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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 June 30, 2000
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 August 1, 2000, 30,925,457 shares of the registrant's Common Stock, par
value $0.001 per share, were outstanding.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C>
Item 1. Financial Statements ..................................................................... 3
Condensed Balance Sheets as of June 30, 2000 (unaudited) and December 31, 1999 ......... 3
Condensed Statements of Operations (unaudited) for the three months ended June 30, 2000
and 1999, and the six months ended June 30, 2000 and 1999 .............................. 4
Condensed Statements of Cash Flows (unaudited) for the three months ended June 30, 2000
and 1999, and the six months ended June 30, 2000 and 1999 .............................. 5
Notes to Condensed Financial Statements ................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .... 9
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 ................................................ 15
Item 3. Defaults Upon Senior Securities .......................................................... *
Item 4. Submission of Matters to a Vote of Security Holders ...................................... 15
Item 5. Other Information ........................................................................ *
Item 6. Exhibits and Reports on Form 8-K ......................................................... 16
</TABLE>
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* No reportable information under this item.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ILLINOIS SUPERCONDUCTOR CORPORATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 3,219,261 $ 723,711
Inventories 846,092 1,092,713
Accounts receivable, net 46,025 175,801
Prepaid expenses and other 199,744 428,475
------------ ------------
Total current assets 4,311,122 2,420,700
Property and equipment:
Property and equipment 8,153,841 8,089,169
Less: accumulated depreciation (5,824,986) (5,433,808)
------------ ------------
Net property and equipment 2,328,855 2,655,361
Restricted certificates of deposit 259,653 291,575
Patents and trademarks, net 602,784 592,823
Deferred financing fees, net 37,293 78,700
Deferred acquisition costs 146,096 --
------------ ------------
Total assets $ 7,685,803 $ 6,039,159
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY):
Current liabilities:
Accounts payable $ 461,953 $ 990,913
Accrued liabilities 681,828 589,043
Current portion of Senior Convertible Notes, net of discount 2,756,224 --
Current portion of other long-term debt 9,383 9,020
------------ ------------
Total current liabilities 3,909,388 1,588,976
Senior Convertible Notes, net of discount 7,737,685 13,002,068
Accrued interest on Senior Convertible Notes 703,850 638,743
Other long-term debt, less current portion 5,179 10,074
Deferred occupancy costs 90,910 91,010
Stockholders' equity (net capital deficiency):
Preferred stock; 300,000 shares authorized; No shares
issued and outstanding at June 30, 2000 and December 31, -- --
1999
Common stock ($.001 par value); 250,000,000 shares
authorized; 30,923,057 and 15,753,001 shares issued and
outstanding at June 30, 2000 and December 31, 1999, 30,923 15,753
respectively
Additional paid-in capital 84,297,461 74,249,643
Notes receivable from stockholders -- (680,696)
Accumulated deficit (89,089,593) (82,876,412)
------------ ------------
Total stockholders' equity (net capital deficiency) (4,761,209) (9,291,712)
------------ ------------
Total liabilities and stockholders' equity (net capital $ 7,685,803 $ 6,039,159
deficiency) ============ ============
</TABLE>
NOTE: The condensed balance sheet as of December 31, 1999 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.
