; provided, however, that no such postponement of suspension
shall be permitted for consecutive 20 day periods, arising out of the same set
as of facts, circumstances or transactions.
(p) If, whether pursuant to a decrease in the conversion price
of the Notes, a decrease in the exercise price of the Warrants or otherwise, the
Holders are entitled to additional shares of Common Stock or other Registrable
Securities not covered in the initial Registration Statement when declared
effective by the Commission, the Company shall, within 30 days of the event
resulting in such increase in Registrable Securities, file a Registration
Statement with
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<PAGE> 10
respect to such additional Registrable Securities and shall use
its best efforts to cause such Registration Statement to become effective within
(60) days of such event.
4. Registration Expenses
(a) All fees and expenses incident to the performance of or
compliance with this Agreement by the Company shall, except as and to the extent
specified in Section 4(b), be borne by the Company whether or not pursuant to an
Underwritten Offering and whether or not the Registration Statement is filed or
becomes effective and whether or not any Registrable Securities are sold
pursuant to the Registration Statement. The fees and expenses referred to in the
foregoing sentence shall include, without limitation, (i) all registration and
filing fees (including, without limitation, fees and expenses (A) with respect
to filings required to be made with the Nasdaq National Market and each other
securities exchange or market on which Registrable Securities are required
hereunder to be listed and (B) in compliance with state securities or Blue Sky
laws (including, without limitation, fees and disbursements of counsel for the
Holders in connection with Blue Sky qualifications of the Registrable Securities
and determination of the eligibility of the Registrable Securities for
investment under the laws of such jurisdictions as the managing underwriters, if
any, or the Holders of a majority of the applicable Registrable Securities may
designate)), (ii) printing expenses (including, without limitation, expenses of
printing certificates for Registrable Securities and of printing prospectuses if
the printing of prospectuses is requested by the managing underwriters, if any,
or by the holders of a majority of the Registrable Securities included in the
Registration Statement), (iii) messenger, telephone and delivery expenses, (iv)
fees and disbursements of counsel for the Company and Special Counsel for the
Holders, in the case of the Special Counsel, to a maximum amount of $5,000, (v)
Securities Act liability insurance, if the Company so desires such insurance,
and (vi) fees and expenses of all other Persons retained by the Company in
connection with the consummation of the transactions contemplated by this
Agreement. In addition, the Company shall be responsible for all of its internal
expenses incurred in connection with the consummation of the transactions
contemplated by this Agreement (including, without limitation, all salaries and
expenses of its officers and employees performing legal or accounting duties),
the expense of any annual audit, the fees and expenses incurred in connection
with the listing of the Registrable Securities on any securities exchange as
required hereunder.
(b) If the Holders require an Underwritten Offering pursuant
to the terms hereof, the Company shall be responsible for all costs, fees and
expenses in connection therewith, except for the fees and disbursements of the
underwriters (including any underwriting commissions and discounts) and their
legal counsel and accountants (which shall be borne by the Holders). Therefore,
in such circumstances the Holders or the underwriters shall bear the expenses of
the fees and disbursements of any legal counsel or accounting firm retained by
the underwriters in connection with such Underwritten Offering and the costs of
any determination (but not filing) by the underwriters of the eligibility of the
Registrable Securities for investment under the applicable state securities
laws. By way of illustration which is not intended to diminish from the
provisions of Section 4(a), the Holders shall not be responsible for, and the
Company shall be required to pay the fees or disbursements incurred by the
Company (including by its legal counsel and accountants) in connection with, the
preparation and filing of a Registration Statement and related Prospectus for
such offering, the maintenance of such Registration Statement in accordance with
the terms hereof, the listing of the Registrable
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<PAGE> 11
Securities in accordance with the requirements hereof, and printing expenses
incurred to comply with the requirements hereof.
5. Indemnification
(a) Indemnification by the Company. The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents (including any underwriters
retained by such Holder in connection with the offer and sale of Registrable
Securities), brokers (including brokers who offer and sell Registrable
Securities as principal as a result of a pledge or any failure to perform under
a margin call of Common Stock), investment advisors and employees of each of
them, each Person who controls any such Holder (within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act) and the officers,
directors, agents and employees of each such controlling Person, to the fullest
extent permitted by applicable law, from and against any and all losses, claims,
damages, liabilities, costs (including, without limitation, costs of preparation
and attorneys' fees) and expenses (collectively, "Losses"), as incurred, arising
out of or relating to any untrue or alleged untrue statement of a material fact
contained in the Registration Statement, any Prospectus or any form of
prospectus or in any amendment or supplement thereto or in any preliminary
prospectus, or arising out of or relating to any omission or alleged omission of
a material fact required to be stated therein or necessary to make the
statements therein (in the case of any Prospectus or form of prospectus or
supplement thereto, in light of the circumstances under which they were made)
not misleading, except to the extent, but only to the extent, that such untrue
statements or omissions are based solely upon information regarding such Holder
furnished in writing to the Company by or on behalf of such Holder expressly for
use therein, or to the extent that such information relates to such Holder or
such Holder's proposed method of distribution of Registrable Securities and was
reviewed and expressly approved in writing by such Holder expressly for use in
the Registration Statement, such Prospectus or such form of Prospectus or in any
amendment or supplement thereto. The Company shall notify the Holders promptly
of the institution, threat or assertion of any Proceeding of which the Company
is aware in connection with the transactions contemplated by this Agreement, and
provided, however, that, with respect to any untrue statement or alleged untrue
statement or omission or alleged omission made in a preliminary prospectus or
Prospectus, the foregoing indemnity agreement shall not inure to the benefit of
any selling Holder, brokers, investment advisors or employees thereof, from whom
the Person asserting any such Losses purchased the Registrable Securities
concerned, or any Person controlling such Holder, to the extent that any such
Loss results from the fact that a copy of the Prospectus or Prospectus as
amended or supplemented was not sent or given to such Person, if required by the
Securities Act so to have been delivered, at or prior to the written
confirmation of the sale of such Registrable Securities to such Person and the
untrue statement or alleged untrue statement or omission or alleged omission was
corrected in such Prospectus or Prospectus as amended or supplemented, if the
Company had previously furnished copies of such Prospectus or Prospectus as
amended or supplemented to such Holder.
(b) Indemnification by Holders. Each Holder shall, severally
and not jointly, indemnify and hold harmless the Company, the directors,
officers, agents and employees, each Person who controls the Company (within the
meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act),
and the directors, officers, agents or employees of such controlling Persons, to
the fullest extent permitted by applicable law, from and against all Losses
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<PAGE> 12
(as determined by a court of competent jurisdiction in a final judgment not
subject to appeal or review) arising solely out of or based solely upon any
untrue statement of a material fact contained in the Registration Statement, any
Prospectus, or any form of prospectus, or arising solely out of or based solely
upon any omission of a material fact required to be stated therein or necessary
to make the statements therein not misleading to the extent, but only to the
extent, that such untrue statement or omission is contained in any information
so furnished in writing by such Holder to the Company specifically for inclusion
in the Registration Statement or such Prospectus or to the extent that such
information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in the Registration Statement, such
Prospectus or such form of Prospectus. In no event shall the liability of any
selling Holder hereunder be greater in amount than the dollar amount of the net
proceeds received by such Holder upon the sale of the Registrable Securities
giving rise to such indemnification obligation.
