<PAGE> 1
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
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)
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 [ ]
On November 9, 1999, 12,760,908 shares of the registrant's Common Stock,
par value $0.001 per share, were outstanding.
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements................................................................................ 1
Condensed Balance Sheets as of September 30, 1999 (unaudited) and December 31, 1998................. 1
Condensed Statements of Operations (unaudited) for the three months ended
September 30, 1999 and 1998, and the nine months ended September 30, 1999 and 1998.................. 2
Condensed Statements of Cash Flows (unaudited) for the nine months ended
September 30, 1999 and 1998......................................................................... 3
Notes to Condensed Financial Statements............................................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................................... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................... 13
Item 2. Changes in Securities and Use of Proceeds........................................................... 16
Item 3. Defaults Upon Senior Securities.................................................................... *
Item 4. Submission of Matters to a Vote of Security Holders................................................ *
Item 5. Other Information.................................................................................. *
Item 6. Exhibits and Reports on Form 8-K................................................................... 16
</TABLE>
- --------------
[FN]
* No reportable information under this item.
</FN>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ILLINOIS SUPERCONDUCTOR CORPORATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 171,434 $ 2,152,595
Inventories 1,910,969 1,424,427
Accounts receivable, net 1,142,278 1,494,418
Prepaid expenses and other 170,945 479,311
------------ -------------
Total current assets 3,395,626 5,550,751
Property and equipment:
Property and equipment 8,089,170 8,285,710
Less: accumulated depreciation 5,198,554 4,761,599
------------ -------------
Net property and equipment 2,890,616 3,524,111
Other assets:
Restricted certificates of deposit 349,270 337,347
Patents and trademarks, net 649,633 615,879
------------ -------------
998,903 953,226
------------ -------------
Total assets $ 7,285,145 $ 10,028,088
============ =============
LIABILITIES AND NET CAPITAL DEFICIENCY:
Current liabilities:
Accounts payable $ 1,404,993 $ 464,752
Accrued liabilities 534,908 799,569
Accrued interest 484,070 129,375
Current portion of other long-term debt 8,751 13,497
------------ -------------
Total current liabilities 2,432,722 1,407,193
Other long term debt, less current portion 12,420 -
Senior Convertible Notes 13,450,000 10,350,000
Discount on Senior Convertible Notes (1,057,275) (1,047,349)
Deferred occupancy costs 91,061 91,212
Net capital deficiency:
Common stock ($.001 par value); 60,000,000 shares 12,761 12,557
authorized at September 30, 1999 and 30,000,000 shares
authorized at December 31, 1998; 12,760,908 shares issued
and outstanding at September 30, 1999 and 12,557,344 shares
issued and outstanding at December 31, 1998
Additional paid-in capital 60,588,790 60,055,321
Notes receivable from stockholders (680,696) (680,696)
Accumulated deficit (67,564,638) (60,160,150)
------------ -------------
Total stockholders' equity (net capital deficiency) (7,643,783) (772,968)
------------ -------------
Total liabilities and stockholders' equity (net capital $ 7,285,145 $ 10,028,088
============ =============
deficiency)
</TABLE>
NOTE: The condensed balance sheet as of December 31, 1998 has been derived from
the audited financial statements for that date but does not include all of the
information and accompanying notes required by generally accepted accounting
principles for complete financial statements.
See the accompanying Notes which are an integral part of the Condensed Financial
Statements.
<PAGE> 4
ILLINOIS SUPERCONDUCTOR CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 1,126,733 $ 226,732 $ 1,955,792 $ 1,738,433
Costs and expenses:
Cost of revenues 2,135,816 1,016,977 4,091,392 3,465,070
Research and development 402,548 643,315 1,364,168 1,981,698
Selling and marketing 307,072 418,685 1,210,844 1,248,273
General and administrative 696,577 843,265 2,130,452 2,338,090
------------ ------------ ------------- -------------
Total costs and expenses 3,542,013 2,922,242 8,796,856 9,033,131
------------ ------------ ------------- -------------
Operating loss (2,415,280) (2,695,510) (6,841,064) (7,294,698)
Other income (expense):
Interest income 31,921 123,735 118,967 191,721
Interest expense (249,331) (5,484,776) (609,391) (8,646,076)
------------ ------------ ------------- -------------
(217,410) (5,361,041) (490,424) (8,454,355)
------------ ------------ ------------- -------------
Loss before extraordinary item (2,632,690) (8,056,551) (7,331,488) (15,749,053)
Extraordinary item - debt
extinguishment - - (73,000) -
------------ ------------ ------------- -------------
Net loss (2,632,690) (8,056,551) (7,404,488) (15,749,053)
Preferred Stock dividends - - - (61,834)
------------ ------------ ------------- -------------
Net loss plus Preferred Stock
dividends $ (2,632,690) $ (8,056,551) $ (7,404,488) $ (15,810,887)
============ ============ ============= =============
Basic and diluted loss per
common share $ (0.21) $ (0.64) $ (0.59) $ (1.45)
============ ============ ============= =============
Weighted average number of common
shares outstanding 12,760,908 12,557,313 12,651,819 10,937,339
============ ============ ============= =============
</TABLE>
See the accompanying Notes which are an integral part of the Condensed Financial
Statements.