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ILLINOIS SUPERCONDUCTOR CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 14,800 $ 317,159 $ 187,163 $ 829,059
Costs and expenses:
Cost of sales 330,162 946,550 979,245 1,955,576
Research and development 713,793 440,057 1,020,121 961,620
Selling and marketing 215,279 447,257 399,804 903,772
General and administrative 1,501,779 725,356 2,567,009 1,433,875
------------ ------------ ------------ ------------
Total costs and expenses 2,761,013 2,559,220 4,966,179 5,254,843
------------ ------------ ------------ ------------
Operating loss (2,746,213) (2,242,061) (4,779,016) (4,425,784)
Other income (expense):
Interest income 67,487 48,690 91,867 87,046
Non-cash interest expense on
Senior Convertible Notes (1,083,752) (228,450) (1,484,632) (351,021)
Other interest expense (15,559) (2,193) (17,143) (9,039)
Other income (expense), net (3,917) -- 4,040 --
------------ ------------ ------------ ------------
(1,035,741) (181,953) (1,405,868) (273,014)
------------ ------------ ------------ ------------
Loss before extraordinary item (3,781,954) (2,424,014) (6,184,884) (4,698,798)
Extraordinary item - debt
extinguishment -- -- (28,297) (73,000)
------------ ------------ ------------ ------------
Net loss $ (3,781,954) $ (2,424,014) $ (6,213,181) $ (4,771,798)
============ ============ ============ ============
Basic and diluted loss per share
before extraordinary item $ (0.12) $ (0.19) $ (0.23) $ (0.37)
Extraordinary item - debt
extinguishment -- -- -- (0.01)
------------ ------------ ------------ ------------
Basic and diluted loss per share $ (0.12) $ (0.19) $ (0.23) $ (0.38)
============ ============ ============ ============
Weighted average number of common
shares outstanding 30,560,776 12,630,461 27,585,386 12,594,105
============ ============ ============ ============
</TABLE>
See the accompanying Notes which are an integral part of the Condensed Financial
Statements.
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ILLINOIS SUPERCONDUCTOR CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(6,213,181) $(4,771,798)
Adjustments to reconcile net loss to net cash used in operating
activities:
Extraordinary item - debt extinguishment 28,297 73,000
Depreciation and amortization 407,858 478,666
Gain on sale of property and equipment -- (12,701)
Write-off of capitalized patent costs 31,775 --
Non-cash interest expense on Senior Convertible Notes 1,484,632 351,021
Changes in operating assets and liabilities (8,424) (200,999)
----------- -----------
Net cash used in operating activities (4,269,043) (4,082,811)
----------- -----------
INVESTING ACTIVITIES:
Decrease in restricted certificates of deposit 31,922 --
Payment of patent costs (58,417) (40,318)
Payment of deferred acquisition costs (146,096) --
Proceeds from sale of property and equipment -- 37,902
Acquisition of property and equipment (64,671) (100,820)
----------- -----------
Net cash provided by (used in) investing activities (237,262) (103,236)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of Senior Convertible Notes 4,000,000 3,300,000
Exercise of stock options 116,727 204
Exercise of warrants 2,889,660 --
Net (decrease) increase in other long-term debt (4,532) 9,577
----------- -----------
Net cash provided by financing activities 7,001,855 3,309,781
----------- -----------
Increase (decrease) in cash and cash equivalents 2,495,550 (876,266)
Cash and cash equivalents at beginning of period 723,711 2,152,595
----------- -----------
Cash and cash equivalents at end of period $ 3,219,261 $ 1,276,329
=========== ===========
</TABLE>
See the accompanying Notes which are an integral part of the Condensed Financial
Statements.
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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 six months ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. For further information, refer to the financial statements,
including the notes thereto, included in the Illinois Superconductor Corporation
(the "Company") Annual Report on Form 10-K for the fiscal year ended December
31, 1999.
NOTE 2 - NET LOSS PER SHARE
Basic and diluted net loss per share is computed based on the weighted
average number of common shares outstanding. Common shares issuable upon the
exercise of options and warrants and conversion of the Company's Senior
Convertible Notes are not included in the per share calculations since the
effect of their inclusion would be antidilutive.
NOTE 3 - INVENTORIES
Inventories consisted of the following:
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
Raw materials ................................ $ 541,000 $ 736,000
Work in process .............................. 95,000 --
Finished product ............................. 210,000 357,000
---------- ----------
$ 846,000 $1,093,000
========== ==========
NOTE 4 - SENIOR CONVERTIBLE NOTES
On May 15, 1998, March 31, 1999, November 5, 1999, and December 29, 1999,
the Company issued and sold $15,650,000 in aggregate principal amount of Senior
Convertible Notes ("the Notes") and issued detachable warrants to purchase an
aggregate of 6,250,000 shares of the Company's common stock.
