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SCHEDULE 14A INFORMATION
Supplement to Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
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Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/X/ Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
ILLINOIS SUPERCONDUCTOR CORPORATION
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement,
if other than the Registrant)
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Payment of Filing Fee (Check the appropriate box):
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/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction
applies:
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(2) Aggregate number of securities to which transaction
applies:
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(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how
it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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George Calhoun
Chief Executive Officer
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June 8, 2000
Dear Stockholder:
Our annual stockholders' meeting has been rescheduled to June 30, 2000.
Further, we have changed the record date for shareholders entitled to vote at
the meeting to the close of business on June 6, 2000. I am writing to explain
why we made these scheduling changes and also to invite you to a conference call
we will be holding on June 13 (details below).
We previously adjourned the annual meeting from its original May 15 date for
two reasons. First, we were required to update our original proxy statement to
give you a description of our proposed acquisition of Spectral Solutions, Inc.
("SSI"), a superconducting filter company with expertise in thin film and
tower-mounted applications. Second, we needed more time to reach a number of
stockholders and former stockholders from whom we had not heard. This is because
with two of the proposals, brokers do not have the discretion to vote shares
without receiving specific instructions from their customers. These two
proposals -- authorizing the issuance of more stock, and amending the stock
option plan -- are vital to the Company's ability to execute its business plan.
The SSI transaction provides the latest example of this, since we will be
acquiring SSI by issuing 3.5 million shares of our common stock.
Nearly two months have passed since the original record date, April 10, and
we have seen unusually heavy trading activity in the interim. Many stockholders
as of that date no longer hold an interest in the Company, so they do not have
an incentive to vote. And investors who have come into our stock after April 10
could not vote on the important proposals requiring stockholder attention. As a
result, while the proxies submitted to date have been solidly supportive of the
proposals, the process of attracting proxies representing a majority of the
outstanding shares has been unusually time-consuming and expensive. WE FELT THAT
THE SENSIBLE AND FAIR SOLUTION WAS TO RESET THE RECORD DATE TO JUNE 6, 2000, SO
THAT A MORE-CURRENT STOCKHOLDER LIST COULD BE USED TO SOLICIT VOTES.
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Because of the new record date, we are re-circulating our proxy statement as
well as a new proxy card and a supplement to the proxy statement. PLEASE
PROMPTLY SUBMIT THIS PROXY CARD AND VOTE YOUR SHARES FOR ALL FOUR PROPOSALS.
(Although any previously submitted and unrevoked proxy card should still be
effective for stockholders who have not changed their share ownership or
brokerage accounts, we encourage everyone to use the new proxy card as an extra
precaution to make sure that your vote is counted.) We apologize for any
inconvenience to those of you who may be receiving this solicitation for a
second time.
Since your support for these proposals is so important to the Company, I
want to invite you to a conference call I will conduct on Tuesday, June 13, at
10:00 a.m. Eastern time. The call-in numbers will be 800-260-0719 (calling from
the U.S.) or 612-332-0226 (calling from outside the U.S.); ask for the "ISC
Conference Call." The call will also be simultaneously broadcast via the
internet, accessible from isc.com. A recording of the conference call will be
available for replay for 30 days at 800-475-6701 (calling from the U.S.) and
320-365-3844 (calling from outside the U.S.), access code 522312.
To raise questions about the annual meeting or request additional copies of
the solicitation materials or the proxy card, please contact our proxy
solicitor:
MACKENZIE PARTNERS, INC.
156 Fifth Avenue
New York, New York 10010
(800) 322-2885 (call toll-free)
(212) 929-5500 (call collect)
(212) 929-0308 (facsimile)
[email protected] (e-mail)
We continue to be excited about the Company's potential, and we believe that
approval of the proposals at the annual meeting and the closing of the SSI
transaction will be important steps to help us realize that potential. We
appreciate your continued interest and support.
Sincerely,
[SIGNATURE]
George C. Calhoun
Chief Executive Officer
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NOTICE OF RESCHEDULING OF ANNUAL MEETING OF STOCKHOLDERS
TO JUNE 30, 2000
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To the Stockholders of
Illinois Superconductor Corporation:
Notice is hereby given that the Annual Meeting of Stockholders of Illinois
Superconductor Corporation (the "Company"), a Delaware corporation, has been
rescheduled and will now be held at the offices of Sonnenschein Nath &
Rosenthal, located at 8000 Sears Tower, Chicago, Illinois 60606, on June 30,
2000, beginning at 10:00 a.m. local time. The rescheduled meeting will be for
the same purposes as the originally scheduled meeting, which are:
(1) To elect two Class I directors to the Company's board of directors;
(2) To approve the amendment and restatement of the Company's Certificate of
Incorporation, as amended, to increase the Company's authorized capital
stock to 250,300,000 shares, consisting of 250,000,000 shares of Common
Stock and 300,000 shares of Preferred Stock;
(3) To approve the amendment and restatement of the Company's Amended and
Restated 1993 Stock Option Plan, as amended;
(4) To ratify the appointment by the board of directors of Ernst & Young LLP
as the independent auditors of the Company's financial statements for
the fiscal year ending December 31, 2000; and
(5) To transact such other business as may properly come before the meeting
or any adjournment or postponement thereof.
The board of directors has fixed the close of business on June 6, 2000 as
the new record date for determining stockholders entitled to notice of, and to
vote at, the rescheduled meeting. Only stockholders of record of the Company as
of the close of business on June 6, 2000 will be entitled to vote at the
meeting.
If you have questions about the annual meeting or would like additional
copies of the Proxy Statement or the proxy card, you should contact our proxy
solicitor:
MACKENZIE PARTNERS, INC.
156 Fifth Avenue
New York, New York 10010
(800) 322-2885 (call toll free)
(212) 929-5500 (call collect)
(212) 929-0308 (facsimile)
[email protected] (e-mail)
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By Order of the Board of Directors,
/s/ CYNTHIA QUIGLEY
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CYNTHIA QUIGLEY
Secretary
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ILLINOIS SUPERCONDUCTOR CORPORATION
451 KINGSTON COURT
MT. PROSPECT, ILLINOIS 60056
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SUPPLEMENT TO PROXY STATEMENT FOR THE ANNUAL MEETING OF
SHAREHOLDERS RESCHEDULED FOR JUNE 30, 2000
JUNE 8, 2000
The following information supplements the proxy statement, dated April 13,
2000 (the "Proxy Statement"), of Illinois Superconductor Corporation (the
"Company") furnished to shareholders of the Company in connection with the
solicitation of proxies on behalf of the board of directors of the Company for
use at the Company's 2000 Annual Meeting of Shareholders. The meeting was
commenced at the Renaissance Chicago Hotel, One West Wacker, Chicago, Illinois
60601, on May 17, 2000 at 1:00 P.M. and was adjourned to the offices of
Sonnenschein Nath & Rosenthal, 8000 Sears Tower, Chicago, Illinois 60606, on
June 15, 2000 at 1:00 P.M. The Company has rescheduled the meeting to June 30,
2000. The June 30 meeting will also be held at Sonnenschein's offices at
10:00 A.M. Proxies are being solicited for the June 30 meeting and at any
adjournments or postponements thereof. The purposes of the annual meeting are as
stated in the notice of annual meeting of shareholders, dated April 13, 2000,
which accompanied the Proxy Statement. This supplement should be read in
conjunction with the Proxy Statement.
In connection with rescheduling the meeting, the Company also fixed June 6,
2000 as the new record date for that meeting. Only holders of record of shares
of the Company's common stock as of the close of business on June 6, 2000, are
entitled to receive notice of and to vote at the rescheduled annual meeting.
As of the new record date, the Company had outstanding 30,843,916 shares of
Common Stock, par value $.001 per share, including attached preferred stock
purchase rights (the "Common Stock"). Each of the outstanding shares of Common
Stock is entitled to one vote on all matters to come before the Annual Meeting.
As of the new record date, none of the Company's Preferred Stock, par value
$.001 per share (the "Preferred Stock"), was outstanding.
Stockholder List. A list of stockholders entitled to vote at the rescheduled
Annual Meeting, arranged in alphabetical order, showing the address and number
of shares registered in the name of each stockholder, will be open to the
examination of any stockholder for any purpose germane to the Annual Meeting
during ordinary business hours commencing on the date hereof and continuing
through the date of the Annual Meeting at the principal offices of the Company,
451 Kingston Court, Mt. Prospect, Illinois 60056.
If you were not a stockholder as of April 10, 2000, it is very important
that you return a properly executed and completed proxy card. Alternatively, if
you were a stockholder as of April 10, 2000, continue to be a stockholder as of
June 6, 2000, have not changed your share ownership or brokerage accounts and
you previously returned a fully competed and duly executed proxy card in
connection with the annual meeting, that proxy remains and will remain effective
unless you have revoked or subsequently revoke that proxy. IN ANY EVENT, BECAUSE
OF THE SIGNIFICANCE OF THE MATTERS TO BE VOTED UPON AT THE ANNUAL MEETING, AND
IN ORDER TO AVOID ANY POTENTIAL CONFUSION, WE ENCOURAGE ALL STOCKHOLDERS TO
RETURN A FULLY COMPLETED AND PROPERLY EXECUTED PROXY CARD IN THE ATTACHED
ENVELOPE.
THE PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
THEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THE PROXY WILL
BE VOTED "FOR" THE NOMINEES LISTED ON THE PROXY, "FOR" THE PROPOSAL TO APPROVE
THE CHARTER AMENDMENT, "FOR" THE PROPOSAL TO APPROVE THE AMENDMENT AND
RESTATEMENT OF THE COMPANY'S 1993 STOCK
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OPTION PLAN, AND "FOR" RATIFICATION OF APPOINTMENT OF ERNST & YOUNG LLP AS THE
INDEPENDENT AUDITORS OF THE COMPANY'S FINANCIAL STATEMENTS FOR THE FISCAL YEAR
ENDING DECEMBER 31, 2000.
THE COMPANY BELIEVES THAT APPROVAL OF EACH OF THE PROPOSALS TO BE CONSIDERED
AT THE ANNUAL MEETING ARE IN THE BEST INTERESTS OF THE COMPANY AND ITS
STOCKHOLDERS, AND ACCORDINGLY REITERATES ITS RECOMMENDATION THAT THE
STOCKHOLDERS VOTE IN FAVOR OF THE PROPOSAL TO AMEND THE COMPANY'S CERTIFICATE OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF CAPITAL STOCK AND
EACH OF THE OTHER PROPOSALS, AND FOR EACH OF THE NOMINEES TO THE BOARD OF
DIRECTORS.
To raise questions about the annual meeting or request additional copies of
the Proxy Statement, this supplement or the proxy card, please contact our proxy
solicitor:
MACKENZIE PARTNERS, INC.
156 Fifth Avenue
New York, New York 10010
(800) 322-2885 (call toll free)
(212) 929-5500 (call collect)
(212) 929-0308 (facsimile)
[email protected] (e-mail)
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RECENT DEVELOPMENTS -- THE SSI MERGER
One of the matters that will be voted on at the annual meeting is the
proposal to amend and restate the Company's Certificate of Incorporation, as
amended, to increase the Company's authorized capital stock to 250,300,000
shares, consisting of 250,000,000 shares of Common Stock and 300,000 shares of
Preferred Stock (the "Charter Amendment"). As noted in the Proxy Statement,
increasing the Company's authorized capital stock will facilitate the Company's
pursuit of strategic business opportunities. One such strategic business
opportunity that the Company has been pursuing is the proposed merger (the
"Merger") of SSI Acquisition Corp., a Colorado corporation and a wholly-owned
subsidiary of the Company ("Sub"), with and into Spectral Solutions, Inc., a
Colorado corporation ("SSI"). Although approval by the Company's stockholders is
not required to approve the Merger, a vote "for" the Charter Amendment to
increase the number of authorized shares of the Company's common stock will
enable the Company to consummate the Merger.
SUMMARY TERM SHEET FOR ACQUISITION OF SPECTRAL SOLUTIONS, INC.
On May 17, 2000, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Sub, SSI, and certain stockholders of SSI. Under
the Merger Agreement, the Company will acquire SSI through a merger of Sub with
and into SSI. Following the Merger SSI, as the surviving corporation, will
become a wholly-owned subsidiary of the Company. The following are the most
material terms of the proposed Merger:
-- In the Merger, a total of 3,500,000 shares of the Company's Common Stock are
to be issued to stockholders of SSI (including shares reserved for issuance
upon SSI Stock Options and 111,111 shares issuable to Falkenberg Capital
Corporation for its services as SSI's financial advisor in connection with
the Merger). These shares of the Company's Common Stock have a value of
approximately $20,671,700, based on the $5.9062 per share closing price of
the Company's Common Stock on the date that the Merger Agreement was
executed (May 17, 2000). Each share of SSI's non-voting common stock and
each share of SSI voting preferred stock will be converted into
approximately 0.17476 shares of the Company's Common Stock (subject to
reduction in the event of certain permitted issuances of SSI capital stock).
See "Proposal to Approve Charter Amendment to Increase Capital Stock of the
Company and the Merger of SSI Acquisition Corp. with and into Spectral
Solutions, Inc. -- Material Terms of the Merger; the Merger Agreement --
Merger Consideration; Conversion of Securities" in this Supplement to Proxy
Statement.
-- Before the closing of the Merger can occur, the Company must increase the
number of authorized but unreserved and unissued shares of Common Stock so
that it can validly issue shares of its Common Stock in the Merger. See
"Proposal to Approve Charter Amendment to Increase Capital Stock of the
Company and the Merger of SSI Acquisition Corp. with and into Spectral
Solutions, Inc. -- Vote Required for Approval of the Merger" in this
Supplement to Proxy Statement.
-- The Company and the other parties to the Merger Agreement have agreed to
customary representations, warranties, covenants and conditions in the
Merger Agreement. 5% of the shares issuable to SSI's stockholders will be
held in escrow until March 31, 2001 (or, if earlier, thirty days after the
Company receives its audited financial statements for fiscal 2000) to fund
indemnification claims. Furthermore, SSI's principal stockholders (holding
in excess of 85% of the outstanding SSI stock) have also agreed to indemnify
the Company for their pro rata share of any such claims to the extent that
damages exceed the escrowed amount. See "Proposal to Approve Charter
Amendment to Increase Capital Stock of the Company and the Merger of SSI
Acquisition Corp. with and into Spectral Solutions, Inc. -- Material Terms
of the Merger; the Merger Agreement" in this Supplement to Proxy Statement.
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-- In connection with the Merger Agreement, certain stockholders of SSI
(holding in excess of 85% of the outstanding capital stock of SSI) have
entered into Option and Exclusive Dealing Agreements (the "Option
Agreement") with the Company. Under these agreements, these SSI stockholders
have:
-- Agreed to vote in favor of the Merger and against certain other
prospective proposals which would impede or prevent the Merger;
-- Granted the Company a proxy to vote their SSI capital stock in
accordance with the Merger Agreement; and
-- Granted the Company an option to purchase their SSI capital stock for
the same price which would be payable for such shares if the Merger was
consummated (the "Option"). The Option is exercisable on or after
June 30, 2000 (or earlier in the event the Merger Agreement is
terminated under certain circumstances).
THIS SUMMARY TERM SHEET IS A SUMMARY OF A FEW OF THE MOST MATERIAL TERMS OF
THE MERGER. YOU SHOULD READ THE INFORMATION UNDER "PROPOSAL TO APPROVE CHARTER
AMENDMENT TO INCREASE CAPITAL STOCK OF THE COMPANY AND THE MERGER OF SSI
ACQUISITION CORP. WITH AND INTO SPECTRAL SOLUTIONS, INC." IN THIS SUPPLEMENT TO
PROXY STATEMENT FOR A MORE COMPLETE DISCUSSION OF THE MERGER.
PROPOSAL TO APPROVE CHARTER AMENDMENT TO INCREASE CAPITAL STOCK OF THE COMPANY
AND THE MERGER OF SSI ACQUISITION CORP. WITH AND INTO SPECTRAL SOLUTIONS, INC.
Pursuant to the Merger Agreement, the Company will acquire SSI through the
merger of Sub with and into SSI. The Merger shall become effective upon the
satisfaction or waiver of the conditions set forth in Article VII of the Merger
Agreement and the filing of articles of merger with the Secretary of State of
the State of Colorado (the "Effective Time"). At the Effective Time, Sub will
cease to exist and SSI will continue to exist as a wholly-owned subsidiary of
the Company.
The parties to the Merger Agreement agreed that the consideration to be
exchanged for all of the outstanding shares of capital stock and stock options
of SSI would consist of 3,500,000 shares of Company Common Stock (including
111,111 shares issuable to Falkenberg Capital, SSI's financial advisor in
connection with the Merger), having a value of $20,671,700 based on the $5.9062
per share closing price of the Company's Common Stock on May 17, 2000 (the date
on which the Merger Agreement was executed) as reported on the National
Association of Securities Dealers' electronic bulletin board.
PARTIES TO THE MERGER AGREEMENT
The Merger Agreement was entered into on May 17, 2000 by and among the
Company, SSI Acquisition Corp., a wholly-owned subsidiary of the Company, SSI,
Russell Scott III, and certain other stockholders of SSI (who collectively own
in excess of 85% of the outstanding capital stock of SSI).
THE COMPANY. The Company is headquartered at 451 Kingston Court, Mt.
Prospect, Illinois 66056, (847) 391-9400. The Company is a leader in the
commercialization of high performance filter technology for the wireless
telecommunications industry. The Company manufactures and markets radio
frequency products which enhance the quality and coverage of cellular telephone,
PCS and other wireless telecommunications services. The Company maintains a
website at http://www.ilsc.com. Further information regarding the Company can be
found in the Company's Form 10-K, which was mailed to the Company's stockholders
with the Proxy Statement, and in Annex C to this Supplement (which includes a
copy of the Company's Quarterly Report on Form 10-Q for the period ended
March 31, 2000).
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SSI. The address of SSI's executive offices is 740 South Pierce Avenue,
Louisville, Colorado 80027, (303) 664-6060. SSI is privately-held company that
develops cryogenic superconducting radio frequency ("RF") front-end systems for
the wireless industry. SSI has recently introduced the industry's first
commercial tower-mounted superconducting system incorporating a superconducting
receiver filter and a cryogenic low-noise amplifier ("LNA"). SSI has pioneered
the development of a super-cooled receive enhancer that can significantly expand
a wireless network's coverage and call quality. Combining the latest in advanced
filtering and low noise amplifier technologies, SSI offers the first
self-contained, high volume manufacturable, tower-top unit that operates in all
weather conditions. SSI maintains a website at http://www.spectralsolutions.com.
SSI is the successor to the business of Superconducting Core
Technologies, Inc. ("SCT"). SCT was founded in the late 1980s at about the time
high temperature superconducting was first discovered. SCT in February 1998
ceased commercial operation, and filed for bankruptcy protection in
September 1998. SSI purchased all of SCT's assets out of bankruptcy and
succeeded to its businesses in April 1999.
OTHER PARTIES. Other parties to the Merger include (i) Sub, (ii) Russell
Scott III and (iii) certain of the other stockholders of SSI (collectively with
Scott, the "Principal Stockholders"). The Principal Stockholders hold more than
85% of the capital stock of SSI and have each agreed to vote in favor of the
Merger and have granted ISC a proxy to vote the Principal Stockholders' shares
in favor of the Merger.
SSI'S CAPITAL STOCK
The authorized capital stock of SSI consists of 20,000,000 shares of voting
preferred stock, par value $0.001 per share, and 10,000,000 shares of non-voting
common stock, par value $0.001 per share. There are issued and outstanding
14,284,147.65 shares of SSI preferred stock owned of record and beneficially by
22 persons, and there are issued and outstanding, assuming full dilution,
4,747,233.35 shares of SSI common stock owned of record and beneficially by 17
persons. SSI also has outstanding stock options to purchase an aggregate of
360,000 shares of SSI's non-voting common stock which are owned by 6 option
holders. Pursuant to the Merger Agreement, SSI has the right, under certain
circumstances, to issue additional shares of its capital stock, however, the
issuance of such additional shares will not increase the aggregate consideration
issuable by the Company in the Merger.
BACKGROUND OF THE MERGER
The Company had a series of preliminary discussions with SCT, SSI's
predecessor, in late 1997 through early 1998, to explore a potential merger of
the two companies. Although the Boards of Directors of each of the two companies
were apprised of these discussions, the discussions never resulted in a formal
agreement or proposal and these discussions were abandoned in early 1998. The
parties continued to have some informal contact thereafter, but none of these
contacts resulted in any formal discussions, proposals or agreements between the
parties, and the Company did not participate in SCT's bankruptcy proceedings.
In December, 1999, Mark Brodsky, Chairman of the Company, was approached by
SSI regarding a potential transaction, by Robert Paige, a member of SSI's Board
of Directors. In January 2000, Mr. Paige followed up his conversations with
Mr. Brodsky with a brief discussion regarding a potential transaction with
George Calhoun, Chief Executive Officer of the Company. A follow-up conversation
was had shortly thereafter between Mr. Calhoun, on behalf of the Company, and
Mr. Paige and Richard Herring (SSI's Chief Executive Officer), on behalf of SSI,
and the parties agreed to begin preliminary due diligence.
On January 19-20, 2000, Mr. Calhoun, accompanied by other Company technical
experts, traveled to SSI's headquarters in Louisville, Colorado for business due
diligence sessions, strategic planning and a plant tour. On January 27, 2000,
Mr. Herring, Michael Cromar (SSI's chief technical officer) and Shawn Doyle
(SSI's officer in charge of marketing and sales) traveled to the Company's
executive offices to discuss the Company with its management and for a plant
tour.
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On February 2 through February 3, 2000, Messrs. Herring and Paige,
accompanied by other SSI personnel, met with Messrs. Brodsky and Calhoun, as
well as Samuel Perlman, a director of the Company, and Cynthia Quigley, the
Company's Chief Financial Officer, to discuss substantive terms of a proposed
transaction between SSI and the Company. This meeting did not result in an
agreement as to the definitive terms of a transaction, and the parties continued
to discuss terms. During this period, the Company performed further business due
diligence of SSI, including further on-sight due diligence on February 25-26.
On February 26, 2000, the parties reached a preliminary agreement on the
terms of the transaction, and on March 3, 2000, the Company circulated its first
draft of the Merger Agreement. Drafts of the additional documents were
circulated shortly thereafter. During the months of March, April and May, the
Company (assisted by the law firm of Sonnenschein Nath & Rosenthal) and SSI
(assisted by its financial advisor, Falkenberg Capital, and the law firms of
Gould & Ratner and Gelt, Paddison & Zinn, P.C.) negotiated the provisions of the
applicable agreements. The parties also continued to perform business, financial
and legal due diligence. During late April and early May, drafts of the
documents were distributed to certain key outside stockholders of SSI who the
Company had determined were required signatories.
On April 28, 2000, the Board of Directors of the Company held a telephonic
meeting at which the terms of the proposed transaction were extensively
discussed. Mr. Calhoun discussed the merits of the transaction and management's
views regarding the advantages of pursuing the transaction. Mr. Brodsky then
informed the Board regarding the status of the negotiations, and discussed the
open issues, which included the scope and terms of the indemnity obligations of
the SSI Stockholders and the willingness of certain SSI stockholders to sign the
agreement. After an extensive discussion, the Board approved the Company's entry
into the transaction, subject to the resolution of the open issues in a manner
acceptable to Messrs. Brodsky and Calhoun. Following several more weeks of
negotiations regarding these issues with SSI and certain of its shareholders,
the final terms of the Merger Agreement were agreed upon on May 17, 2000 and the
parties executed the Merger Agreement as well as the Option and Exclusive
Dealing Agreements. The Company issued a press release announcing its entry into
the Merger Agreement on May 17, 2000.
REASONS FOR ENGAGING IN THE MERGER
The Company is proposing to acquire SSI because the Company believes:
-- SSI's products will enhance the Company's current product portfolio for the
wireless industry, particularly through its tower-mounted configurations;
-- SSI offers a strong patent portfolio which will enhance the Company's patent
position, particularly with respect to tower-mount configurations;
-- SSI brings strong management and highly regarded technical talent, which
will help build the Company's organization and address its strategic
opportunities more efficiently. Among SSI's key personnel are:
-- Dr. Richard Herring, President of SSI, who has nearly 40 years of
technical and management experience in cryogenics, superconducting
applications and aerospace, including a number of years at Ball
Aerospace;
-- Michael Cromar, the chief technical officer of SSI, who is one of the
leading technologists in the field of superconducting applications for
wireless networks and leads a technical team that has been working
together for several years developing wireless superconducting RF
front-end products; and
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-- Shawn Doyle, SSI's Vice President of Sales and Marketing, who previously
was Vice-President of Sales for Wireless Networks at Nortel, and later
held the same position at Trition Network Systems, a broadband wireless
start-up company; and
-- The acquisition will make the Company the only superconducting company in
the world with both thick-film and thin-film technology, allowing it to
better serve the diverse needs of the wireless industry as it moves from
Second Generation (2G) to Third Generation (3G) wireless technology.
The Company's Board of Directors approved the Merger Agreement after
concluding that the Merger was in the best interests of the Company and its
stockholders and determining that the terms and conditions in the Merger
Agreement are fair. In reaching this conclusion, the Board considered various
factors, including the following:
-- The terms and conditions of the Merger Agreement;
-- SSI's assets, obligations, operations, and prospects and those of the
industry in which SSI and the Company compete;
-- SSI's management and technical strengths and the management and technical
needs of the Company;
-- Emerging trends in the superconductor market;
-- An analysis of the wireless telecommunications equipment industry generally;
-- A determination that certain of the technology employed by SSI in its core
business would be helpful in developing the technology employed in the
Company's core business;
-- The potential difficulties in integrating the operations of the two
companies; and
-- The added cash needs associated with acquiring SSI and operating a larger
organization.
In light of the variety of factors considered by the Board, the Board did
not quantify or otherwise attempt to assign relative weights to the specific
factors considered in making its determination to approve the Merger Agreement.
However, in the view of the Board, the potentially negative factors considered
by it were not sufficient, either individually or collectively, to outweigh the
positive factors related to the Merger. The Board has not contracted with a
financial advisor or other consultant for the purpose of securing a fairness
opinion regarding the transactions contemplated in the Merger Agreement.
VOTE REQUIRED FOR APPROVAL OF THE MERGER
Under Delaware law, the vote of the Company's stockholders is not required
to approve the Merger. Nevertheless, it is a condition to the Closing of the
Merger that the Company adopt an amendment to its Certificate of Incorporation
to increase the number of authorized shares of capital stock, and that there be
sufficient authorized but unreserved and unissued shares of Company Common Stock
to permit the valid issuance of shares in the Merger. That amendment, which is
more thoroughly discussed in the Proxy Statement, does require stockholder
approval. The affirmative vote of a majority of the outstanding shares of Common
Stock of the Company entitled to vote as of June 6, 2000 is required to approve
the Charter Amendment and Merger. FAILURE TO VOTE ON THE PROPOSAL, EITHER BY
FAILING TO COMPLETE AND RETURN THE ENCLOSED PROXY CARD OR FAILING TO VOTE AT THE
ANNUAL MEETING OF STOCKHOLDERS, WILL COUNT AS A VOTE AGAINST THE CHARTER
AMENDMENT AND MERGER. The consummation of the Merger also requires the approval
of the Board of Directors and a two-thirds vote of the issued and outstanding
shares of SSI. The SSI Board has approved the Merger, the Merger Agreement, and
the transactions contemplated thereby and at a meeting on May 31, 2000 SSI's
stockholders also approved the Merger and the Merger Agreement.
7
<PAGE>
DIFFERENCES IN RIGHT OF THE COMPANY'S SECURITY HOLDERS AS A RESULT OF THE MERGER
The issuance of shares of the Company's Common Stock to SSI stockholders as
consideration for the Merger will result in a dilution of the voting power of
the shares of Common Stock held by the Company's current stockholders, in that
there will be approximately 11.35% greater number of shares outstanding after
the Merger (as compared to the shares outstanding on the record date), or 3.54%
on a fully diluted basis (assuming conversion of all outstanding Convertible
Notes and exercise of all outstanding options and warrants).
ACCOUNTING TREATMENT
The Merger will be treated as a purchase for accounting and financial
reporting purposes, in accordance with United States generally accepted
accounting principles. Under this method of accounting, the assets and
liabilities of SSI will be recorded on the Company's books at their estimated
fair market value.
FEDERAL INCOME TAX TREATMENT
Neither the Company nor the Company's stockholders will recognize gain or
loss for federal income tax purposes as a result of the Merger.
MATERIAL TERMS OF THE MERGER; THE MERGER AGREEMENT
The summary of the Merger Agreement set forth below highlights the material
terms of the Merger Agreement and the Merger. A copy of the Merger Agreement is
attached to this Supplement to Proxy Statement as Annex A. This description may
not include all the information that interests you. We urge you to read the
Merger Agreement carefully and in its entirety.
GENERAL. Under the Merger Agreement, the Company will acquire SSI through
the merger of Sub with and into SSI. SSI will survive the Merger as a
wholly-owned subsidiary of the Company.
The closing of the Merger will occur on the first business day immediately
following the day upon which all conditions to the Merger have been satisfied or
waived, or at such other time as the Company and SSI agree. Both SSI and Sub are
Colorado corporations. The parties will file articles of merger, together with
any other documents required by law to give effect to the Merger, with the
Secretary of State of the State of Colorado. The Merger will become effective
upon the filing of these documents (the "Effective Time"). We currently expect
that the closing of the Merger will take place shortly after the Company's
annual meeting, to the extent the proposed amendment of the Company's
Certificate of Incorporation is approved, at that meeting.
MERGER CONSIDERATION. In the Merger Agreement, the parties agreed that the
consideration to be exchanged for all of the outstanding capital stock of SSI
would consist of 3,500,000 shares of Common Stock of the Company (including
shares reserved for SSI Stock Options and 111,111 shares issuable to Falkenberg
Capital, SSI's financial advisor).
CORPORATE GOVERNANCE MATTERS. The Articles of Incorporation of SSI, as in
effect immediately prior to the Effective Time of the Merger, shall be amended
as of the Effective Time without any further action on the part of SSI or Sub to
read in its entirety as the Articles of Incorporation of Sub (except that the
name of the surviving corporation shall be Spectral Solutions, Inc.), and, as so
amended, such Articles of Incorporation shall be the Articles of Incorporation
of the surviving corporation until thereafter changed or amended as provided
therein or by applicable law. At the Effective Time and without any further
action on the part of SSI or Sub, the Bylaws of Sub shall be the Bylaws of the
surviving corporation. Upon the
8
<PAGE>
effectiveness of the Merger, Mark Brodsky will become the sole director of the
surviving corporation and the officers of the surviving corporation will be as
follows:
<TABLE>
<S> <C>
President George Calhoun
Secretary and Treasurer: Cynthia Quigley
Assistant Secretary: Samuel Perlman
</TABLE>
CONVERSION OF SECURITIES. Each holder of SSI common stock and preferred
stock will receive for each share of such stock owned 0.17476 shares of Company
Common Stock (subject to reduction in the event of certain permitted issuances
of SSI Securities), plus cash for any fractional shares of Company Common Stock
to which such holder is entitled. Notwithstanding the foregoing, the Company
shall deposit into an escrow established pursuant to an escrow agreement among
the Company, Russell Scott III, as Shareholder Representative, and an escrow
agent 5% of the aggregate number of shares of Company Common Stock otherwise
payable to holders of SSI securities. The escrowed shares will secure a portion
of SSI's stockholders' indemnity obligations under the Merger Agreement.
Furthermore, notwithstanding the foregoing, the number of shares of Company
Common Stock to be issued to holders of SSI securities shall be equitably
adjusted to the extent such adjustment is necessary to preserve the economic
value of such shares as determined by an independent accounting firm selected by
the Company in the event of a change in the number of outstanding shares of the
Company's capital stock resulting from a stock dividend, stock split, reverse
stock split, share combination, recapitalization, merger, consolidation,
acquisition of property or shares, asset spin-off, split-off, reorganization,
stock rights offering, liquidation or similar event, of or by the Company
between May 17, 2000, and the date such shares are distributed.
FRACTIONAL SHARES. The Company will not issue any fractional shares of its
stock in the Merger. In lieu of issuing any fractional shares, the Company will
pay cash to each holder of fractional shares, or will deposit cash into the
escrow, as the case may be, in an amount equal to such fraction multiplied by
the average closing price of the Company Common Stock for the ten consecutive
trading days immediately preceding the second business day prior to the
Effective Time as reported on the principal national stock exchange or automated
quotation system of a national securities association on which the Company
Common Stock is then listed or qualified for trading, or if the Company Common
Stock is not then so listed, as reported on the National Association of
Securities Dealers' electronic bulletin board.