(c) Conduct of Indemnification Proceedings. If any Proceeding
shall be brought or asserted against any Person entitled to indemnity hereunder
(an "Indemnified Party"), such Indemnified Party promptly shall notify the
Person from whom indemnity is sought (the "Indemnifying Party") in writing, and
the Indemnifying Party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the Indemnified Party and the
payment of all fees and expenses incurred in connection with defense thereof;
provided, that the failure of any Indemnified Party to give such notice shall
not relieve the Indemnifying Party of its obligations or liabilities pursuant to
this Agreement, except (and only) to the extent that it shall be finally
determined by a court of competent jurisdiction (which determination is not
subject to appeal or further review) that such failure shall have proximately
and materially adversely prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in
writing to pay such fees and expenses; or (2) the Indemnifying Party shall have
failed promptly to assume the defense of such Proceeding and to employ counsel
reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3)
the named parties to any such Proceeding (including any impleaded parties)
include both such Indemnified Party and the Indemnifying Party, and such
Indemnified Party shall have been advised by counsel that a conflict of interest
is likely to exist if the same counsel were to represent such Indemnified Party
and the Indemnifying Party (in which case, if such Indemnified Party notifies
the Indemnifying Party in writing that it elects to employ separate counsel at
the expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent, which
consent shall not be unreasonably withheld. No Indemnifying Party shall, without
the prior written consent of the Indemnified Party, effect any settlement or
compromise of, or consent to the entry of any judgment with respect to, any
pending or threatened Proceeding in respect of which any Indemnified Party is a
party, unless such settlement, compromise or judgment (i) includes an
unconditional release of such Indemnified Party from all liability on claims
that are the subject matter of such Proceeding and (ii) does not include a
statement as to, or an admission of, fault, culpability or a failure to act by
or on behalf of such Indemnified Party.
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<PAGE> 13
All fees and expenses of the Indemnified Party (including
reasonable fees and expenses to the extent incurred in connection with
investigating or preparing to defend such Proceeding in a manner not
inconsistent with this Section) shall be paid to the Indemnified Party, as
incurred, within 10 Business Days of written notice thereof to the Indemnifying
Party (regardless of whether it is ultimately determined that an Indemnified
Party is not entitled to indemnification hereunder; provided, that the
Indemnifying Party may require such Indemnified Party to undertake to reimburse
all such fees and expenses to the extent it is finally judicially determined
that such Indemnified Party is not entitled to indemnification hereunder).
(d) Contribution. If a claim for indemnification under Section
5(a) or 5(b) is unavailable to an Indemnified Party because of a failure or
refusal of a governmental authority to enforce such indemnification in
accordance with its terms (by reason of public policy or otherwise), then each
Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such Losses, in such proportion as is appropriate to reflect the relative
fault of the Indemnifying Party and Indemnified Party in connection with the
actions, statements or omissions that resulted in such Losses as well as any
other relevant equitable considerations. The relative fault of such Indemnifying
Party and Indemnified Party shall be determined by reference to, among other
things, whether any action in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged omission of a material fact,
has been taken or made by, or relates to information supplied by, such
Indemnifying Party or Indemnified Party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a result
of any Losses shall be deemed to include, subject to the limitations set forth
in Section 5(c), any reasonable attorneys' or other reasonable fees or expenses
incurred by such party in connection with any Proceeding to the extent such
party would have been indemnified for such fees or expenses if the
indemnification provided for in this Section was available to such party in
accordance with its terms.
The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 5(d) were determined by pro
rata allocation or by any other method of allocation that does not take into
account the equitable considerations referred to in the immediately preceding
paragraph. Notwithstanding the provisions of this Section 5(d), no Holder shall
be required to contribute, in the aggregate, any amount in excess of the amount
by which the proceeds actually received by such Holder from the sale of the
Registrable Securities subject to the Proceeding exceeds the amount of any
damages that such Holder has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No Person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any Person who was
not guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this
Section are in addition to any liability that the Indemnifying Parties may have
to the Indemnified Parties.
6. Rule 144
The Company shall file the reports required to be filed by it
under the Securities
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<PAGE> 14
Act and the Exchange Act in a timely manner and, if at any time the Company is
not required to file such reports, the Company will, upon the request of any
Holder, make publicly available other information so long as necessary to permit
sales of its securities pursuant to Rule 144. The Company further covenants that
it will take such further action as any Holder may reasonably request, all to
the extent required from time to time to enable such Holder to sell Registrable
Securities without registration under the Securities Act within the limitation
of the exemptions provided by Rule 144; provided, however, that the Company
shall not be obligated to provide an opinion to any Holder regarding the sale of
Registrable Securities pursuant to exemptions provided by Rule 144. Upon the
request of any Holder, the Company shall deliver to such Holder a written
certification of a duly authorized officer as to whether it has complied with
such requirements.
7. Miscellaneous
(a) Remedies. In the event of a breach by the Company or by a
Holder, of any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement, including recovery of damages,
will be entitled to specific performance of its rights under this Agreement. The
Company and each Holder agree that monetary damages would not provide adequate
compensation for any losses incurred by reason of a breach by it of any of the
provisions of this Agreement and hereby further agrees that, in the event of any
action for specific performance in respect of such breach, it shall waive the
defense that a remedy at law would be adequate.
(b) No Registration Rights Agreements. Except and to the
extent specifically set forth on Schedule 7(b) attached hereto, the Company has
not previously entered into any agreement granting any registration rights with
respect to any of its securities to any Person. Without limiting the generality
of the foregoing, without the written consent of the Holders of at least 75% of
the then underlying and outstanding Registrable Securities, the Company shall
not grant to any Person the right to request the Company to register any
securities of the Company under the Securities Act unless the rights so granted
are subject in all respects to the prior rights in full of the Holders set forth
herein, and are not otherwise in conflict or inconsistent with the provisions of
this Agreement.
(c) No Piggyback on Registrations. Except as and to the extent
specifically set forth on Schedule 7(c) attached hereto, neither the Company nor
any of its securityholders (other than the Holders in such capacity pursuant
hereto) may include securities of the Company in the Registration Statement
other than the Registrable Securities, and the Company shall not enter into any
agreement providing any such right to any of its securityholders.