On March 27, 2000, the Company issued and sold $4,000,000 in aggregate
principal amount of Senior Convertible Notes due January 2, 2001 (the "March
2000 Notes") and issued warrants (the "March 2000 Warrants") to purchase
1,600,000 shares of the Company's common stock. The March 2000 Notes bear
interest at 10% per annum, payable in kind or in cash, 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). Holders of the March 2000
Notes may convert the principal amount, plus accrued interest not paid in cash,
if any, into shares of the Company's common stock at a fixed conversion price of
$0.25 per share. The March 2000 Warrants have an exercise price of $0.25 per
share and expire on November 5, 2004.
Since the March 2000 Notes were issued with detachable warrants with a fair
value of $11,312,000 (calculated using the Black-Scholes Approximation Formula),
the entire $4,000,000 of proceeds received for the March 2000 Notes was
allocated to additional paid-in capital, creating a discount to the debt. This
discount is being recognized
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as a charge to interest expense using the effective interest method over the
nine month term of the March 2000 Notes.
At June 30, 2000, the amount of outstanding Senior Convertible Notes, net
of discounts and including accrued interest, recognized in the condensed balance
sheet is as follows:
Notes, due May 15, 2002 and bearing interest at 2% $ 959,000
Notes, due May 15, 2002 and bearing interest at 6% 6,778,000
Notes, due January 2, 2001 and bearing interest at 10% 2,534,000
Accrued interest 927,000
-----------
$11,198,000
===========
Payments due on the Senior Convertible Notes by maturity date, including
interest accrued through June 30, 2000, are as follows at June 30, 2000:
Notes, due January 2, 2001 $ 6,222,000
Notes, due May 15, 2002 9,309,000
-----------
$15,531,000
===========
Interest on the Senior Convertible Notes is payable in kind or in cash, at
the Company's option. However, if the Company does not meet certain requirements
commencing November 5, 2000, interest on the notes must be paid in cash. At any
time, holders of the Notes may convert the principal amount, plus accrued
interest not paid in cash (if any) into shares of the Company's common stock at
a fixed conversion price of $0.25 per share. All of the Company's assets are
pledged as security to certain of the purchasers of the Notes. Additionally, the
note purchase agreements relating to the Notes contain several covenants, which
limit the Company's ability to incur additional indebtedness and to create any
further lien, pledge, or encumbrance on any assets of the Company.
During the six months ended June 30, 2000, $4,120,222 in aggregate
principal amount of Senior Convertible Notes, plus accrued interest, was
converted into 11,562,457 shares of common stock. During the six months ended
June 30, 1999, $200,000 in aggregate principal amount of Senior Convertible
Notes, plus accrued interest, was converted into 188,363 shares of common stock.
For the six months ended June 30, 2000 and 1999, the Company recognized
extraordinary items of $28,297 and $73,000, respectively, in the condensed
statements of operations related to the Senior Convertible Notes.
The Company recognized $1,083,752 and $228,450 of non-cash interest charges
for the three months ended June 30, 2000 and 1999, respectively, and $1,484,632
and $351,021 of non-cash interest charges for the six months ended June 30, 2000
and 1999. These non-cash interest charges were a result of the amortization of
discounts and deferred financing fees and the accrual of pay in kind interest
related to the Notes.
It is not practicable to estimate the fair value of the Senior Convertible
Notes at June 30, 2000 because a quoted market price for such securities is not
available, the Company has not developed a valuation model necessary to make
such an estimate, and the cost of obtaining an independent valuation would be
prohibitive.