STOCK OPTIONS AND OTHER STOCK RIGHTS. All of SSI's obligations with respect
to each outstanding option to purchase shares of SSI Common Stock, whether
vested or unvested, shall be assumed by the Company under its Amended and
Restated 1993 Stock Option Plan or another parallel plan adopted by the Company
for this purpose. Each option assumed by the Company shall continue to have, and
be subject to, similar terms and conditions set forth therein immediately prior
to the Merger, except that such option shall be governed by the applicable
Company Stock Option Plan, and such option will be exercisable for shares of the
Company Common Stock. The number of shares of the Company Common Stock to be
received upon exercise of an option and the option exercise price shall be
appropriately adjusted in a manner similar to the method of conversion of
currently outstanding shares of SSI Common Stock into shares of the Company
Common Stock so that holders of options to purchase SSI Common Stock shall
preserve the economic value of such options. For purposes of such adjustment in
the number of shares of the Company Common Stock to be received and the exercise
price of the options, the fair market value of the Company Common Stock shall be
based on the closing price per share on the trading date immediately following
the Effective Time, as reported on the National Association of Securities
Dealers' electronic bulletin board (or in the Wall Street Journal if such
closing price is reported therein), and the fair market value of the SSI Common
Stock is based on the fair market value of the number of shares of the Company
Common Stock issuable in exchange for each outstanding share of SSI Common Stock
pursuant to the Merger Agreement.
9
<PAGE>
REPRESENTATIONS AND WARRANTIES. In the Merger Agreement, SSI, its principal
stockholders, and the Company make representations and warranties about
themselves and their businesses, including, but not limited to, the following:
(i) By SSI and the principal stockholders of SSI as to:
-- SSI's proper organization and existence, and SSI's good standing and
qualification to do business in various states;
-- SSI's capital structure;
-- the lawful ownership of SSI shares by its shareholders, including the number
of shares each owns;
-- SSI's subsidiaries;
-- SSI's power and authority to enter into the Merger Agreement and, subject to
the approval of SSI's shareholders, consummate the Merger;
-- SSI's due execution and delivery of the Merger Agreement and the validity
and enforceability of the Merger Agreement;
-- conflicts with, breaches of or defaults under corporate documents of SSI,
applicable laws, certain contracts of SSI or applicable government orders,
permits, licenses or decrees;
-- SSI's financial statements and certain liabilities;
-- the absence of certain adverse changes or events;
-- the required governmental and third-party approvals, filings, consents and
permits and SSI's compliance with applicable laws;
-- SSI's real and personal property;
-- accounts and notes receivable and payable;
-- SSI's insurance, bonds and bank accounts;
-- litigation;
-- tax matters;
-- employee benefit plans and other employee and labor matters;
-- SSI's material contracts and major customers and vendors;
-- environmental matters;
-- assets necessary for the operation of SSI's business;
-- broker's fees;
-- non-compete agreements;
-- inventory;
-- Year 2000 compliance;
-- no misstatements or omissions by SSI in its representations and warranties
in the Merger Agreement, and the accuracy of information provided by SSI and
its stockholders and representatives for inclusion in this supplement;
-- investment representation;
-- regulatory status of SSI; and
10
<PAGE>
-- execution and enforceability of certain other agreements.
(ii) By the Company as to:
-- the Company's and Sub's proper organization, existence and good standing and
qualification to do business in various states;
-- the Company's and Sub's power and authority to enter into the Merger
Agreement and consummate the Merger;
-- the Company's and Sub's due execution and delivery of the Merger Agreement
and the validity and enforceability of the Merger Agreement;
-- conflicts with, breaches of or defaults under corporate documents of the
Company and Sub, applicable laws, certain contracts of the Company or Sub or
applicable government orders, permits, licenses or decrees;
-- the Company's capital structure;
-- the Company's filings with the Securities and Exchange Commission.
CONDUCT OF SSI'S BUSINESS PENDING CLOSING. SSI has agreed that, during the
period from the date of the Merger Agreement until the closing of the Merger,
except as otherwise permitted or contemplated in the Merger Agreement, or unless
the Company consents or approves in writing, that SSI shall carry on its
business in the usual, regular and ordinary course in substantially the same
manner as previously conducted. SSI, however, is permitted to sell additional
securities to accredited investors under certain limited circumstances for the
purposes of funding its transaction expenses and its ongoing operations prior to
Closing.
NO SOLICITATION. SSI and the stockholders have agreed not to solicit or
participate in negotiations with, or provide any information to, any person
(other than the parties to the Merger Agreement) in connection with any exchange
offer, merger, consolidation, sale of substantial or material assets, sale of
securities, acquisition of beneficial ownership of or the right to vote
securities, liquidation, dissolution or similar transaction involving SSI.
ACCESS TO INFORMATION. Upon reasonable notice and at reasonable times until
the closing of the Merger or the termination of the Merger Agreement, SSI has
agreed to provide the Company reasonable access to all of its operations,
offices, properties, books and records.
ALL REASONABLE EFFORTS. Each of the parties to the Merger Agreement has
agreed to use all reasonable efforts to do all things necessary, proper and
advisable under applicable laws and regulations to consummate the transactions
contemplated by the Merger Agreement.
OBTAINING CONSENTS AND APPROVALS. SSI and the principal stockholders have
agreed to use commercially reasonable efforts to obtain all necessary consents
and approvals necessary to the consummation of the transactions contemplated by
the Merger Agreement, to diligently assist the Company in preparing any of the
same, and to keep the Company apprised of any inquiries made of SSI by any
governmental authority with respect to the transactions contemplated by the
Merger Agreement.
SHAREHOLDER APPROVAL. SSI has agreed to take all action necessary to
convene a meeting of its stockholders to act on the Merger Agreement and the
Merger, to recommend approval thereof to the SSI stockholders and solicit
proxies or consents therefor, and to use commercially reasonable efforts to
secure the vote or consent of such stockholders to approve the Merger Agreement
and the Merger. Each SSI stockholder who is a signatory to the Merger Agreement
waives any and all dissenter's rights or appraisal rights in connection with the
Merger and any other transactions contemplated thereby.
11
<PAGE>
REGISTRATION RIGHTS. The Company has agreed to, subject to certain
restrictions, by the later of 30 days after the Effective Time or 45 days after
SSI delivers to the Company audited financial statements as of March 31, 2000,
file a registration statement with respect to the shares of the Company's Common
Stock to be issued to SSI security holders, and to use commercially reasonable
efforts to cause such registration statement to be promptly declared effective.
Each of the Company and the SSI security holders whose shares are included in a
registration statement under the Merger Agreement, will, with limitations,
indemnify and hold the other harmless against any damages to which it becomes
liable under federal or state securities laws as a result of the other's acts or
omissions. If, more than one year after the Effective Time, the Company proposes
to register any of its securities under the Securities Act, and the registration
form to be used may be used for the registration of the Company's common stock
for resale, the Company will promptly notify all SSI stockholders receiving
Company common stock in the Merger of its intention to effect such a
registration and, subject to certain limitations, will include in the
registration the Company common stock issued to SSI stockholders pursuant to the
Merger Agreement which may not be resold by the holder thereof under Rule 144.
RESTRICTIVE COVENANTS. Each of the principal stockholders of SSI (subject
to certain exceptions) has agreed to restrictive covenants regarding, among
others, the revelation of confidential information to competitors of the
Company, the engagement in a business that competes with the Company's
businesses, and the solicitation of current and former customers and employees
of SSI.
CONDITIONS
CERTAIN MUTUAL CONDITIONS. The obligations of each party to the Merger
Agreement to complete the Merger are subject to satisfaction or waiver of the
following conditions:
-- no order of any governmental authority preventing the consummation of the
Merger shall be in effect, and no proceeding brought by any governmental
authority shall be pending or threatened which seeks to prevent the
consummation of the Merger or would materially impair the ability of the
Company to operate the business of SSI;
-- the Escrow Agreement shall have been executed and delivered by the Company,
Russell Scott III, as Shareholder Representative, and the Escrow Agent (as
defined therein);
-- SSI's stockholders shall have approved the Merger Agreement and the Merger;
and
-- the Company shall have sufficient unreserved and unissued shares of
authorized Common Stock to deliver duly authorized, validly issued and fully
paid and nonassessable shares of Company Common Stock to SSI security
holders.
CERTAIN ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE COMPANY AND SUB. The
obligations of the Company and Sub to consummate the transactions contemplated
by the Merger Agreement are contingent upon the satisfaction or waiver of the
following additional conditions:
-- the representations and warranties of SSI and the principal stockholders set
forth in the Merger Agreement shall be true and correct in all material
respects as of the closing date as though such representations and
warranties were made on and as of the closing date; each of the obligations
of SSI and the principal stockholders shall have been satisfied; and the
Company shall have received certificates executed by SSI and the principal
stockholders to that effect.
-- all action necessary to be taken by SSI's Board of Directors and
stockholders to authorize the Merger Agreement and the transactions
contemplated thereby shall have been taken, and all consents, approvals and
authorizations required to be obtained by SSI pursuant to the Merger
Agreement shall have been obtained.
-- certain employees of SSI shall have entered into an employment agreement
with the surviving company and/or the Company, and no key employees of SSI
shall have terminated their employment
12
<PAGE>
with SSI since the date of the Merger Agreement other than as a result of
death, disability or bona fide retirement; and each employee of SSI as of
the Effective Time shall have entered into the Company's standard form of
confidentiality and inventions agreement;
-- each of the holders of options to purchase SSI securities shall have
consented, in writing in a form reasonably acceptable to the Company and its
counsel, to the Company's assumption of such options pursuant to the Merger
Agreement;
-- the Company shall have received all consents and approvals of all
governmental authorities and other persons required to be obtained by SSI
and its principal stockholders in connection with the execution, delivery
and performance of the Merger Agreement and the consummation of the
transactions contemplated thereby;
-- the Company shall have received such certificates of SSI's officers and the
principal stockholders and such other documents or agreements, in each case
in form and substance satisfactory to counsel to the Company, as may
reasonably be requested by the Company;
-- SSI shall have delivered to the Company the opinions of Gelt, Paddison &
Zinn, P.C. and Gould & Ratner, each counsel to SSI and the Principal
Stockholders, addressed to the Company and dated as of the Effective Time;
-- the Company's stockholders shall have duly adopted and approved an amendment
to the Company's Certificate of Incorporation increasing the number of
authorized shares of Company Common Stock to not less than 250,000,000
shares, and the Company shall have duly filed an amendment to its
Certificate of Incorporation with the Secretary of State of Delaware to
effect such increase in the number of authorized shares of Company Common
Stock;
-- any SSI stockholder who has purchased SSI securities in a Permitted Company
Issuance (as defined in the Merger Agreement) shall have executed and
delivered a Letter of Representation (as defined in the Merger Agreement);
-- each SSI stockholder who has not executed a Letter of Representation shall
have executed and delivered a certificate making certain representations for
securities law purposes, as well as appointing Russell Scott III as their
representative under the Escrow Agreement;
-- all of SSI's indebtedness to any of its affiliates shall have been forgiven
or converted into SSI stock;
-- the time period in which notices or other actions required for SSI
stockholders to assert dissenters' or appraisal rights shall have terminated
and the holders of not more than 1% of the SSI securities shall have
asserted such rights; and
-- SSI shall have delivered to the Company audited financial statements in a
form that could be filed by the Company as part of a Report on Form 8-K
under the Securities Act.
CERTAIN ADDITIONAL CONDITIONS TO OBLIGATIONS OF SSI AND THE PRINCIPAL
STOCKHOLDERS. The obligations of SSI and the principal stockholders to
consummate the transactions contemplated by the Merger Agreement are subject to
the satisfaction or waiver of the following additional conditions:
-- the representations and warranties of the Company and Sub set forth in the
Merger Agreement shall be true and correct as of the closing date;
-- the Company and Sub shall have performed and complied with all covenants,
obligations and conditions required by the Merger Agreement to be performed
or complied with by any of them on or prior to the closing date; and
-- the Company shall have delivered to SSI an opinion of Sonnenschein Nath &
Rosenthal;
13
<PAGE>
-- all required action to be taken by the Company and Sub's boards of directors
and stockholders to authorize the Merger shall have been duly and validly
taken;
-- all other documents reasonably requested by SSI or Principal Stockholders
shall have been obtained; and
-- the nominee of the Principal Stockholders to serve a director of the Company
for a two-year term, which shall either be Richard Herring or another person
chosen by the Principal Stockholders and approved in writing by the Company,
shall have been duly elected to such a term.
TERMINATION AND ABANDONMENT.
-- TERMINATION. The Merger Agreement may be terminated at any time before the
Effective Time by mutual written consent of the Company and SSI; by either
the Company or SSI if there has been a material breach of any
representation, warranty, covenant or agreement by any party, which breach
shall not have been cured within 14 days, or a governmental authority shall
have issued an order permanently prohibiting the transactions contemplated
by the Merger Agreement; by the Company if the Company has not received
audited financial statements from SSI on or before May 31, 2000, or if the
parties have not completed the Merger by July 15, 2000; or by SSI if the
Effective Time shall not have occurred by August 3, 2000 (which is the date
which is sixty days after delivery of the SSI audited financials to the
Company).
-- EFFECT OF TERMINATION. If the Merger Agreement is terminated, no party will
be liable to any other party to the Merger Agreement, subject to certain
exceptions.
INDEMNIFICATION.
-- INDEMNIFICATION BY SSI AND THE PRINCIPAL STOCKHOLDERS. SSI and the
Principal Stockholders have agreed to indemnify the Company, its
subsidiaries and certain related parties for certain liabilities arising out
of any breach by SSI and the Principal Stockholders of any representation,
warranty or covenant of SSI or Principal Stockholder in the Merger Agreement
or any other document delivered by SSI or a Principal Stockholder(s)
pursuant to the Merger Agreement
-- INDEMNIFICATION BY THE COMPANY. The Company has agreed to indemnify SSI,
the Principal Stockholders and certain related parties for certain
liabilities arising out of the Company's breach of any representation,
warranty or covenant of the Company or Sub in the Merger Agreement or any
other document delivered by the Company or Sub pursuant to the Merger
Agreement.
-- LIMITATIONS ON INDEMNIFICATION. With certain exceptions relating to taxes,
employment matters, organization, ownership, and certain other matters, the
right of any party to indemnity under the Merger Agreement will expire upon
the earlier of March 31, 2001, or 30 days after delivery to the Company by
its auditors of audited financial statements of the Surviving Corporation
for calendar year 2000. No indemnity claims will be permitted until the
aggregate amount of claims exceed $650,000, but then the applicable party
shall be entitled to recover the full amount of damages. Furthermore, each
of the Principal Stockholders will generally not be required to make any
payments for indemnification in an aggregate amount in excess of the fair
market value of the Company's Common Stock (as of the date such damages are
paid) received by such Principal Stockholder pursuant to the Merger
Agreement plus the proceeds of any sale of the Company's Common Stock
received pursuant to the Merger.
THE OPTION AGREEMENT
Simultaneously with the execution and delivery of the Merger Agreement, the
Principal Stockholders and certain other SSI stockholders entered into the
Option Agreements. These stockholders own in excess of 85% of the outstanding
capital stock of SSI (constituting in excess of 80% of the outstanding Common
14
<PAGE>
Stock and 95% of the outstanding Preferred Stock). The form of the Option
Agreement is included to Annex B hereto, and incorporated herein by reference.
The terms of the Option Agreement are summarized below (although the summary is
qualified in its entirety by the text of the Option Agreement):
AGREEMENT TO VOTE; PROXY. Each SSI stockholder who is a party to an Option
Agreement has agreed that it will vote in favor of the Merger, against any
action that would breach the Merger Agreement, and against any of the following
proposals:
-- a sale of all or substantially all of SSI's assets;
-- a sale or exchange of SSI's capital stock or any recapitalization or
reorganization of SSI;
-- any change in the capitalization of SSI which could dilute the voting power
of their shares;
-- any change in SSI's Board;
-- any other extraordinary corporate event intended or reasonably expected to
impede or adversely affect the Merger.
Each of these SSI shareholders also granted the Company a proxy to vote such
shareholder's SSI stock in accordance with the Merger Agreement.
NO SOLICITATION. Each of the SSI stockholders who is a party to an Option
Agreement agreed not to solicit proposals for a change of control of SSI, and to
inform the Company should it receive any proposal to that effect.
THE OPTION. Each of the SSI Stockholders who is a party to an Option
Agreement also granted the Company an option to purchase his, her or its shares
(now owned or hereafter acquired) in SSI for the same consideration that would
be paid for those shares under the Merger Agreement. The Option is exercisable
at any time after June 30, 2000 or within sixty days following the termination
of the Merger Agreement because of a failure of a condition to closing under the
Merger Agreement which is principally in the control of SSI, its stockholders
and/or its employees and consultants (the "SSI Controlled Conditions"). Upon
exercise of these options, SSI would become a partially-owned subsidiary of the
Company unless and until it acquired the shares of SSI capital stock owned by
the SSI stockholders who were not parties to Option Agreements. There can be no
assurance that the Company would be able to acquire such shares. Because of
this, it is the Company's preference to close the transaction by closing the
Merger Agreement, but it reserves the right to use the Option Agreements to
consummate the proposed transaction. The option portion of the Option Agreement,
like the Merger, can not be closed unless the Company has sufficient authorized
but unissued and unreserved shares of Common Stock to issue to the SSI
stockholders.
TERMINATION. The Option Agreements will terminate on any of the following
conditions:
-- termination of the Merger Agreement by mutual agreement of SSI and the
Company;
-- termination of the Merger Agreement by SSI because of a material breach
of the Merger Agreement by the Company or the issuance of a governmental
order prohibiting the Merger;
-- termination of the Merger Agreement by SSI on or after August 3, 2000
(which is the date which is sixty days after SSI delivered its audited
financial statements to the Company) if at such time the SSI Controlled
Conditions have been satisfied; and
-- sixty days after termination of the Merger Agreement by the Company
(unless at such time the SSI Controlled Conditions have been satisfied,
in which case, the Option Agreement will terminate immediately).
15
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
THE COMPANY
The selected historical financial data with respect to the Company as of and
for the years ended December 31, 1995, 1996, 1997, 1998, and 1999 is included in
Item 6. "Selected Financial Data" of the Company's Annual Report on Form 10-K
for the year ended December 31, 1999, which is incorporated herein by reference.
The selected historical financial data with respect to the Company as of and for
the three-month period ended March 31, 2000 has been derived from the Company's
unaudited financial statements, which are included herein in Annex C to this
Supplement. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals, which the Company considers necessary
for a fair presentation of the financial position and the results of operations
for this period. Operating results for the three months ended March 31, 2000 are
not necessarily indicative of the results that may be expected for the entire
year ending December 31, 2000. The data should be read in conjunction with the
Company's financial statements, related notes, and other financial information
included or incorporated by reference herein.
SSI
The selected historical financial data with respect to SSI as of and for the
year ended December 31, 1999 is derived from the audited financial statements of
SSI, which are included herein in Annex D to this Supplement. The selected
historical financial data with respect to SSI as of and for the three-month
period ended March 31, 2000 has been derived from SSI's unaudited financial
statements, which are included herein in Annex D to this Supplement. The
unaudited financial statements include all adjustments, consisting of normal
recurring accruals, which SSI considers necessary for a fair presentation of the
financial position and the results of operations for this period. Operating
results for the three months ended March 31, 2000 are not necessarily indicative
of the results that may be expected for the entire year ending December 31,
2000. The data should be read in conjunction with SSI's financial statements,
related notes, and other financial information included or incorporated by
reference herein.
16
<PAGE>
SSI SELECTED HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1999 2000
------------ ------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................... $ 44,000 $ --
Costs and expenses:
Cost of sales............................................. (278,647) (87,048)
Research and development.................................. (413,560) (153,688)
Selling, general and administrative....................... (1,975,158) (622,871)
Operating loss.............................................. (2,623,365) (863,607)
Other income (expense):
Interest income........................................... 965 --
Interest expense.......................................... (219,468) --
Other income, net......................................... 6,921 --
Net loss.................................................... (2,834,947) (863,607)
BALANCE SHEET DATA:
Cash........................................................ $ 32,675 $ 101,301
Working capital deficit..................................... (1,080,990) (1,174,566)
Total assets................................................ 1,873,182 1,996,617
Long-term debt, less current portion........................ -- --
Stockholders' equity........................................ 204,111 50,701
</TABLE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined balance sheet as of March 31,
2000 gives effect to the acquisition of SSI, the issuance of 3,500,000 shares of
common stock to fund the acquisition, and the associated costs and expenses as
if each had occurred on March 31, 2000. The unaudited pro forma condensed
combined statements of operations for the year ended December 31, 1999 and for
the three months ended March 31, 2000 give effect to this transaction as if it
occurred at the beginning of the periods presented.
The unaudited pro forma financial data do not purport to represent what our
financial position and results of operations would have been if the transaction
described above had actually occurred as of the dates indicated and are not
intended to project our financial position or results of operations for any
future period. The pro forma adjustments for the purchase price allocation are
preliminary and based on information obtained to date that is subject to
revision as additional information becomes available. Revision to the
preliminary purchase price allocation may have a significant impact on total
assets, total liabilities and stockholders' equity (deficit), and selling,
general and administrative expenses.
The unaudited pro forma condensed combined financial statements should be
read in conjunction with the notes thereto, the historical financial statements
of Illinois Superconductor Corporation included in the Company's 1999 Annual
Report on Form 10-K and in Annex C to this Supplement (the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 2000), and the historical
financial statements of SSI, included as Annex D to this Supplement.
17
<PAGE>
ILLINOIS SUPERCONDUCTOR CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 2000
<TABLE>
<CAPTION>
ILLINOIS SPECTRAL
SUPERCONDUCTOR SOLUTIONS PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS
(NOTE 1) (NOTE 2) (NOTE 3) PRO FORMA
-------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents............... $ 5,496,668 $ 101,301 $ (200,000)a $ 5,397,969
Other current assets.................... 1,332,519 670,049 -- 2,002,568
----------- ---------- ----------- -----------
Total current assets.................... 6,829,187 771,350 (200,000) 7,400,537
Property and equipment, net............. 2,464,263 473,770 -- 2,938,033
Other assets............................ 887,088 21,778 (21,778)b 887,088
Goodwill, net........................... -- 729,719 11,644,692 c 12,374,411
----------- ---------- ----------- -----------
Total assets............................ $10,180,538 $1,996,617 $11,422,914 $23,600,069
=========== ========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Other current liabilities............... $ 1,134,260 $ 294,531 $ -- $ 1,428,791
Current portion of long-term debt....... 1,901,939 1,651,385 (1,651,385)d 1,901,939
----------- ---------- ----------- -----------
Total current liabilities............... 3,036,199 1,945,916 (1,651,385) 3,330,730
Long-term debt, net of current
portion............................... 8,234,712 -- -- 8,234,712
Other long-term liabilities............. 90,960 -- -- 90,960
Stockholders' equity (net capital
deficiency)........................... (1,181,333) 50,701 13,074,299 e 11,943,667
----------- ---------- ----------- -----------
Total liabilities and stockholders'
equity (net capital deficiency)....... $10,180,538 $1,996,617 $11,422,914 $23,600,069
=========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this pro forma condensed combined
balance sheet.
18
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEET
1. Illinois Superconductor Historical Financial Information
The historical amounts represent the balance sheet of Illinois
Superconductor Corporation as of March 31, 2000, as reported in the unaudited
historical financial statements of Illinois Superconductor Corporation.
2. Spectral Solutions Historical Financial Information
The historical amounts represent the balance sheet of SSI as of March 31,
2000, as reported in the unaudited historical financial statements of SSI.
3. Pro Forma Adjustments
The pro forma adjustments give effect to the following:
a. The use of Illinois Superconductor cash on hand to fund direct costs
incurred to complete the acquisition of SSI.
b. The elimination of the historical cost of SSI's patent portfolio.
c. The incremental increase in goodwill resulting from the SSI acquisition,
as follows:
<TABLE>
<S> <C>
Cost in excess of the estimated fair value of the acquired
net assets................................................ $12,374,411
Elimination of historical goodwill of SSI................... (729,719)
-----------
$11,644,692
===========
</TABLE>
d. The elimination of convertible notes of SSI and convertible cash
advances from a related party of SSI as a result of the conversion of
these obligations into SSI common stock prior to closing.
e. The issuance of 3,500,000 shares of common stock based on the closing
price of the Company's common stock on May 31, 2000 of $3.75 per share
and the elimination of the historical stockholders' equity of SSI, as
follows:
<TABLE>
<S> <C>
Issuance of common stock.................................... $13,125,000
Elimination of historical stockholders' equity.............. (50,701)
-----------
$13,074,299
===========
</TABLE>
19
<PAGE>
ILLINOIS SUPERCONDUCTOR CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
ILLINOIS SPECTRAL
SUPERCONDUCTOR SOLUTIONS PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS
(NOTE 1) (NOTE 2) (NOTE 3) PRO FORMA
-------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales................................ $ 2,408,604 $ 44,000 -- $ 2,452,604
Cost of sales............................ (5,923,173) (278,647) -- (6,201,820)
Research and development expenses........ (1,757,214) (413,560) -- (2,170,774)
Selling, general and administrative
expenses............................... (4,199,354) (1,975,158) (1,415,095)a (7,589,607)
------------ ----------- ----------- ------------
Operating loss........................... (9,471,137) (2,623,365) (1,415,095) (13,509,597)
Interest income.......................... 98,194 965 -- 99,159
Interest expense......................... (12,634,745) (219,468) -- (12,854,213)
Other income, net........................ 36,623 6,921 -- 43,544
------------ ----------- ----------- ------------
Loss before extraordinary item........... (21,971,065) (2,834,947) (1,415,095) (26,221,107)
Extraordinary item -- debt
extinguishment......................... (745,197) -- -- (745,197)
------------ ----------- ----------- ------------
Net loss................................. $(22,716,262) $(2,834,947) $(1,415,095) $(26,966,304)
============ =========== =========== ============
Basic and diluted loss per share before
extraordinary item..................... $ (1.71) $ (1.60)
Extraordinary item -- debt
extinguishment......................... (0.06) (0.05)
------------ ------------
Basic and diluted loss per share......... $ (1.77) $ (1.65)
============ ============
Weighted average numbers of common shares
outstanding............................ 12,841,497 3,500,000b 16,341,497
============ =========== ============
</TABLE>
The accompanying notes are an integral part of this pro forma condensed
combined statement of operations.
20
<PAGE>
ILLINOIS SUPERCONDUCTOR CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
ILLINOIS SPECTRAL
SUPERCONDUCTOR SOLUTIONS PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS
(NOTE 1) (NOTE 2) (NOTE 3) PRO FORMA
-------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales................................... $ 172,363 $ -- $ -- $ 172,363
Cost of sales............................... (649,083) (87,048) -- (736,131)
Research and development expenses........... (306,328) (153,688) -- (460,016)
Selling, general and administrative
expenses.................................. (1,249,755) (622,871) (340,216)a (2,212,842)
----------- --------- --------- -----------
Operating loss.............................. (2,032,803) (863,607) (340,216) (3,236,626)
Interest income............................. 24,380 -- -- 24,380
Interest expense............................ (402,464) -- -- (402,464)
Other income................................ 7,957 -- -- 7,957
----------- --------- --------- -----------
Loss before extraordinary item.............. (2,402,930) (863,607) (340,216) (3,606,753)
Extraordinary item -- debt extinguishment... (28,297) -- -- (28,297)
----------- --------- --------- -----------
Net loss.................................... $(2,431,227) $(863,607) $(340,216) $(3,635,050)
=========== ========= ========= ===========
Basic and diluted loss per share before
extraordinary item........................ $ (0.10) $ (0.13)
Extraordinary item -- debt extinguishment... -- --
----------- -----------
Basic and diluted loss per share............ $ (0.10) $ (0.13)
=========== ===========
Weighted average common shares
outstanding............................... 24,325,932 3,500,000b 27,825,932
=========== ========= ===========
</TABLE>
The accompanying notes are an integral part of this pro forma condensed
combined statement of operations.
21
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
1. Illinois Superconductor Historical Financial Information
The historical amounts represent the results of operations of Illinois
Superconductor Corporation for each of the indicated periods as reported in the
historical financial statements of Illinois Superconductor.
2. Spectral Solutions Historical Financial Information
The historical amounts represent the results of operations of SSI for each
of the indicated periods as reported in the historical financial statements of
SSI.
3. Pro Forma Adjustments
The pro forma adjustments give effect to the following:
a. An increase in amortization expense related to the incremental increase
in goodwill of $11,644,692 resulting from the SSI acquisition based on an
estimated life of 8 years, computed as follows:
<TABLE>
<CAPTION>
THREE
YEAR ENDED MONTHS
DECEMBER 31, MARCH 31,
1999 2000
------------ ----------
<S> <C> <C>
Amortization expense on goodwill resulting from SSI
acquisition...................................... $1,546,801 $386,700
Elimination of SSI historical amortization
expense.......................................... (131,706) (46,484)
---------- --------
$1,415,095 $340,216
========== ========
</TABLE>
b. The issuance of 3,500,000 shares of common stock to fund the SSI
acquisition.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF SSI
OVERVIEW
SSI develops, manufactures and markets thin film high-performance,
high-temperature superconductor systems to service providers and original
equipment manufacturers in the wireless telecommunications industry. SSI's
product line, the SuperRX, combines high-temperature superconductors utilizing
thin film technology in conjunction with cryogenic cooling technology to produce
a filter with significant advantages over conventional wireless filters. From
its inception through March 31, 2000, SSI's operating activities related
primarily to conducting research and development, building market awareness,
recruiting management and technical personnel, refining our initial products,
and building an operating infrastructure.
SSI's revenues are derived primarily from sales of the SupeRX 801 and 1901
systems which include the sale of hardware and related installation. SSI's sales
cycle can be lengthy and related contracts typically include performance
specifications and customer acceptance conditions in connection with the sale of
each system to a new customer.
Since its inception, SSI has incurred significant losses and as of
March 31, 2000, had an accumulated deficit of $3,752,157.
RESULTS OF OPERATIONS
REVENUES
SSI generates revenues through the sale of its SupeRX 801 and 1901
superconducting filter and amplifier systems and related installation. Revenue
is recognized when title to the system and risk of loss is transferred to the
customer and all customer acceptance conditions have been met.
Total net revenues for 1999 were $44,000, up from $0 in 1998. This
represents two systems sales at $22,000 per unit. SSI recorded no revenues in
the first three months of 2000.
The cost of sales was $278,647 in 1999 and $87,048 in the first three months
of 2000. This represents a negative gross margin on unit sales in 1999 and the
first quarter of 2000, respectively. The costs of the business are primarily
fixed costs; therefore, gross margins are adversely impacted by lower product
revenue. SSI expects gross margins to become positive as shipments of the SupeRX
801 and 1901 systems increase. However, no assurances can be made that margins
will improve in the future.
Research and development expenses for 1999 were $413,560 and $153,688 for
the first quarter of 2000. These expenses consist primarily of salaries, related
personnel expenses, consultant fees, and prototype expenses related to the
design, development, testing, and enhancement of theSupeRX 801 and 1901 systems.
To date, all of SSI's research and development costs have been expensed as
incurred. SSI believes that continued investment in research and development is
critical to achieving its strategic product development and cost reduction
objectives and, as a result, expects this expense to continue to increase
significantly in absolute dollars in the future.
Sales and marketing expenses for 1999 were $798,037 and $300,289 for the
first quarter of 2000. SSI's sales and marketing expenses consist of salaries
and consulting expenses for personnel engaged in marketing, sales, and field
support for system trials and new sales, as well as promotional expenses such as
trade shows and the commissioning of a major marketing study for product
positioning in the wireless industry. It is believed that these expenses will
significantly increase as SSI moves into the commercial phase and increases its
sales and marketing efforts.
23
<PAGE>
General and administrative expenses totaled $1,177,121 for 1999 and $322,582
for the first quarter of 2000. SSI's general and administrative expenses
consists primarily of salaries and personnel-related expenses, and general
corporate expenses including management consultants.
Interest income in 1999 was $965, and there was no interest income in the
first three months of 2000. Interest income was derived from cash balances in
our bank accounts.
Interest expense of $19,468 in 1999 was primarily related to a convertible
notes issued by SSI to finance its ongoing operations. These loans were
converted into equity of SSI in early 2000. Accordingly, SSI had no interest
expense in the first three months of 2000.
Non-cash interest expense of $200,000 for the year ended December 31, 1999
was related to SSI's convertible promissory notes.
FLUCTUATIONS IN PERIODIC RESULTS
SSI continues to focus on the commercialization of its systems and
commercial revenues are expected to increase over the next several quarters;
however, there can be no assurance that such commercial revenues will increase.
Furthermore, as SSI attempts to achieve commercialization of products, it could
encounter significant variability in results due to seasonality or other
unforeseen factors.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception SSI has financed its operations and investing activities
primarily through private sales of preferred and common stock and the issuance
of convertible debt instruments. Net proceeds from these transactions totaled
$3,216,239 through December 31, 1999 and $4,371,385 through March 31, 2000.
For the year ended December 31, 1999, net cash used in operations totaled
$2,137,957. For the first three months of 2000, net cash used in operations was
$905,004.
Net cash used in investing activities totaled $1,045,607 for the year ending
December 31, 1999. For the first three months of 2000, net cash used in
investing activities was $16,370. The majority of this activity was related to
the acquisition of the assets of Superconducting Core Technologies in April of
1999.
RECENT EVENTS
The following is a short summary of certain key events related to SSI which
have occurred since December 31, 1999 (other than its entry into the Merger
Agreement, which is further described above):
- In January, SSI received $485,000 of proceeds from the sale of 646,665 shares
of preferred stock.