(d) Piggy-Back Registrations. If at any time when there is not
an effective Registration Statement the Company shall determine to prepare and
file with the Commission a registration statement relating to an offering for
its own account or the account of others under the Securities Act of any of its
equity securities, other than on Form S-4 or Form S-8 (each as promulgated under
the Securities Act) or their then equivalents relating to equity securities to
be issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with stock option or other employee
benefit plans, the Company shall
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<PAGE> 15
send to each Holder written notice of such determination and, if within twenty
(20) days after receipt of such notice, any such Holder shall so request in
writing, the Company shall include in such registration statement all or any
part of the Registrable Securities such Holder requests to be registered, except
that if, in connection with any Underwritten Offering for the account of the
Company the managing underwriter(s) thereof shall impose a limitation on the
number of shares of Common Stock which may be included in the registration
statement because, in such underwriter(s)' judgment, such limitation is
necessary to effect an orderly public distribution of securities covered
thereby, then the Company shall be obligated to include in such registration
statement only such limited amount of the Registrable Securities which in the
opinion of such managing underwriter(s) can be sold. Any exclusion of
Registrable Securities shall be made pro rata among the Holders seeking to
include Registrable Securities, in proportion to the number of Registrable
Securities sought to be included by such Holders; provided, however, that the
Company shall not exclude any Registrable Securities unless the Company has
first excluded all outstanding securities the holders of which are not entitled
by right to inclusion of securities in such registration statement; and
provided, further, however, that, after giving effect to the immediately
preceding proviso, any exclusion of Registrable Securities shall be made pro
rata with holders of other securities having the right to include such
securities in such registration statement. No right to registration of
Registrable Securities under this Section shall be construed to limit any
registration otherwise required hereunder.
(e) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holders of at least a majority of the then outstanding Notes, Warrants
and Registrable Securities; provided, however, that, for the purposes of this
sentence, Registrable Securities that are owned, directly or indirectly, by the
Company, or an Affiliate of the Company are not deemed outstanding.
Notwithstanding the foregoing, a waiver or consent to depart from the provisions
hereof with respect to a matter that relates exclusively to the rights of
certain Holders and that does not directly or indirectly affect the rights of
other Holders may be given by Holders of at least 75% of the underlying and
outstanding Registrable Securities to which such waiver or consent relates;
provided, however, that the provisions of this sentence may not be amended,
modified, or supplemented except in accordance with the provisions of the
immediately preceding sentence.
(f) Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed delivered (i) upon receipt, when delivered personally; (ii)
when sent by facsimile, upon receipt if received on a Business Day prior to 5:00
p.m. (Central Time), or the first Business Day following such receipt if
received on a Business Day after 5:00 p.m. (Central Time); or (iii) upon
receipt, when deposited with a nationally recognized overnight express courier
service, fully prepaid, in each case properly addressed to the party to receive
the same. The addresses and facsimile numbers for such communications shall be:
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<PAGE> 16
If to the Company: Illinois Superconductor Corporation
451 Kingston Court
Mt. Prospect, Illinois 60056
Attn: William M. Kochlefl
Fax: (847) 391-5015
With copies to: Katten Muchin & Zavis
525 W. Monroe St. Suite 1600
Chicago, Illinois 60661
Attn: Lawrence D. Levin
Fax: (312) 902-1061
If to a Purchaser: Elliott Associates, L.P.
712 Fifth Avenue, 36th Floor
New York, New York 10019
Attn: Mark Brodsky
Fax: (212) 974-2092
Westgate International, L.P.
c/o Stonington Management Corp.
712 Fifth Avenue, 36th Floor
New York, New York 10019
Attn: Mark Brodsky
Fax: (212) 974-2092
Alexander Finance, LP
1560 Sherman Avenue
Suite 900
Evanston, Illinois 60201
Attn: Brian D. Brookover
Fax: (847) 733-0339
State Farm Mutual Automobile
Insurance Company
One State Farm Plaza
Bloomington, Illinois 16701
Attn: Common Stocks E-9
Fax: (309) 766-7423
With copies to: Kleinberg, Kaplan, Wolff & Cohen, P.C.
551 Fifth Avenue
New York, New York 10176
Attn: Stephen M. Schultz
Fax: (212) 986-8866
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<PAGE> 17
If to any other Person who is then the registered Holder:
To the address or facsimile number of such Holder as it
appears in the stock transfer books of the Company
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
(g) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of each of
the parties and shall inure to the benefit of each Holder. The Company may not
assign its rights or obligations hereunder without the prior written consent of
each Holder. The Purchasers may assign its rights hereunder in the manner and to
the Persons as permitted under the Purchase Agreement.
(h) Assignment of Registration Rights. The rights of each
Purchaser hereunder, including the right to have the Company register for resale
Registrable Securities in accordance with the terms of this Agreement, shall be
automatically assignable by such Purchaser to any assignee or transferee of all
or a portion of the Notes, the Warrants or the Registrable Securities if: (i)
such Purchaser agrees in writing with the transferee or assignee to assign such
rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment, (ii) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (a) the
name and address of such transferee or assignee, and (b) the securities with
respect to such registration rights are being transferred or assigned, (iii)
following such transfer or assignment the further disposition of such securities
by the transferee or assignees is restricted under the Securities Act and
applicable state securities laws, (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this Section, the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions of this Agreement, and (v) such transfer shall have been made in
accordance with the applicable requirements of the Purchase Agreement. The
rights to assignment shall apply to such Purchaser's (and to subsequent)
successors and assigns.
(i) Counterparts. This Agreement may be executed in any number
of counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the same
agreement. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid binding obligation of the
party executing (or on whose behalf such signature is executed) the same with
the same force and effect as if such facsimile signature were the original
thereof.
(j) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without regard
to principles of conflicts of law.
(k) Cumulative Remedies. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
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<PAGE> 18
(l) Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, illegal, void or unenforceable.
(m) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(n) Shares Held by the Company and its Affiliates. Whenever
the consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
its Affiliates (other than the Purchaser or transferees or successors or assigns
thereof if such Persons are deemed to be Affiliates solely by reason of their
holdings of such Registrable Securities) shall not be counted in determining
whether such consent or approval was given by the Holders of such required
percentage.
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<PAGE> 19
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
ILLINOIS SUPERCONDUCTOR CORPORATION
By: /s/ Edward W. Laves
Name: Edward W. Laves
Title: Chief Executive Officer and
President
ELLIOTT ASSOCIATES, L.P.
By: /s/ Authorized Signatory
Name:
Title:
WESTGATE INTERNATIONAL, L.P.
By: Martley International, L.P.,
Attorney-in-fact
By: /s/ Authorized Signatory
Name:
Title:
<PAGE> 20
ALEXANDER FINANCE, LP
By: /s/ Authorized Signatory
Name:
Title:
STATE FARM MUTUAL AUTOMOBILE
INSURANCE COMPANY
By: /s/ James Freytag
Name: James Freytag
Title:Vice President - Common Stocks
By: /s/ John Gordon
Name: John Gordon
Title:Investment Officer
<PAGE> 21
Schedule 7(b)
-------------
Third Amended and Restated Registration Rights Agreement,
dated as of July 14, 1993 between the Company and the persons named therein.
Representative's Warrant Agreement, dated October 23, 1993,
between the Company and Gruntal & Co., Incorporated.
Registration Rights Agreement, dated June 6, 1997, between the
Company and Southbrook International Investments, Ltd.
Registration Rights Agreement, dated October 29, 1997, between
the Company and Elliott Associates, L.P. and Westgate International, L.P.
Registration Rights Agreement, dated May 15, 1998, by and
among the Company, the Purchasers, State Farm Mutual Automobile Insurance
Company, Spring Point Partners, L.P. and Spring Point Offshore Fund.