NOTE 5 - SETTLEMENT OF SHAREHOLDER NOTE RECEIVABLE
On February 22, 2000, the Company reached a settlement agreement with the
borrowers of $680,696 in principal amount of shareholder notes receivable. The
Company agreed to release the borrowers' obligations under the notes in return
for the borrowers' surrender of warrants to purchase 210,196 shares of common
stock of the Company held by them. As a result of this settlement, the Company
recorded a charge of $822,776 to additional paid-in capital in February 2000,
reflecting the carrying amount of the notes and related interest accrued, which
approximates the fair value of the warrants surrendered.
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NOTE 6 - STOCK OPTIONS AND WARRANTS
On February 15, 2000, the Board of Directors of the Company granted to
certain executive level employees (i) an aggregate of 440,000 Deferred Stock
Units ("DSU's") and (ii) an aggregate of 585,000 non-qualified stock options
under the Company's 1993 Amended and Restated Stock Option Plan (the "Plan").
The DSU's represent the right to receive an equivalent number of restricted
shares of the Company's common stock. The non-qualified stock options have an
exercise price of $4.1875 per share (the closing price of the Company's common
stock on February 15, 2000). On March 24, 2000, the Board of Directors of the
Company also granted to a certain executive level employee 500,000 non-qualified
stock options under the Plan. The exercise price for these non-qualified stock
options is $6.6094 (the closing price of the Company's common stock on March 24,
2000). Both the DSU's and non-qualified stock options vest at the rate of 10%,
20%, 30% and 40% on the first, second, third and fourth anniversary,
respectively, of the date of grant. The executive level employees have the right
to defer receipt of the common stock subject to the DSU's to a later date as
elected by the employee.
The DSU's and the non-qualified stock options were granted subject to
approval by the Company's stockholders of an amendment to the Company's Charter
as well as amendment to the Company's 1993 Stock Option Plan. On July 18, 2000,
the Company's stockholders' approved the amendment to the Company's Charter and
the amendment to the Plan. Beginning in the third quarter of 2000, the Company
will recognize compensation expense for the DSU's over the vesting period based
on their intrinsic value of $1,925,000, which is the number of DSU's multiplied
by the closing price of the Company's common stock on July 18, 2000, the
measurement date.
During the six months ended June 30, 2000, warrants for an aggregate of
3,448,907 shares of the Company's common stock were exercised for proceeds of
$2,889,660. No warrants were exercised during the six months ended June 30,
1999.
In March 2000 the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25. The Company is required
to adopt the Interpretation on July 1, 2000. The Interpretation requires that
stock options that have been modified to reduce the exercise price be accounted
for as variable. The Company has repriced options on May 10, 1999 and in
accordance with generally accepted accounting principles accounts for the
repriced stock options as fixed. As a result of adopting the Interpretation, the
Company will be required to apply variable accounting to these options and if
the market price of the Company's stock increases it will recognize additional
compensation expense that it otherwise would not have incurred. However, the
impact cannot be determined as it is dependent on the change in the market price
of the stock from July 1, 2000 until the stock options are exercised, forfeited,
or expire unexercised.
NOTE 7 - SUBSEQUENT EVENTS
On July 18, 2000, the stockholders of the Company approved an increase in
the total authorized capital stock of the Company from 60,100,000 shares to
250,300,000 shares. The number of authorized shares of common stock was
increased from 60,000,000 shares to 250,000,000 shares, and the number of
authorized shares of preferred stock was increased from 100,000 shares to
300,000 shares.
On August 8, 2000, the Company acquired all of the outstanding shares of
capital stock of Spectral Solutions, Inc. ("SSI"), in exchange for 3,500,000
shares of the Company's common stock and the assumption of certain options held
by SSI shareholders. SSI develops and manufactures cryogenic superconducting RF
front-end systems for the wireless industry.