2
<PAGE> 5
ILLINOIS SUPERCONDUCTOR CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (7,404,488) $ (15,749,053)
Adjustments to reconcile net loss to net cash used in
operating activities:
Extraordinary item - debt extinguishment 73,000 -
Depreciation and amortization 738,422 837,552
Gain on sale of property and equipment (30,662) -
Non-cash interest expense on Senior Convertible Notes 601,132 8,561,000
Changes in operating assets and liabilities 841,576 (1,670,113)
------------- --------------
Net cash used in operating activities (5,181,020) (8,020,614)
------------- --------------
INVESTING ACTIVITIES:
Sales of available-for sale securities - 500,313
Payment of patent costs (53,459) (87,403)
Acquisition of property and equipment (112,566) (53,635)
Proceeds from sale of property and equipment 58,006 -
------------- --------------
Net cash provided by (used) in investing activities (108,019) 359,275
------------- --------------
FINANCING ACTIVITIES:
Proceeds from issuance of Senior Convertible Notes 3,300,000 10,350,000
Additional offering costs from issuance of Preferred
Stock - (140,633)
Exercise of stock options 204 7,325
Collection of notes receivable from stockholders - 5,000
Increase (decrease) in other long-term debt 7,674 (64,964)
------------- --------------
Net cash provided by financing activities 3,307,878 10,156,728
------------- --------------
Increase (decrease) in cash and cash equivalents (1,981,161) 2,495,389
Cash and cash equivalents at beginning of period 2,152,595 2,766,886
============= ==============
Cash and cash equivalents at end of period $ 171,434 $ 5,262,275
============= ==============
</TABLE>
See the accompanying Notes which are an integral part of the Condensed Financial
Statements.
3
<PAGE> 6
ILLINOIS SUPERCONDUCTOR CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine months ended September 30, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. For further information, refer to the financial
statements, including the notes thereto, included in Illinois Superconductor
Corporation's (the "Company") Annual Report on Form 10-K for the fiscal year
ended December 31, 1998.
NOTE 2 - NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share is computed based on the
weighted average number of common shares outstanding. Common shares issuable
upon the exercise of options and warrants are not included in the per share
calculations since the effect of their inclusion would be antidilutive.
NOTE 3 - COMPREHENSIVE INCOME
During the three and nine months ended September 30, 1999, total
comprehensive income (loss) amounted to $(2,633,000) and $(7,404,000),
respectively, compared to $(8,057,000) and $(15,811,000) for the same respective
periods in 1998.
NOTE 4 - INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
<S> <C> <C>
Raw materials................ $1,369,000 $1,084,000
Work in process............. 274,000 60,000
Finished product............. 268,000 280,000
---------- ----------
Total inventory............... $1,911,000 $1,424,000
========== ==========
</TABLE>
NOTE 5 - LONG TERM DEBT
On May 15, 1998, the Company issued and sold $10,350,000 in aggregate
principal amount of senior convertible notes due May 15, 2002 (the "May 1998
Notes") and issued warrants (the "May 1998 Warrants") to purchase 4,140,000
shares of the Company's common stock, par value $0.001 per share ("Common
Stock"). The May 1998 Notes (based upon their terms at the time of issue) bear
interest at 2% per annum, payable in cash or shares of Common Stock at the
Company's option (unless the Company does not meet certain requirements
commencing November 5, 2000, in which case interest must be paid in cash). The
May 1998 Notes mature on May 15, 2002 and (based upon their terms at the time of
issue) are convertible (based on the principal amount, plus accrued and unpaid
interest, if any), into shares of Common Stock at a fixed conversion price of
$1.50 per share. On and after May 15, 2000, the
4
<PAGE> 7
Company may redeem, under certain conditions, all or a portion of the May 1998
Notes at a redemption price equal to the principal amount plus accrued interest
thereon, if any. The May 1998 Warrants (based upon the terms at their time of
issue) have an exercise price of $3.75 per share and expire on May 15, 2001.
Since the May 1998 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 Common Stock on the date of issuance, multiplied
by the number of shares into which the May 1998 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 that the
May 1998 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
May 1998 Warrants issued in conjunction with the May 1998 Notes (equal to
$1,230,000, and calculated using the Black-Scholes Approximation Formula) was
allocated to additional paid-in capital, thus creating an additional discount to
the debt. This discount is being recognized as a charge to interest expense
using the effective interest method over the four year term of the May 1998
Notes.