<PAGE> 22
Schedule 7(c)
-------------
Third Amended and Restated Registration Rights Agreement,
dated as of July 14, 1993 between the Company and the persons named therein.
Representative's Warrant Agreement, dated October 23, 1993,
between the Company and Gruntal & Co., Incorporated.
Registration Rights Agreement, dated June 6, 1997, between the
Company and Southbrook International Investments, Ltd.
Registration Rights Agreement, dated October 29, 1997, between
the Company and Elliott Associates, L.P. and Westgate International, L.P.
<PAGE> 1
EXHIBIT 4.22
AMENDMENT TO SECURITIES PURCHASE AGREEMENT (this "AMENDMENT TO NOTE
AGREEMENT") dated as of March 31, 1999, by and among Elliott Associates, L.P., a
limited partnership organized and existing under the laws of Delaware
("ELLIOTT"), Westgate International, L.P., a limited partnership organized and
existing under the laws of the Cayman Islands ("WESTGATE"), Alexander Finance,
LP, a limited partnership organized and existing under the laws of Illinois
("ALEXANDER"), State Farm Mutual Automobile Insurance Company, an insurance
company organized and existing under the laws of Illinois ("State Farm"), Spring
Point Partners, L.P., a limited partnership organized and existing under the
laws of California and Spring Point Offshore Fund, a corporation organized and
existing under the laws of the Cayman Islands (each, a "2% NOTE PURCHASER" and
collectively, the "2% NOTE PURCHASERS"), and Illinois Superconductor
Corporation, a corporation organized and existing under the laws of Delaware
(the "COMPANY").
W I T N E S S E T H
WHEREAS, as of May 15, 1998, the Company and the Purchasers entered
into a Securities Purchase Agreement (the "2% NOTE AGREEMENT"), pursuant to
which the Purchasers purchased from the Company: (i) $10,350,000 in aggregate
principal amount of 2% Senior Convertible Notes of the Company due May 15, 2002
(the "2% NOTES") and (ii) warrants (the "2% NOTE WARRANTS") to purchase an
aggregate of 4,140,000 shares of the Company's common stock, par value $.001 per
share ("COMMON STOCK"), at an exercise price of $3.75 per share;
WHEREAS, pursuant to a Securities Purchase Agreement, dated as of March
31, 1999 (the "6% NOTE Agreement"), Elliott, Westgate, Alexander and State Farm
(the "6% NOTE PURCHASERS"), are purchasing: (i) $3,300,000 in principal amount
of 6% Senior Convertible Notes of the Company due May 15, 2002 (the "6% NOTES");
and (ii) warrants to purchase an aggregate of 1,320,000 shares of Common Stock
at $1.4625 per share (the "6% NOTE WARRANTS");
WHEREAS, in connection with the 6% Note Agreement, the Company, the 2%
Note Purchasers and the 6% Note Purchasers (collectively, the "INVESTORS")
desire that the terms of the 2% Note Agreement, the 2% Notes and the 2% Note
Warrants be amended to reflect the exercise of certain rights thereunder from
the date hereof going forward; and
WHEREAS, pursuant to the terms of the 6% Note Agreement, the Company
and the 6% Note Purchasers desire that certain of the 2% Notes and 2% Note
Warrants held by the 6% Note Purchasers and set forth in the Schedule of
Purchasers to the 6% Note Agreement (the "DESIGNATED 2% NOTES" and the
"DESIGNATED 2% NOTE WARRANTS", respectively) be amended to reflect certain terms
contained herein.
NOW, THEREFORE, in consideration of the mutual covenants in this
Agreement, the Company and the Investors hereby agree as follows:
1. BOARD SEATS. That portion of Section 3.12 of the 2% Note Agreement
following the first two sentences thereof is hereby amended to read in its
entirety as follows:
<PAGE> 2
"Until such time as the amount of Common Stock
issuable upon conversion of the then outstanding 2%
Notes (including the Designated 2% Notes) and 6%
Notes is less than 5% of then outstanding Common
Stock (the "MINIMUM AMOUNT"), the Company shall cause
the individuals originally designated hereunder by
holders of the 2% Notes (or such other individual(s)
designated by a plurality of the Investment Amount
(as defined below) as replacement(s), and acceptable
to a majority of the members of the Board of
Directors (not including the Investors' designees),
such acceptance not to be unreasonably withheld) to
be nominated to the Board of Director(s) of the
Company and will solicit proxies from stockholders
voting in favor of such nominees. For so long as the
Investors have the right to appoint members to the
Company's Board of Directors pursuant to this Section
3.12, the Company covenants not to increase the size
of its Board of Directors above nine (9) members.
Notwithstanding the foregoing, any holder of 2% Notes
(including the Designated 2% Notes) or 6% Notes may
elect, upon notice to the Company , which notice may
be rescinded by a subsequent notice received no
earlier than 61 days following the date the prior
notice is received, to waive its right to participate
in the foregoing selection of members of the
Company's Board of Directors, provided that for
purposes of the Minimum Amount, the amount of Common
Stock issuable upon conversion of such holder's 6%
Notes and 2% Notes (including Designated 2% Notes)
shall be counted. As used herein, "Investment Amount"
shall refer to the sum of the principal amount
outstanding on (i) the 6% Notes; and (ii) the 2%
Notes (including the Designated 2% Notes.)
2. FUTURE FINANCINGS. Section 3.13 of the 2% Note Agreement is hereby
deleted in its entirety and replaced with the following provision:
"For so long as any 6% Notes, 6% Note Warrants, 2%
Notes (including Designated 2% Notes) and 2% Note
Warrants (including Designated 2% Note Warrants)
shall be outstanding, in the event that the Company
shall seek any financing (excluding a firm commitment
underwritten public offering or the issuance of the
Company's securities in connection
2
<PAGE> 3
with a strategic partnership or joint venture), it
shall: (i) provide reasonable notice to the Investors
holding such securities of its intention to seek
financing and (ii) provide such Investors with a
reasonable opportunity to submit a proposal for
financing.
3. FURTHER COVENANT OF THE COMPANY. Section 3.17A of the 2% Note
Agreement is hereby amended to read in its entirety as follows:
"Furthermore, the Company covenants that for as long
as the amount outstanding of the Investment Amount is
at least $5,625,000, the Company, will not, without
the prior written approval of at least $5,625,000 of
the Investment Amount:
(i) consolidate with or merge into any other
person, or permit any other person to
consolidate or merge into it;
(ii) sell, lease or otherwise dispose of all or
substantially all of its assets;
(iii) amend its certificate of incorporation
(other than to effect an increase in the
authorized capital stock of the Company);
(iv) adopt any plan pursuant to which capital
stock of the Company or rights to purchase
capital stock of the Company are issued,
except for (A) a director compensation plan
to be implemented during 1999; and (B) for
the adoption and amendment of employee
benefit plans, if any, only if such adoption
or amendment does not authorize shares of
Common Stock equaling more than 20% of the
then outstanding shares of Common Stock and
does not provide for options having a
exercise price less than the market price of
Common Stock; or
(v) engage in any transaction, which pursuant to
the rules of any securities market or
exchange on which the Common Stock is
traded, requires approval of holders of the
Common Stock.