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NOTE CONCERNING FORWARD-LOOKING STATEMENTS
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 ability to integrate SSI's and the Company's businesses as a
result of the merger with SSI; 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, all of 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; decline in 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; volatility of the Company's common stock price;
continued downward pressure on the prices charged for the Company's products due
to competition of rival manufacturers of radio frequency and 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, 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" and "Item 1. Financial Statements" and
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1999. 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 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 cellular, personal communications services ("PCS") and other
wireless telecommunications services.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 and 1999
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The Company's net sales decreased $302,359, or 95.3%, to $14,800 for the
three months ended June 30, 2000 from $317,159 for the three months ended June
30, 1999, as a result of lower unit volume. The Company anticipates its unit
volume to remain at a reduced pace in 2000 based on forecasts of slow domestic
expansion by cellular operators and a delayed deployment of sales to
international markets.
Cost of sales decreased to $330,162 for the three months ended June 30,
2000 from $946,550 for the same period in 1999. The reduction in cost of sales
was due to the decrease in sales volume, lower provisions for obsolete
inventory, and favorable benefits from the completion of supplier concession
plans, offset by the effects of low utilization levels and excess capacity. The
Company expects cost of sales to exceed net sales until it manufactures and
ships a significantly higher amount of its commercial products.
The Company's research and development expenses increased to $713,793 for
the three months ended June 30, 2000, from $440,057 for the same period in 1999,
an increase of 62.2%. These costs were higher primarily as a result of a
collaborative research agreement, which began during the second quarter of 2000,
and higher prototype spending on the Company's recently announced All
Temperature Performance ("ATP(TM)") filter product. During the remainder of
2000, management expects research and development expenditures to continue on a
consistent level.
Selling and marketing expenses decreased to $215,279 for the three months
ended June 30, 2000, from $447,257 for the same period in 1999, a decrease of
51.9%. The decrease in these expenses was due to a decrease in personnel and
reduced sales-related travel costs. Management expects selling and marketing
expenses to increase during 2000 from current levels as sales and marketing
efforts are expanded for the Company's ATP(TM) filter product.
General and administrative expenses increased to $1,501,779 for the three
months ended June 30, 2000, from $725,356 for the same period in 1999, an
increase of 107.0%. This increase was primarily attributable to an increase in
consulting, travel and professional costs. Consulting costs increased as a
result of upgrades made to information systems infrastructure, travel costs were
higher as management pursued new relationships with customers in Europe and
Asia, and professional fees increased due to the Company's strategic initiatives
and its prolonged proxy solicitation in connection with its annual meeting.
Non-cash interest expense increased to $1,083,752 for the three months
ended June 30, 2000 from $228,450 for the same period in 1999, an increase of
374.4%. The increase in this expense is primarily a result of the issuance of an
aggregate of $6,000,000 of Senior Convertible Notes in November 1999, December
1999 and March 2000 at higher effective rates of interest.
Six Months Ended June 30, 2000 and 1999
The Company's net sales decreased $641,896, or 77.4%, to $187,163 for the
six months ended June 30, 2000 from $829,059 for the six months ended June 30,
1999, as a result of lower unit volume. The Company anticipates its unit volume
to remain at a reduced pace in 2000 based on forecasts of slow domestic
expansion by cellular operators and a delayed deployment of sales to
international markets.
Cost of sales decreased to $979,245 for the six months ended June 30, 2000
from $1,955,576 for the same period in 1999. The reduction in cost of sales was
due to the decrease in sales volume, lower provisions for obsolete inventory,
and favorable benefits from the completion of supplier concession plans, offset
by the effects of low utilization levels and excess capacity.
The Company's research and development expenses increased to $1,020,121 for
the six months ended June 30, 2000, from $961,620 for the same period in 1999,
an increase of 6.1%. These costs were higher as a result of a collaborative
research agreement, which began during the second quarter of 2000, and higher
prototype spending on the Company's recently announced All Temperature
Performance ("ATP(TM)") filter product. These costs were offset by reduced
travel expenditures.