On March 31, 1999, the Company issued and sold $3,300,000 in aggregate
initial principal amount of senior convertible notes due May 15, 2002 (the
"March 1999 Notes") and issued warrants (the "March 1999 Warrants") to purchase
1,320,000 shares of Common Stock. The March 1999 Notes bear interest at 6% per
annum, payable in kind or in cash, at the Company's option (unless the Company
fails to meet certain requirements commencing November 5, 2000, in which case
interest must be paid in cash). Holders of the March 1999 Notes may convert the
principal amount, plus accrued interest not paid in cash, if any, into shares of
Common Stock at a fixed conversion price of $1.125 per share (based upon the
terms at the time of issue). On and after May 15, 2000, the Company may redeem
all or a portion of the March 1999 Notes at a redemption price equal to the
principal amount plus accrued interest thereon, if any, under certain
conditions. The March 1999 Warrants (based upon their terms at the time of
issue) have an exercise price of $1.4625 per share and expire on March 31, 2002.
Concurrently with the issuance of the March 1999 Notes, the Company amended
certain terms of $5,500,000 in aggregate principal amount of the May 1998 Notes
(the "Amended Notes") and the May 1998 Warrants exercisable for an aggregate of
2,200,000 shares of the Common Stock (the "Amended Warrants") issued in
connection therewith. The Amended Notes, as so amended, bear interest at the
rate of 6% per annum, payable in cash or shares of Common Stock, at the
Company's option (unless the Company does not meet certain requirements
commencing November 5, 2000, in which case interest must be paid in cash), 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.
A portion of the proceeds of the March 1999 Notes equal to the fair value
of the March 1999 Warrants issued in conjunction with the March 1999 Notes
(equal to $300,000 and calculated using the Black-Scholes Approximation Formula)
was allocated to additional paid-in capital, thus creating a discount to the
debt. This discount is being recognized as a charge to interest expense using
the effective interest method over the three year term of the March 1999 Notes.
In addition, the increase in fair value of the Amended Warrants as a result of
the decrease in exercise price (equal to $41,000 and calculated using the
Black-Scholes Approximation Formula) was allocated to additional paid-in
capital, thus creating an additional discount on the Amended Notes. This
discount is being recognized as a charge to interest expense using the effective
interest method over the remaining three year term of the Amended Notes.
The amendments to the Amended Notes and the Amended Warrants resulted in a
$73,000 charge in the first quarter of 1999 which is shown as an extraordinary
item in the Company's Statements of Operations for the nine months ended
September 30, 1999.
During the second quarter of 1999, $200,000 in aggregate principal amount
of the Amended Notes, plus accrued interest, were converted into 186,314 shares
of common stock.
5
<PAGE> 8
The Company recognized $247,000 and $601,000 of non-cash interest charges
during the three months and nine months ended September 30, 1999, respectively,
as a result of the amortization of the discount on the May 1998 Notes, the
Amended Notes and the March 1999 Notes.
The effective interest rate on the May 1998 Notes is approximately 74%, the
effective interest rate on the Amended Notes is approximately 81%, and the
effective interest rate on the March 1999 Notes is approximately 9%.
NOTE 6 - CAPITAL STOCK
On June 9, 1999, the stockholders of the Company approved an increase in
the total authorized capital stock of the Company from 30,100,000 shares to
60,100,000 shares, including an increase in the number of authorized shares of
Common Stock from 30,000,000 shares to 60,000,000 shares.
NOTE 7 - STOCK OPTIONS AND WARRANTS
On May 10, 1999, the Board of Directors granted to each employee of the
Company (other than the executive officers of the Company) (collectively, the
"Non-Executive Employees") the option to (i) reduce the exercise prices of up to
a maximum of 15,000 of the unexercised stock options previously granted to such
Non-Executive Employee under the Company's Amended and Restated 1993 Stock
Option Plan, as amended (the "Plan"), to $.5625 per share (the closing price of
the Common Stock on May 10, 1999) and (ii) to cause all of such stock options
not otherwise scheduled to become fully vested on or before May 10, 2000 to
become fully vested on such date. As a result thereof, an aggregate of 279,550
stock options previously granted under the Plan were amended as described in the
preceding sentence. In addition, on May 10, 1999 the Board of Directors granted
to the executive officers and certain Non-Executive Employees of the Company
additional non-statutory stock options to purchase an aggregate of 343,575
shares of Common Stock under the Plan. Such stock options become fully vested on
the first anniversary of the date of grant, have exercise prices of $.5625 per
share (the closing price of the Common Stock on May 10, 1999), and expire 10
years from the date of grant.