3
<PAGE> 4
The Company covenants that within ten (10) days of (i) the applicable
holders of the 6% Notes, and 2% Notes (including Designated 2% Notes) notifying
the Company that they do or do not object to the Company engaging in the action
for which their approval has been sought or (ii) the lapse of the 10 Business
Day period without the Company being notified by the applicable holders as to
whether or not they object to the Company engaging in such action, each pursuant
to this Section 3.17A, the Company will either (x) publicly disclose the
information disclosed to the holders of the 6% Notes and 2% Notes (including
Designated 2% Notes) pursuant to this Section 3.17A which it deems to be
material, non-public information and with respect to the balance of such
information, if any, notify such holders in writing that it does not deem such
information to be material, non-public information and that it will not deem
such information to have been misappropriated if such holders trade in the
Common Stock while in possession of such information, or (y) notify such holders
in writing that it does not deem the information disclosed to the holders of the
6% Notes and 2% Notes (including Designated 2% Notes) pursuant to this Section
3.17A to be material, non-public information and that it will not deem such
information to have been misappropriated if such holders trade in the Common
Stock while in possession of such information; provided that the Company
acknowledges that if, and only if, it fails to do either (x) or (y) within the
applicable ten (10) day period, the holders of the 6% Notes and 2% Notes
(including Designated 2% Notes) may publicly disclose such information.
4. PURCHASER OWNERSHIP OF COMMON STOCK. Section 3.15 of the 2% Note
Agreement is hereby deleted in its entirety.
5. RIGHTS IF TRADING IN COMMON STOCK IS SUSPENDED OR DILUTED. Section
3.16 of the 2% Note Agreement is hereby amended to insert the following on the
fifth line thereof after "Nasdaq National Market (" but before "unless...":
"unless such delisting shall be due to failure to
comply with the maintenance criteria set forth in
NASD Rule 4450 (or any successor rule) with respect
to "(i) minimum bid price or (ii) net tangible assets
or"
6. CONSENT TO ISSUANCE OF 6% NOTES AS PARI PASSU OBLIGATIONS. The 2%
Note Purchasers hereby consent to the issuance of the 6% Notes as obligations
which are pari passu with the 2% Notes.
7. AMENDMENTS TO ALL 2% NOTES.
(a) Events of Default. Section 5(a) "Events of Default" of each of the
2% Notes is hereby amended to add at the end of the sentence beginning `An
"Event of Default" is. . .', the following clause:
"; or (vii) if any principal payments under any of
the Company's 6% Senior Convertible Notes due May 15,
2002 are accelerated."
4
<PAGE> 5
(b) Limitation on Beneficial Ownership of Common Stock. Each of the 2%
Notes is hereby amended to add the following paragraph (j) to Section 3 thereof:
"(j) Notwithstanding anything to the contrary herein,
the Holder may not use its ability to convert this
Note if such conversion would result in the total
number of shares of Common Stock deemed beneficially
owned by the Holder (other than by virtue of the
ownership of this Note or ownership of other
securities that have limitations on a holder's right
to convert or exercise similar to those limitations
set forth herein), together with all shares of Common
Stock deemed beneficially owned by the Holder's
Affiliates (as defined in the Purchase Agreement)
that would be aggregated for purposes of determining
a group under Section 13(d) of the Exchange Act,
exceeding 9.9% of the total issued and outstanding
shares of the Company's Common Stock (the "Restricted
Ownership Percentage"); provided that (w) the Holder
shall have the right, at any time and from time to
time, to reduce the Restricted Ownership Percentage
applicable to it immediately upon written notice to
the Company, (x) the Holder shall have the right to
increase its Restricted Ownership Percentage and
otherwise waive in whole or in part the restrictions
of this Section 3(j) immediately upon written notice
to the Company in the event of an occurrence or
notice of an intended or pending Change of Control
(as defined in the Purchase Agreement) (a "Change of
Control Notice") or the delivery by the Company of a
notice of a redemption of the Notes or the Company's
6% Senior Convertible Notes by the Company (a
"Redemption Notice"), and (y) the Holder can make
subsequent adjustments pursuant to (w) or (x) any
number of times (which adjustment shall be effective
immediately). The delivery of a Conversion Notice by
the Holder shall be deemed a representation by the
Holder that it is in compliance with this Section
3(j).
(c) Amendments to Events. Section 3(c)(i) of each of the 2% Notes is
hereby amended to insert the following in clause (e) thereof after "delisted
from the Nasdaq National Market (" but before "unless":
"unless such delisting shall be due to failure to
comply with the maintenance criteria set forth in
5
<PAGE> 6
NASD Rule 4450 (or any successor rule) with respect
to (i) minimum bid price or (ii) net tangible assets
or"
8. AMENDMENT OF 2% NOTE WARRANTS. Each of the 2% Note Warrants is
hereby amended to add the following paragraph (f) to Section 3 thereof:
"(f) Notwithstanding anything to the contrary herein,
the Holder may not use its ability to exercise this
Warrant if such exercise would result in the total
number of shares of Common Stock deemed beneficially
owned by the Holder (other than by virtue of the
ownership of this Warrant or ownership of other
securities that have limitations on a holder's right
to convert or exercise similar to those limitations
set forth herein), together with all shares of Common
Stock deemed beneficially owned by the Holder's
Affiliates (as defined in the Purchase Agreement)
that would be aggregated for purposes of determining
a group under Section 13(d) of the Exchange Act,
exceeding 9.9% of the total issued and outstanding
shares of the Company's Common Stock (the "Restricted
Ownership Percentage"); provided that (w) the Holder
shall have the right, at any time and from time to
time, to reduce the Restricted Ownership Percentage
applicable to it immediately upon written notice to
the Company, (x) the Holder shall have the right to
increase its Restricted Ownership Percentage and
otherwise waive in whole or in part the restrictions
of this Section 3(f) immediately upon written notice
to the Company in the event of an occurrence or
notice of an intended or pending Change of Control
(as defined in the Purchase Agreement) (a "Change of
Control Notice") or the delivery by the Company of a
notice of a redemption of the Company's 6% Senior
Convertible Notes or the Company's 2% Senior
Convertible Notes by the Company (a "Redemption
Notice") and (y) the Holder can make subsequent
adjustments pursuant to (w) or (x) any number of
times (which adjustment shall be effective
immediately). The delivery of an exercise notice by
the Holder shall be deemed a representation by the
Holder that it is in compliance with this paragraph.
6
<PAGE> 7
9. AMENDMENT TO THE DESIGNATED 2% NOTES. In addition to the changes set
forth in Section 6 herein, each of the Designated 2% Notes is hereby amended,
effective the date hereof, as follows:
(a) Interest Rate. The interest on the Designated 2% Notes shall be
increased from 2% to 6% per annum.
(b) Payment and Calculation of Interest. The existing accrued interest
on the Designated 2% Notes on the date hereof shall be paid in the manner set
forth in Section 3(a)(ii) in the form of Amended Designated 2% Notes referred to
in paragraph (e) below.