- In January, SSI hired Shawn Doyle as its principal sales and marketing
executive.
- In April, SSI issued $487,500 worth of its capital stock at a price of $.75
per share.
- In April, warrants were exercised to purchase 2,000,000 shares of SSI's
preferred stock at $.30 per share, generating $600,000 in capital.
- In April, $600,000 in convertible notes were converted into preferred stock
of SSI.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF ILLINOIS SUPERCONDUCTOR
Management's discussion and analysis of financial condition and results of
operations of Illinois Superconductor for the fiscal year ended December 31,
1999 is included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999. You are encouraged to review that discussion in the context
of this proxy supplement, as it forms a part of this supplement and is
incorporated by reference. Furthermore, management's discussion and analysis of
financial condition and results of operations for the Company for the three
month period ended March 31, 2000 is included in Annex C to this Supplement, and
should also be read carefully.
25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Illinois Superconductor Corporation
We have audited the accompanying balance sheets of Illinois
Superconductor Corporation as of December 31, 1999 and 1998, and the related
statements of operations, stockholders' equity (net capital deficiency), and
cash flows for each of the three years in the period ended December 31, 1999.
Our audits also included the financial statement schedule listed in the
Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Illinois
Superconductor Corporation at December 31, 1999 and 1998, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with auditing standards generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
The accompanying financial statements have been prepared assuming that
Illinois Superconductor Corporation will continue as a going concern. As
more fully described in Note 3, Illinois Superconductor Corporation has
incurred ongoing operating losses and does not currently have financing
commitments in place to meet expected cash requirements through 2000. These
conditions raise substantial doubt about Illinois Superconductor
Corporation's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 3. The financial
statements do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
Ernst & Young LLP
Chicago, Illinois
February 25, 2000
26
<PAGE>
FORWARD LOOKING STATEMENTS
STATEMENTS CONTAINED IN THIS SUPPLEMENT THAT ARE NOT HISTORICAL FACTS ARE
FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS ARE MADE PURSUANT TO
THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 AND 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 CURRENT AVAILABLE TO IT.
ACCORDINGLY, THESE STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES, AND
CONTINGENCIES, WHICH COULD CAUSE THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENT FOR 2000 AND BEYOND TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN, OR
IMPLIED BY, SUCH STATEMENTS. THESE IMPORTANT FACTORS INCLUDE, WITHOUT
LIMITATION, THE FAILURE OF THE SSI TRANSACTION TO CLOSE; THE ABILITY TO
INTEGRATE SSI'S AND THE COMPANY'S BUSINESSES IN THE EVENT THAT THE SSI
TRANSACTION IS COMPLETED; THE COMPANY'S AND SSI'S HISTORY OF NET LOSSES AND THE
LACK OF ASSURANCE THAT THE COMPANY'S AND SSI'S EARNINGS WILL BE SUFFICIENT TO
COVER FIXED CHARGES IN THE FUTURE; THE DEGREE TO WHICH THE COMPANY IS LEVERAGED
AND 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; THE ADVERSE EFFECTS ON LIQUIDITY OF THE
COMPANY'S COMMON STOCK BECAUSE OF ITS DE-LISTING FROM THE NASDAQ NATIONAL MARKET
IN JUNE 1999; CONTINUED DOWNWARD PRESSURE ON THE PRICES CHARGED FOR THE
COMPANY'S PRODUCTS DUE TO THE COMPETITION OF RIVAL MANUFACTURERS OF FRONT END
SYSTEMS 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 UPDATE OR
REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT NEW EVENTS OR UNCERTAINTIES.
To raise questions about the annual meeting or request additional copies of
the Proxy Statement, this supplement or the proxy card, please contact our proxy
solicitor:
MACKENZIE PARTNERS, INC.
156 Fifth Avenue
New York, New York 10010
(800) 322-2885 (call toll free)
(212) 929-5500 (call collect)
(212) 929-0308 (facsimile)
[email protected] (e-mail)
27
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
AMONG
ILLINOIS SUPERCONDUCTOR CORPORATION,
SSI ACQUISITION CORP.,
SPECTRAL SOLUTIONS, INC.,
RUSSELL SCOTT III,
AND
CERTAIN OTHER STOCKHOLDERS OF
SPECTRAL SOLUTIONS INC.
DATED MAY 17, 2000
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated May 17, 2000 ("AGREEMENT"), by and among
Illinois Superconductor Corporation, a Delaware corporation ("PARENT"), SSI
Acquisition Corp., a Colorado corporation and a wholly-owned subsidiary of
Parent ("SUB"), Spectral Solutions, Inc., a Colorado corporation (the
"COMPANY"), Russell Scott III ("SCOTT"), and the other stockholders of the
Company set forth on the signature pages hereto (together with Scott,
collectively, the "PRINCIPAL STOCKHOLDERS"). The Company and Sub are sometimes
herein collectively referred to as the "CONSTITUENT CORPORATIONS."
RECITALS
A. The Company is engaged in the business of developing, manufacturing and
marketing high temperature superconductivity products designed to enhance the
quality, capacity, coverage and flexibility of cellular, personal communication
services and other wireless telecommunications services (the "BUSINESS").
B. Parent, Sub and the Company desire to effect a merger ("MERGER") of Sub
into the Company, pursuant to which (i) subject to Sections 2.1(d) and 2.5
hereof, (a) each share of the Company's Non-Voting common stock, $.001 par value
per share ("COMPANY COMMON STOCK") will be converted into and exchanged for
shares of the voting Common Stock of Parent, $.001 par value per share ("PARENT
COMMON STOCK"), and (b) each share of the Company's Voting Preferred stock,
$.001 par value ("COMPANY PREFERRED STOCK") will be converted into and exchanged
for shares of Parent Common Stock and (ii) Parent will become the sole
stockholder of the Surviving Corporation (as defined below).
C. The Boards of Directors of Parent, Sub and the Company have each
approved the Merger upon the terms and subject to the conditions set forth
herein and deem it advisable and in the best interests of their respective
stockholders that the Merger be consummated.
D. For federal income tax purposes, it is intended that the Merger shall
qualify as a reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "CODE").
E. Certain of the capitalized terms used herein are defined in
Section 12.10.
AGREEMENTS
NOW, THEREFORE, in consideration of the recitals (which are deemed to be a
part of this Agreement), mutual covenants, representations, warranties and
agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1. THE MERGER; SURVIVING CORPORATION. Upon the terms and subject
to the conditions hereof, and in accordance with the provisions of the Colorado
Business Corporation Act, as amended (the "CBCA"), at the Effective Time (as
defined herein) Sub shall be merged with and into the Company as soon as
practicable after satisfaction or waiver of the conditions set forth in
Article VIII. Following the Merger, the separate existence of Sub shall cease,
and the Company shall continue as the surviving corporation in the Merger (the
"SURVIVING CORPORATION").
SECTION 1.2. EFFECT OF THE MERGER. The Merger shall have the effects set
forth in the CBCA. From and after the Effective Time (as defined below), the
Surviving Corporation shall be a wholly-owned subsidiary of Parent.
SECTION 1.3. ARTICLES OF INCORPORATION OF THE SURVIVING CORPORATION. The
Articles of Incorporation of the Company, as in effect immediately prior to the
Effective Time of the Merger, shall be amended as of the Effective Time without
any further action on the part of the Constituent Corporations to read in its
entirety as the Articles of Incorporation of Sub (except that the name of the
Surviving Corporation shall be
<PAGE>
Spectral Solutions, Inc.), and, as so amended, such Articles of Incorporation
shall be the Articles of Incorporation of the Surviving Corporation until
thereafter changed or amended as provided therein or by applicable law.
SECTION 1.4. BYLAWS OF THE SURVIVING CORPORATION. At the Effective Time
and without any further action on the part of the Constituent Corporations, the
Bylaws of Sub shall be the Bylaws of the Surviving Corporation.
SECTION 1.5. BOARD OF DIRECTORS AND OFFICERS OF THE SURVIVING
CORPORATION. At the Effective Time, the persons listed on SCHEDULE 1.5(A) shall
be the directors of the Surviving Corporation and the persons listed on
SCHEDULE 1.5(B) shall be the initial officers of the Surviving Corporation each
holding such positions as indicated on such Schedule, each of such directors and
officers to hold office until their respective successors are duly elected and
qualified, or their earlier death, resignation or removal.
SECTION 1.6. EFFECTIVE TIME OF THE MERGER. The Constituent Corporations
will cause articles of merger and such other documents as are required by the
CBCA to be duly filed with the Secretary of State of the State of Colorado (the
"COLORADO AUTHORITY"). The Merger shall become effective upon the satisfaction
or waiver of the conditions set forth in Article VIII and the filing of articles
of merger substantially in the form attached hereto as EXHIBIT A with the
Colorado Authority (the time of such filing being the "EFFECTIVE TIME").
ARTICLE II
CONVERSION OF SHARES
SECTION 2.1. CONVERSION OF CAPITAL STOCK. As of the Effective Time, by
virtue of the Merger and without any action on the part of the holders of the
capital stock of the Constituent Corporations:
(a) SUB COMMON STOCK. All of the issued and outstanding shares of Sub
common stock, $.001 par value per share ("SUB COMMON STOCK"), shall be converted
into and become one fully paid and non-assessable share of common stock of the
Surviving Corporation.
(b) CANCELLATION OF TREASURY STOCK. All shares of Company Common Stock
and/or Company Preferred Stock ("COMPANY SECURITIES") that are owned directly or
indirectly by the Company shall be cancelled, and no consideration shall be
delivered in exchange therefor.
(c) CONVERSION OF COMPANY COMMON STOCK. Except as provided in Sections 2.2
and 2.3 and subject to Section 2.1(e), each issued and outstanding share of
Company Common Stock issued and outstanding immediately prior to the Effective
Time shall be converted into and exchanged solely for the Pro Rata Number of
shares of Parent Common Stock.
(d) CONVERSION OF COMPANY PREFERRED STOCK. Except as provided in Sections
2.2 and 2.3 and subject to Section 2.1(e), each issued and outstanding share of
Company Preferred Stock issued and outstanding immediately prior to the
Effective Time shall be converted into and exchanged solely for the Pro Rata
Number of shares of Parent Common Stock.
(e) ESCROW SHARES. Notwithstanding the foregoing, Parent shall deposit
into the Escrow (as defined below) 5% of the aggregate number of shares of
Parent Common Stock otherwise payable pursuant to Section 2.1(c) and
Section 2.1(d) hereof (the "ESCROW SHARES"), which Escrow Shares shall be
registered in the stock register maintained by the Company and/or its transfer
agent in the name of the Escrow Agent and simultaneously with the Closing
without any further action by any Person, become subject to the terms and
conditions of, the escrow (the "ESCROW") established pursuant to an escrow
agreement among Parent, Russell Scott III, as Shareholder Representative, and
the Escrow Agent named therein substantially in the form of EXHIBIT B (the
"ESCROW AGREEMENT"). The Escrow Shares shall be allocated among the holders of
Company Securities (other than Dissenting Shares) on a pro rata basis based upon
the aggregate number of shares of Parent Common Stock each such holder is
entitled to receive under Sections 2.1(c) and 2.1(d).
2
<PAGE>
(f) EQUITABLE ADJUSTMENTS. Notwithstanding the foregoing, the number of
shares of Parent Common Stock to be issued pursuant to Sections 2.1(c) and
2.1(d) of this Agreement (and the number of Escrow Shares) shall be equitably
adjusted to the extent that such adjustment is necessary to preserve the
economic value of such shares as determined by an independent accounting firm
selected by Parent, at Parent's expense and subject to the reasonable approval
of the Company, in the event of a change in the number of outstanding shares of
Parent's capital stock resulting from a stock dividend, stock split, reverse
stock split, share combination, recapitalization, merger, consolidation,
acquisition of property or shares, asset spin-off, split-off, reorganization,
stock rights offering, liquidation or similar event, of or by Parent between the
date hereof and the date such shares are distributed. No such activities are
currently contemplated.
(g) PRO RATA NUMBER. For the purposes of this Agreement, the term "PRO
RATA NUMBER" shall mean a number equal to the quotient of (x) 3,500,000 minus
the number of shares of Parent Common Stock issued to the Financial Adviser in
accordance with Section 6.8 hereof divided by (y) the aggregate number of
outstanding shares of Company Preferred Stock and Company Common Stock plus the
aggregate number of shares of Company Common Stock issuable upon exercise of the
Options (as defined herein) (whether vested or unvested), and any other
outstanding warrants, subscriptions or other rights to acquire, directly or
indirectly, Company Common Stock plus the number of shares of Company Common
Stock issuable upon the conversion of any outstanding debt or equity securities
convertible, directly or indirectly, into Company Common Stock.
(h) DEFINITION OF MERGER CONSIDERATION. The shares of Parent Common Stock
(including, without limitation, the Escrow Shares) to be received pursuant to
Sections 2.1(c) and this 2.1(d) upon the conversion of the Company Securities
shall be referred to as the "MERGER CONSIDERATION."
SECTION 2.2. DISSENTERS' RIGHTS. The Holders of Company Securities as to
which dissenters' rights shall have been duly demanded under applicable law
("DISSENTING SHARES"), if any, shall be entitled to payment by the Surviving
Corporation only of the fair value of such shares plus accrued interest to the
extent permitted by and in accordance with the provisions of applicable law;
PROVIDED, HOWEVER, that (i) if any holder of Dissenting Shares shall, under the
circumstances permitted by applicable law, subsequently deliver a written
withdrawal of such holder's demand or (ii) if any holder fails to establish such
holder's entitlement to demand or receive payment as provided under applicable
law, such holder or holders (as the case may be) shall forfeit such right to
payment for such Company Securities and such stock shall thereupon be deemed to
have been converted into Parent Common Stock as of the Effective Date in
accordance with Section 2.1 hereof (including, without limitation, that 5% of
such shares of Parent Common Stock shall constitute additional Escrow Shares
subject to the terms of the Escrow in accordance with Section 2.1(e)).
SECTION 2.3. NO FRACTIONAL SHARES. No certificates representing fractional
shares of Parent Common Stock shall be issued upon the surrender for exchange of
certificates formerly representing Company Securities or deposited into the
Escrow pursuant to this Article II. In lieu of any such fractional shares, the
recipient will be paid cash or cash will be deposited into the Escrow in an
amount equal to such fraction multiplied by the average closing price of Parent
Common Stock for the ten consecutive trading days immediately preceding the
second business day prior to the Effective Time as reported on the principal
national stock exchange or automated quotation system of a national securities
association on which Parent Common Stock is then listed or qualified for
trading, or if there Parent Common Stock is not then so listed, as reported on
the National Association of Securities Dealer's electronic bulletin board.
SECTION 2.4. ASSUMPTION OF OPTIONS. The Company's obligations with respect
to each outstanding option, as set forth on SCHEDULE 2.4 hereto, to purchase
shares of Company Common Stock, whether vested or unvested (the "OPTIONS"),
shall, by virtue of this Agreement, and without further action of the Company,
the Parent or the holders of any Option, be assumed by Parent under its Amended
and Restated 1993 Stock Option Plan or a similar plan to be adopted by Parent
for this purpose (as amended, the
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"PARENT STOCK OPTION PLAN"). Unless otherwise elected by Parent prior to the
Effective Time, Parent shall make such assumption in such manner that
(i) Parent is a corporation "assuming a stock option in a transaction to which
Section 424(a) applies" within the meaning of Section 424 of the Code or
(ii) to the extent that Section 424 of the Code does not apply to such Option,
Parent would be such a corporation were Section 424 of the Code applicable to
such Option. Each Option so assumed by Parent under this Agreement shall
continue to have, and be subject to, similar terms and conditions set forth
therein immediately prior to the Effective Time, except that (i) such Option
shall be governed by the Parent Stock Option Plan, (ii) such Option will be
exercisable for that number of shares of Parent Common Stock equal to the
product of the number of shares of Company Common Stock that were purchasable
under such Option immediately prior to the Effective Time multiplied by the Pro
Rata Number, and (iii) the per share exercise price for the shares of Parent
Common Stock issuable upon exercise of such assumed Option will be equal to the
exercise price per share of Company Common Stock at which such Option was
exercisable immediately prior to the Effective Time multiplied by the quotient
determined by dividing the fair market value of the Parent Common Stock by the
fair market value of the Company Common Stock, and rounding the resulting
exercise price up to the nearest whole cent. For purposes of this Section 2.4,
the fair market value of a share of Parent Common Stock is based on the closing
price per share on the trading day immediately following the date on which the
Effective Time occurs, as reported on the National Association of Securities
Dealer's electronic bulletin board (or in the Wall Street Journal if such
closing price is reported therein), and the fair market value of the Company
Common Stock is based on the fair market value of the number of shares of Parent
Common Stock issuable in exchange for each such share of Company Common Stock
pursuant to Section 2.1 hereof (including any Escrow Shares issued on account
thereof). As soon as reasonably practicable after the Effective Time, the
Company will deliver to Option holders appropriate notices setting forth such
holders' rights pursuant to the Parent Stock Option Plan and confirming that the
Options have been assumed by Parent under the Parent Stock Option Plan in
accordance with the terms and conditions of this Section 2.4.
SECTION 2.5. STOCK CERTIFICATES; SURRENDER AND PAYMENT.
(a) EFFECT OF MERGER ON COMPANY STOCK CERTIFICATES. As of the Effective
Time, each stock certificate representing Company Securities shall cease to
represent such Company Securities and shall represent only (i) in the case of
Dissenting Shares, the rights of the holder as provided in Section 2.2 or
(ii) in all other cases, the right to receive Merger Consideration pursuant to
and in accordance with the terms hereof and any holder thereof shall cease to
have any rights as a stockholder of the Company or the Surviving Company.
(b) SURRENDER AND PAYMENT. As promptly as practicable after the Effective
Time, the Surviving Corporation or its agent shall send transmittal materials to
each Person who, immediately prior to the Effective Time, was the record holder
of Company Securities, for use in exchanging the certificates representing such
Company Securities for the Merger Consideration (other than Escrow Shares). Upon
surrender of such certificates to the Surviving Corporation or such agent,
together with a duly executed letter of transmittal and any other documents
reasonably required by the Surviving Corporation, the record holder of such
certificate shall be entitled to receive in exchange therefor, the Merger
Consideration (other than the Escrow Shares); provided, that in the case of any
certificate representing Dissenting Shares, such certificate shall be returned
to the presenting Person.
(c) LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any Certificate
evidencing shares of Company Securities shall have been lost, stolen or
destroyed, upon the making of an affidavit setting forth that fact by the person
claiming such lost, stolen or destroyed Certificate(s) and granting a reasonable
bond and/or indemnity against any claim that may be made against Parent or Sub
with respect to such Certificate(s), Parent shall issue to such person the
appropriate number of shares of Parent Common Stock with respect to such lost,
stolen or destroyed Certificate(s).
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(d) CLOSING OF THE COMPANY'S STOCK TRANSFER BOOKS. After the Effective
Time, no transfers of shares of Company Securities shall be recorded in the
stock transfer books of the Surviving Corporation or its transfer agent, and any
certificate representing Company Securities so presented for transfer shall be
deemed to have been tendered pursuant to Section 2.5(b) hereof.
SECTION 2.6. TRANSFER OF PARENT COMMON STOCK. No holder of Company
Securities (a "STOCKHOLDER") shall sell, assign, convey or otherwise transfer
any Parent Common Stock issued pursuant to this Agreement except pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
(the "SECURITIES ACT") or an exemption from registration thereunder and
otherwise in accordance with all applicable federal and state securities laws.
Unless and until otherwise permitted by this Agreement, each certificate of
Parent Common Stock issued pursuant to this Agreement to any Stockholder or his
or her nominee, or to any subsequent transferee of such certificate shall be
stamped or otherwise imprinted with a legend in substantially the following
form:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or any
state securities laws and thus may not be offered for sale, sold,
transferred or otherwise disposed of unless registered under the
Securities Act of 1933, as amended, and any applicable state
securities laws or unless an exemption from such registration is
available." The shares represented by this Certificate are subject
to registration rights set forth in sections 6.14 and 6.15 of a
certain Agreement and Plan of Merger dated May 17, 2000."
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PRINCIPAL STOCKHOLDERS
The Company and the Principal Stockholders hereby represent and warrant to
each of Parent and Sub as of the date hereof and as of the Effective Time as set
forth below. The information disclosed on any Schedule attached hereto shall be
deemed to relate to the section of this Article III to which such Schedule is
expressly referenced, as well as such other sections of this Article III as a
reasonable person would infer based on the language and content of the Schedule.
SECTION 3.1. ORGANIZATION AND AUTHORITY. The Company is duly incorporated,
validly existing and in good standing under the laws of the State of Colorado,
with all requisite power and authority to own, lease and operate its properties
and to carry on its business as now being conducted. No order has been made or
petition presented or resolution adopted which relates to the winding-up of the
Company or for an administration order in respect of the Company, nor has any
administrative or other receiver been appointed by any Governmental Authority or
other Person with respect to all or part of the assets of the Company, and no
power to make any such appointment has arisen. The Company has delivered to
Parent complete and correct copies of the Articles of Incorporation and Bylaws
presently in effect for the Company, and the Company is not in default under or
in violation of any provision of such documents.
SECTION 3.2. QUALIFICATION. The Company is qualified or licensed to do
business and is in good standing in each jurisdiction in which the ownership or
leasing of property by it or the conduct of its business requires such licensing
or qualification. SCHEDULE 3.2 contains a list of all jurisdictions in which the
Company is qualified or licensed to do business.
SECTION 3.3. AUTHORIZATION. The Company has full corporate power and
authority to enter into, execute and deliver this Agreement and the Additional
Agreements to which it is a party and to perform and observe fully its
obligations hereunder and thereunder and to perform the transactions
contemplated hereby and thereby; provided, however that consummation of the
Merger shall require approval of the Company's stockholders (the "COMPANY
STOCKHOLDERS") in accordance with the CBCA and the Company's Articles of
Incorporation and By-laws ("COMPANY STOCKHOLDER APPROVAL"). The Company's Board
of Directors has taken all action required by law, the Company's Articles of
Incorporation and Bylaws, or
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otherwise to authorize the execution, delivery and performance of this Agreement
and the Additional Agreements to which the Company is a party and the
consummation by the Company of the transactions contemplated hereby and thereby,
and no other corporate proceedings on the part of the Company are necessary to
authorize the entry into, execution, delivery or performance of this Agreement
and the Additional Agreements other than Company Stockholder Approval. This
Agreement and the Additional Agreements to which the Company is a party have
been duly and validly executed and delivered by the Company, and, assuming due
authorization, execution and delivery by Parent and Sub, constitute valid and
binding legal obligations of the Company, enforceable against the Company in
accordance with their terms except for the Enforceability Exceptions.
SECTION 3.4. NO VIOLATION. Neither the execution, delivery or performance
of this Agreement or the Additional Agreements nor (assuming Company Stockholder
Approval) the consummation of the transactions contemplated hereby or thereby
will (a) violate, conflict with or result in any breach of any provision of the
Articles of Incorporation or Bylaws of the Company, (b) except as set forth on
SCHEDULE 3.4, violate, conflict with or result in a violation or breach of, or
constitute a default (with or without due notice or lapse of time or both) in
any material respect under, or permit the termination of, or require any notice
under, or require the consent of any other party to, or result in the
acceleration of, or entitle any party to accelerate (whether as a result of a
change in control of the Company or otherwise) any obligation or agreement, or
result in the loss of any benefit or the imposition of any fee or penalty, or
give rise to the creation of any Lien upon any of the respective properties or
assets of the Company, in each case under any of the terms, conditions or
provisions of any debt, note, bond, mortgage, indenture, deed of trust, license,
lease, permit, agreement or other instrument or obligation to which the Company
is a party or by which they or any of their respective properties or assets may
be bound or affected (unless requisite waivers or consents satisfactory in form
and substance to Parent shall have been obtained in writing and delivered to
Parent prior to the Closing) or (c) violate in any material respect any Rules
(including foreign, federal and state securities laws) of any Governmental
Authority applicable to the Company or any of its properties, assets or
operations.
SECTION 3.5. CAPITALIZATION OF THE COMPANY. The authorized capital stock
of the Company consists of 20,000,000 shares of Company Preferred Stock and
10,000,000 shares of Company Common Stock. There are issued and outstanding
14,284,147.65 shares of Company Preferred Stock owned of record and beneficially
by the Persons and in the amounts specified on SCHEDULE 3.5(A) attached hereto,
free and clear of all Liens. There are issued and outstanding 4,697,233.35
shares of Company Common Stock owned of record and beneficially by the Persons
and in the amounts specified on SCHEDULE 3.5(B) attached hereto, free and clear
of all Liens. There are no shares of Company Securities held by the Company as
treasury stock. All of the issued and outstanding shares of Company Securities
are validly issued, fully paid, non-assessable and are without, and were not
issued in violation of, any preemptive rights, and were not issued in violation
of federal or state securities laws. No other class of capital stock of the
Company is issued or outstanding, and other than the Options (which Options and
their holders are accurately described on SCHEDULE 2.4), there are no options,
warrants, calls, subscriptions, conversion or other rights, agreements or
commitments to acquire from the Company any shares of capital stock of the
Company or any other securities convertible into, exchangeable for or evidencing
the right to subscribe for any shares of capital stock of the Company or the
Surviving Corporation, or any other security of the Company or the Surviving
Corporation. There are no outstanding or authorized stock appreciation, phantom
stock or similar rights with respect to the Company. Except as set forth on
SCHEDULE 3.5(C), there are no voting agreements, voting trust agreements,
proxies or stockholder or similar agreements relating to the capital stock of
the Company. The Company is not subject to any obligation (contingent or
otherwise) to repurchase or otherwise acquire or retire any shares of its
capital stock. The Company has delivered to Parent accurate and complete copies
of the stock records of the Company including copies of the duly cancelled
certificates representing any shares of the capital stock of the Company which
were previously issued and then cancelled.
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SECTION 3.6. NO SUBSIDIARIES. The Company does not own any investment,
equity securities or other legal and/or beneficial interests in any Person.
SECTION 3.7. CONSENTS AND APPROVALS. Except for consents and approvals of
or filings or registrations with (a) the Colorado Authority relating to the
filing of a certificate of merger pursuant to the CBCA, and (b) as set forth on
SCHEDULE 3.7, no filing or registration with, no notice to and no permit,
authorization, consent or approval of, any third party or any Governmental
Authority is necessary for the consummation by the Company Stockholders and the
Company of the transactions contemplated by this Agreement or the Additional
Agreements or to enable the Company to continue to conduct its business after
the Effective Time in a manner which is consistent with that in which it is
presently conducted or contemplated to be conducted.
SECTION 3.8. BOOKS AND RECORDS. The books and records of the Company and
each Subsidiary are, and have been, maintained in the usual, regular, ordinary
and appropriate manner by the Company, and all of the transactions of such
Persons are properly reflected therein.
SECTION 3.9. FINANCIAL STATEMENTS.
(a) The Company has furnished to Parent copies of the unaudited balance
sheets of the Company as of March 31, 2000 (such balance sheet as of March 31,
2000 being referred to herein as the "MOST RECENT BALANCE SHEET"), together with
the related unaudited consolidated statements of income, stockholders' equity
and changes in cash flows for the period from the Company's inception until
March 31, 2000 and the notes and supplementary information thereto, if any,
accompanied, to the extent available, by the reports thereon of the Company's
independent public accountant (such financial statements being hereinafter
referred to as the "FINANCIAL STATEMENTS").
(b) It is the intention of the parties that the unaudited balance sheets and
consolidated statements of income, stockholders' equity and changes in cash
flows will be replaced and superceded by audited financials pursuant to Sections
6.7 and 8.2(j). At such time as the Company furnishes to Parent its audited
financials these audited financials shall become the "Most Recent Balance Sheet"
and "Financial Statements." Provided, however, that if the audited financials
disclose material adverse differences from the unaudited financials, then Parent
and Sub may terminate this Agreement pursuant to Section 10.1(c)(i), although
Parent and Sub shall not be entitled to any damages as a result of such errors
unless the unaudited financials contained intentional misrepresentations.
(c) The Financial Statements and each item therein, including the notes
thereto (i) were prepared in accordance with generally accepted accounting
principles in the United States of America applied on a consistent basis
throughout the periods covered thereby ("GAAP"), (ii) present fairly in all
material respects the financial position, results of operations and changes in
cash flows, as applicable, of the Company and its consolidated Subsidiaries or
the Company, as of such dates and for the periods then ended (subject, in the
case of the un-audited interim Financial Statements, to normal year-end audit
adjustments consistent with prior periods), (iii) are accurate, correct and
complete and are, in all material respects, in accordance with the books of
account and records of the Company and (iv) can be reconciled with the financial
statements and the financial records maintained and the accounting methods
applied by the Company for federal income tax purposes.
SECTION 3.10. ABSENCE OF UNDISCLOSED LIABILITIES. Notwithstanding any
limitations or qualifications of, or exceptions to any other representation and
warranty contained in this Article III, except as described on SCHEDULE 3.10
hereto, (a) there are no Liabilities, commitments or obligations of the Company
of any kind whatsoever, (b) neither the Company nor any of the Principal
Stockholders Knows of any valid basis for the assertion of any such Liabilities,
commitments or obligations, and (c) neither the Company nor any Principal
Stockholder Knows of any existing condition, situation or set of circumstances
which is reasonably likely to result in such a Liability, commitment or
obligation, other than (x) Liabilities, commitments and obligations to the
extent and in the amounts set forth on the Most Recent Balance Sheet
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(none of which results from, arises out of, relates to, is in the nature of or
was caused by any breach of contract, breach of warranty, tort, infringement or
violation of law), (y) obligations to perform the executory portions of
contracts to which the Company is a party, provided that such obligations are
set forth in such contracts, such contracts are set forth on SCHEDULE 3.14
hereto, and such contracts were entered into in the ordinary course of business
and have been made available to Parent, and (z) additional accruals of
Liabilities of the type that would be included on a balance sheet of the Company
in accordance with GAAP incurred in the ordinary course of business consistent
with past practices subsequent to the date of the Most Recent Balance Sheet and
prior to the date hereof or the Closing Date (as applicable), provided that none
of such additional accruals results from, arises out of, relates to, is in the
nature of, or was caused by any breach of contract, breach of warranty, tort,
infringement or violation of law or relates to indebtedness for borrowed money
or inter-company debt or debt owed to Affiliates and such additional accruals
are not, in the aggregate, material.
SECTION 3.11. ABSENCE OF CERTAIN CHANGES. Except as disclosed on
SCHEDULE 3.11 attached hereto, since March 31, 2000, the Company has conducted
its businesses only in the ordinary and usual course using its best efforts to
maintain and enhance the Business and there has been no material adverse change
in the assets, properties, business, operations, prospects, customer, licensor,
licensee, supplier or employee relations, net income or condition (financial or
otherwise) of the Company or in the ability of the Company or any of the
Principal Stockholders to perform this Agreement, the Additional Agreements and
the transactions contemplated hereby and thereby (a "MATERIAL ADVERSE EFFECT").
For purposes of this Agreement, any change or effect in an amount or value or
having an impact of $50,000 or more individually, or $100,000 or more in the
aggregate, shall be deemed to be "material" and result in a Material Adverse
Effect. Except as disclosed on SCHEDULE 3.11 attached hereto, there is no event,
condition, circumstance or, to the Knowledge of the Company or any Principal
Stockholder, prospective development which has had or may have a Material
Adverse Effect. Without limiting the generality of the foregoing, except as
disclosed on SCHEDULE 3.11 attached hereto, the Company has not since March 31,
2000:
(a) declared, set aside or paid any dividend or other distribution (whether
in cash, stock or property) with respect to the equity interests of the Company,
(b) purchased, redeemed (or called for redemption), issued, sold, or
otherwise acquired or disposed of any shares of capital stock or other equity
securities of the Company, or granted any options, warrants or other rights to
purchase, or convert any obligation into, shares of capital stock or any
evidence of indebtedness or other securities of the Company,
(c) incurred or assumed any indebtedness (whether directly or by way of
guarantee or otherwise) for borrowed money, or become bound to repay prematurely
any borrowed money,
(d) forgiven or canceled any debts or claims,
(e) discharged or satisfied any Lien, or paid any Liability, other than
current liabilities for trade or business obligations shown on the Most Recent
Balance Sheet or incurred thereafter (but only to the extent such payment was in
the ordinary course of business consistent with past practices),
(f) changed its credit policies or practices,
(g) (i) increased the rate or terms of compensation (including termination
and severance pay) payable or to become payable by the Company to its directors,
officers, employees or agents, or increased the rate or terms of any bonus,
insurance, pension or other employee benefit plan, program or arrangement made
to, for or with any such directors, officers, employees or agents, except
increases occurring in the ordinary course of business consistent with past
practice or as required by applicable law, or (ii) entered into any employment,
severance or termination agreement with any such Person,
(h) made any loan, advance or capital contribution to any Person,
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(i) waived any significant rights relating to the business of the Company or
arising under or relating to any of its assets, interests or properties,
(j) experienced any damage, destruction or loss to the properties or assets
owned, leased or used by the Company, whether or not covered by insurance and
whether as a result of fire, flood, riot, strike, act of God, other hazard or
otherwise,
(k) changed its financial or tax accounting principles or methods, except
insofar as may be required by a change in GAAP,
(l) changed, or authorized any change, in its Articles of Incorporation or
Bylaws,
(m) changed any of its business policies, customs or practices, including
advertising, licensing, investment, marketing, pricing, credit, the collection
of receivables, the payment of payables, purchasing, production, personnel,
sales, returns, budget, research and development and product acquisition
policies,
(n) commenced, accelerated, ceased or curtailed any research and development
efforts other than in the ordinary course of business, consistent with past
practices,
(o) sold, leased, licensed, abandoned or made any other disposition of, or
created or permitted to exist any Liens with respect to, any of its properties,
Proprietary Rights or assets or made any acquisition of all or any part of the
properties, assets, capital stock or business of any other Person, other than
sales of inventory and licenses of Proprietary Rights in the ordinary course of
business consistent with past practices,
(p) entered into any merger, consolidation, recapitalization or other
business combination or reorganization (except for the transactions contemplated
herein),
(q) amended, terminated or failed to renew, or received any threat to
terminate or fail to renew, any Contract (as hereinafter defined) or other
agreement other than in the ordinary course of business and where such
amendment, termination, failure to renew or threat, singly or together with
other such actions, will not have a Material Adverse Effect,
(r) failed to pay trade payables of its business in the ordinary course of
business or done anything to adversely affect its relationship with customers,
suppliers, licensors or licensees,
(s) induced any employee, agent or consultant of the Company to leave or
terminate his or her employment or engagement with the Company or acted to
otherwise adversely affect the relation of the Company with any key employee,
consultant or agent,
(t) terminated, amended or modified any Plans, or adopted any employee
benefit plan, agreement, arrangement, commitment, policy or practice,
(u) without limiting the foregoing, engaged in any other material
transaction other than in the ordinary course of business consistent with past
practices, or
(v) agreed, either in writing or in a binding oral agreement, to do any of
the foregoing.