On June 9, 1999, the stockholders of the Company approved an amendment to
the Plan providing for (i) an increase of an additional 806,468 shares of Common
Stock reserved for issuance to employees, consultants and non-employee directors
("Non-Employee Directors") of the Company under the Plan; (ii) the elimination
of the distinction between the number of shares reserved for issuance under the
Plan to employees and consultants of the Company and the number of shares
reserved for issuance to Non-Employee Directors; (iii) a change in the
provisions providing for the annual automatic grant of stock options to
Non-Employee Directors; (iv) discretionary grants of stock options to
Non-Employee Directors as determined at the discretion of the Board of
Directors; and (v) an acceleration of the time during which options granted
under the Plan may be exercised upon the occurrence of certain events
constituting a "Change of Control" (as defined in the Plan). On June 9, 1999,
the Board of Directors granted to each Non-Employee Director a discretionary
non-statutory stock option to purchase 47,000 shares of Common Stock. Such stock
options become fully vested on the first anniversary of the date of grant, have
exercise prices of $1.0310 per share (the closing price of the Common Stock on
June 9, 1999), and expire 10 years from the date of grant.
NOTE 8 - LEGAL PROCEEDINGS
See "Part II. - Other Information, Item 1. Legal Proceedings" for a
description of outstanding legal proceedings involving the Company. The Company
believes that the resolution of the matters discussed therein will not have a
material adverse effect on the financial condition, results of operations or
cash flows of the Company.
6
<PAGE> 9
NOTE 9 - SUBSEQUENT EVENT
On November 5, 1999, the Company issued and sold $1,000,000 in aggregate
principal amount of senior convertible notes due January 2, 2001 (the "November
1999 Notes") and issued warrants (the "November 1999 Warrants") to purchase
400,000 shares of Common Stock. The November 1999 Notes bear interest at of 10%
per annum, payable in kind or in cash, at the Company's option (unless the
Company fails to meet certain requirements commencing November 5, 2000, in which
case interest must be paid in cash). Holders of the November 1999 Notes may
convert the principal amount, plus accrued interest not paid in cash, if any,
into shares of Common Stock at a fixed conversion price of $0.25 per share. The
November 1999 Warrants have an exercise price of $0.25 per share and expire on
November 5, 2004.
Concurrently with the issuance of the November 1999 Notes, the Company
amended certain terms of $11,800,000 in aggregate principal amount of the March
1999 Notes and the May 1998 Notes (the "Further Amended Notes") and certain
terms of the March 1999 Warrants and May 1998 Warrants previously exercisable
for an aggregate of 4,800,000 shares of the Common Stock (the "Further Amended
Warrants") issued in connection therewith. The Further Amended Notes were
amended to reduce their fixed conversion price to $0.25 per share. The exercise
price of the Further Amended Warrants was reduced to $0.25 per share.
Since the November 1999 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
$875,000, and calculated as the difference between the conversion price ($0.25
per share) and the quoted market price of the Common Stock on the date of
issuance ($0.47 per share) multiplied by the number of shares into which the
November 1999 Notes are convertible (4,000,000 shares)) will be allocated to
additional paid-in capital, thus creating a discount to the debt. This discount
will be recognized as a charge to interest expense using the effective interest
method over the period from the date of issuance of the November 1999 Notes to
the date the November 1999 Notes first become convertible. In addition, a
portion of the proceeds of the November 1999 Notes equal to the fair value of
the November 1999 Warrants issued in conjunction with the November 1999 Notes
will be allocated to additional paid-in capital, thus creating an additional
discount to the debt. This additional discount, in an as yet to be determined
amount, will be recognized as a charge to interest expense using the effective
interest method over the fourteen month term of the November 1999 Notes.
The increase in fair value of the Further Amended Warrants as a result of
the decrease in exercise price will be allocated to additional paid-in capital,
thus creating an additional discount on the Further Amended Notes. This
additional discount, in an as yet to be determined amount, will be recognized as
a charge to interest expense using the effective interest method over the
remaining term of the Further Amended Notes.
The amendments described in the preceding paragraph will result in an
extraordinary charge, in an as yet to be determined amount, during the fourth
quarter of 1999.
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Because the Company wants to provide investors with more meaningful and
useful information, this Report contains, and incorporates by reference, certain
"forward-looking statements" that reflect the Company's current expectations
regarding the future results of operations, performance and achievements of the
Company. The Company has tried, wherever possible, to identify these
forward-looking statements by using words such as "anticipates," "believes,"
"estimates," "expects," "plans," "intends" and similar expressions. These
statements reflect the Company's current beliefs and are based on information
currently available to it. Accordingly, these statements are subject to certain
risks, uncertainties and contingencies, which could cause the Company's actual
results, performance or achievements to differ materially from those expressed
in, or implied by, such statements. These factors include, among others, the
following: the Company's ability to obtain additional financing in the near
future; 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, the fact that its assets are pledged
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; uncertainty about the Company's ability to compete effectively
against better capitalized competitors and to withstand downturns in its
business or the economy generally; demand for, and acceptance of, the Company's
products; the adverse effects on the liquidity of the Company's common stock
because of its delisting from the NASDAQ National Market in June 1999; continued
downward pressure on the prices charged for the Company's products due to
competition of rival manufacturers of radio frequency front end products for the
wireless telecommunications market; the timing and receipt of customer orders;
the Company's ability to attract and retain key personnel; and the effects of
legal proceedings. A more complete description of these risks, uncertainties and
assumptions is included in the Company's filings with the Securities and
Exchange Commission, including those described under the heading "Risk Factors"
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1998 and those disclosed under the heading "Risk Factors" in the Company's
Registration Statement on Form S-2, as amended, filed on July 9, 1999. 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 Report or to reflect the
occurrence of unanticipated events.