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Selling and marketing expenses decreased to $399,804 for the six months
ended June 30, 2000, from $903,772 for the same period in 1999, a decrease of
55.8%. The decrease in these expenses was due to a decrease in personnel and
reduced travel, trade show, delivery, and advertising costs.
General and administrative expenses increased to $2,567,009 for the six
months ended June 30, 2000, from $1,433,875 for the same period in 1999, an
increase of 79.0%. This increase was primarily attributable to an increase in
consulting, travel and professional costs. Consulting costs increased as a
result of upgrades made to information systems infrastructure, travel costs were
higher as management pursued new relationships with customers in Europe and
Asia, and professional fees increased due to the Company's strategic initiatives
and its prolonged proxy solicitation and annual meeting timetable.
Non-cash interest expense increased to $1,484,632 for the six months
ended June 30, 2000 from $351,021 for the same period in 1999, an increase of
322.9%. The increase in this expense is primarily a result of the issuance of an
aggregate of $9,300,000 of Senior Convertible Notes in March 1999, November
1999, December 1999 and March 2000 at higher effective rates of interest.
For the six months ended June 30, 2000 and 1999, the Company recognized
extraordinary items of $28,297 and $73,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company's cash and cash equivalents were $3,219,261,
an increase of $2,495,550 from the balance at December 31, 1999 of $723,711.
This increase primarily reflects proceeds received during the six months ended
June 30, 2000 from the new issuance of Senior Convertible Notes and the exercise
of warrants and stock options of $4,000,000 and $3,006,387, respectively,
reduced by the use of $4,269,043 of cash for operations.
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 the Company's
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 new issuance of Senior Convertible Notes in March 2000 and the
receipt of proceeds from the exercise of warrants and stock options in the six
months ended June 30, 2000, the Company believes that during the fourth quarter
of 2000, it will require substantial additional funds to finance its operations
and to re-pay or re-finance $6.2 million of Senior Convertible Notes due January
2, 2001, if such notes are not converted by that date. The Company expects,
given current business conditions, that there exists a reasonable probability
that such conversion will occur. 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 both domestically and
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 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 2000 and beyond. To that end, the Company has
commenced discussions with potential strategic and financial investors, with the
goal to secure additional financing by the fourth quarter. The Company intends
to enter into negotiations with the purchasers of the Senior Convertible Notes
due January 2, 2001 to extend the maturity of these notes. Additionally, the
Company has entered into a factoring agreement, whereby the Company may assign
and sell its interest, on a full recourse basis, in its present and future trade
accounts receivable, subject to the consent of its current investors. The
Company has pledged its receivables and inventory as collateral under the
factoring agreement. The factoring agreement expires on September 27, 2000 and
will not be renewed.
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The Company's Senior Convertible 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 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 de-listed 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 the NASDAQ National Market. In February 2000, the Company applied
to NASDAQ for listing of the Company's Common Stock on the NASDAQ Small-Cap
Market. However, there can be no assurance that the Common Stock will be listed.
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, or potential products that
the Company would not otherwise relinquish. In particular, if the Company does
not secure adequate additional financing, the Company believes that it may not
be able to continue as a going concern.
The Company is currently conducting discussions with several unrelated
parties regarding potential strategic business opportunities, acquisitions or
alliances that may take a number of different forms, including contractual
licensing relationships or joint venture relationships. The SSI transaction is
one such business opportunity. Discussions with other potential strategic
partners have not developed to a point where a structure or specific terms and
conditions have been definitively agreed upon. There can be no assurance that
the discussions will lead to any business opportunities or alliances, or that
any other transactions will be consummated.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any material market risk sensitive instruments.
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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 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.
The Company filed a motion for summary judgment against Mr. Siegler, which
was on hold pending the deposition of an expert retained by Mr. Siegler in the
case. The Company deposed this witness in March 2000. A hearing on the Company's
summary judgment motion was held in June 2000, and the motion was subsequently
denied. The parties are completing additional discovery ordered by the Court. No
trial date has been set.