SECTION 3.12. LITIGATION. Except as set forth on SCHEDULE 3.12 attached
hereto, which contains a list and summary description of all pending and, to the
Knowledge of the Company and the Principal Stockholders, threatened Claims,
there are no Claims pending or, to the Knowledge of the Company or the Principal
Stockholders, threatened by or before any Governmental Authority or before any
arbitrator of any nature, brought by or against the Company, or any of its
officers, directors, stockholders, employees or agents involving, affecting or
relating to the business, assets, operations or securities of the Company, or
the transactions contemplated by this Agreement or the Additional Agreements,
nor is there any basis for any such Claim. Neither the Company nor any of its
respective businesses, assets or properties is subject to any order, writ,
judgment, award, injunction or decree of any Governmental Authority or
arbitrator. No present or former employee of the Company has made or is entitled
to assert, any Claim against the Company by virtue of any patent or latent
employment-related health defect.
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SECTION 3.13. TITLE TO ASSETS; LIENS AND ENCUMBRANCES.
(a) Except as set forth on SCHEDULE 3.13 attached hereto, the Company holds
and owns full, unconditional, good and marketable title to all of the assets
used in its businesses, including all of the assets reflected on the Most Recent
Balance Sheet, free and clear of all Liens except for Liens (a) for taxes not
yet delinquent or the validity of which are being contested in good faith by
appropriate actions, and (b) on assets leased or licensed by the Company as
described in any Schedule hereto, in which case the Company holds a leasehold or
licensed interest free and clear of all other Liens except for the lessor's or
licensor's interest therein. All of the assets of the Company are owned or
leased by the Company and are in reasonable operating condition in accordance
with industry practice (subject to normal wear and tear) and as such are
adequate and sufficient to conduct the business of the Company as presently
conducted and as currently contemplated to be conducted. Neither the Company nor
any of the Principal Stockholders is aware of (i) any assets of the Company
which require substantial repair or replacement, (ii) any manufacturer, supplier
or servicer of any assets of the Company or any Subsidiary which has terminated
its operations or suffered a significant adverse change in its condition
(financial or otherwise) or (iii) any other facts or circumstances which would
materially adversely affect the Surviving Corporation's ability to obtain repair
or replacement products, parts or services with respect to any assets of the
Company after the Closing.
(b) The Chapter 11 Plan and related confirmation order in the
Superconducting Core Technologies, Inc. Chapter 11 cases (under which the
Company acquired the Business) (collectively, the "CONFIRMED PLAN") are not the
subject of an appeal or a motion to reconsider or revoke and have not been
amended, waived or otherwise altered or supplemented from the form originally
approved by the applicable bankruptcy court. A true and complete copy of the
plan and confirmation order have been provided to Parent by the Company. The
Confirmed Plan has been substantially consummated and the time for any appeal,
motion to reconsider or motion to vacate the Confirmed Plan for any alleged
fraud under Section 1144 of the Bankruptcy Code has not been extended and each
such period has lapsed. The purchase contemplated by the Confirmed Plan from the
debtors to the Company closed on March 15, 1999, and a true and complete set of
the closing documents from that closing have been provided to Parent by the
Company.
SECTION 3.14. CONTRACTS. Set forth on SCHEDULE 3.14 attached hereto is a
list of all contracts, mortgages, notes, security agreements, trust indentures,
arrangements, leases, licenses, commitments and other agreements and instruments
(collectively, "CONTRACTS") to which the Company is a party which is material
and relates to or affects the capital stock, business, assets, properties or
operations of the Company or to which the Company or its business, assets,
properties or operations may be bound or subject, including all written or oral,
express or implied Contracts (a) relating to Proprietary Rights owned or used by
the Company, (b) not made in the ordinary course of business, (c) relating to
the borrowing of money or for lines of credit, (d) involving leases and
subleases of real or personal property requiring annual payments in excess of
$25,000 or which cannot be terminated without penalty on 90 days notice,
(e) for the sale of any assets other than in the ordinary course of business or
for the grant of any options or preferential rights to purchase any assets,
property or rights, (f) granting any power of attorney with respect to the
affairs of the Company, (g) involving suretyship contracts, working capital
maintenance or other form of guaranty agreements, (h) limiting or restraining
the Company from engaging or competing in any lines of business or with any
Person, (i) involving partnerships or joint ventures which the Company is a
partner or participant in, (j) pursuant to which the Company may make or receive
payments in excess of $25,000 per annum or which cannot be terminated without
penalty on 90 days notice, (k) with any current or former stockholder, officer,
director, employee, agent or consultant of the Company, or with any entity in
which any of the foregoing is or was a controlling person, (l) involving any
Plan, (m) involving non-competition, secrecy or confidentiality agreements,
(n) involving the employment of temporary employees or the retention of
independent contractors requiring the payment of in excess $25,000 per year,
(o) the benefits of which are contingent or accelerated, or the terms of which
are altered, by the
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occurrence of, or the value of any benefits of which will be calculated on the
basis of, any of the transactions contemplated by this Agreement or the
Additional Agreements, (p) which involves exclusive dealing, supply or
requirements obligations, (q) pursuant to which the Company has any
indemnification obligations, (r) which provide for warranties or return of
product, (s) which is a "futures" contract committing the Company to purchase,
or accept delivery of product at future times at fixed prices, or (t) involving
amendments, modifications, extensions or renewals of any of the foregoing.
SCHEDULE 3.14 also sets forth all such material contracts and agreements
currently being negotiated by the Company. The Contracts can be performed by the
Company in the ordinary course of business (consistent with past practices),
assuming no material breach by the other party. Each of the Contracts is valid
and binding and in full force and effect and (subject to the Enforceability
Exceptions) is enforceable against the parties thereto in accordance with its
terms, and there are no existing material defaults or events of default which
(whether with or without notice, lapse of time or the happening or occurrence of
any other event) would constitute a default by the Company thereunder or any
other party thereto. Except as set forth on SCHEDULE 3.14, the consummation of
the transactions contemplated hereby, without notice to or consent or approval
of any party, will not constitute a default under or a breach of any provisions
of any Contracts and Parent and the Surviving Corporation will have and may
enjoy and enforce all rights and benefits under each such Contract. There is no
Lien on the Company's or any of the Subsidiaries' interests under any of the
Contracts. True and complete originals or copies of the Contracts listed or
required to be listed in SCHEDULE 3.14 have been delivered by the Company to
Parent. The Company is not a party to any oral Contracts requiring annual
payments in excess of $10,000, individually, or $25,000 in the aggregate, or
which cannot be terminated at any time without penalty.
SECTION 3.15. EMPLOYEE BENEFIT PLANS.
(a) Set forth on SCHEDULE 3.15 attached hereto is a true and complete list
of each Plan, whether formal or informal, written or oral. A true and complete
copy of each Plan, along with each summary description of such Plan, has been
furnished by the Company to Parent.
(b) None of the Plans is a multi-employer plan as defined in Section 3(37)
or Section 4001(a)(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or Section 414(f) of the Code. None of the Plans is a
voluntary employees' beneficiary association as defined in Section 501(c)(9) of
the Code. Neither the Company nor any of the Subsidiaries nor any of the ERISA
Affiliates of the foregoing maintains, has ever maintained, or has any liability
with respect to an employee benefit plan as defined in Section 3(3) of ERISA
that is subject to Title IV of ERISA, Section 302 of ERISA or Section 412 of the
Code. No Plan is intended to qualify under Section 423 of the Code. None of the
Plans is a prototype plan. No Plan is subject to the laws of a foreign
jurisdiction or of Puerto Rico or Guam. Neither the Company nor any of the ERISA
Affiliates has any Liability or potential Liability under any non-qualified
deferred compensation plan.
(c) Each of the Plans is in compliance in all material aspects with the
requirements provided by the Rules and any other laws applicable to such Plans,
including ERISA and the Code and the applicable nondiscrimination requirements
under ERISA and the Code. Each Plan and its related trust intended to qualify
under Section 401(a) and Section 501(a) of the Code is so qualified and has
heretofore been determined by the Internal Revenue Service to so qualify, which
determination covers the Tax Reform Act of 1986, and nothing has occurred and no
condition exists that could cause the loss of such qualification; provided that,
to the extent any such Plan has not been operated in accordance with its terms,
it has been operated in all material aspects in accordance with terms permitted
under applicable law to be incorporated into such Plan no earlier than a date
for which the applicable remedial amendment period under Section 401(b) of the
Code will not expire prior to December 31, 2001. All required reports (including
Form 5500 Annual Reports, Summary Annual Reports and Summary Plan Descriptions)
have been timely filed and, if required, timely distributed to participants and
beneficiaries. Any notices required by ERISA or the Code or any other state,
federal or local law or any ruling or regulation of any state, federal or local
administrative agency with respect to the Plans, including any notices required
by Section 204(h) and
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Section 606 of ERISA and Section 4980B of the Code, have been appropriately
given. Neither the Company nor any Subsidiary or ERISA Affiliate maintains,
contributes to, or has any Liability for medical, health, life, death or other
welfare benefits for previously terminated employees or for current employees
who may be terminated in the future (other than any welfare benefits provided in
compliance with the Consolidated Omnibus Budget Reconciliation Act, other
similar law or laws passed in the future). No amounts payable under the Plans
otherwise deductible for federal income tax purposes will fail to be deductible
by virtue of Section 280G of the Code.
(d) With respect to the Plans, all applicable contributions or payments for
all periods ending prior to Closing have been made in full or properly accrued
for in accordance with GAAP. Subject only to normal retrospective adjustments in
the ordinary course, all insurance premiums have been paid in full with regard
to each such Plan for policy years or other applicable policy periods ending on
or before Closing. Except as set forth on SCHEDULE 3.15, the consummation of the
transactions contemplated by this Agreement or the Additional Agreements will
not, (i) pursuant to the terms of any Plan, accelerate the time of payment or
vesting or increase the amount of compensation due any employee or officer of
the Company or any ERISA Affiliate or (ii) with respect to any Plan, constitute
a prohibited transaction described in Section 406 of ERISA or Section 4975 of
the Code.
(e) With respect to each Plan (i) no prohibited transaction as defined in
Section 406 of ERISA or Section 4975 of the Code has occurred, (ii) no Claim
with respect to the assets thereof (other than routine claims for benefits made
in the ordinary course of plan administration for which plan administrative
review procedures have not been exhausted) are pending, or, to the knowledge of
the Company or any of the Principal Stockholders, threatened or imminent against
or with respect to any of the Plans, the Company, any Subsidiary, any ERISA
Affiliate, or any fiduciary, as such term is defined in Section 3(21) of ERISA
("FIDUCIARY"), of any Plan, including any Claim regarding conduct which
allegedly interferes with the attainment of rights under any Plan, and
(iii) none of the Company, the Principal Stockholders, the ERISA Affiliates or
the Fiduciaries has any Knowledge of any facts which would give rise to or could
give rise to any Claim regarding the Plans or conduct which allegedly interferes
with the attainment of rights under any Plan, and (iv) none of the Company, the
ERISA Affiliates or their respective directors, officers, or employees, or the
Fiduciaries has any liability for failure to comply with ERISA or the Code for
any action or failure to act in connection with the administration or investment
of the assets of such Plans.
(f) Neither the Company nor any ERISA Affiliate has incurred or expects to
incur any withdrawal liability (either as a contributing employer or as part of
a controlled group which includes a contributing employer) to any multi-employer
plan, as defined in Section 3(37) or Section 4001(a)(3) of ERISA or
Section 414(f) of the Code, in connection with any complete or partial
withdrawal from such plan occurring on or before the Closing.
(g) With respect to each Plan, the Company has furnished to Parent true and
complete copies of (i) all plan documents, (ii) the most recent determination
letters received from the Internal Revenue Service, (iii) the most recent
application for determination filed with the Internal Revenue Service, (iv) the
latest actuarial valuations, (v) the latest financial statements, (vi) the
latest Form 5500 Annual Report and Schedule A and Schedule B thereto, (vii) all
related trust agreements, insurance contracts or other funding arrangements
which implement any of such Plans, (viii) all Summary Plan Descriptions and
summaries of material modifications and all modifications thereto communicated
to employees and (ix) in the case of stock options, restricted stock, stock
appreciation rights or similar awards, grants or rights issued under any Plan, a
list of holders, dates of grant, number of shares, exercise price per share and
dates exercisable.
SECTION 3.16. ENVIRONMENTAL MATTERS.
(a) Except as set forth on SCHEDULE 3.16 attached hereto, the Company is and
at all times has been, in compliance with all applicable Environmental Laws,
which compliance includes the possession by the Company of all material permits
and other governmental authorizations required under applicable Environmental
Laws, and compliance with the terms and conditions thereof. Except as set forth
on
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SCHEDULE 3.16 attached hereto, the Company has not received any communication
(written or oral), and the Company and the Principal Stockholders have no actual
current knowledge that any predecessor to the Company or its business
(including, without limitation, Superconducting Core Technologies) has received
any communication (written or oral), whether from a Governmental Authority,
Person, citizens group or otherwise, that alleges that the Company is not or was
not in compliance with any Environmental Law, and there are no existing
circumstances that may prevent or interfere with such compliance in the future.
All permits and other governmental authorizations currently held by the Company
pursuant to the Environmental Laws are identified on SCHEDULE 3.16.
SCHEDULE 3.16 sets forth all environmental audits and similar reports in the
possession of the Company with respect to each parcel of Real Estate (as defined
below) and each parcel of real property which the Company or any Subsidiary
previously owned, used, leased or subleased. The Company has provided Parent
with accurate and complete copies of such environmental audits and similar
reports.
(b) Except as set forth on SCHEDULE 3.16, there is no Environmental Claim
pending or, to the Knowledge of the Company or the Principal Stockholders,
threatened against the Company or against any Person whose Liability for any
Environmental Claim that the Company has or may have retained or assumed either
contractually or by operation of law.
(c) There are no past or present actions, activities, circumstances,
conditions, events or incidents, including the release, emission, discharge,
presence or disposal of any Materials of Environmental Concern, or exposures of
employees or other Persons to Materials of Environmental Concern that could
reasonably form the basis of any Environmental Claim against the Company or
against any Person whose Liability for any Environmental Claim the Company or
any of the Subsidiaries has or may have retained or assumed either contractually
or by operation of law.
(d) Without in any way limiting the generality of the foregoing, (i) all
on-site and off-site locations where the Company has stored or has disposed or
arranged for the disposal of, Materials of Environmental Concern, are identified
in SCHEDULE 3.16, (ii) all underground storage tanks previously or presently
located on property owned or leased by the Company are identified in
SCHEDULE 3.16, along with a description of the capacity and contents of such
tanks, any removal or closure activities associated with such tanks and the
compliance of such tanks with underground storage tank requirements and
(iii) except as set forth in SCHEDULE 3.16, there is no asbestos contained in or
forming part of any building, building component, equipment, structure or office
space owned or leased by the Company.
SECTION 3.17. TAXES. Except as set forth in SCHEDULE 3.17, the Company has
timely filed or caused to be filed or will timely file or cause to be filed all
federal, state, local and foreign Tax (as defined below) and information
returns, forms, estimates, information statements and reports ("RETURNS")
required to be filed by it on or before the Effective Time and has paid or
caused to be paid, or have made adequate provision or set up an adequate accrual
or reserve for the payment of, all Taxes required to be paid in respect of the
periods for which such Returns are due, and have established an adequate accrual
or reserve for the payment of all Taxes payable in respect of the period,
including portions thereof, subsequent to the last of said periods required to
be so accrued or reserved up to and including the Effective Time. For these
purposes, the Tax attributable to the period including the Effective Time should
be determined as if the taxable year ended at the Effective Time. The Company is
not delinquent in the payment of any Tax, and, except as set forth on
SCHEDULE 3.17 hereto, no deficiencies for any Tax, assessment or governmental
charge have been claimed, proposed, assessed or, to the Knowledge of the Company
or the Principal Stockholders, threatened. There are no Liens on the assets of
the Company for unpaid Taxes, except for Liens relating to Taxes that are not
yet due and payable. Except as set forth on SCHEDULE 3.17 attached hereto, no
waiver or extension of time to assess any Taxes has been given or requested. No
claim has been made by any taxing authority in any jurisdiction where the
Company does not file Tax returns that the Company is or may be subject to
taxation by that jurisdiction. SCHEDULE 3.17 attached hereto sets forth the
federal, state, local and foreign income Returns for all Open Periods (as
defined below). For the purposes of this Section, (a) the term "TAX" shall
include all taxes, charges, withholdings, fees, levies, penalties, additions,
interest or
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other assessments imposed by any federal, state, local or foreign or other
taxing authority on the Company or any of the Subsidiaries or any of their
respective properties, assets or operations (including as a result of being a
member of an affiliated, combined or unitary group or as a result of any
obligation arising out of an agreement to indemnify any other Person), and
including those related to income, employee welfare or retirement (including
social security), gross receipts, sales, use, occupation, services, leasing,
valuation, addition of value, transfer, license, excise, customs duties or
franchise and (b) the term "OPEN PERIOD" shall mean all periods for which the
applicable statutes of limitation have not run in full and with respect to which
the Tax return has (i) not been audited by the Internal Revenue Service or
comparable state, local or foreign agencies or (ii) has been audited by the
Internal Revenue Service or comparable state, local or foreign agencies but all
aspects of such audit have not been fully and finally resolved.
Except as set forth in SCHEDULE 3.17: (i) the Company has not been a member
of an Affiliated Group or been included in a combined, consolidated or unitary
Tax return; (ii) the Company is not a party to or bound by any Tax allocation or
Tax sharing agreement or has any current or potential obligation to indemnify
any other Person with respect to Taxes; (iii) the Company has not been a United
States real property holding corporation within the meaning of Code
Section 897(c)(2) during the applicable periods specified in Code
Section 897(c)(1)(A)(ii); (iv) the Company is not required to make any
adjustments under Section 481(a) of the Code by reason of a change in accounting
method which affects any taxable year ending after the Closing Date, or has any
application pending to effect such a change of accounting method; and (v) the
Company is not obligated to make any payments, or is a party to an agreement
that could make it obligated to make payments, which will not be deductible
under Section 280G of the Code.
SECTION 3.18. COMPLIANCE WITH APPLICABLE LAW.
(a) Set forth on SCHEDULE 3.18 attached hereto is a true and complete list
of all licenses, permits, franchises, authorizations, registrations and
approvals (the "LICENSES") issued or granted to the Company by any Governmental
Authority and all pending applications therefor, complete and correct copies of
which have been delivered to Parent. Such list contains a summary description of
each such item and, where applicable, specifies the date issued, granted or
applied for, the expiration date and the current status thereof. Each License of
the Company has been duly obtained, is valid and in full force and effect and is
not subject to any pending or, to the Knowledge of the Company or the Principal
Stockholders, threatened administrative or judicial proceeding to revoke, cancel
or declare such License invalid in any respect. No default or breach exists with
respect to any of the Licenses, and no event or condition exists which but for
the lapse of time or notice or both would constitute a default or breach in any
material respect with respect to any of the Licenses. Consummation of the
transactions contemplated hereby will not affect the validity of any License or
give rise to any administrative or judicial proceeding which may modify, revoke,
cancel or declare such License invalid in any respect. The Company holds, and at
all times has held, all Licenses necessary for the lawful conduct of its
business under and pursuant to, and the business of the Company is not being and
has not been conducted in violation of, any Rule of any Governmental Authority
applicable to the Company or any of its properties, assets or operations.
(b) The Company has complied in all material respects with the Rules, and
has not received any written notification (or to its knowledge any oral
notification) of any asserted present or past failure by it to comply with the
Rules. None of the Company, any of the Company's officers, agents or employees
nor any distributor, licensee or any other Person acting on behalf of the
Company has (i) made any unlawful political contributions, (ii) made any payment
or provided services which were not legal to make or provide or which such
Person Knew or should have Known were not legal for the payee or the recipient
of such services to receive, (iii) received any payments, services or gratuities
which were not legal to receive or which the Company or such Persons should have
Known were not legal for the payor or the provider to make or provide, (iv) had
any transactions or payments which are not recorded in its accounting books and
records or disclosed in its financial statements, (v) has had any off-book bank
or cash accounts or "slush funds", (vi) made any payments to governmental
officials in their individual capacities for the purpose of affecting their
action or the action of the government they represent to obtain special
concessions, or (vii) made illegal payments to obtain or retain business.
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SECTION 3.19. BROKERS' FEES AND COMMISSIONS. Except as set forth on
SCHEDULE 3.19 attached hereto, neither the Company nor any Stockholder nor any
of their respective directors, officers, employees or agents has employed any
investment banker, broker, finder or intermediary in connection with the
transactions contemplated hereby. A true and correct copy of the engagement
agreement of any Person set forth on SCHEDULE 3.19 hereto relating to the
transactions contemplated hereby has been delivered to Parent.
SECTION 3.20. PROPRIETARY RIGHTS.
(a) SCHEDULE 3.20 attached hereto sets forth a list and brief description of
all Trademarks, Patents, Trade Names, Copyrights and licenses of Proprietary
Rights (other than with respect to off-the-shelf software) which, in any such
case, are (i) utilized in the operation of the business of the Company,
(ii) owned by the Company or (iii) binding upon the Company or any of its
assets, rights or properties. Except as described on SCHEDULE 3.20 attached
hereto, the Company owns, on an exclusive basis free and clear of all Liens, or
has the exclusive right to use, all of the Proprietary Rights identified in
SCHEDULE 3.20 without any limitations or restrictions of any kind and without
Known conflict or asserted conflict with intellectual property rights of others,
and such Proprietary Rights constitute all the Proprietary Rights that are used
in or necessary for the conduct of the Company's business as presently being
conducted and as contemplated by the Company in the Projections to be conducted
in the foreseeable future. The Proprietary Rights are valid and enforceable
(subject to the Enforceability Exceptions) and no application, patent or
registration relating thereto has lapsed, expired or been abandoned (except in
the ordinary course of business consistent with past practices) or canceled or
is the subject of cancellation or other adversarial proceeding, and all pending
applications are in good standing. The Company is the owner of record of all
copyrights, trademarks, service marks, logos, slogans, and trade names for which
registrations have been issued to the Company by the United States Patent and
Trademark Office or any similar office of a foreign country. All of such
registrations are listed on SCHEDULE 3.20. All rights of the Company in and to
the Proprietary Rights will be unaffected by the transactions contemplated by
this Agreement. The Company has not entered into and is not a party to or
subject to, any contract or other agreement which restricts or impairs the use
of any of the Proprietary Rights owned or used by it.
(b) Except as described on SCHEDULE 3.20 attached hereto, the Company is not
a party to any license or agreement relating to, and does not pay or receive any
royalty from anyone on account of, any of the Proprietary Rights. All licenses
set forth on SCHEDULE 3.20 are valid and binding obligations of the Company and
of the other parties thereto, and (subject to the Enforceability Exceptions) are
enforceable against the parties thereto in accordance with their respective
terms.
(c) No Proprietary Rights owned, used or under development by the Company,
and no services or products sold by the Company, conflict with or infringe upon
any proprietary rights of any third party, and to the Knowledge of the Company
and the Principal Stockholders, there exists no basis which would render any
Proprietary Rights invalid or un-protectable under applicable Rules. To the
Knowledge of the Company and the Principal Stockholders, no Person is infringing
on or violating the Proprietary Rights owned or used by the Company. The Company
has not given or received any notice of any pending conflict with, or
infringement of, the rights of others with respect to any Proprietary Rights or
with respect to any license of Proprietary Rights under which the Company is
licensor or licensee. No Claim is pending, or, to the Knowledge of the Company
or any Principal Stockholder, threatened, which involves Proprietary Rights and
there are no interference, opposition or cancellation proceedings or
infringement suits pending, or to the Knowledge of the Company or the Principal
Stockholders, threatened with respect to any Proprietary Rights.
(d) Neither the Company, nor any of the Proprietary Rights owned or used by
it, is subject to any judgment, order, writ, injunction or decree of any
Governmental Authority, and, except as described on SCHEDULE 3.20 attached
hereto, the Company has not entered into and is not subject to, any consent,
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indemnification, forbearance to sue or settlement agreement with respect to
Proprietary Rights and relating to the validity of, or the Company's ownership
of or right to use Proprietary Rights.
(e) Except as set forth on SCHEDULE 3.20, all personnel, including
employees, agents, consultants and contractors, who have contributed to or
participated in the conception and development of any of the Proprietary Rights
owned by the Company have executed nondisclosure agreements and either (i) have
been or are party to a written agreement with the Company (or one of its
predecessors) that has accorded the Company (or such predecessor) full,
effective, exclusive and original ownership of all Proprietary Rights or
(ii) have executed appropriate instruments of assignment in favor of the Company
as assignees that have conveyed to the Company full, effective, and exclusive
ownership of all such Proprietary Rights.
SECTION 3.21. LABOR MATTERS.
(a) Except as set forth on SCHEDULE 3.21 attached hereto, no present or
former employee or independent contractor performing services for the Company
has a Claim pending or, to the Knowledge of the Company or the Principal
Stockholders, has threatened to make a Claim against the Company (under any Rule
of any Governmental Authority or otherwise), including any Claim for
(i) overtime pay, other than overtime pay for the current payroll period,
(ii) wages, salaries or profit sharing (excluding wages, salaries or profit
sharing for the current payroll period), (iii) vacations, time off or pay in
lieu of vacation or time off, other than vacation or time off (or pay in lieu
thereof) earned in respect of the Company's current fiscal year, (iv) any
violation of any Rule or contract relating to minimum wages or maximum hours of
work, (v) discrimination against employees on any basis, (vi) unlawful or
wrongful employment or termination practices, (vii) unlawful retirement,
termination or labor relations practices or breach of contract or (viii) any
violation of occupational safety or health standards. Except as disclosed on
SCHEDULE 3.21, there are no administrative charges, arbitration or mediation
proceedings or court complaints pending or, to the Knowledge of the Company or
the Principal Stockholders, threatened against the Company before the U.S. Equal
Employment Opportunity Commission or any state or federal court or agency or any
other entity concerning alleged employment discrimination, contract violation or
any other matters relating to the employment of labor. There is no unfair labor
practice charge or complaint pending or, to the Knowledge of the Company or the
Principal Stockholders, threatened against the Company or any Subsidiary before
the National Labor Relations Board or any similar state or local body.
(b) Except as set forth on SCHEDULE 3.21 attached hereto, the Company is and
has been in compliance in all material respects with all applicable Rules
relating to the employment of labor, including employment and employment
practices, terms and conditions of employment, wages and hours, equal
opportunity, occupational health and safety, severance, termination or
discharge, collective bargaining and the payment of employee welfare and
retirement and other taxes, the Worker Adjustment Retraining and Notification
Act and the Immigration Reform and Control Act of 1986, each as amended, and are
not engaged in any unfair labor practice or any violation of any other law, rule
or regulation concerning employment or retention of independent contractors.
(c) The Company is not a signatory or party to, or otherwise bound by, a
collective bargaining agreement (or any other agreement with any labor
organization) which covers employees of the Company, and, to the Knowledge of
the Company and the Principal Stockholders, there is no activity or proceeding
of any labor organization (or representative thereof) to organize any
unorganized employees of the Company or any Subsidiary. The Company has never
experienced any material work stoppage, and there is not pending or threatened
against the Company any labor dispute, grievance, slowdown, lockout, strike,
work stoppage or other collective labor action in effect, pending or threatened
against or affecting the business of the Company or any Subsidiary. To the
Knowledge of the Company or the Principal Stockholders, and except as set forth
on SCHEDULE 3.21, no executive, key employee or group of employees of the
Company has any plan to terminate employment with the Company.
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(d) Except as set forth on SCHEDULE 3.21, the Company is not a party to or
bound by any Contract for the employment of any director or employee of the
Company or any of the Subsidiaries or for the performance by any independent
contractor (including consultants and the like) of services (other than auditing
or legal services) for the Company. The Company has furnished to Parent true and
correct copies of all the documents listed on SCHEDULE 3.21.
(e) SCHEDULE 3.21 sets forth, for the Company, a true and complete list of
directors and officers who perform services for such entity, and for each such
Person includes a complete and accurate summary description of the material
compensation paid to such Person (including the date of the most recent increase
thereof) and any severance pay, lump sum or other payment, compensation or other
remuneration that such Person is or would be eligible to receive, or has
received, upon termination of employment or service (other than such Person's
current balance in the Company's 401(k) Plan) or as a result of any of the
transactions contemplated by this Agreement. Except as set forth in
SCHEDULE 3.21, the Company has no oral or written severance policy or severance
obligations.
(f) Set forth on SCHEDULE 3.21 is a true and complete list of all manuals,
brochures or publications or similar documents of the Company and each ERISA
Affiliate regarding office administration, personnel matters and hiring,
evaluation, supervision, training, termination and promotion of employees of the
Company or any ERISA Affiliate, including the Company's or any ERISA Affiliate's
affirmative action plan, if any, and all written and significant oral
communications to employees concerning such matters.
(g) SCHEDULE 3.21 sets forth a true, accurate and complete list of all
former employees of the Company whose employment with the Company ceased on or
after March 1, 1999.
SECTION 3.22. NON-COMPETE AGREEMENTS. Except as set forth on
SCHEDULE 3.22 attached hereto, no oral or written Contract, license or permit
restricts the ability of the Company to own, possess or use its assets or
conduct its business or operations in any geographic area or other market or
market segment or restricts in any way the full participation of the Principal
Stockholders or, to the Knowledge of the Company or the Principal Stockholders,
any key employees, officers, agents or consultants of the Company in the
operation of such business.
SECTION 3.23. INVENTORY. Except as disclosed on SCHEDULE 3.23 attached
hereto, the inventories of the Company reflected on the Most Recent Balance
Sheet, or acquired by the Company after the date thereof and prior to the
Effective Time (i) are of a quality useable or saleable in the ordinary course
of business, and are of a quantity sufficient to enable the Company to carry on
its respective businesses as currently conducted assuming that there is no
material increase in demand from past experience, (ii) are carried at amounts
which reflect valuations at the lower of cost, determined on a first-in
first-out basis, or market, (iii) have been determined in accordance with GAAP,
and (iv) except to the extent provided for in the reserve set forth on the
balance sheet of the Most Recent Balance Sheet, in accordance with GAAP, do not
include any obsolete, nonconforming or defective materials or any items that
were, or should have been, at any prior time written-off or written-down by the
Company. Except as disclosed on SCHEDULE 3.23 attached hereto and in the
Financial Statements, the Company and its Subsidiaries have, and the Surviving
Corporation will have no Liability for any refunds, allowances or returns in
respect of products sold or services provided prior to the date hereof (or the
Effective Time, as applicable) or in respect of products included in the
inventory of the Company as of the Effective Time and distributed, shipped or
sold by or for the account of the Surviving Corporation after the Effective
Time, except to the extent of the reserves therefor reflected on the balance
sheet of the Most Recent Balance Sheet, in accordance with GAAP. Except as set
forth on SCHEDULE 3.23 attached hereto, all inventories disposed of subsequent
to the date of the Most Recent Balance Sheet have been disposed of only in the
ordinary course of business and at prices and under terms that are normal and
consistent with past practice.