GENERAL
The following is a discussion and analysis of the historical results of
operations and financial condition of the Company and factors affecting the
Company's financial resources. This discussion should be read in conjunction
with the financial statements, including the notes thereto, set forth herein
under "Part I. - Financial Information, Item 1. Financial Statements" and in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998. This discussion 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 forward-looking statements. Such forward-looking statements
are qualified by reference to, and should be read in conjunction with, the
italicized language set forth above.
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 ("RF") front-end
products which are designed to enhance the quality, capacity, coverage, and
flexibility of 800 MHz cellular, 1.96GHz personal communications services
("PCS") and other wireless telecommunications services.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 and 1998
8
<PAGE> 11
Net revenues increased to $1,127,000 from $227,000, an increase of
$900,000, or 396%. This increase was primarily related to higher unit sales
volumes. The higher sales volumes were partially offset by reduced selling
prices.
Net revenues derived from international sales of the Company's products
were in U.S. dollars and were not material. Net revenues derived from leased
products were in U.S. dollars and were not material. Such leased products are
leased to certain of the Company's customers for testing purposes, and such
products are returned to the Company after completion of the tests.
Cost of products sold increased to $2,136,000 from $1,017,000, an increase
of $1,119,000 or 110.0%. The cost of products sold consists of direct material,
labor and overhead costs associated with the products that were shipped during
the period. Due to low utilization levels and excess capacity in the Company's
manufacturing facility, cost of products sold exceeded net revenues for the
period. The Company expects the cost of products sold 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
to $403,000 from $643,000, a reduction of $240,000 or 37.3%. These costs were
lower due to the successful development of the Company's core products,
increased efficiency in the Company's development processes and the focusing of
development efforts on products with a greater probability of commercial sales.
The Company expects to continue reducing its research and development expenses
during 1999.
Selling and marketing expenses decreased to $307,000 from $419,000, a
reduction of $112,000, or 26.7%. This reduction was primarily due to lower
exhibition, trade show, and travel expenses.
General and administrative expenses decreased to $697,000 from $843,000, a
reduction of $146,000, or 17.3%. This expense reduction was primarily due to
lower professional fees, and general office expenses.
Operating loss declined to $2,415,000 from $2,696,000, an improvement of
$281,000 or 10.4%. This improvement was primarily due to higher sales as well as
expenses for lower research and development, selling and marketing and general
and administrative.
Net interest expense decreased to $217,000 from $5,361,000, a decline of
$5,144,000 or 96.0%. This decrease was due to a decrease in non-cash interest
charges of $5,519,000.
Nine Months Ended September 30, 1999 and 1998
Net revenues increased to $1,956,000 from $1,738,000, an increase of
$218,000, or 12.5%. This increase was primarily related to higher unit volume.
The higher unit volume was partially offset by reduced selling prices.
Net revenues derived from international sales of the Company's products
were in U.S. dollars and were not material. Net revenues derived from leased
products are in U.S. dollars and were not material. Such leased products are
leased to certain of the Company's customers for testing purposes, and such
products are returned to the Company after completion of the tests.
Cost of products sold increased to $4,091,000 from $3,465,000, an increase
of $626,000, or 18.1%. The cost of products sold consists of direct material,
labor and overhead costs associated with the products that were shipped during
the period. Due to low utilization levels and excess capacity in the Company's
manufacturing facility, cost of products sold exceeded net revenues for the
period. The Company expects the cost of products sold 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
to $1,364,000 from $1,982,000, a reduction of $618,000 or 31.2%. These costs
were lower due to the successful development of the Company's core products,
increased efficiency in the Company's development processes and the focusing of
9
<PAGE> 12
development efforts on products with a greater probability of commercial sales.
The Company expects to continue reducing its research and development expenses
during 1999.
Selling and marketing expenses decreased to $1,211,000 from $1,248,000, a
decrease of $37,000 or 3.0%. This decrease was due primarily to decreased trade
show, travel and delivery expenses.
General and administrative expenses decreased to $2,130,000 from
$2,338,000, a reduction of $208,000, or 8.9%. This expense reduction was
primarily due to lower professional fees and general office supply expenses.
Operating loss declined to $6,841,000 from $7,295,000, an improvement of
$454,000, or 6.2%. This improvement was primarily due to lower research and
development expenses.
Net interest expense decreased to $490,000 from $8,454,000, a decline of
$7,964,000, or 94.2%. This decrease was primarily due to a decrease in non-cash
interest charges of $7,960,000.