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.
Lipman Litigation
In January 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.
In February 1998, the Company and the Named Directors filed a motion to
dismiss Mr. Lipman's complaint, arguing in part that the plaintiff's claims were
barred by their failure to fulfill the legal prerequisites for suing the Named
Directors. In June 1998, the court granted the Company's and the Named
Directors' motion to dismiss the
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complaint. Thereafter Mr. Lipman filed an amended complaint against the Named
Directors but excluding 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 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 Named Directors filed a motion to dismiss Mr. Lipman's amended complaint
which the court granted 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 including 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. The Company and the
Named Directors filed a motion to dismiss the second amended complaint which the
Court granted 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. 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, and attorneys' fees. In June 1999, the
Company and the Named Directors filed a motion to dismiss the third amended
complaint, arguing in part that the plaintiffs still had failed to fulfill the
prerequisites for asserting their stock devaluation claims as a shareholder
derivative action, and that the plaintiffs' claims of selective disclosure and
fraud were barred on substantive and procedural grounds. 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 which the Court denied in September 1999. In October 1999, the
plaintiffs filed their notice of appeal from the dismissal orders. All briefing
on the appeal was completed in May 2000. The Company and the Named Directors
regard the appeal as without merit and they intend to vigorously defend against
it.
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.
Elliott 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 five directors of
the Company, two of whom, Messrs. Mark Brodsky and Samuel Perlman, are employed
by a company that provides management services to, and is under common control
with, Elliott and Westgate.
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An amended complaint dated September 2, 1999 was served on the Company. The
amended complaint raises the same claims alleged in the original complaint. As a
"nominal defendant" the Company, by agreement with the plaintiff, has not
responded to the lawsuit, but has reserved its right to move to dismiss any
amended pleading.
Defendants moved to dismiss the amended complaint in February 2000. In
response, the plaintiff has cross-moved for leave to amend his complaint again.
The proposed new pleading adds Alexander Finance, LP as a defendant for the
Section 16(b) claims, but also proposes state law breach of fiduciary duty
claims against current directors Howard Hoffman, Tom L. Powers, Mark D. Brodsky,
George Calhoun and Sam Perlman and former directors Edward W. Laves, Robert D.
Mitchum and Terry S. Parker, based on the board of directors' decision to issue
securities to the defendants at $0.25 per share.
Laves Litigation
On July 17, 2000 Edward W. Laves filed a complaint for Damages for Breach
of Contract and Violation of Illinois Wage Payment and Collection Act against
the Company and current directors George Calhoun, Samuel Perlman, and Mark
Brodsky in the Circuit Court of Cook County, Illinois, County Department, Law
Division. Damages in excess of $9.5 million are sought against the defendants on
a joint and several basis; Laves has asked for a jury.
In this two count complaint, Count One alleges that Laves, the former
President, Chief Executive Officer and Chairman of the Board of Directors of the
Company, terminated his employment with the Company on November 24, 1999. It is
further alleged that Laves' resignation was caused by material changes in his
"authority, control, leadership and decision making" at the Company, made by the
Board of Directors starting in or about November, 1999. These acts allegedly
constituted "constructive termination" pursuant to the terms of his employment
agreement with the Company, dated as of July 1, 1998 (the term of which expired
on December 31, 1999). Damages are sought for severance payments and certain
stock options.
Count Two of the Complaint alleges, based on the same facts as set forth in
Count One, that the individual-named defendants, as officers and/or agents of
the Company, knowingly permitted the Company to violate the Illinois Wage
Payment and Collection Act by failing to pay Laves severance and vest him with
certain stock options, thus imposing personal liability against those
individuals as employers under the Act. The same damages are sought under this
count as under Count One.
No responsive pleading to the Complaint is yet due. The Company intends to
vigorously oppose the Complaint. As previously disclosed, the Company believes
that Mr. Laves is not entitled to any severance or other compensation based upon
his resignation from the Company.