(c) Conversion Price. The Conversion Price shall be reduced from $1.50
to $1.125, subject to further adjustments pursuant to the terms of the
Designated 2% Notes.
(d) Benefits of 6% Note Agreement. The Designated 2% Notes shall be
entitled to the benefits of the provisions contained in the 6% Note Agreement
which apply to them.
(e) Other Changes. The Designated 2% Notes shall be further amended, as
provided in the form of Amended Designated 2% Notes, attached as Exhibit A
hereto.
(f) Amended Designated 2% Notes. Concurrently with the execution of
this Amendment to Note Agreement, the 6% Note Purchasers shall exchange their
existing Designated 2% Notes for amended Designated 2% Notes in the Form of
Exhibit A, reflecting the amendment set forth in paragraphs (a) through (e)
above and the amendments in Section 6 herein.
10. AMENDMENT TO THE DESIGNATED 2% NOTE WARRANTS. In addition to the
changes set forth in Section 7 herein, each of the Designated 2% Note Warrants
is hereby amended, effective the date hereof, as follows:
(a) Exercise Price. The Exercise Price shall be reduced from $3.75 to
$1.4625 per share (subject to further adjustment set forth in the Designated 2%
Note Warrants).
(b) Expiration Date. The Expiration Date shall be March 31, 2002.
(c) Amended Designated 2% Note Warrants. Concurrently with the
execution of this Amendment to Note Agreement, the 6% Note Purchasers shall
exchange their existing certificates representing the Designated 2% Note
Warrants for certificates, in the Form of Exhibit B hereto, reflecting the
changes, set forth in paragraphs (a) and (b) above and the amendments in Section
7 herein.
11. EFFECT OF AMENDMENT. As amended herein, the 2% Note Agreement, the
2% Notes, the Designated 2% Notes, the 2% Note Warrants and the Designated 2%
Note Warrants shall remain in full force and effect.
7
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective authorized persons as of the date first
indicated above.
Company:
ILLINOIS SUPERCONDUCTOR CORPORATION
By: /s/ Edward W. Laves
Name: Edward W. Laves
Title: President and Chief Executive Officer
Purchasers:
ELLIOTT ASSOCIATES, L.P.
By: /s/ Authorized Signatory
Name:
Title:
WESTGATE INTERNATIONAL, L.P.
By: Martley International, L.P.
As Attorney-in-fact
By: /s/ Authorized Signatory
Name:
Title:
ALEXANDER FINANCE, LP
By: /s/ Authorized Signatory
Name:
Title:
<PAGE> 9
STATE FARM MUTUAL AUTOMOBILE
INSURANCE COMPANY
By: /s/ James Freytag
Name: James Freytag
Title: Vice President - Common Stocks
By: /s/ John Gordon
Name: John Gordon
Title: Investment Officer
SPRING POINT PARTNERS, L.P.
By:
Name:
Title:
SPRING POINT OFFSHORE FUND
By:
Name:
Title:
<PAGE> 1
EXHIBIT 10.16
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (the "Agreement") is entered into as of
the [insert day]th day of [insert month], [insert year], by and between Illinois
Superconductor Corporation, a Delaware corporation (the "Company"), and [insert
name of officer] ("Indemnitee").
RECITALS
Indemnitee has been asked to serve as an officer 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 continue 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
continue 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 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
<PAGE> 2
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
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. DETERMINATION OF INDEMNIFICATION.
7.1 Notwithstanding any other provision of this Agreement (i) the
obligations of the Company under Section 1 of this Agreement shall be subject to
the condition that the Reviewing Party (as defined in Section 7.6 below) shall
have determined (in a written opinion, in any case in which the Independent
Legal Counsel referred to in Section 7.3 below is involved) that the Indemnitee
would be permitted to be indemnified under this Agreement and (ii) the
obligation of the Company to make an expense advance pursuant to Section 9 of
this Agreement shall be subject to the condition that the Reviewing Party shall
not have determined, in good faith, that the Indemnitee has failed to cooperate
with any internal Company inquiry of any alleged misconduct committed by the
Indemnitee.
7.2 The Reviewing Party shall be selected by the Company's Board
of Directors; provided,
<PAGE> 3
however, that if there has been a Change in Control (other than a Change in
Control which has been approved by a majority of the Company's Board of
Directors who were directors immediately prior to such Change in Control) the
Reviewing Party shall be the Independent Legal Counsel referred to in Section
7.3 below. If there has been no determination by the Reviewing Party within the
fifteen (15) day period referred to in Section 9 of this Agreement, the
Reviewing Party shall be deemed to have made a determination that it is
permissible to indemnify the Indemnitee under this Agreement.
7.3 The Company agrees that if there is a Change in Control
(other than a Change in Control which has been approved by a majority of the
Company's Board of Directors who were directors immediately prior to such Change
in Control) then the Independent Legal Counsel (as defined in Section 7.7 below)
shall be selected by the Indemnitee and approved by the Company (which approval
shall not be unreasonably withheld) and such Independent Legal Counsel shall
determine whether the officer is entitled to indemnification for expenses,
judgments, fines, penalties and amounts paid in settlement (including, without
limitation, all interest, assessments and other charges paid or payable in
connection therewith) under this Agreement. Such Independent Legal Counsel shall
render its written opinion to the Company and the Indemnitee as to whether and
to what extent the Indemnitee will be permitted to be indemnified for expenses,
judgments, fines, penalties and amounts paid in settlement (including, without
limitation, all interest, assessments and other charges paid or payable in
connection therewith). The Company agrees to pay the reasonable fees of the
Independent Legal Counsel and to indemnify fully such Independent Legal Counsel
against any and all expenses (including reasonable attorneys' fees), claims,
liabilities and damages arising out of or relating to this Agreement or the
engagement of such Independent Legal Counsel pursuant hereto.
7.4 If a determination denying the Indemnitee's claim is made by
the Reviewing Party (other than the Independent Legal Counsel), notice of such
determination shall disclose with particularity the reasons for such
determination. If a determination denying the Indemnitee's claim is made by the
Independent Legal Counsel, the notice shall include a copy of the related legal
opinion of such counsel.
7.5 For purposes of this Agreement, a "Change in Control" shall
be deemed to have occurred if (i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, other than a trustee or
other fiduciary holding securities under an employee benefit plan of the Company
or a corporation owned directly or indirectly by the stockholders of the Company
in substantially the same proportions as their ownership of stock of the
Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934), directly or indirectly, of securities of
the Company representing 15% or more of the total voting power represented by
the Company's then outstanding Voting Securities (as defined in Section 7.8
below), or (ii) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board of Directors of the Company
and any new director whose election by the Company's Board of Directors or
nomination for election by the Company's stockholders was approved by a vote of
at least two-thirds (2/3) of the directors then still in office who either were
directors at the beginning of the period or whose election or nomination for
election was previously so approved, cease for any reason to constitute a
majority thereof, or (iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the Voting Securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity) at least 85% of the total voting power represented by the
Voting Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company (in one transaction or a series of
transactions) of all or substantially all of the assets of the Company.