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
1900 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 has identified,
developed and implemented corrective actions intended to ensure that its
software, equipment and systems will function properly with respect to dates in
the year 2000 and thereafter. The total cost of such year 2000 compliance
activities has not been material. Although the Company continues to assess its
software, equipment and systems which are potentially susceptible to the Year
2000 issue, the Company does not expect to incur material additional costs to
correct any newly identified potential problems. The Company believes that it
has no material exposure to contingencies related to the Year 2000 issue for the
products that it has sold to date.
The Company processes its transactions and applications utilizing a network
of personal computers. In addition, the Company's telephone system, fax
machines, payroll, alarm systems and other miscellaneous systems utilize
computer equipment and software. The Company has identified the software and
equipment which 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 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 communications 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
10
<PAGE> 13
customers, but has received indications that most of the Company's customers are
working on year 2000 compliance.
The Company's most likely worst case scenario with respect to the Year 2000
Issue is that (1) its manufacturing applications may malfunction and (2) third
party suppliers of raw materials and utilities and customers may be unable to
remediate their own Year 2000 Issues. In such scenario, the Company could
experience manufacturing interruptions, delays in distribution of its products
and reduced sales. This would have a material adverse effect on the Company's
operations. The Company currently has no contingency plan in the event such
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 September 30, 1999, the Company's cash and cash equivalents, including
restricted certificates of deposit, were $521,000, a decrease of $1,969,000 from
the December 31, 1998 balance of $2,490,000.
Amounts outstanding at September 30, 1999 from certain stockholders
included $681,000 in principal amount of promissory notes plus $142,000 of
accrued interest. 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.
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.
Despite the completion on November 5, 1999 of the issuance and sale of $1.0
million in principal amount of November 1999 Notes (information concerning which
is incorporated herein by reference from the Company's Form 8-K, dated November
5, 1999, and filed November 12, 1999), the Company believes that during the
fourth quarter of 1999 or the first quarter of 2000 it will require substantial
additional funds to finance its product development, manufacturing and marketing
activities and otherwise to maintain its operations. The Company's strategy to
generate sufficient working capital to fund its operations and cash requirements
in the future includes: increasing sales and advancing market penetration by
selling its products to original equipment manufacturers and customers in
overseas markets; building strong and enduring relationships with existing
customers and expanding product offerings to meet varying customer needs; and
reducing product costs through redesign, economies of scale in material
purchases, the refinement of manufacturing processes, and the further reductions
in overhead. The Company is actively seeking financing in order to obtain
working capital to continue its operations according to its current operating
plan through the fourth quarter of 1999 and beyond. In April 1999, the Company
hired Mesirow Financial, Inc. to assist the Company with raising additional
capital and evaluating strategic alternatives.
The outstanding May 1998 Notes, the 1999 Notes, the November 1999 Notes and
the Further Amended Notes (collectively, the "Notes") contain restrictions
limiting the Company's ability to incur additional indebtedness or to pay
dividends (other than in shares of Common Stock) and are secured by the
Company's assets. This may adversely affect the
11
<PAGE> 14
Company's ability to raise additional equity or debt financing. In the event
that the Company fails to achieve break-even or positive operating income during
the second quarter of 2001, the Notes may become immediately due and payable
unless the holders thereof agree to modify or waive such provision. In addition,
the Company's Common Stock was delisted from trading on the NASDAQ National
Market in June 1999 due to the Company's continuing inability to meet the net
tangible assets requirement for continued listing. The Common Stock is now
traded in the over-the-counter market and quoted on the National Association of
Securities Dealers, Inc. electronic bulletin board. This does not provide the
same liquidity for the trading of securities as NASDAQ. Consequently, if the
Company is unable to list the Common Stock for trading on another securities
market or exchange, the Company may be unable to obtain additional funding as
needed, and/or any such additional funding may be on disadvantageous terms.
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, potential products that
the Company would not otherwise relinquish. In particular, if the Company does
not secure adequate additional financing during the first quarter of 2000 (or
possibly earlier), the Company believes that it may not be able to continue as
a going concern.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any material market risk sensitive instruments.
12
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. 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, for a
total price of $4,000,000, to Mr. Siegler of 370,370.37 shares of Common Stock,
plus warrants (immediately exercisable at $12.96 per share) to purchase an
additional 370,370.37 shares of Common Stock. 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 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
13
<PAGE> 16
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 Drobny. The complaint also sought an unspecified amount of compensatory
and punitive damages, and attorneys' fees.
The Company and the Named Directors regarded 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 a shareholder derivative 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 his first amended complaint against the Named Directors but
excluded the Company itself as a defendant. The amended 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 and thereafter drawing two tranches of the financing. The first amended
complaint sought 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 alleged that the stock owned
by the putative class lost $61 million due to the financing the Named Directors
selected, and sought an unspecified amount of compensatory and punitive damages.