SECTION 3.24. ACCOUNTS RECEIVABLE. Except as set forth on SCHEDULE 3.24,
all outstanding accounts, notes and loans receivable reflected on the Most
Recent Balance Sheet or accrued by the Company or any Subsidiary after the date
thereof and prior to the Effective Time are due and valid claims
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against account debtors for goods or services delivered or rendered, and are
collectible in full within 90 days of delivery and subject to no defenses,
offsets or counterclaims, except to the extent reserved against on the balance
sheet of the Most Recent Balance Sheet, as applicable, in accordance with GAAP.
The Surviving Corporation has no obligation pursuant to any Rule of any
Governmental Authority (whether in bankruptcy or insolvency proceedings or
otherwise) to repay, return, refund or forfeit any receivables collected by the
Company prior to the Effective Time or any receivables reflected on the Most
Recent Balance Sheet, which the Surviving Corporation collects after the
Effective Time. Except as set forth on SCHEDULE 3.24, all receivables arose in
the ordinary course of business, none of the obligors of such receivables have
refused or given notice that it refuses to pay the full amount thereof and none
of the obligors of such receivables is an Affiliate of the Company. Except as
set forth on SCHEDULE 3.24, no receivables are subject to prior assignment or
Lien. Except as reflected on the Most Recent Balance Sheet or on SCHEDULE 3.24,
the Company has not incurred any Liabilities to customers for discounts,
returns, promotional allowances or otherwise. Neither the Company nor any of its
Subsidiaries has any receivables arising out of secured transactions.
SECTION 3.25. BANK ACCOUNTS. SCHEDULE 3.25 attached hereto sets forth the
names and addresses of all banks, trust companies, savings and loan associations
and other financial institutions at which the Company maintains an account,
deposit, safe deposit box, lock box or other arrangement for the collection of
accounts receivable or line of credit or other loan facility relationship or
accounts of any nature and the names of all Persons authorized to draw thereon,
make withdrawals therefrom or have access thereto. Prior to or at the Effective
Time, the Company will deliver or make available to Parent copies of all records
pertaining to such bank accounts. SCHEDULE 3.25 sets forth an accurate and
complete list of all certificates of deposit, debt or equity securities and
other investments owned, beneficially or of record, by the Company
("INVESTMENTS"). The Company and the Subsidiaries have good and marketable title
to all of the Investments.
SECTION 3.26. INSURANCE. SCHEDULE 3.26 attached hereto sets forth an
accurate, correct and complete list and summary description (including the name
of the insurer, the name, address and telephone number of the insurance broker
or agent, type of coverage, premium, policy number, limits of liability for
personal injury and property damage, expiration date, description of pending
claims thereunder and the aggregate amount paid out under each policy through
the date hereof) of all binders, policies of insurance, self insurance programs
or fidelity bonds ("INSURANCE") maintained by the Company or in which the
Company is a named insured. True and complete copies of all such insurance
policies have been furnished to Parent by the Company. All Insurance has been
issued under valid and enforceable policies or binders for the benefit of the
Company and the Subsidiaries, and all such policies or binders are in full force
and effect and are in amounts and for risks, casualties and contingencies
customarily insured against by enterprises with similar operations and are
adequate to protect the properties and business of the Company. There are and
have been no inaccuracies in any application for Insurance policies, nor any
failure to pay premiums thereon when due or otherwise comply with the terms
thereof. The Company has not received any notice from any of their insurance
carriers that any insurance premiums will be increased in the future or that any
insurance coverage listed on SCHEDULE 3.26 will not be available to the Company
in the future on substantially the same terms as now in effect. There are no
pending or asserted claims against any Insurance as to which any insurer has
denied liability (except for reservation of rights), and there are no claims
under any Insurance that have been disallowed or improperly filed.
SECTION 3.27. REAL ESTATE.
(a) Neither the Company nor any Subsidiary owns any real property.
(b) SCHEDULE 3.27 sets forth an accurate, correct and complete list of all
real property now or formerly leased or subleased by the Company, including
identification of the lease or sublease, street address, annual rent, expiration
date and list of contracts, agreements, leases, subleases, options and
commitments, oral or written, affecting such real estate or any interest therein
to which the Company is a party or by
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which any of their interests in real property is bound (the "REAL ESTATE
LEASES") and all leasehold improvements thereon. The Company or a Subsidiary has
been in peaceable possession of the real property covered by each Real Estate
Lease (the "REAL ESTATE") since the commencement of the original term of such
lease, and has performed all obligations required to be performed by it to date
under such lease. The Company has delivered to Parent accurate, correct and
complete copies of each Real Estate Lease. Except as disclosed on
SCHEDULE 3.27, neither the Real Estate Leases nor the leasehold interest nor any
of the leasehold improvements of the Company with respect to the Real Estate is
subject to any Liens (except Liens in favor of the lessor of such Real Estate);
and none of such Real Estate is subject to any easements, rights of way,
licenses, grants, building or use restrictions, exceptions, reservations,
limitations or other impediments which adversely affect the value of the
leasehold interest therein or which interfere with or impair the present and
continued use thereof in the usual and normal conduct of the business of the
Company and the Subsidiaries. Neither the Company nor, to the Knowledge of the
Company or the Principal Stockholders, any other party to the Real Estate Leases
is in default in any material respect under any of the Real Estate Leases.
(c) No real property other than the Real Estate is or has been used in the
business of the Company and the Subsidiaries. Except as disclosed on
SCHEDULE 3.27, no Real Estate is located within a wetland or flood or waterfront
erosion hazard area, and the buildings, structures and improvements situated
thereon and appurtenances thereto and are in reasonable operating condition
(subject to normal wear and tear), and as such are adequate to conduct the
business of the Company as presently conducted. Neither the whole nor any
portion of any Real Estate has been condemned, requisitioned or otherwise taken
by any public authority, and no notice of any such condemnation, requisition or
taking has been received. No such condemnation, requisition or taking is, to the
Knowledge of the Company or the Principal Stockholders, threatened or
contemplated. Except as disclosed on SCHEDULE 3.27, there are no public
improvements pending or contemplated which may result in special assessments
against or otherwise affect the Real Estate.
(d) The Real Estate is in compliance in all material respects with, includes
all rights necessary to assure compliance with, and all buildings, structures,
other improvements and fixtures on such Real Estate and the operations therein
conducted conform in all material respects to, all applicable health, fire,
water, environmental, safety, zoning, building, use or similar Rules. The Real
Estate includes all rights to any off-site facilities necessary to ensure
material compliance with all applicable zoning, building, health, fire, water
and use Rules. The zoning of each parcel of Real Estate permits the existing
improvements and the continuation following consummation of the transactions
contemplated hereby of the business of the Company as presently conducted
thereon. The Company and the Subsidiary have all licenses, certificates of
occupancy, permits and authorizations required to operate their businesses and
utilize the Real Estate. The Company has all easements and rights necessary or
appropriate to conduct their operations, including easements for all utilities,
services, roadway and other means of ingress and egress and each parcel of Real
Estate has direct access to public roadways. Except as disclosed on
SCHEDULE 3.27, the execution, delivery and performance of this Agreement and the
transactions contemplated hereby will not result in the imposition of any
transfer or other Tax with respect to the Real Estate. There will be no accrued
but unpaid Taxes payable by the Company or any Subsidiary with respect to the
Real Estate as of the Effective Time which is in excess of (or accruing at a
rate which would result in a Tax in excess of) comparable Taxes paid by the
Company or any Subsidiary in prior periods or to the extent of the reserves
therefor reflected on the Most Recent Balance Sheet in accordance with GAAP,
except for generally applicable real estate property tax increases imposed by
the taxing authority.
SECTION 3.28. PRODUCTS AND WARRANTY LIABILITY. Except as set forth on
SCHEDULE 3.28 attached hereto, there is no action, suit, written (or to the
Company's knowledge, oral) inquiry, proceeding or investigation by or before any
Governmental Authority pending or, to the Knowledge of the Company or the
Principal Stockholders, threatened, against or involving the Company relating to
any product alleged to have been processed, manufactured, serviced or sold by
the Company and alleged to have been defective,
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or improperly processed, manufactured or serviced (a "WARRANTY CLAIM") which
could, individually or in the aggregate, have a Material Adverse Effect, nor are
there any existing facts or circumstances which make it reasonably probable that
a Warranty Claim could be asserted, which, if so asserted, would be reasonably
likely to result in a Material Adverse Effect. Except as set forth on
SCHEDULE 3.28, (i) the Company will not be subject to any Claim, expense,
Liability or obligation arising from injury to Person or property as a result of
ownership, possession or use of any product manufactured, processed, serviced,
distributed or shipped or sold by the Company prior to the Effective Time,
(ii) there is no fact relating to any product that may impose upon the Company a
duty to recall such product or a duty to warn customers or others of a defect in
any such product and (iii) there is no latent or overt design, manufacturing or
other defect in any product produced by the Company, which could, individually
or in the aggregate, have a Material Adverse Effect. The Surviving Corporation
will not incur any product or service warranty expense in respect of products
sold or services provided by the Company prior to the Effective Time in excess
of the reserves therefor reflected on the Most Recent Balance Sheet in
accordance with GAAP which expense could reasonably likely, individually or in
the aggregate, have a Material Adverse Effect.
SECTION 3.29. TRANSACTIONS WITH RELATED PARTIES. Except as set forth on
SCHEDULE 3.29 attached hereto, (a) there have never been nor are there now any
transactions between the Company and (i) any director, officer, employee (except
for the employment relationship), stockholder or Affiliate of the Company, or
(ii) any relative or spouse (or relative of such spouse) of any such director,
officer, employee, stockholder or Affiliate (such Persons in (i) and (ii) being
referred to herein as a "RELATED PARTY" or collectively as the "RELATED
PARTIES"), (b) no Related Party has ever been a director or officer of, or has
had any direct or indirect interest in, any firm, corporation, association or
business enterprise which during such period has been a supplier, customer,
sales agent, licensor, licensee, lessor or lessee of the Company, or has
competed with or been engaged in any business of the kind being conducted by the
Company, (c) no Related Party has an interest in or owns, directly or
indirectly, in whole or in part, any tangible or intangible property of the
Company, or that the Company uses in the conduct of its business, (d) no Related
Party has any cause of action or other claim whatsoever against or owes any
money or other amounts to, nor is any Related Party owed any money or other
amounts by, the Company other than amounts owed for compensation, employee
benefits or travel expenses incurred in the ordinary course of business and
(e) no Related Party is a party to any contract, lease, agreement, arrangement
or commitment used in the operations of the Company. Except as set forth on
SCHEDULE 3.29 attached hereto, the Company has no indebtedness to or from any
Related Party.
SECTION 3.30. CUSTOMERS AND VENDORS. Set forth on SCHEDULE 3.30 attached
hereto is a list of the 20 largest of each of the customers and vendors
(specifying the amount purchased or sold) of the Company for the twelve month
period ending March 31, 2000. During the twelve months preceding the date hereof
or the Effective Time, as applicable, no such customer or vendor has terminated
or changed significantly its relationship with the Company, to the Knowledge of
the Company or the Principal Stockholders, the Company has not done anything to
adversely affect their relationship with any such customers or vendors and to
the Knowledge of the Company or the Principal Stockholders, no such customer or
vendor has suffered a significant adverse change in its condition (financial or
otherwise). Except as set forth on SCHEDULE 3.30, no customer or vendor of the
Company has threatened to terminate or change significantly its relationship
with the Company on or after the Effective Time, nor, to the Knowledge of the
Company or the Principal Stockholders, will the consummation of the transactions
contemplated by this Agreement materially adversely affect the relationship of
the Company with any of its customers or vendors. The Company directly invoices
the customers who purchase products.
SECTION 3.31. NAMES. Except as disclosed on SCHEDULE 3.31 attached hereto,
the Company has never operated under any name other than Spectral
Solutions, Inc.
SECTION 3.32. FORECASTS. The operating plan summaries and forecasts for
the Company delivered by the Company to Parent (the "FORECASTS"), which
Forecasts are attached hereto as SCHEDULE 3.32, were prepared by the Company in
good faith and in a manner consistent with past forecasting practices (taking
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into account changes in accounting methods), and the Company believes that the
assumptions upon which the Forecasts are based are reasonable. Based upon
presently available information and excluding any impact on the financial
performance of the Surviving Corporation resulting solely from the transactions
contemplated by this Agreement, the Forecasts provide a reasonable estimate of
the anticipated financial performance of the Surviving Corporation for the
period covered thereby but there is no guarantee or warranty that any such
results will be obtained.
SECTION 3.33. YEAR 2000 COMPLIANCE. Except as set forth on SCHEDULE 3.33
attached hereto, all computer, network or other data processing hardware,
software, systems and technology, and all computer controlled facility
components (defined as software driven technology and embedded microchip
technology, including programmable thermostats, HVAC controllers, auxiliary
elevator controllers, utility monitoring and control systems, fire detection and
suppression systems, alarms, security systems, and any other facilities control
systems utilizing microcomputer, minicomputer, or programmable logic
controllers) (collectively, the "COMPUTER SYSTEMS") owned or used by the Company
are fully Year 2000 Compliant. The Company has not suffered, and the Company
reasonably expects that the Company will not at any time hereafter suffer any
interruption of, or interference with, its business operations or activities by
reason of the failure of any Computer Systems owned or used by the Company or,
to the knowledge of the Company or the Principal Stockholders, any of its
suppliers to be Year 2000 Compliant. For such purposes, "YEAR 2000 COMPLIANT"
means, with respect to any Computer Systems owned or used by any Person, that
such Computer Systems (a) will correctly store, represent, and process
(including sort) all dates (including single and multi-century formulas and leap
year calculations), such that errors will not occur when the date being used is
in the Year 2000, or in a year preceding or following the Year 2000; and
(b) will operate and will not cause or result in an abnormal termination or
ending.
SECTION 3.34. DISCLOSURE. All documents, agreements and other papers and
materials delivered by or on behalf of the Company or the Principal Stockholders
in connection with this Agreement, the Additional Agreements and the
transactions contemplated hereby and thereby are true, complete and accurate.
All documents referred to in this Agreement, including in the Schedules or
Exhibits, and the corporate minute books of the Company have been delivered to
Parent. Such corporate minute books contain all of the minutes of meetings of
stockholders, board of directors, and any committees of the board of directors
that have been held and all of the written consents to action executed in lieu
thereof. None of the representations, warranties or statements of the Company or
the Principal Stockholders contained in this Agreement, in the Schedules or
Exhibits hereto, or in any other agreement, instrument or document executed or
delivered by or on behalf of such Person in connection with the transactions
contemplated by this Agreement contains any untrue statement of a material fact
or omits to state any material fact required to be stated therein or necessary
to make the representations, warranties or statements made, in the context in
which made, not false or misleading. There is no fact Known to the Company or
the Principal Stockholders which has not been disclosed to Parent and Sub in
writing that could reasonably likely cause a Material Adverse Effect or could
reasonably likely result in a Material Adverse Effect. The Company and the
Principal Stockholders acknowledge that the statements contained in this Section
shall not be deemed to limit or qualify any of the other representations or
warranties contained in this Agreement, in the Schedules or Exhibits hereto or
in any agreement or document delivered in connection herewith.
SECTION 3.35. DISCLAIMER. No promises or representations have been or are
made by the Company or any Principal Stockholder or other Company Stockholder
except as expressly set forth in this Agreement, whether regarding Company's
conduct of the Business prior to the Closing, the operations of the Business
prior to the Closing, any projections or forecasts of the Business or Company,
or otherwise; and Parent and Sub (and any stockholders thereof), in entering
into this Agreement have not relied on any representations or promises except as
set forth in this Agreement (including, without limitation, the Schedules and
Exhibits hereto).
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF THE PRINCIPAL STOCKHOLDERS
Each of the Principal Stockholders hereby represent and warrants severally
but not jointly, to each of Parent and Sub as of the date hereof and as of the
Effective Time as set forth below. The information disclosed on any Schedule
attached hereto shall be deemed to relate solely to the section of this
Article IV to which such Schedule relates and shall not be deemed made by other
sections to which such discloses may apply unless such disclosure is
cross-referenced in the Schedule(s) relating to such other section(s), and only
to the extent that the applicable information or risk is described.
SECTION 4.1. AUTHORIZATION. Such Principal Stockholder, to the extent that
it is not a natural person is an entity duly organized, validly existing and in
good standing under the laws of its jurisdiction of organization, with full
power and authority to enter into, execute and deliver this Agreement and the
Additional Agreements to which it is a party and to perform and observe fully
its obligations hereunder and thereunder and to perform the transactions
contemplated hereby and thereby. Such Principal Stockholder to the extent that
he or she is a natural person, has the legal capacity to enter into this
Agreement and the Additional Agreements to which such Person is a party and to
consummate the transactions contemplated hereby and thereby. Such Principal
Stockholder has taken all action required by law, the Company's Articles of
Incorporation and Bylaws, or otherwise to authorize the execution, delivery and
performance of this Agreement and the Additional Agreements to which such Person
is a party and the consummation by such Principal Stockholder of the
transactions contemplated hereby and thereby. This Agreement and the Additional
Agreements to which such Person is a party have been duly and validly executed
and delivered by such Principal Stockholder and, assuming due authorization,
execution and delivery by Parent and Sub, constitute valid and binding legal
obligations of such Principal Stockholder, enforceable against each of such
Principal Stockholder in accordance with their terms subject to the
Enforceability Exceptions.
SECTION 4.2. NO VIOLATION. Neither the execution, delivery or performance
of this Agreement or the Additional Agreements by such Principal Stockholder nor
the consummation of the transactions contemplated hereby or thereby will
(a) violate, conflict with or result in any breach of any provision of the
organizational or governing documents of such Principal Stockholder,
(b) violate, conflict with or result in a violation or breach of, or constitute
a default (with or without due notice or lapse of time or both) in any material
respect under, or permit the termination of, or require any notice under, or
require the consent of any other party to, or result in the acceleration of, or
entitle any party to accelerate (whether as a result of a change in control of
the Company or otherwise) any obligation or agreement, or result in the loss of
any benefit or the imposition of any fee or penalty, or give rise to the
creation of any Lien upon any of the respective properties or assets of the
Company or such Principal Stockholder (including the Principal Stockholder's
Company Securities), in each case under any of the terms, conditions or
provisions of any debt, note, bond, mortgage, indenture, deed of trust, license,
lease, permit, agreement or other instrument or obligation to which such
Principal Stockholder is a party or by which they or any of their respective
properties or assets may be bound or affected (unless requisite waivers or
consents satisfactory in form and substance to Parent shall have been obtained
in writing and delivered to Parent prior to the Closing) or (c) violate in any
material respect any Rules (including foreign, federal and state securities
laws) of any Governmental Authority applicable to such Principal Stockholder or
any of their respective properties, assets or operations.
SECTION 4.3. OWNERSHIP OF STOCK. Such Principal Stockholder owns of record
and beneficially the amounts and type of Company Securities specified as owned
by such Principal Stockholder on SCHEDULE 3.5 attached hereto, free and clear of
all Liens and such Principal Stockholder does not own, beneficially or of
record, any other debt or equity securities of the Company or any option,
warrant, call, subscription or any other right to acquire any such securities.
There are no options, warrants, calls, subscriptions, conversion or other
rights, agreements or commitments to acquire from such Principal Stockholder any
shares of
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capital stock of the Company or any other securities convertible into,
exchangeable for or evidencing the right to subscribe for any shares of capital
stock of the Company or the Surviving Corporation, or any other security of the
Company or the Surviving Corporation. Except as set forth on SCHEDULE 3.5, there
are no voting agreements, voting trust agreements, proxies or stockholder or
similar agreements relating to the capital stock of the Company to which any
Stockholder is a party. Such Principal Stockholder has sole power of disposition
and voting with respect to all of the Company Securities owned beneficially or
of record by such Principal Stockholder, including without limitation, the sole
power to demand, assert or otherwise exercise dissenter's or appraisal rights.
Such Principal Stockholder is not a resident of any state which is subject to
community property laws.
SECTION 4.4. INVESTMENT REPRESENTATION. Such Principal Stockholder will
accept the Merger Consideration for his, her or its own account and not for any
other Person and for investment purposes only and without any view to
distribute, resell or otherwise transfer the same. Such Principal Stockholder
represents, warrants and acknowledges that he, she or it has such knowledge and
experience in business and financial matters as to be capable of evaluating the
merits and risks of the investment contemplated to be made hereunder and that
they have sufficient financial strength to hold the same as an investment and to
bear the economic risks of such investment (including possible loss of such
investment) for an indefinite period of time. Such Principal Stockholder
acknowledges that he, she or it is fully informed that the Merger Consideration
being sold hereunder is being sold pursuant to a private offering exemption of
the Securities Act of 1933, as amended (the "SECURITIES ACT"), and is not being
registered under the Securities Act or under the securities or blue sky laws of
any state or foreign jurisdiction; that such securities must be held
indefinitely unless they are subsequently registered under the Securities Act
and any applicable state securities or blue sky laws, or unless an exemption
from registration is available thereunder; and that Parent, except as expressly
provided in Sections 6.14 and 6.15 hereof, has no obligation to register such
securities. Such Principal Stockholder acknowledges that he, she or it has such
knowledge and experience in financial and business matters so as to be capable
of evaluating the risks and merits of this investment, that all public documents
and records pertaining to the investment in Parent have been made available or
delivered to them; that they have had an opportunity to ask questions of and
receive answers from Parent concerning the terms and conditions of this
Agreement and the Additional Agreements and to obtain additional information, to
the extent that Parent possesses such information or can acquire it without
unreasonable effort or expense, necessary to verify the accuracy of the
information contained in such public documents and records.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF PARENT AND SUB
Parent and Sub hereby jointly and severally represent and warrant to the
Company and the Company Stockholders that:
SECTION 5.1. ORGANIZATION AND QUALIFICATION. Each of Parent and Sub is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and Colorado, respectively.
SECTION 5.2. AUTHORIZATION. Parent and Sub each have full corporate power
and authority to execute and deliver this Agreement and the Additional
Agreements to which it is a party and to perform and observe fully its
obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby, subject to receipt of Parent Stockholder
Approval (as defined in Section 8.1 hereof). Each of Parent and Sub has taken
all corporate action required to authorize the execution, delivery and
performance by it of this Agreement and the Additional Agreements to which it is
a party and the consummation by it of the transactions contemplated hereby and
thereby. This Agreement and the Additional Agreements to which Parent or Sub is
a party have been duly and validly executed and delivered by Parent or Sub, as
applicable, and, assuming due authorization, execution and delivery by the
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Company and the Company Stockholders, will constitute a valid and binding
obligation of Parent or Sub, as applicable. The approval of the Parent
Stockholders is not required to authorize the transactions contemplated hereby,
except to the extent necessary to authorize a sufficient number of shares of
Parent Common Stock so that the Parent Common Stock issuable to the Company
Stockholders pursuant hereto are duly authorized (which approval, under the
proxy rules under the Securities Exchange Act of 1934, as amended, could require
the same disclosure as if the transactions contemplated hereby did require
approval of the Parent Stockholders).
SECTION 5.3. NO VIOLATION. Neither the execution and delivery of this
Agreement by Parent and Sub and the performance by Parent and Sub of their
obligations hereunder nor the consummation by Parent and Sub of the transactions
contemplated hereby will (a) violate, conflict with or result in any breach of
any provision of the Certificate of Incorporation or Bylaws of Parent or Sub,
(b) violate, conflict with or result in a violation or breach of, or constitute
a default (with or without due notice or lapse of time or both) under, or permit
the termination of, or result in the acceleration of, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which Parent or
Sub is a party or by which they or any of their respective properties or assets
may be bound or affected or (c) violate any Rule of any Governmental Authority
applicable to Parent or Sub or any of their respective properties, assets or
operations, excluding from the foregoing clauses (b) and (c) violations,
conflicts, breaches or defaults which, in the aggregate would not have a
material adverse effect on the business, properties, operations or condition
(financial or otherwise) of Parent or Sub.
SECTION 5.4. CAPITALIZATION OF PARENT. The authorized capital stock of
Parent consists of 60,000,000 shares of Parent Common Stock and 100,000 shares
of preferred stock, of which 10,000 shares have been designated as Series A
Junior Participating Preferred Stock. Except as set forth in SCHEDULE 5.4, the
Parent Commission Filings accurately describe the outstanding and reserved
capital shares, and obligations to issue capital shares, of Parent. Assuming
that the condition to closing set forth in Section 8.1(e) has been satisfied,
the shares of Parent Common Stock to be issued hereunder subject to the terms
hereof and Escrow Agreements will be validly issued, fully paid, non-assessable
and free and clear of preemptive rights, Liens (except as may arise from any
action of the holder thereof), warrants, options or other repurchase rights.
SECTION 5.5. CONSENTS AND APPROVALS. Other than the filing of a
certificate of merger pursuant to the CBCA and requirements of federal and state
securities laws, no filing or registration with, no notice to and no permit,
authorization, consent or approval of, any public or governmental body or
authority is necessary for the consummation by Parent or Sub of the transactions
contemplated by this Agreement.
SECTION 5.6. BROKERS. Parent has not engaged any investment banker, broker
or finder in connection with the transactions contemplated hereby.
SECTION 5.7. PARENT COMMISSION REPORTS. Parent has timely filed with the
Securities and Exchange Commission ("SEC") and made available to the Company and
the Principal Stockholders all periodic reports, annual reports to stockholders
and proxy statements required to be filed by it during the last two fiscal
years, under the Securities Exchange Act of 1934, as amended ("EXCHANGE ACT")
(such periodic reports and other documents, together with any amendments
thereto, are sometimes collectively referred to as the "PARENT COMMISSION
FILINGS"). The Parent Commission Filings (a) either did not contain any untrue
statements of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading as of their respective
dates, or to the extent that such misrepresentation or omission may have
existed, such disclosure has been corrected by Parent in subsequent Parent
Commission Filings prior to the Closing Date, and (b) complied as of their
respective dates in all material respects with the applicable requirements of
the Exchange Act and the applicable rules and regulations of the SEC thereunder.
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SECTION 5.8. ABSENCE OF CERTAIN ACTIONS. Notwithstanding any limitations
or qualifications of, or exceptions to any other representation and warranty
contained in this Article V, except as described on SCHEDULE 5.8, there has been
no material adverse change in the affairs of Parent which has not been disclosed
in the Parent Commission Filings.
SECTION 5.9. DISCLAIMER. No promises or representations have been or are
made by Parent to the Company or any Stockholder except as expressly set forth
in this Agreement, whether regarding Parent's conduct of the Business following
the Closing, the operations of Parent following the Closing, any projections or
forecasts of the Business or Parent relating to the period following the
Closing, or otherwise and Sellers, in entering into this Agreement, have not
relied on any representations or promises except as set forth in this Agreement
and in the Parent Commission Filings.
ARTICLE VI
COVENANTS
SECTION 6.1. CONDUCT OF BUSINESS OF THE COMPANY PRIOR TO THE EFFECTIVE
TIME. From the date hereof through the Effective Time, the Company agrees that,
except as expressly contemplated or permitted by this Agreement or to the extent
that Parent shall otherwise consent in writing (such consent not to be
unreasonably withheld or delayed), the Company shall use commercially reasonable
best efforts to carry on its business and affairs in such a manner so that the
representations and warranties contained in Article III shall continue to be
true and correct in all material respects on and as of the Closing as if made
again by the Company on the Closing Date, and the Company shall carry on its
business in the usual, regular and ordinary course in substantially the same
manner as heretofore conducted, and use commercially reasonable best efforts to
preserve intact its present business organizations, keep available the services
of its present officers and employees and preserve its relationships with
customers, suppliers and others having business dealings with them. From the
date hereof through the Effective Time, the Principal Stockholders agree that
except as expressly contemplated or permitted by this Agreement or to the extent
that Parent shall otherwise consent in writing, the Principal Stockholders shall
carry on their affairs so that the representations and warranties contained in
Article IV hereof shall continue to be true and correct on and as of the Closing
as if made again by the Principal Stockholders on the Closing Date. Without
limiting the generality of the foregoing, prior to the Effective Time, and
except as expressly contemplated or permitted by this Agreement, the Company
will not, without the prior written consent of Parent:
(a) split, combine or reclassify any shares of its capital stock or other
equity interests, declare, pay or set aside for payment any dividend or other
distribution in respect of its capital stock or other equity interests, or
directly or indirectly, redeem, purchase or otherwise acquire any shares of its
capital stock or other securities;
(b) issue, sell, pledge, dispose of, encumber or deliver (whether through
the issuance or granting of any options, warrants, commitments, subscriptions,
rights to purchase or otherwise) any stock or other equity interests of any
class of the Company or any securities convertible into or exercisable or
exchangeable for shares of stock or other equity interests of any class of the
Company (other than (i) the issuance of stock certificates in replacement of
lost certificates or issuance of Company Common Stock upon exercise of any
Options, or (ii) the issuance of additional shares of Company Common Stock or
Company Preferred Stock to accredited investors (as defined in Rule 501 under
the Securities Act) in an amount up to ten percent (10%) of the total number of
shares of the Company's currently issued and outstanding Common Stock and
Company Preferred Stock in order to raise additional working capital if such an
issuance is reasonable under the circumstances), provided, that (i) the
purchaser of such additional stock is a Company Stockholder immediately prior to
such issuance; (ii) such Purchaser either (A) is or becomes by executing
appropriate documents a Principal Stockholder or (B) (1) waives all appraisal or
dissenter rights with respect to all Company Securities then owned or thereafter
acquired in connection with the Merger and the related transactions, (2) grants
Parent an irrevocable proxy (containing terms of which are substantially similar
to the terms of the proxy (but not the option terms) contained in the Option and
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Exclusive Dealing Agreements referenced in the definition of Additional
Agreements and (3) agrees to execute an applicable Letter of Representation and
Agreement in substantially the form referenced in Section 8.2(i) in connection
with the Closing; (iii) after such issuance not less 85% of the outstanding
Company Securities are owned by Principal Stockholders, in the aggregate, and
(iv) after such issuance not less than 80% of the then outstanding Company
Preferred Stock and 80% of the then outstanding Company Common Stock are subject
to all of the provisions of the Option and Exclusive Dealing Agreements (i.e.,
the option terms as well as the proxy terms) (an issuance of stock permitted by
this clause (ii) is referred to herein as a "PERMITTED ADDITIONAL INVESTMENT");
(c) incur any Liability or obligation other than in the ordinary and usual
course of business and consistent with past practice, issue any debt securities,
make, create, incur, assume or suffer to exist any Lien on its assets, or
assume, guarantee, endorse or otherwise as an accommodation become responsible
for the Liabilities of any other Person;
(d) pay any deferred Tax Liability or repay any other Tax Liability other
than in the ordinary course of business;
(e) acquire (by merger, consolidation, acquisition of stock or assets or
otherwise) any corporation, partnership or other business organization or
division or significant assets thereof or acquire, directly or indirectly, any
equity interest in any Person or incur any capital expenditures other than the
capital expenditures set forth on SCHEDULE 6.1;
(f) amend, modify or waive compliance with the Articles of Incorporation or
Bylaws of the Company or the terms of any Option;
(g) sell, lease, license, encumber or otherwise dispose of any assets in
excess of $50,000 individually or $200,000 in the aggregate other than sales of
inventory in the ordinary course of business;
(h) make any change in financial or tax accounting methods, principles or
practices or make or cause to be made any elections on Tax returns of the
Company or any Subsidiary, except as consistent with past practices;
(i) enter into, amend or terminate, or agree to enter into, amend or
terminate, any Contract other than in the ordinary course of business unless, in
each case, such amendment, termination, or agreement, singly or together with
other such actions, will not have a Material Adverse Effect;
(j) extend credit in the sale of products, collection of receivables or
otherwise, other than in the ordinary course of business consistent with past
practices;
(k) fail to pay any of the Company's accounts payable within 45 days of
incurrence of such account payable (except in the case of wages and other
compensation payable to employees, which shall at all times be paid when due in
a timely and regular manner and payables to Leybold related to purchase orders
specified in SCHEDULE 3.11, which shall be paid within thirty days of delivery
of the applicable equipment);
(l) fail to maintain inventories at current levels, except for sales in the
ordinary course of business consistent with past practices, and maintain the
property and assets of the business in reasonable operating condition,
reasonable wear and tear excepted;
(m) fail to maintain and keep in full force and effect all insurance on
assets and property or for the benefit of employees of the business, all
liability and other casualty insurance, and all bonds on personnel, presently
carried, fail to present all claims under such insurance policies in a proper
and timely manner or breach any obligation under such insurance policies;
(n) fail to preserve intact the organization of the business, keep all
Licenses in full force and effect, use commercially reasonable efforts to keep
available the services of the present executives, employees and agents of the
business (other than customary turnover not initiated by the Company) and
preserve and enhance the goodwill of suppliers, distributors, customers and
others having business relationships with the Company;
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(o) fail to maintain its books, accounts and records in the usual, regular
and ordinary manner on a basis consistent with prior years;
(p) fail to conduct its business in the usual and ordinary course consistent
with past practices except for changes contemplated by this Agreement or
resulting from this Agreement;
(q) take any action that would require disclosure on SCHEDULE 3.11 hereof;
(r) directly or indirectly engage in any transaction with any officer,
director, stockholder or other insider or Affiliate which is not at arm's
length;
(s) fail to use commercially reasonable efforts to take or omit to take any
action where such failure would make any representation or warranty in
Article III hereof untrue or incorrect as of the Closing provided, however, that
the failure to spend money outside the usual and ordinary course of business
shall not constitute a violation of this subsection (r);
(t) adopt, amend or terminate any Plan, other than changes in employee
welfare or benefit arrangements with respect to officers and employees of the
Company made in the ordinary course consistent with past practice;
(u) grant, or become obligated to grant, any increase in the compensation of
officers or employees of the Company, including any such increase pursuant to
any Plan (except for increases in compensation in the ordinary course of
business consistent with past practice);
(v) enter into any employment or similar agreement or arrangement with any
director or employee of the Company or any independent contractor to provide
services to the Company outside of the ordinary course of business consistent
with past practices; or
(w) agree, in writing or otherwise, to do any of the foregoing.