7.6 For purposes of this Agreement, the "Reviewing Party" shall
mean any appropriate person or body consisting of a member or members of the
Board of Directors of the Company or any other person or body appointed by the
Board who is not a party to the particular action, suit or proceeding with
respect to which the Indemnitee is seeking indemnification, or the Independent
Legal Counsel.
7.7 For purposes of this Agreement, the "Independent Legal
Counsel" shall mean an attorney, selected in accordance with the provisions of
Section 7.3 above, who shall not have otherwise performed services for the
Company or the Indemnitee within the five years preceding such selection (other
than in
<PAGE> 4
connection with seeking indemnification under this Agreement). The Independent
Legal Counsel shall not be any person who, under the applicable standards of
professional conduct then prevailing, would have a conflict of interest in
representing either the Company or the Indemnitee in an action to determine the
Indemnitee's rights under this Agreement, nor shall the Independent Legal
Counsel be any person who has been sanctioned or censured for ethical violations
of applicable standards of professional conduct.
7.8 For purposes of this Agreement, "Voting Securities" shall
mean any securities of the Company or another entity which vote generally in the
election of directors of the Company or such other entity.
8. INDEMNIFICATION PROCEDURES.
8.1 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 14 of this Agreement 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.
8.2 If, at the time that the Company receives notice under
Section 8.1 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.
8.3 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.
9. 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.
10. 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> 5
11. 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.
12. 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.
13. 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.
14. 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
Attn: General Counsel
with a copy to: Katten Muchin & Zavis
525 West Monroe Street
Suite 1600
Chicago, IL 60661-3693
Attn: Lawrence Levin, Esq.
15. 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.
16. 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.
17. DURATION. 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.
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: ______________________________________
Edward W. Laves
President and Chief Executive Officer
------------------------------------------
(Signature)
[NAME OF OFFICER]
-----------------------
-----------------------
(Print Address)
<PAGE> 1
EXHIBIT 10.17
EMPLOYMENT AGREEMENT
Employment Agreement dated and effective as of July 1, 1998 (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
Laves is currently employed by the Company pursuant to an Amended and
Restated Employment Agreement between the Company and Laves dated and effective
as of July 1, 1997 (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'
employment. In order to specify such terms and conditions, and extend the term
of Laves' employment with the Company, Laves and the Company agree as follows:
AGREEMENT
1. EMPLOYMENT FOR TERM. The Company hereby employs Laves and Laves
hereby accepts employment with the Company for the period beginning on July 1,
1998 and ending on December 31, 1999 (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' employment under this Agreement, but shall not terminate
Laves' or the Company's other obligations in this Agreement.
2. POSITION AND DUTIES. During the Term, Laves shall continue to serve
as the Chairman of the Board, President and Chief Executive Officer of the
Company. During the Term, Laves shall also hold such additional positions and
titles as the Board of Directors of the Company (the "BOARD") may determine from
time to time. During the Term, Laves shall devote substantially all of his
business time and best efforts to his duties as an employee of the Company.
3. COMPENSATION.
(a) BASE SALARY. Effective as of June 11, 1998 and ending on
December 31, 1999, the Company shall pay Laves a base salary at a rate of
$200,000 per annum, payable at least monthly on the Company's regular pay cycle
for professional employees.
(b) BONUSES. Laves shall be eligible to receive bonuses of up to
fifty percent (50%) of his base salary during Term 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.
<PAGE> 2
(a) GENERAL. The Term shall end immediately upon Laves' 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 pursuant to the requirements of any
government contract or regulation; or 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 December 31, 1999, other than for Cause, then the Company shall make the
"Severance Payment" (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, 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 first 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'
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.
(d) OPTION MATTERS. If the Company ends the Term without Cause,
the Company and
<PAGE> 3
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' right,
title and interest in and to any and all Inventions, the full title to which is
required to be in the United States government by a contract between the Company
and the United States government or any of its agencies. The provisions of
Sections 8(a), 8(b) and this Section 8(c) are not intended to supersede or limit
the effect of any prior confidentiality or proprietary rights agreements
previously executed by Laves.
(d) PERIODS 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 first anniversary of the day following the date of
termination of Laves' employment with the Company. "NON-SOLICITATION 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
<PAGE> 4
(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-Solicitation 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 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' 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
<PAGE> 5
of any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of a similar or dissimilar condition or provision
at the same time, any prior time or any subsequent time.
12. NOTICES. All notices, demands or other communications of any kind
to be given or delivered under this Agreement shall be in writing and shall be
deemed to have been properly given if (a) delivered by hand, (b) delivered by a
nationally recognized overnight courier service, (c) sent by registered or
certified United States Mail, return receipt requested and first class postage
prepaid, or (d) facsimile transmission followed by a confirmation copy delivered
by a nationally recognized overnight courier service. Such communications shall
be sent to the parties at their respective addresses as follows:
If to Laves: Edward Laves
If to the Company: Illinois Superconductor Corporation
451 Kingston Court
Mount Prospect, Illinois 60056
Attention: Vice President of Human Resources
with a copy to: Lawrence D. Levin
Katten Muchin & Zavis
525 West Monroe Street, Suite 1600
Chicago, Illinois 60661-3693
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 currently contained in this
Agreement) as shall be valid and enforceable under the applicable law.
14. SURVIVORSHIP. The respective rights and obligations of the
parties hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
15. HEADINGS. All descriptive headings of sections and paragraphs in
this Agreement are intended solely for convenience of reference, and no
provision of this Agreement is to be construed by reference to the heading of
any section or paragraph.
16. WITHHOLDING TAXES. All salary, benefits, reimbursements and any
other payments to Laves under this Agreement shall be subject to all applicable
payroll and withholding taxes and deductions required by any law, rule or
regulation of and federal, state or local authority.
17. APPLICABLE LAW: JURISDICTION. The laws of the State of Illinois
shall govern the
<PAGE> 6
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.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first above written.
ILLINOIS SUPERCONDUCTOR CORPORATION
By:
------------------------------------
JAMES PAJCIC
Vice-President Human Resources,
Treasurer and Secretary
-------------------------------------------
EDWARD W. LAVES
<PAGE> 1
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
Employment Agreement dated and effective as of November 9, 1998 (this
"AGREEMENT"), between ILLINOIS SUPERCONDUCTOR CORPORATION, a Delaware
corporation (with its successors and assigns, referred to as the "COMPANY"), and
DENNIS CRAIG ("CRAIG").
PRELIMINARY STATEMENT
Craig is now employed as the Vice President - Engineering and
Manufacturing of the Company. The Company desires to continue to employ Craig,
and Craig wishes to continue to be employed by the Company, upon the terms and
conditions set forth in this agreement.
AGREEMENT
1. EMPLOYMENT FOR TERM. The Company hereby employs Craig and Craig
hereby accepts employment with the Company for the period beginning on the date
of this agreement and ending on December 31, 1999 (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 Craig's employment under this Agreement, but shall not
terminate Craig's or the Company's other obligations in this Agreement.