The Company and the Named Directors regarded the amended complaint as without
factual or legal merit. Accordingly, the Named Directors filed a motion to
dismiss Mr. Lipman's first amended complaint in July 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. In January 1999, Mr. Lipman and two added former
stockholders filed a second amended complaint against the Named Directors and
again included the Company itself as a defendant.
The second amended complaint alleged that the Named Directors breached
their duties of loyalty and due care to the putative class and further alleged
that the purported devaluation of the plaintiffs' stock resulting from the June
1997 financing was an improper "assessment" on the plaintiffs' shares for which
they sought 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. The Court granted the motion to dismiss in April 1999,
finding that (i) the plaintiffs could not assert their stock devaluation claims,
except derivatively, and (ii) the plaintiffs still had failed to fulfill the
prerequisites for maintaining a shareholder derivative action against the Named
Directors. In May 1999, the plaintiffs filed a third amended complaint against
the Company and the Named Directors.
14
<PAGE> 17
The third amended complaint reiterated the plaintiffs' previous allegations
that the Named Directors breached their duties of loyalty, due care and candor
to the putative class, and again alleged the plaintiffs' claims of an improper
"assessment." The third amended complaint also asserted two claims of purported
common law fraud and a supposed violation of the Illinois Consumer Fraud Act
based on allegations that the Company and the Named Directors had selectively
disclosed "material, non-public confidential information" to the non-party
financier in order to obtain the financing that the Company selected in June
1997, which allegedly reduced the Common Stock price. The plaintiffs sought an
unspecified amount of compensatory and punitive damages, interest and attorneys'
fees. In June 1999, the Company and the Named Directors filed a motion to
dismiss the third amended complaint, arguing that the plaintiffs' allegations of
purported market manipulation by the financier, facilitated by supposedly
improper selective disclosure, are beyond the jurisdiction of the Illinois court
and fail to allege certain essential elements of common law fraud and the
Illinois Consumer Fraud Act. The defendants' motion also argued that the
plaintiffs still had failed to fulfill the prerequisites for asserting their
stock devaluation claims as a shareholder derivative action. In August 1999, the
Court granted the Company's and the Named Directors' motion, and dismissed the
suit with prejudice.
Thereafter the plaintiffs filed a motion for reconsideration of the
dismissal; the Court denied the plaintiffs' reconsideration motion on September
23, 1999. On October 21, 1999, the plaintiff filed their notice of appeal from
the dismissal orders. The Company and the named Directors regard the appeal as
without merit and they intend to vigorously defend against the plaintiffs'
appeal from the Circuit Court's dismissal orders
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 alleged 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 sought an unspecified amount of
compensatory damages, various equitable relief and attorney's fees.
The Company and the Named Directors regarded 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. In July 1999, the Court of Chancery granted the defendants' motion to
dismiss the complaint finding that the plaintiffs had failed to satisfy the
prerequisites for maintaining a shareholder derivative action under Delaware
law. By order dated August 11, 1999, the Court of Chancery granted the Company's
and the named Directors' motion to dismiss with prejudice the suit as it relates
to Mr. Greenwald, the named plaintiff.
16(b) Litigation
On February 26, 1999, Mark Levy, derivatively on behalf of the Company,
filed a complaint against Southbrook International Investments, Ltd.
("Southbrook"), Elliott Associates, L.P. ("Elliott"), and Westgate
International, L.P. ("Westgate"), and against the Company as a "nominal
defendant." The complaint filed in the United States District Court for the
Southern District of New York, alleges that Southbrook, Elliott and Westgate,
while having beneficial ownership of more than 10% of the Company's common
stock, violated Section 16(b) of the Securities Exchange Act of 1934 in
connection with purchases and sales of Company securities within six month
periods. The complaint seeks to recover from Southbrook, Elliott and Westgate
their respective profits (in unspecified amounts) from those transactions. No
relief is sought against the Company as a nominal defendant.
Elliot and Westgate are currently investors in the Company with substantial
rights to acquire Company common stock by conversion of notes and exercise of
warrants and have designated four of the current six directors of the Company,
two of whom, Messrs. Mark Brodsky and Samuel Perlman, are affiliated with
Elliot.
15
<PAGE> 18
An amended complaint dated September 2, 1999 was served on the Company. The
amended complaint raises the same claims alleged in the original complaint. The
Company has not yet responded to the amended complaint.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Information concerning the New Notes and New Warrants sold by the Company
on November 5, 1999 and not registered under the Securities Act of 1933 is
incorporated herein by reference from the Company's Current Report on Form 8-K
dated November 5, 1999 and filed on November 15, 1999. The securities sold were
not registered under the Securities Act of 1933, in reliance upon the exemption
in Section 4(2) thereof for a transaction by an issuer not involving a public
offering, based upon the fact that the sale was made exclusively to financially
sophisticated institutional investors with which the Company had a pre-existing
relationship, which represented that they were acquiring the securities for
their own account for investment purposes and not for distribution.