SECTION 6.2. NO SOLICITATION. Neither the Company nor the Principal
Stockholders shall, and each shall cause their respective Affiliates, officers,
partners, directors, employees, representatives and agents, not to, directly or
indirectly, encourage, solicit, initiate, engage or participate in discussions
or negotiations with, or provide any information to, any Person other than
Parent, Sub or their Affiliates (a "THIRD PARTY") in connection with any
exchange offer, merger, consolidation, sale of substantial or material assets,
sale of securities, acquisition of beneficial ownership of or the right to vote
securities, liquidation, dissolution or similar transaction involving the
Company (such proposals, announcements or transactions being referred to herein
as "ACQUISITION PROPOSALS"). The Company and the Principal Stockholders shall
promptly inform Parent of any written (or to the extent the Company or any
Principal Stockholder has knowledge, any oral) inquiry (including the terms
thereof and the identity of the Third Party making such inquiry) which any one
of them may receive in respect of an Acquisition Proposal and furnish to Parent
a copy of any such written inquiry.
SECTION 6.3. ACCESS TO INFORMATION. Between the date of this Agreement and
the Effective Time, at reasonable times and upon reasonable notice without
significant disruption to the business of the Company, the Company will give
Parent and its authorized representatives full access at Parent's expense to all
personnel, offices and other facilities, and to all books and records of the
Company (including Tax returns and accounting work papers) and shall permit
Parent to make and shall fully cooperate with regard to such inspections (in
order to conduct, among other things, interviews of individuals, visual
inspections of facilities, and Phase I and, if necessary, Phase II environmental
assessments of the facilities) as it may require and shall cause its officers to
furnish Parent such financial and operating data and other information with
respect to the business and properties of the Company as Parent may from time to
time reasonably request; provided, however, that the Company shall have the
right to be present during any such inspection and contact with personnel, and
all records and information shall remain subject to a certain
confidentiality/proprietary agreement dated January 19, 2000. The
representations and warranties of the Company contained herein or in any
certificate or other documents delivered to Parent shall not be
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deemed waived or otherwise affected by any such investigation made by Parent or
any of its representatives. By written notice to the Parent and Sub given at
least ten (10) days prior to the anticipated Closing Date, the Company or any
Principal Stockholder may supplement or amend any of the disclosure schedules
attached hereto (or create one or more additional disclosure schedules, if
appropriate) with respect to any matter that arises or is discovered after the
date of this Agreement that, if existing or known at the date of this Agreement,
would have been required to be set forth or listed in any such schedule;
provided that, for purposes of determining the rights and obligations of the
parties under this Agreement, any such disclosure will be deemed to have been
disclosed to Parent and Sub as of the date of this Agreement and Parent shall be
deemed to have consented to any such disclosure solely for the purposes of
determining whether Parent is entitled to indemnity (but not for the purpose of
determining whether the condition to closing set forth in Section 8.2(a) has
been satisfied) unless: (i) the items disclosed arose other than in the ordinary
course of business; and (ii) in case of items that arose from events,
transactions and occurrences after the date hereof, such items constitute
violations of the covenants contained in Section 6.1 or (iii) the items
disclosed were known to the Company on the date hereof.
SECTION 6.4. ALL REASONABLE EFFORTS. Subject to the terms and conditions
herein provided, each of the parties hereto agrees to use commercially
reasonable efforts to take, or cause to be taken, all action, and to do, or
cause to be done as promptly as practicable, all things necessary, proper and
advisable under applicable laws and regulations to consummate and make effective
the transactions contemplated by this Agreement (including, without limitation,
refraining from taking any action with the intent of making any representation
or warranty of such party to be or become untrue). If at any time after the date
hereof any further action is necessary or desirable to carry out the purposes of
this Agreement, including the execution of additional instruments, each party to
this Agreement shall take all such necessary action.
SECTION 6.5. CONSENTS AND APPROVALS. The Company and the Principal
Stockholders shall (a) use their commercially reasonable efforts to obtain all
necessary permits, consents, waivers, approvals, orders and authorizations of
all Governmental Authorities and other Persons required to be obtained by the
Company and Principal Stockholders in connection with the execution, delivery
and performance of this Agreement, the Additional Agreements and the
consummation of the transactions contemplated hereby and thereby by each such
party (including, without limitation, the consent of the holders of the Options
to the terms of Section 2.4 hereof), (b) diligently assist and cooperate with
Parent in preparing and filing all documents required to be submitted by Parent
to any Governmental Authority or its stockholders in connection with the
execution, delivery and performance of this Agreement, the Additional Agreements
and the consummation of the transactions contemplated hereby and thereby and the
obtaining of Parent Stockholder Approval (as defined in Section 8.1 hereof)
(which assistance and cooperation shall include timely furnishing to Parent of
all information concerning the Company or Principal Stockholders which, in the
opinion of counsel to Parent, is required to be included in such documents
provided that reasonable notice is given), and in obtaining any permits,
consents, waivers, approvals, orders and authorizations which may be required to
be obtained by Parent in connection therewith and (c) keep Parent apprised of
the status of any inquiries made of such party by any Governmental Authority
with respect to this Agreement, the Additional Agreements or the transactions
contemplated hereby and thereby. Each party will keep the other apprised of the
status of any inquiries made of such party by any Governmental Authority with
respect to this Agreement, the Additional Agreements or the transactions
contemplated hereby and thereby.
SECTION 6.6. PUBLIC ANNOUNCEMENTS. Parent shall determine when and the
extent to which it is desirable or necessary to issue any press release or other
public statements with respect to the transactions contemplated by this
Agreement, including the Merger and neither the Company nor the Principal
Stockholders shall make any such press release or public statement without the
prior consent of Parent. Parent shall not issue any such press release or make
any such public statement without first consulting with the Company and without
first providing the Company with a copy of any such written press release and
provide the Company with a reasonable opportunity to have input, except as may
be required by
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applicable law or by obligations pursuant to any listing agreement with any
securities market or any securities market regulations.
SECTION 6.7. DISCLOSURE SUPPLEMENTS. The Company and the Principal
Stockholders shall promptly deliver to Parent in writing any information which,
if existing, occurring or Known at the date of this Agreement, would have been
required to be set forth or described in any Schedule hereto or which is
necessary to correct any information in any Schedule which has been rendered
inaccurate thereby, including, without limitation, the audited financial
statements of the Company promptly upon their delivery by the Company's auditor.
Parent shall promptly deliver to the Company in writing notice of any Parent
Commission Filings made after the date hereof and any information not included
in any Parent Commission Filing which, if existing, occurring, or Known at the
date of this Agreement, would have been required to be set forth or described in
any Schedule hereto or which is necessary to correct any information in any
Schedule which has been rendered inaccurate thereby.
SECTION 6.8. PAYMENT OF TRANSACTION EXPENSES. Prior to the Effective Time,
the Company shall have paid its transaction expenses invoiced prior to the
Effective Time as well as any other transaction expenses which the Company
reasonably estimates shall be incurred through the Effective Time not to exceed
the lesser of (x)$200,000] and (y) the proceeds (net of transaction expenses)
from any Permitted Additional Investment; provided further that upon the
Effective Time Parent shall deliver 111,111 shares of Parent Common Stock to the
Financial Advisor (the issuance of which will reduce the number of shares of
Parent Common Stock issuable to the Company Stockholders pursuant to and in
accordance with Section 2.1(g)).
SECTION 6.9. COMPANY STOCKHOLDER APPROVAL.
(a) As promptly as practicable, the Company shall (i) in accordance with the
applicable provisions of the CBCA and the Company's Articles of Incorporation
and By-laws, call, give notice, convene a special meeting, or solicit written
consents of the Company Stockholders for the purpose of approving this Agreement
and the Merger, (ii) recommend such approvals to the Company Stockholders and
solicit proxies or consents therefor, and (iii) use commercially reasonable
efforts to obtain such approvals of its stockholders. The Principal Stockholders
shall vote, cause to be voted or execute a written consent with respect to all
shares of Company Securities directly or indirectly owned beneficially or of
record by them in favor of such approvals, and shall use commercially reasonable
efforts to cause the other Company Stockholders to vote or execute a written
consent in favor of such approvals. Each Principal Stockholder hereby fully and
forever waives any and all dissenter's or appraisal rights in connection with
the Merger and any other transactions contemplated hereby which such Principal
Stockholder may now or hereafter have under applicable law or otherwise.
(b) In connection with the solicitation of such consent and approval, the
Company will prepare appropriate statements required to be furnished to the
Company Stockholders under the CBCA, the Company's Articles of Incorporation and
By-laws and Rule 502(b)(2) under the Securities Act (the "INFORMATION
STATEMENT") and to be mailed to each Company Stockholder, all at the earliest
practicable time; PROVIDED, HOWEVER, that the Information Statement shall be
subject to the prior review and approval of Parent which is not to be
unreasonably withheld or delayed. None of the information supplied or to be
supplied by the Company for inclusion in or with the Information Statement
(other than Parent Commission Filings and other information provided by Parent
in writing expressly for inclusion in or with the Information Statement) will,
at the date the Information Statement is first mailed to the Company
Stockholders, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are made,
not misleading (except for information furnished in writing by Parent expressly
for inclusion therein or therewith).
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SECTION 6.10. AUTHORIZATION OF PARENT COMMON STOCK. Parent shall, in
accordance with the applicable provisions of Delaware law, Parent's Certificate
of Incorporation and By-laws, and the Securities Exchange Act of 1934, as
amended, use commercially reasonable efforts to seek any approvals necessary for
Parent to have sufficient authorized but unissued shares of Parent Common Stock
to issue all of the Merger Consideration.
SECTION 6.11. DIRECTORS, OFFICERS AND TRUSTEES. As of the Effective Time,
upon the request of Parent, the Principal Stockholders shall promptly cause any
officer or director of the Company to tender his or her resignation with respect
to such office or directorship and shall cause any trustee (or similar official)
of any Plan to tender its resignation with respect to such position.
SECTION 6.12. SPECIFIC PERFORMANCE. Each of the parties hereto hereby
acknowledges and agrees that the other parties would be damaged irreparably in
the event that any of the material provisions of this Agreement are not
substantially performed in accordance with their specific terms or are otherwise
breached. Accordingly, each of the parties hereto hereby agrees that the other
parties shall be entitled to an injunction or injunctions to prevent breaches of
the material provisions of this Agreement and to enforce specifically this
Agreement and the terms and provisions hereof in addition to any other remedy to
which they may be entitled pursuant hereto.
SECTION 6.13. INTENTIONALLY OMITTED.
SECTION 6.14. REGISTRATION RIGHTS.
(a) REGISTRATION. Subject to Sections 6.14(b) and 6.14(c) hereof, by the
later of: (i) 30 days after the Effective Time, or (ii) 45 days after the
Company delivers to Parent the Company's audited balance sheet as of March 31,
2000, and the Company's audited consolidated statements of income, stockholders'
equity and cash flows for the period from the Company's inception through
March 31, 2000 (the "Company Audited Financial Statements"), Parent shall
file a registration on Form S-2 or S-3 (or such other form which Parent is then
eligible to use with respect to the resale of Parent Common Stock) containing
the minimum amount of disclosure required by the Securities Act and the rules of
the Securities and Exchange Commission (the "SEC") thereunder which, pursuant to
Rule 415 of the Securities Act, covers the Merger Consideration, (including the
prospectus, amendments and supplements thereto, including post-effective
amendments, and all exhibits and material incorporated by reference therein, a
"REGISTRATION STATEMENT"), and shall use its commercially reasonable best
efforts to cause such Registration Statement to be promptly declared effective.
Subject to Section 6.14(b), Parent will use commercially reasonable best efforts
to keep such Registration Statement in effect for a period expiring on the First
Anniversary of the Effective Time (or, if earlier, the date upon which all of
the shares of Parent Common Stock registered thereunder have been sold in
accordance therewith). Parent shall keep the Principal Stockholders informed of
the status and progress of all filings, SEC questions and any delays and timing
of the preparation, filing, extension and ultimate effectiveness of the
Registration Statement.
(b) BLACKOUT PERIODS. If, prior to the filing or effectiveness of a
Registration Statement, Parent shall furnish to the Principal Stockholders a
certificate stating that the Parent has determined in its good faith judgment
that the sale of Parent Common Stock pursuant to the Registration Statement
would require (x) disclosure of material non-public information, the current
disclosure of which would, in the sole judgment of Parent, be inadvisable under
the circumstances (an "INFORMATION BLACKOUT"), or (y) filing of financial
statements with the SEC in connection with a material acquisition or other event
(a "FINANCIAL STATEMENT BLACKOUT"), then Parent's obligation to file a
Registration Statement or use its commercially reasonable best efforts to cause
such Registration Statement to become effective shall be deferred for a period
not to exceed the earlier of (i) the date upon which (1) in the case of an
Information Blackout such material information is disclosed to the public or
(2) in the case of a Financial Statement Blackout, the date upon which such
financial statements are filed with the SEC or (ii) 90 days after Parent makes
such good faith determination (the "BLACKOUT PERIOD"). If the Registration
Statement is effective, then, upon
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written notice from Parent of an Information Blackout or a Financial Statement
Blackout Parent may suspend sales pursuant to the Registration Statement for the
applicable Blackout Period.
(c) STOCKHOLDER'S OBLIGATIONS. Parent may require, as a precondition to
its obligations pursuant to this Section 6.14 and/or Section 6.15 to any Company
Stockholder, that such Company Stockholder furnish Parent with such information
relating to such Company Stockholder and the shares of Parent Common Stock owned
by such Company Stockholder as Parent deems reasonably necessary or appropriate
in order to effect the registration of the Parent Common Stock in accordance
herewith and, further that such Company Stockholder deliver a certification that
(i) such Company Stockholder intends in good faith to sell the Parent Common
Stock owned by such Company Stockholder for which registration has been
requested, (ii) such sale will be pursuant to ordinary brokerage transactions,
(iii) such Company Stockholder will deliver or cause to be delivered the
prospectus contained in the Registration Statement, as then in effect, to such
broker prior to the consummation of any such sale, (iv) such Company
Stockholder, upon receipt of notice of any Blackout Period will (a) keep that
fact that such notice has been delivered strictly confidential, (b) promptly
halt any offer, sale, trading or transfer of any Parent Common Stock included in
the applicable Registration Statement for the duration of such Blackout Period,
(c) promptly halt any use, publication or dissemination or distribution of the
applicable Registration Statement, each prospectus included therein, and any
amendment or supplement thereto for the duration of the Blackout Period; and
(v) upon receipt of any notice from the Parent of the happening of any event of
as a result of which the Registration Statement contains an untrue statement of
a material fact or omits any fact necessary to make the statements therein not
misleading, such Company Stockholder shall forthwith discontinue disposition of
pursuant to the Registration Statement until receipt by such Company Stockholder
of a supplemented or amended prospectus contemplated, and (vi) agree to bound by
the indemnification provisions set forth in Section 6.14(d).
(d) INDEMNIFICATION. In the event any shares of Parent Common Stock issued
pursuant to the Merger are included in a registration statement under Sections
6.14 or 6.15:
(i) To the extent permitted by law, Parent will indemnify and hold
harmless each Company Stockholder and each of its directors,
officers, and any person who controls such Company Stockholder
within the meaning of the Securities Act against any losses, claims,
damages, or liabilities (joint or several) to which they may become
subject under the Securities Act of 1933, as amended (the
"Securities Act"), the Securities Exchange Act of 1934, as amended
(the "Exchange Act") or other federal or state law, insofar as such
losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any of the following
statements, omissions or violations (collectively a "Violation") by
Parent: (x) any untrue statement or alleged untrue statement of a
material fact contained in such Registration Statement, (y) the
omission or alleged omission to state therein a material fact
required to be stated therein, or necessary to make the statements
therein, in light of the circumstances in which they were made, not
misleading, or (z) any violation or alleged violation by Parent or
each of its directors, officers, or any person who controls Parent
within the meaning of the Securities Act of the Securities Act, the
Exchange Act, any other federal or state securities law or any rule
or regulation promulgated under the Securities Act, the Exchange Act
or any state securities law in connection with the offering covered
by such registration statement; and Parent will pay as incurred to
each such Company Stockholder for any legal or other expenses
reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action;
PROVIDED HOWEVER, that, pursuant to Section 6.14(d)(iii), the
indemnity agreement contained in this Section 6.14(d) shall not
apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the
consent of Parent, nor shall Parent be liable in any such case for
any such loss, claim, damage, liability or action to the extent that
it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by, or on
behalf
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of, such Company Stockholder; and PROVIDED FURTHER, that if any
claim, action, demand, loss, damage, liability, cost or expense
arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission contained in any
preliminary prospectus which did not appear in the final prospectus
and if the Company Stockholder delivered a copy of the preliminary
prospectus to the person alleging damage and failed to deliver a
copy of the final prospectus to such persons, Parent shall not be
liable with respect to the claims of such person.
(ii) To the extent permitted by law, each Company Stockholder will, if
shares of Parent Common Stock issued hereunder and held by such
Company Stockholder are included in the securities as to which such
registration qualifications or compliance is being effected,
severally and not jointly, indemnify and hold harmless Parent, each
of its directors, its officers and each person, if any, who
controls Parent within the meaning of the Securities Act, any
underwriter and any other holder of Parent Common Stock selling
securities under such registration statement or any of such other
stockholder's partners, directors or officers or any person who
controls such stockholder, against any losses, claims, damages or
liabilities (joint or several) to which Parent or any such
director, officer, controlling person, underwriter or other such
stockholder, or partner, director, officer or controlling person of
such other stockholder may become subject under the Securities Act,
the Exchange Act or other federal or state law, insofar as such
losses, claims, damages or liabilities (or actions in respect
thereto) arise out of or are based upon any Violation, in each case
to the extent (and only to the extent) that such Violation occurs
in reliance upon and in conformity with written information
furnished by, or on behalf of, such Company Stockholder to be
specifically for use in connection with such registration; and each
such Company Stockholder will pay as incurred any legal or other
expenses reasonably incurred by Parent or any such director,
officer, controlling person, underwriter or other stockholder, or
partner, officer, director or controlling person of such other
stockholder in connection with investigating or defending any such
loss, claim, damage, liability or action if it is judicially
determined that there was such a Violation; PROVIDED FURTHER, that
in no event shall any indemnity under this
Section 6.14(d)(ii) exceed the net proceeds (after payment of
taxes) from the offering received by such Company Stockholder.
(iii) Promptly after receipt by an indemnified party under this
Section 6.14(d) of notice of the commencement of any action
(including any governmental action), such indemnified party will,
if a claim in respect thereof is to be made against any
indemnifying party under this Section 6.14(d), deliver to the
indemnifying party a written notice of the commencement thereof and
the indemnifying party shall have the right to participate in, and,
to the extent the indemnifying party so desires, jointly with any
other indemnifying party similarly noticed, to assume the defense
thereof with counsel mutually satisfactory to the parties;
PROVIDED, HOWEVER, that an indemnified party shall have the right
to retain separate counsel mutually satisfactory to the parties,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by
the indemnifying party would be inappropriate due to actual or
potential differing interests between such indemnified party and
any other party represented by such counsel in such proceeding. The
failure to deliver written notice to the indemnifying party within
a reasonable time of the commencement of any such action, if
materially prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified
party under this Section 6.14(d), but the omission so to deliver
written notice to the indemnifying party will not relieve it of any
liability that it may have to any indemnified party otherwise than
under this Section 6.14(d). No indemnifying party shall be liable
to an indemnified party for any settlement of any action or claim
made without the consent of the indemnifying party; no indemnifying
party may unreasonably withhold its consent to any such settlement.
No indemnifying party will consent to entry of any judgment or
enter into any settlement that does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to
such claim or litigation.
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(iv) If the indemnification provided for in this Section 6.14(d) is held
by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any losses, claims, damages or
liabilities referred to herein, the indemnifying party, in lieu of
indemnifying such indemnified party thereunder, shall to the extent
permitted by applicable law contribute to the amount paid or
payable by such indemnified party as a result of such loss, claim,
damage or liability in such proportion as is appropriate to reflect
the relative fault of the indemnifying party on the one hand and of
the indemnified party on the other in connection with the
Violation(s) that resulted in such loss, claim, damage or
liability, as well as any other relevant equitable considerations.
The relative fault of the indemnifying party and of the indemnified
party shall be determined by a court of law by reference to, among
other things, whether the untrue or alleged untrue statement of a
material fact or the omission to state a material fact relates to
information supplied by the indemnifying party or by the
indemnified party and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such
statement or omission; PROVIDED, that in no event shall any
contribution by a Company Stockholder hereunder exceed the net
proceeds from the offering received by such Company Stockholder.
(v) The obligations of Parent and the Company Stockholders under this
Section 6.14(d) shall survive completion of any offering of Parent
Common Stock in a registration statement and the termination of this
Agreement.
SECTION 6.15. PIGGYBACK REGISTRATION RIGHTS. If, at any time after the
first anniversary of the Effective Time, Parent proposes to register any of its
securities under the Securities Act (other than as set forth in Section 6.15
above) and the registration form to be used may be used for the registration of
the Parent Company Stock for resale (a "Piggyback Registration"), the Parent
will give prompt written notice to all Company Stockholders of its intention to
effect such a registration (which notice shall be given not less than 25 days
prior to the date the registration statement is to be filed) and, subject to the
terms hereof and Section 6.14(c), will include in such registration (to the
extent actually effected) all Parent Common Stock issued pursuant hereto with
respect to which the Parent has received written requests for inclusion therein
within 15 days after the receipt of the Parent's notice (the "Piggyback
Shares"); provided, however that Parent shall have no obligation to provide
notice of or include such Registrable Shares with such Piggyback Registration in
the event such Piggyback Registration is an underwritten registration. The
rights pursuant hereto shall expire for any Company Stockholder on the first
date on which such Company Stockholder can sell all shares of Parent Common
Stock issued pursuant hereto and then owned by such Company Stockholder pursuant
to Rule 144.
SECTION 6.16. EMPLOYEES. The Company and the Principal Stockholders shall
use commercially reasonable efforts to encourage the current employees of the
Company to continue their employment and relationship with the Surviving
Corporation following the Effective Time without any obligation of Parent or Sub
to renegotiate any such employees' terms and conditions of employment.
SECTION 6.17. EMPLOYEE BENEFITS MATTERS. The Surviving Corporation's
officers and employees shall be eligible to participate in Parent's employee
benefits programs (including medical and disability insurance, stock option
plans, and 401(k) or other retirement plans), on the same terms and conditions
as Parent's own officers and employees within not more than 90 days of the
Effective Time. Until the transition to Parent's programs is complete, the
Surviving Corporation or Parent shall maintain the Company's current employee
benefit programs so that there is no lapse in coverage for any employee or
officer who continues with the Surviving Corporation or its successor.
SECTION 6.18. INDEMNIFICATION; DIRECTORS' AND OFFICERS' LIABILITY
INSURANCE.
(a) The certificate of incorporation and bylaws of the Surviving Corporation
shall contain the provisions with respect to indemnification set forth in the
certificate of incorporation and bylaws of the Company on the date of this
Agreement, which provisions shall not be amended, repealed or otherwise
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modified prior to March 31, 2001 in any manner that would adversely affect the
rights thereunder of persons who at any time prior to the Effective Time were
identified as prospective indemnities under the certificate of incorporation or
bylaws of the Company in respect of actions or omissions occurring at or prior
to the Effective Time (including, without limitation, the transactions
contemplated by this Agreement), unless such modification is required by
applicable law.
(b) Parent shall cause to be maintained in effect until March 31, 2001 the
current policies of directors' and officers' liability insurance and fiduciary
liability insurance maintained by the Company with respect to matters occurring
prior to the Effective Time; provided, however, that: (i) Parent may substitute
therefor policies of substantially the same coverage containing terms and
conditions that are substantially the same for the indemnified parties to the
extent reasonably available; and (ii) Parent shall not be required to pay a
premium for such insurance in excess of $16,000, but in such case shall purchase
as much coverage as possible for such amount.
ARTICLE VII
RESTRICTIVE COVENANTS.
In consideration of the Merger Consideration, each of the Principal
Stockholders, severally, covenants with Parent as follows:
SECTION 7.1. RESTRICTIONS. Each Principal Stockholder acknowledges that
Parent has paid valuable consideration for the assets of the Company,
particularly customer and supplier lists, distribution records, know-how,
goodwill and other proprietary business information and trade secrets of the
Company. The use by any Principal Stockholder of these relationships and such
confidential information in a business or activity which competes with Parent or
its Affiliates would provide the competing business with an unfair advantage
over Parent or its Affiliates. Accordingly, subject to the other provisions of
this Article VII, Parent wishes to restrict each Principal Stockholder's use of
such information and each Principal Stockholder's ability to compete with Parent
and its Affiliates. Each Principal Stockholder severally agrees, for the Merger
Consideration, to comply from and after the Effective Time with the terms of
this Article, all of which are reasonable and necessary to protect the
confidential business information and trade secrets being acquired by Parent and
to prevent any unfair advantage from being conferred upon a competing business
of Parent or its Affiliate, as set forth below.
SECTION 7.2. NON-COMPETITION.
(a) For a period of two years from and after the Effective Time, each
Principal Stockholder (other than Tyco Electronics Corporation and Robert M.
Yandrofski, PhD) agrees, severally, that it shall not, directly or indirectly,
either alone or as a stockholder, partner, consultant, owner, agent, creditor,
co-venturer of any other Person, or in any other capacity, directly or
indirectly, engage in the Business within the Prohibited Area; provided that
nothing herein shall prohibit any Stockholder from being an owner of not more
than 5% of the outstanding stock of any class of a corporation which is publicly
traded, so long as such Stockholder does not actively participate in the
business of such corporation; provided further, that the restrictions contained
in this Section 7.2 shall not apply to any Principal Stockholder listed on
Schedule 7.2 hereof at any time after his Involuntary Termination of Employment.
(b) The term "PROHIBITED AREA" shall mean the areas set forth on
Schedule 7.2.
(c) Each Principal Stockholder further agrees that it shall not directly or
indirectly engage in any business at any time under a trademark or trade name
that is confusingly similar to or may connote an association with "SPECTRAL
SOLUTIONS", "SCT" or Superconductor Core Technologies" or any other trademark,
trade name or logo of the Company; provided, however, that the use of
Superconductor Core Technologies' "Y Snowflake" logo by a Principal Stockholder,
shall not, by itself, violate this Section 7.2(c).
SECTION 7.3. NON INTERFERENCE WITH BUSINESS RELATIONS. For a period of two
years after the Closing Date, no Principal Stockholder shall, directly or
indirectly, solicit, induce or attempt to solicit or induce any
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customer, supplier, licensee or other business relation of Parent or its
Affiliates (including, without limitation, the Company and the Surviving
Company) to cease doing business with Parent or its Affiliates, or in any way
interfere with any such business relation of Parent or its Affiliates.
Notwithstanding the foregoing, Robert M. Yandrofski, directly or through or with
others, shall not be prohibited from offering products, services or technologies
to other parties, including by soliciting, inducing or attempting to solicit or
induce any other party to obtain any such products, services or technologies, or
from consummating any transaction with any such party with respect to any such
products, services or technologies, provided that Robert Yandrofski shall not
use the Parent's Protected Information (defined below) to do so.
SECTION 7.4. SOLICITATION OF CUSTOMERS AND EMPLOYEES. For a period of two
years after the Closing Date, no Principal Stockholder (other than Tyco
Electronics Corporation) shall, directly or indirectly, either alone or as a
stockholder, partner, consultant, adviser, owner, agent, creditor, co-venturer
of any other Person, or in any other capacity, (i) (except in the case of Robert
M. Yandrofski, PhD) sell to or solicit sales of products produced in the
Business to any customer or account which was a customer or account of the
Company as of the Closing Date or within the one-year period prior thereto, or
(ii) (other than through general, non targeted advertisements) solicit, hire,
attempt to solicit or hire, or participate in any attempt to solicit or hire any
person who was an employee of the Company or any of its Affiliates as of the
Closing Date or within the six-month period prior thereto.
SECTION 7.5. CONFIDENTIAL INFORMATION. Each Principal Stockholder
recognizes that Parent's business interests require the fullest practical
protection and confidential treatment of all information not generally known
within the relevant trade group or by the public, including all documents,
writings, memoranda, business plans, illustrations, designs, plans, processes,
programs, inventions, computer software, reports, sources of supply, customer
lists, supplier lists, trade secrets and all other valuable or unique
information and techniques acquired, developed or used by the Company relating
to its businesses, operations, employees and customers (hereinafter collectively
termed "PROTECTED INFORMATION"). Each Principal Stockholder expressly
acknowledges and agrees that Protected Information constitutes trade secrets and
confidential and proprietary business information of Parent. Protected
Information shall not include information which is or becomes part of the public
domain through no breach of this Agreement by any Principal Stockholder. In
addition, with respect to Robert M. Yandrofski, Protected Information shall not
include any information (a) previously known, discovered, created, developed or
the like and that either does not belong to the Company or is not directly
relevant to the Company's business as that business has been conducted through
the Effective Time, (b) that was acquired or otherwise received prior to the
effective date of this Agreement without obligation of confidentiality, or
(c) that is independently developed without reference to the confidential and
proprietary information of the Company or the Parent. Each Principal Stockholder
acknowledges that Protected Information is essential to the success of the
Business, and it is the policy of Parent to maintain as secret and confidential
Protected Information which gives Parent a competitive advantage over those who
do not know the Protected Information and is expressly and implicitly protected
by Parent from unauthorized disclosure. Accordingly, each Principal Stockholder
agrees to hold such Protected Information in a fiduciary capacity, to keep
secret and to treat confidentially and not to, and not to permit any other
Person to, directly or indirectly, appropriate, divulge, disclose or otherwise
disseminate to any other Person nor use in any manner for any Principal
Stockholder or any other Person's purposes or benefit any Protected Information,
and not to use or aid others in using any such Protected Information in
competition with Parent or its Affiliates except to the extent that disclosure
is required by law; provided, however, that each Principal Stockholder shall
provide Parent with notice as far in advance of any required disclosure as is
practicable in order for Parent to obtain an order or other assurance that any
information required to be disclosed will be treated as Protected Information
and each Principal Stockholder shall use all reasonable efforts to cooperate
with Parent in connection therewith and in furtherance thereof. This obligation
of non-disclosure of information shall continue to exist for so long as such
information remains Protected Information. For purposes of this Agreement, trade
secrets are subject to the protection of the Illinois Trade Secret Act.
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SECTION 7.6. SCOPE. If, at the time of enforcement of this Article VII, a
court shall hold that the duration, scope or area restrictions stated herein are
unreasonable under circumstances then existing, the parties agree that the
maximum duration, scope or area reasonable under such circumstances shall be
substituted for the stated duration, scope or area.
SECTION 7.7. REMEDIES. Each Principal Stockholder agrees that if he or she
shall commit or threaten to commit a breach of any of the covenants contained in
this Article VII, then Parent shall have the right to obtain all appropriate
injunctive and other equitable remedies therefor, in addition to any other
rights and remedies that may be available at law, it being acknowledged and
agreed that any such breach would cause irreparable injury to Parent and that
money damages would not provide an adequate remedy therefor.
ARTICLE VIII
CLOSING CONDITIONS
SECTION 8.1. CONDITIONS TO EACH PARTY'S OBLIGATIONS UNDER THIS
AGREEMENT. The respective obligations of each party under this Agreement shall
be subject to the fulfillment at or prior to the Effective Time of the following
conditions, any one or more of which may be waived by the written consent of the
parties hereto:
(a) No injunction, restraining order or other ruling or order issued by any
Governmental Authority or other legal restraint or prohibition preventing the
consummation of the Merger shall be in effect and no proceeding brought by any
Governmental Authority shall be pending or threatened in writing which seeks any
injunction, restraining order or other order which would prohibit consummation
of the Merger or materially impair the ability of Parent to own and operate the
business and assets of the Surviving Corporation after the Effective Time.
(b) Parent, Sub, the Principal Stockholders and the Escrow Agent shall have
executed and delivered the Escrow Agreement, which agreements shall become
effective at the Effective Time.
(b) Company Stockholder Approval shall have been duly and validly obtained.
(c) Parent shall have sufficient unreserved and un-issued shares of
authorized Parent Common Stock to deliver all of the Merger Consideration in the
form of duly authorized, validly issued and fully paid and nonassessable shares
of Parent Common Stock.