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Information concerning the Senior Convertible Notes and Warrants issued by
the Company on March 27, 2000 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 and filed on March 28, 2000. The securities issued 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 March
2000, prohibit the Company from paying dividends on its Common Stock (other than
in shares of Common Stock).
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Stockholders' Meeting for 2000 was originally
scheduled for May 17, 2000. As a result of the Company's agreement to acquire
SSI, and because there were not a sufficient number of stockholders voting on
the proposals before the Meeting, the original meeting was adjourned.
Subsequently, the Board of Directors of the Company decided to reschedule the
Annual Meeting for June 30, 2000 and to reset the record date for such Meeting
to June 6, 2000. The June 30 Meeting was also adjourned, this time until July
18, 2000.
Additional information regarding the adjournments of the Annual Meeting can
be found in the Company's Additional Definitive Proxy Materials filed June 9,
2000.
At the Company's Annual Stockholders' Meeting held July 18, 2000, the Company's
stockholders approved:
1. The election of Dr. George Calhoun and Mr. Samuel Perlman to the Company's
Board of Directors, for a term expiring at the Company's annual
stockholders' meeting in 2003, or until their successors are duly elected
and qualify;
2. An amendment to the Company's Certificate of Incorporation increasing the
authorized share capital of the Company to 250,300,000 shares, of which
250,000,000 shares are designated Common Stock and of which 300,000 shares
are designated as Preferred Stock;
3. An amendment to the Company's Amended and Restated 1993 Stock Option Plan
which, among other things, increases the maximum number of shares for which
stock options may be granted to any individual during any calendar year,
and provides for an additional 3,500,000 shares to be reserved for issuance
under the Plan;
4. The appointment of Ernst & Young LLP as the independent auditors of the
Company's financial statements for the fiscal year ending December 31,
2000.
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 May 15, 2000.
A Current Report on Form 8-K, dated and filed May 19, 2000.
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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: August 11, 2000 By: /s/ GEORGE CALHOUN
---------------------------------------------
George Calhoun
Chief Executive Officer
(Principal Executive Officer)
Date: August 11, 2000 By: /s/ CHARLES F. WILLES
---------------------------------------------
Charles F. Willes
Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
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").
3.3 Certificate of Amendment to Certificate of Incorporation filed
July 18, 2000, increasing the authorized share capital of the
Company incorporated by reference to the Company's Registration
Statement on Form S-8 filed August 7, 2000 (the "August 2000
S-8").
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., incorporated by
reference 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.
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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").
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, LP (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 Letter Agreement, dated November 12, 1999 amending the Letter
Agreement identified as Exhibit 4.23, above, incorporated by
reference to Exhibit 4.26 to the Company's quarterly report on
Form 10-Q filed May 12, 2000 for the quarterly period ended
March 31, 2000 (the "First Quarter" 10-Q).
4.27 Securities Purchase Letter Agreement dated December 28, 1999, by
and among the Company and the Investors, incorporated by
reference to Exhibit 4.27 to the First Quarter 10-Q.
4.28 Securities Purchase Letter Agreement dated March 27, 2000, by
and among the Company and the Investors, incorporated by
reference to Exhibit 4.28 to the First Quarter 10-Q.
10.1 1993 Amended and Restated Stock Option Plan, as amended,
incorporated by reference to Exhibit 4.6 to the August 2000
S-8.**
10.2 Employment Agreement dated April 12, 1999 between the Company
and Amr Abdelmonem, incorporated by reference to 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.
10.3 Agreement and Plan of Merger, dated May 17, 2000, by and among
the Company, Spectral Solutions, Inc. ("SSI") and certain
shareholders of SSI, incorporated by reference to Annex A
to the Company's definitive Additional Proxy Materials filed
June 9, 2000.
27. Financial Data Schedule.*
----------------
* Filed herewith.
** Management Contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-Q.
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