The terms of the Company's debt, including the securities issued in
November 1999, prohibit the Company from paying dividends on its Common Stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibits are listed in the Exhibit Index, which list is incorporated herein
by reference.
(b) Reports on Form 8-K:
A Current Report on Form 8-K, dated and filed August 5, 1999, reported
under Item 5 and filed an exhibit.
A Current Report on Form 8-K, dated November 5, 1999, and filed on November
15, 1999, reported under Item 1, "Changes in Control of the Registrant" and
filed exhibits.
16
<PAGE> 19
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
ILLINOIS SUPERCONDUCTOR CORPORATION
Date: November 15, 1999 By: /s/ EDWARD W. LAVES
----------------------------------------
Edward W. Laves, Ph.D.
President and Chief Executive Officer
Date: November 15, 1999 By: /s/ KENNETH E. WOLF
----------------------------------------
Kenneth E. Wolf
Controller and Treasurer
(Principal Accounting Officer)
17
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
<S> <C>
3.1 Certificate of Incorporation of the Company, as amended,
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").
4.1 Specimen stock certificate representing Common Stock, incorporated
by reference to Exhibit 4.1 to the IPO Registration Statement.
4.2 Form of Series B Warrants, incorporated by reference to Exhibit 4.2
to the IPO Registration Statement.
4.3 Form of Series C Warrants, incorporated by reference to
Exhibit 4.3 to the IPO Registration Statement.
4.4 Form of Representative Warrant, incorporated by reference to
Exhibit 4.4 to the IPO Registration Statement.
4.5 Rights Agreement dated as of February 9, 1996 between the Company
and LaSalle National Trust, N.A., to the Exhibit to the Company's
Registration Statement on Form 8-A, filed with the SEC on February
12, 1996.
4.8 Warrant dated June 6, 1997 issued to Southbrook International
Investments, Ltd., incorporated by reference to Exhibit 4.5 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").
4.14 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, incorporated
by reference to Exhibit 4.18 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998 (the "1998
Form 10-K").
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
<S> <C>
4.19 Form of Warrant dated March 31, 1999, incorporated by reference
to Exhibit 4.19 to the 1998 Form 10-K.
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, incorporated by
reference to Exhibit 4.20 to the 1998 Form 10-K.
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, incorporated by
reference to Exhibit 4.21 to the 1998 Form 10-K.
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, incorporated by reference to
Exhibit 4.22 to the 1998 Form 10-K.
4.23 Letter Agreement, dated November 5, 1999, by and among the Company
and Elliott Associates, L.P., Westgate International, L.P. and
Alexander Finance, L.P. (the "Investors"), incorporated by
reference to Exhibit 10(a) to the Company's Form 8-K, dated
November 5, 1999 and filed November 15, 1999.
4.24 Letter Agreement re Modification of Covenants, dated November 5,
1999, by and among the Company and the Investors, incorporated by
reference to Exhibit 10(b) to the Company's Form 8-K, dated
November 5, 1999 and filed November 15, 1999.
4.25 Security Agreement, dated November 5, 1999, by and among the
Company and the Investors, incorporated by reference to Exhibit
10(c ) to the Company's Form 8-K, dated November 5, 1999 and filed
November 15, 1999.
4.26 Form of letter agreement, dated November 12, 1999 amending the
Letter Agreement identified as Exhibit 4.23, above, incorporated
by reference to Exhibit 10(f) to the Company's Form 8-K, dated
November 5, 1999 and filed November 15, 1999.
10.20 Employment Agreement dated April 12, 1999 between the Company and
Amr Abdelmonem, incorporated by reference Exhibit 10.20 to the
Company's Registration Statement on Form S-2, as amended, filed
with the SEC on July 9, 1999, Registration No.
333-77337.
27. Financial Data Schedule.
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 171,434
<SECURITIES> 0
<RECEIVABLES> 1,165,870
<ALLOWANCES> 23,592
<INVENTORY> 1,910,969
<CURRENT-ASSETS> 3,385,626
<PP&E> 6,089,170
<DEPRECIATION> 5,195,554
<TOTAL-ASSETS> 7,285,145
<CURRENT-LIABILITIES> 2,432,722
<BONDS> 0
0
0
<COMMON> 12,761
<OTHER-SE> 7,656,544
<TOTAL-LIABILITY-AND-EQUITY> 7,285,145
<SALES> 1,955,792
<TOTAL-REVENUES> 1,955,792
<CGS> 4,091,392
<TOTAL-COSTS> 4,091,392
<OTHER-EXPENSES> 4,705,464
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 609,391
<INCOME-PRETAX> 7,331,488
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,331,488
<DISCONTINUED> 0
<EXTRAORDINARY> 73,000
<CHANGES> 0
<NET-INCOME> 7,404,488
<EPS-BASIC> 0.59
<EPS-DILUTED> 0.59
</TABLE>