2. POSITION AND DUTIES. During the Term, Craig shall continue to
serve as the Vice President Engineering and Manufacturing of the Company. During
the Term, Craig shall also hold such additional positions and titles as the
Board of Directors of the Company (the "BOARD") or the President may determine
from time to time. During the Term, Craig 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. Effective as of June 11, 1998 and ending on
December 31, 1999, the Company shall pay Craig a base salary at a rate of
$150,000 per annum, payable at least monthly on the Company's regular pay cycle
for professional employees.
(b) BONUSES. Craig shall be eligible to receive bonuses during
the Term 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 Craig during the Term, and
shall not preclude the Board from awarding Craig a higher salary or stock
options at any time, nor shall they preclude the Board from awarding Craig
bonuses or other compensation in the discretion of the Board.
4. EMPLOYEE BENEFITS. During the Term, Craig 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 Craig 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 Craig'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).
<PAGE> 2
(b) NOTICE OF TERMINATION. Promptly after it ends the Term, the
Company shall give Craig 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 Craig in connection with his employment; Craig's gross negligence
in performing any of his duties under this Agreement; Craig'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; Craig'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 (v) material and continuing breach by
Craig of any of his agreements in this Agreement.
(b) TERMINATION WITHOUT CAUSE. If the Company ends the Term prior
to December 31, 1999, other than for Cause, then the Company shall make the
"Severance Payment" (as defined below) to Craig 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 Craig 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 Vice President - Engineering and
Manufacturing of the Company, such change or changes shall be deemed to be a
constructive termination of Craig's 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 Craig's base salary in effect on the day prior to the date on
which the Severance Period commences; and (ii) the term "SEVERANCE PERIOD" means
the period commencing on the day following the date of termination of Craig's
employment with the Company and ending on the six-month anniversary of the date
of termination, subject to earlier termination as of the date that Craig
commences full time employment with any other person or entity.
Craig 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 Craig shall be obligated
to perform such services only to the extent that Craig determines in his
discretion that such services shall not interfere with the conduct of Craig'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 Craig 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
Craig resigns as an employee or officer of the Company, or if Craig dies, then
the Company shall have no obligation to pay Craig 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 Craig agree that notwithstanding any term or provision of any
agreement between Craig and the Company to the contrary, (i) all options held by
Craig 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 Craig or his personal representative, and (ii) Craig (or his
personal representative, as the case may be) shall have the right to exercise
such vested options, and all other
<PAGE> 3
options previously vested in Craig prior to the date of termination, for a
period of 365 days following such end of the Term. Craig 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, Craig 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 Craig is requested in a
judicial, administrative or governmental proceeding to disclose any of the
Company Information, Craig 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, Craig may furnish the material so required to be furnished, but
Craig will furnish only that portion of the Company Information that legally is
required.
(c) OWNERSHIP. Craig hereby assigns to the Company all of Craig'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 Craig, either alone or jointly
with others, during the course of the performance of services for the Company.
Craig shall also assign to, or as directed by, the Company, all of Craig'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 Craig.
(d) PERIODS DEFINED. "NON-COMPETITION PERIOD" means the period
beginning on the day following the date of termination of Craig's employment
with the Company and ending on the first anniversary of the day following the
date of termination of Craig's employment with the Company. "NON-SOLICITATION
PERIOD" means the period beginning on the day following the date of termination
of Craig's employment with the Company and ending on the second anniversary of
the day following the date of termination of Craig's employment with the
Company.
(e) COVENANTS OF NON-COMPETITION AND NON-SOLICITATION. Craig
acknowledges that his services pursuant to this Agreement are unique and
extraordinary, that the Company will be dependent upon Craig 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. Craig 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, Craig covenants and agrees that
during the Non-Competition Period Craig 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 Craig at the beginning of this Section, Craig additionally
acknowledges, covenants, and agrees that, during the Non-Solicitation Period,
Craig shall not, directly or indirectly, whether on his own behalf or on
<PAGE> 4
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 Craig pursuant to Sections 3, 4, 5 and 7(b) above.
(f) EQUITABLE REMEDIES. Craig 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 Craig 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) CRAIG. This Agreement is a personal contract, and the rights
and interests that the Agreement accords to Craig may not be sold, transferred,
assigned, pledged, encumbered, or hypothecated by him. Except as contemplated in
Section 7(d) above, Craig shall not have any power of anticipation, alienation
or assignment of the payments contemplated by this Agreement, all rights and
benefits of Craig shall be for the sole personal benefit of Craig, 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 Craig. Except as so provided, this Agreement shall inure to the benefit
of and be binding upon Craig 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 Craig), 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 Craig's employment with the Company and
supersedes all prior negotiations, discussions, understandings and agreements,
whether written or oral, between Craig and the Company relating to the subject
matter of this Agreement. All prior employment agreements, including the Prior
Agreement, between the Company and Craig 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 Craig and by a duly authorized officer of the Company other that
Craig. 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
<PAGE> 5
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 Craig: Dennis Craig
Illinois Superconductor Corporation
451 Kingston Court
Mt. Prospect, IL 60056
If to the Company: Illinois Superconductor Corporation
451 Kingston Court
Mount Prospect, Illinois 60056
Attention: Vice President of Human Resources
with a copy to: Lawrence D. Levin
Katten Muchin & Zavis
525 West Monroe Street, Suite 1600
Chicago, Illinois 60661-3693
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 Craig 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 Craig 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 Craig 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 Craig hereby submits to the nonexclusive jurisdiction
<PAGE> 6
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.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first above written.
ILLINOIS SUPERCONDUCTOR CORPORATION
By:
----------------------------------------
EDWARD W. LAVES
President and Chief Executive Officer
----------------------------------------------
DENNIS CRAIG
<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, Form S-3 No. 333-41731 and Form S-3 No.
333-56601 of our report dated February 26, 1999 (except Note 3, as to which the
date is March 31, 1999), with respect to the financial statements and schedule
of Illinois Superconductor Corporation included in the Annual Report on Form
10-K for the year ended December 31, 1998.
/s/ Ernst & Young LLP
----------------------
Ernst & Young LLP
Chicago, Illinois
March 31, 1999
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<ARTICLE> 5
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,152,595
<SECURITIES> 0
<RECEIVABLES> 1,582,408
<ALLOWANCES> 87,990
<INVENTORY> 1,424,427
<CURRENT-ASSETS> 5,550,751
<PP&E> 8,285,710
<DEPRECIATION> 4,761,599
<TOTAL-ASSETS> 10,028,088
<CURRENT-LIABILITIES> 1,407,193
<BONDS> 0
0
0
<COMMON> 12,557
<OTHER-SE> (785,525)
<TOTAL-LIABILITY-AND-EQUITY> 10,028,088
<SALES> 3,242,930
<TOTAL-REVENUES> 3,242,930
<CGS> 7,047,347
<TOTAL-COSTS> 7,047,347
<OTHER-EXPENSES> 8,133,307
<LOSS-PROVISION> 19,215
<INTEREST-EXPENSE> 10,247,919
<INCOME-PRETAX> (21,911,954)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21,911,954)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (21,911,954)
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