SECTION 8.2. CONDITIONS TO THE OBLIGATIONS OF PARENT AND SUB UNDER THIS
AGREEMENT. The obligations of Parent and Sub under this Agreement shall be
further subject to the satisfaction, at or prior to the Effective Time, of the
following conditions any one or more of which may be waived by Parent and Sub:
(a) Each of the covenants, obligations and conditions of the Company and the
Principal Stockholders required to be performed or complied with or satisfied by
such Person at or prior to the Closing pursuant to this Agreement shall have
been duly performed, complied with and satisfied in all material respects, and
each of the representations and warranties of the Company and the Principal
Stockholders contained in this Agreement (including the Schedules delivered on
the date of this Agreement but not including any information delivered to Parent
subsequent to the date hereof pursuant to Section 6.7 hereof) shall be true and
correct in all material respects (with materiality to be determined in the
reasonable discretion of Parent) as of the date of this Agreement and as of the
Effective Time as though made at and as of the Effective Time, and Parent and
Sub shall have received certificates to that effect signed by an officer of the
Company and the Principal Stockholders.
(b) All (i) action required by law or otherwise to be taken by the Board of
Directors and stockholders of the Company to authorize the execution, delivery
and performance of this Agreement and the Additional Agreements to which such
Person is a party and the transactions contemplated hereby and thereby shall
have been duly and validly taken, (ii) material licenses, permits, consents,
waivers, approvals
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and similar authorizations of or from any Governmental Authorities or other
Persons necessary or advisable in connection with the consummation of the Merger
and the other transactions contemplated by this Agreement or any Additional
Agreement or for the lawful conduct of the business of the Surviving Corporation
following the Closing Date shall have been delivered, made or obtained, and
Parent shall have received copies thereof in form and substance reasonably
satisfactory to Parent.
(c) Each of the employees of the Company identified on SCHEDULE 8.2 shall
have entered into an employment agreement with the Surviving Company and/or
Parent containing terms and conditions mutually agreeable to Parent and such
employees and no key employees of the Company shall have terminated his or her
employment with the Company since the date hereof other than as a result of
death, disability or bona fide retirement; and each employee of the Company as
of the Effective Time shall have entered into Parent's standard form of
confidentiality and inventions agreement.
(d) Each of the holders of the Options shall have consented, in writing in a
form reasonably acceptable to Parent and its counsel, to the assumption of the
Options pursuant to and in accordance with SECTION 2.4 hereof.
(e) Parent shall have received all material permits, consents, waivers,
approvals, orders and authorizations of all Governmental Authorities and other
Persons required to be obtained by the Company and the Principal Stockholders in
connection with the execution, delivery and performance of this Agreement, the
Additional Agreements and the consummation of the transactions contemplated
hereby and thereby by each such party, in each case in form and substance
satisfactory to counsel to Parent (and with the materiality of any permit,
consent, waiver, approval, order or authorization to be determined in the
reasonable discretion of Parent).
(f) Parent shall have received such certificates of the Company's officers
and the Principal Stockholders and such other documents or agreements, in each
case in form and substance satisfactory to counsel to Parent, as may reasonably
be requested by Parent.
(g) The Company shall have delivered to Parent the opinions of Gelt,
Paddison & Associates, P.C. and Gould & Ratner, each counsel to the Company and
the Principal Stockholders, addressed to Parent and dated as of the Effective
Time, in substantially the forms set forth, respectively, on EXHIBITS C-1 AND
C-2 attached hereto (subject to customary qualifications and exceptions);
(h) Parent's stockholders shall have duly adopted and approved an amendment
to Parent's Certificate of Incorporation increasing the number of authorized
shares of Parent Common Stock to not less than 250,000,000 shares ("PARENT
STOCKHOLDER APPROVAL"), and Parent shall have duly filed an amendment to its
Certificate of Incorporation with the Secretary of State of Delaware to effect
such increase in the number of authorized shares of Parent Common Stock.
(i) Each of the Principal Stockholders and any other Company Stockholder who
has purchased Company Securities in a Permitted Company Issuance shall have
executed and delivered the appropriate Letter of Representation and Agreement,
in substantially the form set forth on Exhibit D attached hereto, which shall
include (i) certain securities law related acknowledgements, (ii) a waiver of
dissenters rights and (iii) a general release of the Company and its officers
and directors.
(j) Each Company Stockholder which has not executed a Letter of
Representation and Agreement shall have executed and delivered a certificate in
substantially the form set forth on Exhibit E attached hereto.
(k) All of the Company's indebtedness owed to any of its Affiliates on the
date hereof, or hereafter incurred, shall have either been forgiven or converted
into Company Securities on the terms specified in the Disclosure Schedules
hereto.
(l) The time period in which notices or any other actions which might be
required for Company Stockholders to assert any dissenters or appraisal rights
(whether pursuant to Section 7-113-101 through
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7-113-302 of the CBCA or otherwise) in connection with the Merger shall have
terminated, and Company Stockholders holding not more than 1% of the Company
Securities then outstanding (assuming the exercise or conversion of all
outstanding options, warrants, subscriptions, convertible debt or equity
securities) shall have asserted any such dissenters or appraisal rights.
(m) The Company shall have delivered to Parent the Company Audited Financial
Statements in a form which could be filed by Parent as part of a Report on
Form 8-K under the Securities Act.
(n) The Company shall have received an acknowledgment from Robert Arentz
that he has received all of the Company Securities to which he is entitled for
his services to the Company.
(o) The Stock Restriction Agreement identified in the Disclosure Scheules
shall have been terminated.
SECTION 8.3. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND PRINCIPAL
STOCKHOLDERS UNDER THIS AGREEMENT. The obligations of the Company and the
Principal Stockholders under this Agreement shall be further subject to the
satisfaction, at or prior to the Effective Time, of the following conditions any
one or more of which may be waived by the Company and the Principal
Stockholders:
(a) Each of the covenants, obligations and conditions of Parent and Sub,
respectively, required to be performed, complied with or satisfied by either at
or prior to the Closing pursuant to the terms of this Agreement shall have been
duly performed, complied with and satisfied, and each of the representations and
warranties of Parent and Sub contained in this Agreement shall be true and
correct in all material respects (with materiality to be determined in the
reasonable discretion of the Company) as of the date of this Agreement and as of
the Effective Time as though made at and as of the Effective Time.
(b) Parent shall have delivered to the Company an opinion of Sonnenschein
Nath & Rosenthal, counsel to Parent and Sub, dated as of the Effective Time, in
substantially the form attached hereto as EXHIBIT F.
(c) All action required by law or otherwise to be taken by the Board of
Directors and stockholders of the Parent and Sub to authorize the execution,
delivery and performance of this Agreement and the Additional Agreements to
which such Person is a party and the transactions contemplated hereby and
thereby shall have been duly and validly taken.
(d) All other documents, instruments and approvals reasonably requested by
the Company or Principal Stockholders shall have been obtained, including shares
of Parent Common Stock issuable pursuant hereto (other than the Escrow Shares)
duly registered, in the stock register maintained for Parent Common Stock by
Parent and/or its transfer agent, in the name of the applicable Company
Stockholders.
(e) The nominee of the Principal Stockholders to serve as a director of
Parent for a two year term, which shall either be Richard Herring or another
person chosen by the Principal Stockholders and approved in writing by Parent
(which approval shall not be unreasonably withheld), shall have been duly
elected to such a term.
ARTICLE IX
CLOSING
SECTION 9.1. CLOSING. The closing (the "CLOSING") of the transactions
contemplated by this Agreement shall take place at the offices of Sonnenschein
Nath & Rosenthal, 8000 Sears Tower, Chicago, Illinois 60606, at 10:00 a.m.,
local time, on the first business day following the day on which the last of the
conditions set forth in Article VIII is fulfilled or waived, or at such other
time and place and on such other date as Parent and the Company shall agree (the
"CLOSING DATE").
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(a) At the Closing, the Company shall deliver to Parent the following:
(i) all previously undelivered documents required to be delivered by
the Company to Parent at or prior to the Closing in connection with
the transactions contemplated hereby; and
(ii) such other certificates, agreements and documents as Parent shall
reasonably request.
(b) At the Closing, Parent shall deliver to the Company the following:
(i) all previously undelivered documents required to be delivered by
Parent to the Company at or prior to the Closing in connection with
the transactions contemplated hereby; and
(ii) such other certificates, agreements and documents as the Company
shall reasonably request.
(c) At the Closing, Parent and Sub shall deliver or cause to be delivered to
the Escrow Agent certificates evidencing the number of shares of Parent Common
Stock to be delivered to the Escrow Agent under Sections 2.1(e) hereof, which
certificates will be duly issued and registered in the name of the Escrow Agent.
ARTICLE X
TERMINATION AND ABANDONMENT
SECTION 10.1. TERMINATION. This Agreement may be terminated and the Merger
contemplated hereby may be abandoned at any time prior to the Effective Time:
(a) by mutual written consent of the Company and Parent;
(b) by either the Company or Parent:
(i) if there shall have been a material breach of any representation,
warranty, covenant or agreement on the part of Parent and Sub on
the one hand, or the Company or the Principal Stockholders on the
other, set forth in this Agreement which breach shall not have been
cured, or inaccuracy shall not have been corrected, within fourteen
days following receipt by the breaching party of notice of such
breach; or
(ii) if a Governmental Authority shall have issued an order, decree or
ruling or taken any other action, in each case permanently
restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement, and such order, decree, ruling or
other action shall have become final and non-appealable; or
(c) By Parent:
(i) If the Company Audited Financial Statements in a form which could
be filed by Parent as part of a Report on Form 8-K under the
Securities Act shall have not been received by Parent on or before
May31, 2000 or if such Audited Financial Statements disclose
material adverse errors in the unaudited financial statements
previously provided by the Company (provided that a termination
because of errors in the Company's unaudited financials must be
made within 10 days after receipt of the Company Audited Financial
Statements);
(ii) If the Effective Time shall not have occurred on or before
July 15, 2000; or
(d) By the Company if the Effective Time shall not have occurred on or
before the later of (x) July 15, 2000 and (y) the date which is sixty days after
the Company Audited Financial Statements in a form which could be filed by
Parent as part of a Report on Form 8-K under the Securities Act shall have been
received by Parent.
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PROVIDED, HOWEVER, that the right to terminate this Agreement under either
clause (c)(ii) or (d) shall not be available to any party whose breach of this
Agreement has been the cause of, or resulted in, the failure of the Merger to
occur on or before such date.
SECTION 10.2. PROCEDURE AND EFFECT OF TERMINATION. In the event of
termination of this Agreement pursuant to Section 10.1 hereof, written notice
thereof shall forthwith be given to the other parties to this Agreement and this
Agreement shall terminate and the Merger shall be abandoned, without further
action by any of the parties hereto. If this Agreement is terminated as provided
herein, no party hereto shall have any liability or further obligation to any
other party to this Agreement resulting from such termination except (i) that
the provisions of this Section 10.2, and the proviso of
Section 10.1(b)(iii) shall remain in full force and effect, and (ii) no party
waives any claim or right against a breaching party to the extent that such
termination results from the breach by a party hereto of any of its
representations, warranties, covenants or agreements set forth in this
Agreement.
ARTICLE XI
SURVIVAL AND INDEMNIFICATION
SECTION 11.1. SURVIVAL AND REMEDIES. All representations and warranties of
each of the parties hereto contained in this Agreement or the Additional
Agreements, including all statements contained in any certificate, schedule,
document or other writing delivered pursuant hereto or in connection with the
transactions contemplated hereby, shall be deemed to be representations and
warranties within the meaning of this Section 11.1, shall be deemed to be
material and to have been relied upon by Parent or the Principal Stockholders,
as the case may be, and shall survive the Closing until the earlier of
March 31, 2001, or thirty days after delivery to Parent by its auditors of
audited financial statements of the Surviving Corporation for the calendar year
2000 (the "Expiration Date"), except (a) in the case of representations and
warranties set forth in Sections 3.3, 3.5, 3.6, 4.1, 4.3, 5.2 and 5.4, as to
which claims may be made at any time (regardless of whether the facts giving
rise to such claim are also the subject of any expired representation or
warranty); and (b) in the case of representations and warranties set forth in
Sections 3.15 and 3.17, as to which claims may be made at any time prior to the
expiration of the applicable statute of limitations with respect thereto
(regardless of whether the facts giving rise to such claim are also the subject
of any expired representation or warranty) (the representations and warranties
listed in clauses (a) and (b) are referred to as the "UNLIMITED
REPRESENTATIONS"). Notwithstanding anything to the contrary in the previous
sentence, any claim for indemnification relating to a breach of any such
representation or warranty asserted in a writing (stating the nature of the
claim, the identity of the underlying claimants, if applicable, and an estimate
of the amount of the claim, if known, and the basis for the claim) on or before
the expiration of the relevant time period shall survive, and the
representations and warranties referenced in such claim shall survive for
purposes of such claim, until resolved or judicially determined. All of the
covenants and agreements of each of the parties hereto contained in this
Agreement or in any document delivered pursuant to this Agreement shall survive
the Closing, and claims for indemnification relating to a breach of any such
covenant or agreement may be made at any time. In the event of a breach of any
of such representations, warranties, covenants and agreements, the party to whom
such representation, warranty, covenant or agreement has been made shall have
all rights and remedies for such breach available to it under the provisions of
this Agreement, or otherwise, whether of law or in equity, regardless of any
disclosure to, or investigation made by or on behalf of such party on or before
the Closing Date. Claims for indemnification under this Article XI, except with
respect to Claims (i) pursuant to Article VII hereto, or (ii) based upon any
fraud or intentional misrepresentation made or committed by any party hereto in
connection herewith, are the sole and exclusive remedy of the parties for any
and all loss, damage (including, for this purpose only, any punitive,
consequential, lost profits, benefit of the bargain, and special damages),
expense (including court costs, amounts paid in settlement, judgments,
attorneys' fees and other expenses for investigating and defending), claim,
deficiency, and Liability.
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SECTION 11.2. INDEMNIFICATION OF PARENT BY THE COMPANY AND THE
STOCKHOLDERS.
(a) Subject to Section 11.2(b) and Section 11.8, the Company, in the event
the Closing hereunder does not occur, or the Principal Stockholders and the
other Company Stockholders (in the case of the other Company Stockholder's only
to the extent of the Escrow), in the event the Closing hereunder does occur,
shall, to the extent not covered and promptly paid by applicable insurance,
indemnify, defend and hold harmless Parent and its past, present and future
directors, officers, employees, agents, subsidiaries and Affiliates (the "PARENT
INDEMNIFIED PARTIES") for any and all loss, damage, expense (including court
costs, amounts paid in settlement, judgments, reasonable attorneys' fees and
other reasonable expenses for investigating and defending), claim, deficiency,
Liability or obligation related to, resulting from, caused by or arising from:
(i) any inaccuracy in or breach of any representation or warranty made by the
Company and the Principal Stockholders in Article III hereof or made by the
Company in any other agreement, instrument or document delivered by the Company
pursuant hereto, and (ii) any failure to perform or breach by the Company prior
to the Effective Time of any covenant or agreement made by the Company herein or
in any other agreement, instrument or document delivered by the Company or any
of its respective Affiliates pursuant hereto (collectively, the "DAMAGES").
(b) Notwithstanding anything to the contrary contained in Section 11.2(a),
however, no indemnification shall be required to be made under Section 11.2
(a) (except as a result of a breach of any Unlimited Representations) until the
aggregate amount of all Damages under Section 11.2(a) exceeds $650,000 (the
"Threshold Amount"), but then Parent shall be entitled to recover the full
amount of Damages. After the Effective Time, Parent shall satisfy any claim for
Damages under this Section 11.2 by withdrawing from the Escrow, in accordance
with the terms of the Escrow Agreement, that number of shares of Parent Common
Stock determined by dividing the amount of the claim by the average closing
price of Parent Common Stock as reported on the Nasdaq Stock Market (or the
NASD's electronic bulletin board, for any day that Parent Common Stock is not
listed on the Nasdaq Stock Market) for the ten trading days immediately
preceding the third business day prior to the date of such withdrawal from the
Escrow; PROVIDED, HOWEVER, to the extent the claims for such Damages cannot be
satisfied in full from the Escrow (the "EXCESS DAMAGES") the Principal
Stockholders (but not the other Company Stockholders) shall be liable for the
portion of the Excess Damages determined in accordance with Section 11.2(c).
Subject to and in accordance with the Escrow Agreement, the balance, if any, of
the Escrow remaining on the Distribution Date (as defined in the Escrow
Agreement) shall be distributed to the Company Stockholders.
(c) Each Principal Stockholder shall be liable for that amount of Excess
Damages multiplied by a fraction, the numerator which equals the aggregate
number of shares of Company Securities owned by such Company Stockholder
immediately prior to the Effective Time and the denominator which equals the
aggregate number of Company Securities outstanding immediately prior to the
Effective Time, assuming (for both the numerator and denominator) that all
Options (whether vested or unvested) and any warrants, options or other rights
to purchase Company Securities are exercised or converted in full; PROVIDED,
HOWEVER, that the amount of Excess Damages for which any Principal Stockholder
is liable shall not exceed the sum of: (i) the fair market value of Parent
Company Stock received by such Principal Stockholder pursuant to this Agreement
(not including any Parent Common Stock or other securities or cash allocable to
the Principal Stockholder held in the Escrow and applied to Parent's claim for
Damages out of the Escrow pursuant to Section 11.2(b), but assuming all Options,
whether vested or unvested, and any warrants, options or other rights to
purchase Company Securities are exercised or converted in full and including any
additional shares of Parent Common Stock or other securities issued as stock
dividends on account of stock splits with respect to such shares), which are
owned by such Principal Stockholder (or any transferee other than pursuant to a
bona fide sale to a person who is not an Affiliate of such Principal
Stockholder) as of the date such Excess Damages are paid by such Principal
Stockholder, plus (ii) the proceeds of any sale of Parent Common Stock received
by such Principal Stockholder pursuant to this Agreement (including any
additional shares of Parent Common Stock or other securities issued as stock
dividends on account of stock splits with respect to such shares) which were
sold by such Principal
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Stockholder (or any transferee other than pursuant to a bona fide sale to a
person who is not an Affiliate of such Principal Stockholder) prior to the date
such Excess Damages are paid by the Principal Stockholder, net of any selling
expenses incurred in effectuating such sale or sales. For the purpose of the
preceding sentence, Parent Common Stock is valued in the same manner as it is
valued in connection with a withdrawal from the Escrow.
(d) The foregoing in no way shall limit any remedy provided for herein or at
law or equity resulting from a breach of any obligation under Article VII
hereunder.
(e) AS A MATTER OF CLARIFICATION, IT IS THE INTENTION OF THE PARTIES THAT
(EXCEPT WITH RESPECT TO CLAIMS PURSUANT TO ARTICLE VII OR THOSE BASED ON FRAUD
OR INTENTIONAL MISREPRESENTATION), FROM AND AFTER THE EFFECTIVE TIME, THE
PRINCIPAL STOCKHOLDERS MAY ONLY BE LIABLE FOR DAMAGES IN CONNECTION WITH, OR
RELATING TO, THIS AGREEMENT PURSUANT TO THIS ARTICLE XI (OR, IF APPLICABLE, THE
PROVISIONS OF THE OPTION AND EXCLUSIVE DEALING AGREEMENTS INCORPORATING THIS
ARTICLE XI BY REFERENCE THEREIN), AND THAT THE MAXIMUM LIABILITY OF A PRINCIPAL
STOCKHOLDER FOR INDEMNIFICATION UNDER THIS ARTICLE XI IN CONNECTION WITH A
BREACH OF THE REPRESENTATIONS OR WARRANTIES CONTAINED IN ARTICLE III SHALL BE
THE SHARES OF PARENT COMMON STOCK RECEIVED BY SUCH PRINCIPAL STOCKHOLDER AS A
RESULT THE MERGER (AND ANY PROCEEDS REALIZED UPON THE SALE THEREOF), AS MORE
FULLY DETAILED IN THIS SECTION 11.2.
SECTION 11.3. INDEMNIFICATION OF PARENT BY THE PRINCIPAL
STOCKHOLDERS. Each Principal Stockholder shall, to the extent not covered and
promptly paid by applicable insurance, severally but not jointly, indemnify,
defend and hold harmless Parent Indemnified Parties for any and all loss damage,
expense (including court costs, amounts paid in settlement, judgments,
reasonable attorneys' fees and other reasonable expenses for investigating and
defending), Claim deficiency, Liability or obligation related to, resulting
from, caused by or arising from: (a) any inaccuracy in or breach of any
representation or warranty made by such Principal Stockholder in Article IV
herein or in any other agreement, instrument or document delivered by such
Principal Stockholder pursuant hereto, (b) any failure to perform or breach by
such Principal Stockholder of any covenant or agreement made by such Principal
Stockholder herein or in any other agreement, instrument or document delivered
by such Principal Stockholder or any of his, her or its Affiliates pursuant
hereto, and (c) any transaction expenses incurred by the Company and/or the
Company Stockholders in connection with the transaction contemplated by this
Agreement, except to the extent that such transaction expenses were paid by the
Company or Parent as permitted pursuant to Section 6.9.
SECTION 11.4. INDEMNIFICATION BY PARENT. Parent shall, to the extent not
covered and promptly paid by applicable insurance, indemnify, defend and hold
harmless each of the Company and its past, present and future directors,
officers, employees, agents, subsidiaries and Affiliates and the Company
Stockholders, and its and their successors, assigns, heirs and personal
representatives (the "SELLER INDEMNIFIED PARTIES"), for any and all loss,
damage, expense (including court costs, amounts paid in settlement, judgments,
reasonable attorneys' fees and other reasonable expenses for investigating and
defending), suit, action, claim, deficiency, liability or obligation related to,
caused by or arising from any inaccuracy or breach of any representation or
warranty, any failure to perform or breach of any covenant or agreement made by
the Parent or Sub herein or in any other agreement, instrument or document
delivered by Parent or Sub pursuant hereto, and any and all claims made in good
faith based upon facts alleged that, if true, would have constituted any such
misrepresentation, breach or failure.. Notwithstanding anything to the contrary
contained in this Section 11.4, no indemnification shall be required to be made
under this Section 11.4 (except as a result of a breach of any Unlimited
Representations) until the aggregate amount of all Damages under Section 11.4
exceeds the Threshold Amount, but then the Seller Indemnified Parties shall be
entitled to recover the full amount of Damages. Furthermore, in no event shall
Parent be liable for Damages pursuant to this Section 11.4 in an amount which
exceeds the product of (x) the number of shares of Parent Common Stock
constituting the Merger Consideration times (y) the average last sale price of
Parent Common Stock on the NASD's electronic bulletin board for the ten days
immediately preceding the third business day prior to the date hereof.
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SECTION 11.5. INDEMNIFICATION PROCEDURE FOR THIRD PARTY CLAIMS AGAINST
INDEMNIFIED PARTIES.
(a) In the event that subsequent to the Effective Time any Person
("INDEMNIFIED PARTY") asserts a claim for indemnification or receives notice of
the assertion of any claim or of the commencement of any action or proceeding by
any entity which is not a party to this Agreement (including any Governmental
Authority) (a "THIRD PARTY CLAIM") against such Indemnified Party, with respect
to which Parent or the Company Stockholders ("INDEMNIFYING PARTY") is required
to provide indemnification under this Agreement, the Indemnified Party shall
give written notice together with a statement of any available information
regarding such claim (the "NOTICE OF CLAIM") to the Indemnifying Party promptly
after learning of such claim; PROVIDED, HOWEVER, that notice to the Principal
Stockholders shall be deemed notice to all of the Company Stockholders. If the
Indemnifying Party is the Company Stockholders and the potential aggregate
amount of such indemnity claim, together with all other pending indemnity claims
under this Agreement and the Purchase Agreement, is less than the Cap as of the
date the Notice of Claim is delivered to the Indemnifying Party, or if the
Indemnifying Party is Parent, then in each case the Indemnifying Party shall
have the right, upon written notice to the Indemnified Party (the "DEFENSE
NOTICE") promptly after receipt from the Indemnified Party of the Notice of
Claim, to conduct at its expense the defense against such claim in its own name,
or, if necessary, in the name of the Indemnified Party; PROVIDED, HOWEVER, that
the Indemnified Party shall have the right to approve the defense counsel
representing the Indemnifying Party, which approval shall not be unreasonably
withheld, and in the event the Indemnifying Party and the Indemnified Party
cannot agree upon such counsel within ten days after the Defense Notice is
provided, then Indemnifying Party shall propose an alternate Defense Counsel,
which shall be subject again to the Indemnified Party's approval, which approval
shall not be unreasonably withheld. The Indemnifying Party shall not settle or
compromise any Third Party Claim for which it has assumed the defense pursuant
to this Section 11.5(a) without the Indemnified Party's prior written consent
thereto, unless the terms of such settlement or compromise discharge and release
the Indemnified Party from all Liabilities and obligations thereunder and do not
involve a remedy other than the payment of money by the Indemnifying Party.
(b) In the event that the Indemnifying Party shall fail to give the Defense
Notice within the time and as prescribed by Section 11.5(a), or if the
Indemnifying Party is the Company Stockholders and either (i) the aggregate
amount of such indemnity claim, together with all other pending indemnity claims
under this Agreement and the Purchase Agreement, equals or exceeds $2,500,000 as
of the date the Notice of Claim is delivered to the Indemnifying Party, or
(ii) such claim does not specify a dollar amount and the potential aggregate
dollar amount of such claim, together with all other pending indemnity claims
under this Agreement and the Purchase Agreement, is reasonably expected to equal
or exceed $2,500,000 as of the date the Notice of Claim is delivered to the
Indemnifying Party, or (iii) such claim involves a claim for injunctive or other
equitable relief affecting Parent or the Surviving Corporation, then in any such
event the Indemnified Party shall have the right to conduct such defense, at the
Indemnifying Party's expense, in good faith with counsel reasonably acceptable
to the Indemnifying Party, but the Indemnified Party shall be prohibited from
compromising or settling the claim without the prior written consent of the
Indemnifying Party, which consent shall not be unreasonably withheld. In the
event that the Indemnified Party conducts the defense pursuant to this
Section 11.4(b), the Indemnifying Party will, at its expense, make available to
the Indemnified Party such assistance and materials as the Indemnified Party may
reasonably request. The Indemnifying Party may participate in such defense at
its own expense.
(c) In the event that the Indemnifying Party does deliver a Defense Notice
and thereby elects to conduct the defense of the subject Third Party Claim, the
Indemnified Party will cooperate with and make available to the Indemnifying
Party such assistance and materials as it may reasonably request, all at the
expense of the Indemnifying Party. Regardless of which Party defends such claim,
the other Party shall have the right at its expense to participate in the
defense assisted by counsel of its own choosing. Notwithstanding the foregoing
and in the event that the Indemnifying Party delivers a Defense Notice and
thereby elects to conduct the defense of the subject Third Party Claim but does
not proceed diligently to
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defend or settle such Third Party Claim within a reasonable time after its
receipt of notice of the assertion or commencement thereof, then (a) the
Indemnified Party shall have the right, but not the obligation, to undertake at
the expense of the Indemnifying Party the defense or settlement of such Third
Party Claim for the account and at the risk of the Indemnifying Party, and
(b) the Indemnifying Party shall be bound by any defense or settlement that the
Indemnified Party may make as to such Third Party Claim. No delivery of a
Defense Notice by an Indemnifying Party in connection with a Third Party Claim
shall prejudice any right of such Indemnifying Party to challenge whether the
Indemnified Party is entitled to indemnification hereunder with respect to such
Third Party Claim.
(d) Any judgment entered or settlement agreed upon in the manner provided
herein shall be binding upon the Indemnifying Party, and shall be conclusively
deemed to be an obligation with respect to which the Indemnified Party is
entitled to prompt indemnification hereunder, subject to the Indemnifying
Party's right to appeal an appealable judgment or order.
SECTION 11.6. FAILURE TO GIVE TIMELY NOTICE. A failure by an Indemnified
Party to give timely, complete or accurate notice as provided in this
Article XI will not affect the rights or obligations of any party hereunder
except and only to the extent that, as a result of such failure, any party
entitled to receive such was actually damaged as a result of such failure to
give timely notice. Notwithstanding the foregoing, the parties hereby
acknowledge and agree that nothing in this Section 11.6 shall be deemed to
extend any of the time periods set forth in Section 11.1 with respect to the
survival of representations and warranties.
SECTION 11.7. INSURANCE. If an Indemnified Party both collects proceeds
from any insurance company and receives a payment from the Indemnifying Party
hereunder, and the sum of such proceeds and payment is in excess of the Damages
or losses with respect to the matter that is the subject of the indemnity, then
the Indemnified Party shall promptly refund to the Indemnifying Party the amount
of such excess.
SECTION 11.8. LIMITATION OF LIABILITY. Notwithstanding anything to the
contrary contained elsewhere in this Agreement, in no event shall any party be
liable for any consequential, incidental, or special damages except to the
extent such damages relate to the intentional misconduct or fraud of a party;
provided, however, that: (i) nothing in this Section 11.8 shall prevent any
party from recovering for differences in value as the result of a breach of a
representation, warranty, or covenant; and (ii) Parent shall not be liable for a
lack of an increase in the market value of the Parent Common Stock, even if
contemplated by the Company Stockholders, except to the extent such lack of
increase is the result of a breach of Parent's obligations under this Agreement.
Furthermore, nothing in this Section 11.8 shall limit a party's right to
indemnification in connection with a Third Party Claim pursuant to which such
party was required to pay a third party consequential, incidental, or special
damages.
ARTICLE XII
MISCELLANEOUS PROVISIONS
SECTION 12.1. AMENDMENT AND MODIFICATION. This Agreement may be amended
only pursuant to a written instrument signed on behalf of the Company, Parent
and the Principal Stockholders.
SECTION 12.2. WAIVER OF COMPLIANCE; CONSENTS. Any failure of Parent or
Sub, on the one hand or the Company or the Principal Stockholders, on the other
hand, to comply with any obligation, covenant, agreement or condition contained
herein may be waived only in writing by the Company and the Principal
Stockholders or Parent and Sub, respectively, but such waiver or failure to
insist upon strict compliance with such obligation, covenant, agreement or
condition shall not operate as a waiver of, or estoppel with respect to, any
other failure. The failure of any party hereto to enforce at any time any
provision of this Agreement shall not be construed to be a waiver of such
provision, nor in any way to affect the validity of this Agreement or any part
hereof or the right of any party to enforce any such provision. Any amendment or
waiver effected in accordance with Section 12.1 or this Section 12.2 shall be
binding upon each of the Company Stockholders.
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SECTION 12.3. VALIDITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full force and
effect.
SECTION 12.4. EXPENSES AND OBLIGATIONS. Except as set forth in
Section 6.8 hereof, all costs and expenses incurred in connection with the
consummation of the transactions contemplated by this Agreement by Parent and
Sub shall be paid by Parent or Sub and all costs and expense incurred in
connection with the consummation of the transactions contemplated by this
Agreement by the Company shall be paid by the Principal Stockholders.
SECTION 12.5. PARTIES IN INTEREST. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and, nothing in this
Agreement except as set forth in Article X hereof, express or implied, is
intended to confer upon any other Person any rights or remedies of any nature
whatsoever under or by reason of this Agreement.
SECTION 12.6. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given upon receipt and may be sent by
hand, mail (registered or certified mail, postage prepaid, return receipt
requested), recognized overnight delivery service or upon transmission by
telecopy, electronic or facsimile transmission (with request of assurance of
receipt in a manner customary for communication of such type) as follows:
(a) If to Parent or Sub, or to the Company after the Effective Time, to:
Illinois Superconductor Corporation
451 Kingston Court
Mount Prospect, Illinois 60056
Attn: Chief Executive Officer
Telecopy: (847) 299-9609
and
Illinois Superconductor Corporation
c/o Elliott Associates
712 Fifth Avenue
New York, New York 10019
Attention: Mark Brodsky
Telecopy: 212-974-2092
E-Mail: [email protected]
with a copy (which shall not constitute notice) to:
Sonnenschein Nath & Rosenthal
8000 Sears Tower
233 S. Wacker Drive
Chicago, Illinois 60606
Attn: Michael D. Rosenthal, Esq.
Telecopy: (312) 876-7934
E-Mail: [email protected]
(b) if to the Company or the Principal Stockholders, to:
Spectral Solutions, Inc.
740 South Pierce Avenue
Louisville, Colorado 80027
Attn: Richard Herring, Ph.D.
Telecopy: (303) 664-6070
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with a copy (which shall not constitute notice) to:
Gelt, Paddison & Associates, P.C.
303 E. 17th Avenue
Suite 910
Denver, Colorado 80203
Attn: Eric Zinn, Esq.
Telecopy: (303) 830-9400
E-Mail: [email protected]
And
Gould & Ratner
222 N. LaSalle Street
Suite 800
Chicago, Illinois 60601
Attn: Fredric D. Tannenbaum, Esq.
Telecopy: (312) 236-3241
E-Mail: [email protected]
SECTION 12.7. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Illinois without regard to
the conflicts-of-laws rules thereof.
SECTION 12.8. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same agreement.
SECTION 12.9. HEADINGS. The article and section headings contained in this
Agreement are solely for the purpose of reference, are not part of the agreement
of the parties and shall not affect in any way the meaning or interpretation of
this Agreement.
SECTION 12.10. CERTAIN DEFINITIONS. For purposes of this Agreement, the
term:
(a) "ADDITIONAL AGREEMENTS" shall mean the Escrow Agreement and the Option
and Exclusive Dealing Agreement substantially in the form of EXHIBIT G hereto,
to be executed by each of the Principal Stockholders in favor of Parent in
connection herewith, and all other agreements and documents contemplated by this
Agreement;
(b) "AFFILIATE" shall mean (i) a Person that directly or indirectly, through
one or more intermediaries, controls, is controlled by, or is under common
control with, another Person and (ii) any parent, spouse, lineal descendant or
adopted child of a Person specified in clause (i), any spouse or adopted child
of any such descendant or any child of such spouse, the executors,
administrators, conservators or personal representatives of any Person referred
to in this clause (ii) and any Person which, directly or indirectly, is owned or
controlled by one or more of the Persons referred to in this clause (ii) or any
trust principally for their benefit;
(c) "AFFILIATED GROUP" means any affiliated group as defined in
Section 1504 of the Code (or any analogous combined, consolidated or unitary
group under state, local or foreign income Tax law) of which the Company or any
of its Affiliates is or has been a member;
(d) "CAUSE" shall mean a termination of employment following the employee's:
(i) conviction of any act which constitutes a felony under applicable
federal or state law either in connection with the performance of
employee's obligations on behalf of his employer or any of its
Affiliates (collectively the "EMPLOYER") or which affects such
employee's ability to perform his obligations to perform his
obligations as an employee of the Employer or
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pursuant to any written employment or similar agreement between him
and the Employer (an "EMPLOYMENT AGREEMENT");
(ii) willful misconduct in connection with the performance of his
duties and responsibilities as an employee of the Employer or
under any Employment Agreement (after written notice and at least
30 days opportunity to cure);
(iii) commission of an act of embezzlement, fraud or dishonesty which
results in a loss, damage or injury to the Employer;
(iv) substantial and continuing neglect, gross negligence or
inattention in the performance of his duties as an employee of
Employer which is not cured within in thirty days of receipt of a
written notice thereof from the Employer;
(v) unauthorized use or unauthorized disclosure of any trade secret or
confidential information of the Employer;
(vi) material breach of any Employment Agreement which is not cured
within thirty days of receipt of written notice thereof from the
Employer; or
(vii) the continued failure of Employee, after thirty days notice and
consultation with Employer, to perform his duties in a reasonably
effective manner.
(d) "CLAIMS" shall mean all pending and threatened claims, actions, causes
of action, demands, orders, notices, suits, grievances, proceedings, disputes,
arbitrations and investigations;
(e) "ENFORCEABILITY EXCEPTIONS" shall mean except as such enforcement may be
limited by applicable bankruptcy, insolvency, moratorium, or similar laws from
time to time in effect which affect creditors' rights generally, and by legal
and equitable limitations on the enforceability of specific remedies;
(f) "ENVIRONMENTAL CLAIM" shall mean any Claim (written or oral) by any
Person or any Governmental Authority alleging potential Liability or obligations
(including potential Liability or obligations for or requirement to incur
investigatory costs, cleanup costs, governmental response costs, natural
resources damages, property damages, personal injuries, or penalties) arising
out of, based on or resulting from (i) the presence, release or threatened
release into the environment, of any Materials of Environmental Concern at any
location, whether or not owned or operated by the Company, or
(ii) circumstances forming the basis of any violation, potential violation or
alleged violation, or Liability, potential Liability or alleged Liability, under
any Environmental Law;
(g) "ENVIRONMENTAL LAWS" shall mean all now existing Rules and permit
conditions relating to pollution or protection of human health or the
environment (including ambient air, indoor air, surface water, ground water,
land surface or subsurface strata), including Rules relating to emissions,
discharges, releases or threatened releases of Materials of Environmental
Concern, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Materials of
Environmental Concern;
(h) "ERISA AFFILIATE" shall mean any corporation or other Person which is a
member of the same controlled group (within the meaning of Section 414(b) of the
Code) of corporations or other Persons as the Company, or which is under common
control (within the meaning of Section 414(c) of the Code) with the Company, or
any corporation or other Person which is a member of an affiliated service group
(within the meaning of Section 414(m) of the Code) with the Company, or any
corporation or other Person which is required to be aggregated with the Company
pursuant to Section 414(o) of the Code or the regulations promulgated under
Sections 414(b), (c), (m) or (o) of the Code;
(i) "FINANCIAL ADVISOR" shall mean Falkenberg Capital Corporation, the
financial advisor retained by the Company in connection with the transactions
contemplated hereby.
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(j) "GOVERNMENTAL AUTHORITY" shall mean any court (federal, state, local,
foreign or otherwise), any arbitration or other alternative dispute mechanism,
any federal, state, local, foreign or other government or governmental
department, agency, board, commission, bureau or instrumentality and any other
regulatory authority;
(k) "INVOLUNTARY TERMINATION OF EMPLOYMENT" shall mean a termination of a
Principal Stockholder's employment with the Parent, the Surviving Corporation
and their respective Affiliates: (i) by Parent other than for Cause or (ii) by
the Principal Stockholder (x) within sixty days of receipt of notice from Parent
of any required relocation of his principal office by more than 45 miles from
its then present location (y) within sixty days of any material reduction in his
pay or benefits (except a reduction in benefits which also affects all other
similarly situated employees; provided, however, the failure to maintain
commercially reasonable health and medical benefits shall constitute grounds for
an Involuntary Termination of Employment) or upon a general change in the nature
and duties of his job which a reasonable person in employee's circumstances
would consider materially adverse, provided that such change was not cured by
the Principal Stockholder's employer within thirty days of written notice
objecting to such change and that the Principal Stockholder terminated his
employment within thirty days following the expiration of such cure period.
(l) "KNOWLEDGE" (or any form of such term, such as "Knows", "Known", etc.)
as used in this Agreement with respect to a party's awareness of the presence or
absence of a fact, event or condition shall mean (i) the actual knowledge of
such Person after due inquiry, and in the case of any Person other than an
individual, any director, officer, shareholder (beneficial or of record),
managing director, partner, trustee or similar individual of such Person plus
(ii) the knowledge that should be obtained by a party conducting itself
reasonably and with sound discretion in the management of its own affairs;
(m) "KNOW-HOW" shall mean laboratory journals, specialized knowledge
(including product knowledge and use and application knowledge), trade secrets,
formulae, product formulations, recipes, processes, product designs,
specifications, quality control, procedures, manufacturing, engineering and
other drawings, computer data bases and software, technology, other intangibles,
technical information, safety information, engineering data and design and
engineering specifications, research records, market surveys and all promotional
literature, customer and supplier lists and similar data;
(n) "LIABILITY" means any liability (whether known or unknown, whether
asserted or unasserted, whether absolute or contingent, whether accrued or
un-accrued, whether liquidated or un-liquidated, and whether due or to become
due and regardless of when or by whom asserted), including any liability for
Taxes;
(o) "LIENS" shall mean all title defects, charges, claims, restrictions,
liens, pledges, security interests, mortgages, tenancies and other possessory
interests, conditional sale or other title retention agreements, assessments,
easements, rights of way, covenants, restrictions, rights of first refusal,
encroachments and other burdens, options, restrictions or encumbrances of any
kind;
(p) "MATERIALS OF ENVIRONMENTAL CONCERN" shall mean chemicals or other
substances subject to regulation pursuant to Environmental Laws, including
pollutants, contaminants, wastes, by products, toxic substances, radionuclides,
polychlorinated biphenyls, asbestos, petroleum (including crude oil or any
fraction thereof) and petroleum products;
(q) "PATENTS" shall mean patents (including all reissues, reexaminations,
divisions, continuations, continuations in part and extensions thereof), utility
models, patent applications and patent disclosures docketed;
(r) "PERSON" shall mean an individual, corporation, limited liability
company, partnership, joint venture, association, trust, unincorporated
organization or, as applicable, any other entity;
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(s) "PLAN" shall mean each bonus, pension, stock option, stock purchase,
stock bonus, benefit, welfare, profit sharing, retirement, disability, vacation,
severance, hospitalization, insurance, incentive, deferred compensation and
other similar fringe or employee benefit plans, funds, programs or arrangements,
all employment contracts or executive compensation agreements, written or oral,
and all collective bargaining agreements and each other "employee benefit plan"
(within the meaning of Section 3(3) of ERISA), in each of the foregoing cases
which cover, are maintained for the benefit of, or relate to any or all
employees (regardless whether such employees' regular place of employment is
within or without the United States) or terminated employees of the Company or
any Subsidiary or ERISA Affiliate;
(t) "PROPRIETARY RIGHTS" shall mean (i) Patents, (ii) Trademarks,
(iii) Trade Names, (iv) Know-how, (v) rights in trade dress and packaging and
(vi) shop rights, copyrights, inventions, trade secrets, service marks and all
other intellectual property rights, in each case whether registered or not and
in each case wherever such rights exist throughout the world, and including the
right to recover for any past infringement;
(u) "RULES" shall mean any federal, state, local or foreign statute, law,
code, ordinance, rule, regulation, judgment, writ, decree, injunction, order,
concession, grant, franchise, permit or license or other governmental or
regulatory authorization or approval applicable to the Company, any of the
Subsidiaries or any of the Company Stockholders or any of their respective
assets, properties, operations or any Plan;
(v) "TRADEMARKS" shall mean trademarks, service marks, brand marks,
registrations thereof, pending applications for registration thereof, and such
unregistered rights which are used in the business of the Company or any of the
Subsidiaries; and
(w) "TRADE NAMES" shall mean (i) trade names and other identifying names,
(ii) brand names, and (iii) logos and all other names and slogans used in the
business of the Company or any of the Subsidiaries.
SECTION 12.11. ENTIRE AGREEMENT. This Agreement (including all Exhibits
and Schedules attached hereto and incorporated by reference herein) and the
documents and instruments referred to herein, and the other agreements included
in or contemplated by the exhibits hereto (the "OTHER AGREEMENTS") embody the
entire agreement and understanding of the parties hereto with respect to the
subject matter contained herein or therein. This Agreement (including all
Exhibits and Schedules attached hereto and incorporated by reference herein),
and the Other Agreements supersede all prior agreements and understandings
between the parties with respect to such subject matter.
SECTION 12.12. ASSIGNMENT. This Agreement shall not be assigned by
operation of law or otherwise, except that it may be assigned (other than the
obligations in Article II) by Parent or Sub to one or more of their Affiliates
who agree in writing to be bound by the provisions hereof; PROVIDED, that Parent
remains obligated under this Agreement, that the Company and Principal
Stockholders shall be promptly informed of any such assignment, that such
assignees make the appropriate representations and warranties set forth in
Article V and that no delay shall be caused by such assignment. Subject to the
foregoing, this Agreement will be binding upon and inure to the benefit of and
be enforceable by the parties and their respective successors and permitted
assigns.
SECTION 12.13. NO STRICT CONSTRUCTION. The language used in this Agreement
shall be deemed to be the language chosen by the parties hereto to express their
mutual intent, and no rule of strict construction shall be applied against any
Person.
SECTION 12.14. WAIVERS OF TRIAL BY JURY. EACH OF THE COMPANY, THE
PRINCIPAL STOCKHOLDERS, PARENT AND SUB HEREBY IRREVOCABLY WAIVES ANY AND ALL
RIGHTS TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR ANY OF THE ADDITIONAL AGREEMENTS, AND CONSENTS TO THE GRANTING
OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY THE COURT.
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SECTION 12.15. CONSENT TO JURISDICTION. AS A FURTHER INDUCEMENT TO PARENT
AND SUB TO ENTER INTO THIS AGREEMENT AND IN CONSIDERATION THEREFORE, THE
COMPANY, THE PRINCIPAL STOCKHOLDERS AND PARENT AND SUB EACH COVENANT AND AGREE
THAT ANY STATE OR FEDERAL COURT WITHIN COOK COUNTY, ILLINOIS SHALL HAVE
JURISDICTION OF ANY ACTION OR PROCEEDING RELATING TO, OR ARISING UNDER OR IN
CONNECTION WITH THIS AGREEMENT AND THE OTHER AGREEMENTS AND PARENT, THE COMPANY
AND EACH OF THE PRINCIPAL STOCKHOLDERS CONSENTS TO PERSONAL JURISDICTION OF SUCH
COURTS AND WAIVES ANY OBJECTION (WHETHER BASED ON FORUM NON CONVENIENS OR
OTHERWISE) TO SUCH COURTS' JURISDICTION OR AS TO THE APPROPRIATENESS OR
CONVENIENCE OF ANY SUCH FORUM. SERVICE OF ANY SUMMONS AND COMPLAINT MAY BE MADE
BY: (A) PERSONALLY DELIVERING A COPY OF SUCH SUMMONS AND COMPLAINT TO (IF A
NATURAL PERSON) THE INDIVIDUAL TO BE SERVED; (B) LEAVING A COPY OF SUCH SUMMONS
AND COMPLAINT AT THE INDIVIDUAL'S USUAL PLACE OF ABODE WITH ANY PERSON OVER THE
AGE OF 18 WHO IS A MEMBER OF SUCH INDIVIDUAL'S FAMILY; (C) LEAVING A COPY OF
SUCH SUMMONS AND COMPLAINT AT THE INDIVIDUAL'S USUAL PLACE OF BUSINESS WITH THE
INDIVIDUAL'S ASSISTANT OR SECRETARY; (D) DELIVERING A COPY TO AN AGENT
AUTHORIZED BY APPOINTMENT OR LAW TO ACCEPT SERVICE OF PROCESS; OR (E) ANY OTHER
METHOD AUTHORIZED UNDER APPLICABLE LAW.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
[SIGNATURE PAGES, SCHEDULES AND EXHIBITS TO THIS AGREEMENT HAVE BEEN
INTENTIONALLY OMITTED.]
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TABLE OF CONTENTS
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ARTICLE I THE MERGER........................................ 1
SECTION 1.1. The Merger; Surviving Corporation.......... 1
SECTION 1.2. Effect of the Merger....................... 1
SECTION 1.3. Articles of Incorporation of the Surviving
Corporation............................................ 2
SECTION 1.4. Bylaws of the Surviving Corporation........ 2
SECTION 1.5. Board of Directors and Officers of the
Surviving Corporation.................................. 2
SECTION 1.6. Effective Time of the Merger............... 2
ARTICLE II CONVERSION OF SHARES............................. 2
SECTION 2.1. Conversion of Capital Stock................ 2
(a) Sub Common Stock................................ 2
(b) Cancellation of Treasury Stock.................. 2
(c) Conversion of Company Common Stock............. 2
(d) Conversion of Company Preferred Stock........... 2
(e) Escrow Shares.................................. 2
(f) Equitable Adjustments.......................... 3
(g) Pro Rata Number................................ 3
(h) Definition of Merger Consideration............. 3
SECTION 2.2. Dissenters' Rights......................... 3
SECTION 2.3. No Fractional Shares....................... 3
SECTION 2.4. Assumption of Opinions..................... 3
SECTION 2.5. Stock Certificates; Surrender and
Payment................................................ 4
(a) Effect of Merger on Company Stock
Certificates........................................ 4
(b) Surrender and Payment........................... 4
(c) Lost, Stolen or Destroyed Certificates......... 4
(d) Closing of the Company's Stock Transfer Books... 5
SECTION 2.6. Transfer of Parent Common Stock............ 5
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE PRINCIPAL STOCKHOLDERS............................ 5
SECTION 3.1. Organization and Authority................. 5
SECTION 3.2. Qualification.............................. 5
SECTION 3.3. Authorization.............................. 5
SECTION 3.4. No Violation............................... 6
SECTION 3.5. Capitalization of the Company.............. 6
SECTION 3.6. No Subsidiaries............................ 7
SECTION 3.7. Consents and Approvals..................... 7
SECTION 3.8. Books and Records.......................... 7
SECTION 3.9. Financial Statements....................... 7
SECTION 3.10. Absence of Undisclosed Liabilities........ 7
SECTION 3.11. Absence of Certain Changes................ 8
SECTION 3.12. Litigation................................ 9
SECTION 3.13. Title to Assets; Liens and Encumbrances... 10
SECTION 3.14. Contracts................................. 10
SECTION 3.15. Employee Benefit Plans.................... 11
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SECTION 3.16. Environmental Matters..................... 12
SECTION 3.17. Taxes..................................... 13
SECTION 3.18. Compliance with Applicable Law............ 14
SECTION 3.19. Brokers' Fees and Commissions............. 15
SECTION 3.20. Proprietary Rights........................ 15
SECTION 3.21. Labor Matters............................. 16
SECTION 3.22. Non-Compete Agreements.................... 17
SECTION 3.23. Inventory................................. 17
SECTION 3.24. Accounts Receivable....................... 17
SECTION 3.25. Bank Accounts............................. 18
SECTION 3.26. Insurance................................. 18
SECTION 3.27. Real Estate............................... 18
SECTION 3.28. Products and Warranty Liability........... 19
SECTION 3.29. Transactions with Related Parties......... 20
SECTION 3.30. Customers and Vendors..................... 20
SECTION 3.31. Names..................................... 20
SECTION 3.32. Forecasts................................. 20
SECTION 3.33. Year 2000 Compliance...................... 21
SECTION 3.34. Disclosure................................ 21
SECTION 3.35. Disclaimer................................ 21
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PRINCIPAL
STOCKHOLDERS.............................................. 22
SECTION 4.1. Authorization.............................. 22
SECTION 4.2. No Violation............................... 22
SECTION 4.3. Ownership of Stock......................... 22
SECTION 4.4. Investment Representation.................. 23
ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND
SUB....................................................... 23
SECTION 5.1. Organization and Qualification............. 23
SECTION 5.2. Authorization.............................. 23
SECTION 5.3. No Violation............................... 24
SECTION 5.4. Capitalization of Parent................... 24
SECTION 5.5. Consents and Approvals..................... 24
SECTION 5.6. Brokers.................................... 24
SECTION 5.7. Parent Commission Reports.................. 24
SECTION 5.8. Absence of Certain Actions................. 25
SECTION 5.9. Disclaimer................................. 25
ARTICLE VI COVENANTS........................................ 25
SECTION 6.1. Conduct of Business of the Company Prior to
the Effective Time..................................... 25
SECTION 6.2. No Solicitation............................ 27
SECTION 6.3. Access to Information...................... 27
SECTION 6.4. All Reasonable Efforts..................... 28
SECTION 6.5. Consents and Approvals..................... 28
SECTION 6.6. Public Announcements....................... 28
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SECTION 6.7. Disclosure Supplements..................... 29
SECTION 6.8. Payment of Transaction Expenses............ 29
SECTION 6.9. Company Stockholder Approval............... 29
SECTION 6.10. Authorization of Parent Common Stock...... 30
SECTION 6.11. Directors, Officers and Trustees.......... 30
SECTION 6.12. Specific Performance...................... 30
SECTION 6.13. INTENTIONALLY OMITTED..................... 30
SECTION 6.14. Registration Rights....................... 30
(a) Registration.................................... 30
(b) Blackout Periods................................ 30
(c) Stockholder's Obligations...................... 31
(d) Indemnification................................. 31
SECTION 6.15. Piggyback Registration Rights............. 33
SECTION 6.16. Employees................................. 33
SECTION 6.17. Employee Benefits Matters................. 33
SECTION 6.18. Indemnification; Directors' and Officers'
Liability Insurance.................................... 33
ARTICLE VII RESTRICTIVE COVENANTS........................... 34
SECTION 7.1. Restrictions............................... 34
SECTION 7.2. Non-competition............................ 34
SECTION 7.3. Non Interference with Business Relations... 34
SECTION 7.4. Solicitation of Customers and Employees.... 35
SECTION 7.5. Confidential Information................... 35
SECTION 7.6. Scope...................................... 36
SECTION 7.7. Remedies................................... 36
ARTICLE VIII CLOSING CONDITIONS............................. 36
SECTION 8.1. Conditions to Each Party's Obligations
under this Agreement................................... 36
SECTION 8.2. Conditions to the Obligations of Parent and
Sub under this Agreement............................... 36
SECTION 8.3. Conditions to the Obligations of the
Company and Stockholders under this Agreement.......... 38
ARTICLE IX CLOSING.......................................... 38
SECTION 9.1. Closing.................................... 38
ARTICLE X TERMINATION AND ABANDONMENT....................... 39
SECTION 10.1. Termination............................... 39
SECTION 10.2. Procedure and Effect of Termination....... 40
ARTICLE XI SURVIVAL AND INDEMNIFICATION..................... 40
SECTION 11.1. Survival and Remedies..................... 40
SECTION 11.2. Indemnification of Parent by the Company
and the Stockholders................................... 41
SECTION 11.3. Indemnification of Parent by the Principal
Stockholders........................................... 42
SECTION 11.4. Indemnification by Parent................. 42
SECTION 11.5. Indemnification Procedure for Third Party
Claims Against Indemnified Parties..................... 43
SECTION 11.6. Failure to Give Timely Notice............. 44
SECTION 11.7. Insurance................................. 44
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SECTION 11.8. Limitation of Liability................... 44
ARTICLE XII MISCELLANEOUS PROVISIONS........................ 44
SECTION 12.1. Amendment and Modification................ 44
SECTION 12.2. Waiver of Compliance; Consents............ 44
SECTION 12.3. Validity.................................. 45
SECTION 12.4. Expenses and Obligations.................. 45
SECTION 12.5. Parties in Interest....................... 45
SECTION 12.6. Notices................................... 45
SECTION 12.7. Governing Law............................. 46
SECTION 12.8. Counterparts.............................. 46
SECTION 12.9. Headings.................................. 46
SECTION 12.10. Certain Definitions...................... 46
SECTION 12.11. Entire Agreement......................... 49
SECTION 12.12. Assignment............................... 49
SECTION 12.13. No Strict Construction................... 49
SECTION 12.14. Waivers of Trial By Jury................. 49
SECTION 12.15. Consent to Jurisdiction.................. 50
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EXHIBITS
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EXHIBIT A Form of Articles of Merger to be filed with the Secretary of
State of Colorado
EXHIBIT B Form of Escrow Agreement
EXHIBIT C-1 Form of Opinion of Gelt, Paddison & Associates P.C
EXHIBIT C-2 Form of Opinion of Gould & Ratner.
EXHIBIT D Forms of Principal Stockholders Letter and Representation
Agreement
EXHIBIT E Stockholder Certificate
EXHIBIT F Form of Opinion of Sonnenschein Nath & Rosenthal
EXHIBIT G Option and Exclusive Dealing Agreement
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SCHEDULES
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SCHEDULE 2.4. Option List
SCHEDULE 3.2. List of Jurisdictions Where Licensed or Qualified to do
Business
SCHEDULE 3.4 No Violation
SCHEDULE 3.5. Capitalization of the Company
SCHEDULE 3.6 Ownership of Subsidiaries' Capital Stock
SCHEDULE 3.7. Consents and Approvals
SCHEDULE 3.9 Financial Statements
SCHEDULE 3.10 Undisclosed Liabilities
SCHEDULE 3.11. Absence of Certain Changes
SCHEDULE 3.12. List and Summary of all Pending and Threatened Claims
SCHEDULE 3.13. Liens and Encumbrances
SCHEDULE 3.14. Contracts
SCHEDULE 3.15. Employee Benefit Plans
SCHEDULE 3.16. Environmental Matters
SCHEDULE 3.17. Taxes
SCHEDULE 3.18. List and Summary of Licenses
SCHEDULE 3.19 Brokers
SCHEDULE 3.20. Proprietary Rights
SCHEDULE 3.21. Labor Matters
SCHEDULE 3.22 Non-Compete Agreements
SCHEDULE 3.23 Inventory
SCHEDULE 3.24. Accounts Receivable
SCHEDULE 3.25. Bank Accounts
SCHEDULE 3.26. Insurance
SCHEDULE 3.27. Real Estate
SCHEDULE 3.28. Products and Warranty Liability
SCHEDULE 3.29. Transactions with Related Parties
SCHEDULE 3.30. Customers and Vendors
SCHEDULE 3.31. Names
SCHEDULE 3.32 Forecasts
SCHEDULE 3.33 Year 2000 Compliance
SCHEDULE 5.4 Parent Capitalization
SCHEDULE 5.8 Material Adverse Changes
SCHEDULE 6.1. Permissible Capital Expenditures
SCHEDULE 7.2. Prohibited Area
SCHEDULE 8.2. Employees with Employment Agreements
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ANNEX B
OPTION AND EXCLUSIVE DEALING AGREEMENT
OPTION AND EXCLUSIVE DEALING AGREEMENT ("AGREEMENT") dated May 17, 2000, by
and between Illinois Superconductor Corporation, a Delaware corporation ("ISC")
and (the "STOCKHOLDER")(1).
RECITALS
SSI ACQUISITION CORP., a Colorado corporation which is a wholly-owned
subsidiary of ISC ("MERGER SUB"), ISC and Spectral Solutions, Inc., a Colorado
corporation ("COMPANY"), Russell Scott III and certain of the Company's other
stockholders (collectively, the "PRINCIPAL STOCKHOLDERS"), are entering into an
Agreement and Plan of Merger, of even date herewith (as such agreement may be
amended from time to time, the "MERGER AGREEMENT"), pursuant to which (and
subject to the terms and conditions specified therein) Merger Sub will be merged
with and into Company and ISC will be the sole stockholder of the surviving
corporation resulting from such transaction (said transaction being hereinafter
called the "MERGER").
In consideration of and as a condition to ISC's entering into the Merger
Agreement, ISC requires that each of the Principal Stockholders and certain of
the other stockholders of the Company (the "Designated Non-Principal
Stockholders") enter into, and each of the Principal Stockholders and Designated
Non-Principal Stockholders have agreed to enter into, option and exclusive
dealing agreements substantially in the form hereof with ISC (collectively, the
"OPTION AGREEMENTS"). Capitalized terms used herein without definition shall
have the meaning given such terms in the Merger Agreement.
AGREEMENT
To implement the foregoing and in consideration of the mutual agreements
contained herein, the parties hereby agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF STOCKHOLDER. The Stockholder hereby
represents and warrants to ISC as follows:
1.1 OWNERSHIP OF SHARES.
(a) Stockholder is the record holder and beneficial owner of the
Company Securities and/or options listed on SCHEDULE 1.1 hereto, (all
such securities owned by the Stockholder shall constitute the "EXISTING
SHARES," and together with any and all debt or equity of Company acquired
of record or beneficially by Stockholder in any capacity after the date
hereof and prior to the termination hereof, whether upon exercise of
options, conversion of the Preferred Stock or other convertible
securities, purchase, exchange or otherwise, shall constitute
collectively, the "SHARES").
(b) Stockholder will have sole power of disposition with respect to
the Shares owned by Stockholder and will have sole voting power with
respect to the matters set forth in Section 2 hereof and sole power to
demand dissenter's or appraisal rights, in each case with respect to all
Shares with no restrictions on such rights, subject to applicable federal
and state securities laws and the terms of this Agreement.
1.2 REVIEW OF AGREEMENTS. Stockholder has had the opportunity to
review, and consult with counsel regarding, the terms of this Agreement, the
Merger Agreement and the Escrow Agreement (as defined in the Merger
Agreement and attached thereto as EXHIBIT B).
1.3 RELIANCE BY PURCHASER. Stockholder understands and acknowledges
that ISC is entering into the Merger Agreement in reliance upon
Stockholder's execution, delivery and performance of this Agreement.
Stockholder further understands and acknowledges that Stockholder is
------------------------
(1) Each Stockholder will enter into a separate agreement.
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(a) granting to ISC the irrevocable proxy pursuant to Section 2.2 of this
Agreement, (b) making the covenants contained in Section 3 of this Agreement
and (c) granting the Option contained in Section 8, in each case in
consideration of the execution and delivery of the Merger Agreement. If a
Principal Stockholder, Stockholder further covenants that ISC shall be
entitled to rely on the representations, warranties and covenants of the
Stockholder in his capacity as a Principal Stockholder as contained in
Article III, Article IV, Article VI and Article VII, respectively, of the
Merger Agreement and that such representations, warranties and covenants
shall be incorporated into this Agreement with the same force and effect;
PROVIDED, HOWEVER, for the purposes hereof, the "Effective Time" and the
"Closing" shall be deemed to have occurred on the Option Closing Date
pursuant to Section 8 hereof.
1.4 BROKERS. Except to the extent disclosed in Section 3.19 of the
Merger Agreement, no agent, broker, investment banker, financial advisors or
other person or entity is or will be entitled to any brokerage commission,
finder's fee or like payment in connection with any of the transactions
contemplated by this Agreement or the Merger Agreement based upon such
arrangements made by or on behalf of Stockholder.
2. AGREEMENT TO VOTE; PROXY.
2.1 VOTING. Stockholder hereby agrees that, until the Termination Date
(as defined in Section 6), at any meeting of the shareholders of Company and
at any adjournment thereof, however called, or in connection with any
written consent of one or more of the shareholders of Company, Stockholder
shall vote (or cause to be voted) the Shares held of record or beneficially
by Stockholder: (i) in favor of the Merger, the execution and delivery by
Company of the Merger Agreement and the approval of the terms thereof, and
each of the other actions contemplated by the Merger Agreement and this
Agreement, and any actions required in furtherance hereof and thereof;
(ii) after the delivery of a valid Exercise Notice in accordance with
Section 8.2(a) in favor of the removal of all then serving members of the
Company's Board of Directors, (b) in favor of the election of the nominees
to the Company's Board of Directors designated by the Option Holder (as
defined in Section 8.1 of this Agreement) in the Exercise Notice to fill the
vacancies created by such removal, and (c) against all other nominees to the
Company's Board of Directors (provided, however, that the removal and
replacement of the Board of Directors described in this clause shall not
take effect until the closing of the Options in accordance with the
provisions of Section 8 and the rest of this Agreement); (iii) against any
action or agreement that would result in a breach of any covenant,
representation or warranty or any other obligation or agreement of Company
under the Merger Agreement or of Stockholder under this Agreement; and
(iv) against any of the following actions (other than the Merger and the
transactions with ISC and Merger Sub contemplated by the Merger Agreement):
(a) a sale, lease, exchange, transfer or other disposition, directly or
indirectly, of all or a substantial portion of the assets of Company or any
of the Subsidiaries, (b) a sale or exchange of capital stock of Company or
any of the Subsidiaries or a reorganization, consolidation,
recapitalization, dissolution or liquidation of Company or any of the
Subsidiaries; (c) any change in the board of directors of Company; (d) any
change in the present capitalization of Company or any other matter which
could in any way dilute, reduce or adversely affect the aggregate voting
power or rights, of the Shares (other than any Permitted Additional
Investment, as defined in the Merger Agreement); or (e) any extraordinary
corporate transaction or other action, including, without limitation, any
amendment of the articles of incorporation or by-laws Company, which is
intended, or could reasonably be expected, to impede, interfere with, delay,
postpone, discourage or adversely affect the Merger or the transactions
contemplated by the Merger Agreement or this Agreement or the consummation
or contemplated economic benefits of any of the foregoing (the events
described in clause (iv)(a) through (e) being collectively referred to as a
"Change of Control Event"). Stockholder shall not enter into any agreement
or understanding with any person or entity prior to the Termination Date to
vote or
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give instructions after the Termination Date in any manner inconsistent with
clause (i), (ii), (iii), or (iv) of this Section 2.1 or the provisions of
the preceding sentence.
2.2 PROXY. STOCKHOLDER HEREBY CONSTITUTES AND APPOINTS THE THEN
SERVING PRESIDENT, VICE PRESIDENT AND SECRETARY OF ISC OR ANY OF THEM
INDIVIDUALLY TO ACT FOR STOCKHOLDER AS HIS PROXY, WITH FULL POWER OF
SUBSTITUTION IN EACH, TO REPRESENT STOCKHOLDER FOR PURPOSES OF VOTING THE
SHARES AS EXPRESSLY PROVIDED IN SECTION 2.1. STOCKHOLDER AGREES THAT THIS
PROXY SHALL CONSTITUTE A DULY-EXECUTED AND DELIVERED PROXY PURSUANT TO
SECTION 7-107-203 OF THE COLORADO BUSINESS CORPORATION ACT (THE "ACT"), THAT
THE PROXY SHALL BE IRREVOCABLE PRIOR TO THE TERMINATION DATE, GIVEN THAT IT
IS COUPLED WITH AN INTEREST IN THE SHARES SUFFICIENT IN LAW TO SUPPORT AN
IRREVOCABLE POWER. STOCKHOLDER HEREBY REVOKES, EFFECTIVE UPON THE EXECUTION
AND DELIVERY HEREOF, ALL OTHER PROXIES THAT STOCKHOLDER MAY HAVE HERETOFORE
APPOINTED OR GRANTED, AND NO SUBSEQUENT PROXY SHALL BE GIVEN OR WRITTEN
CONSENT EXECUTED (AND IF GIVEN OR EXECUTED, SUCH PROXY SHALL NOT BE
EFFECTIVE) BY STOCKHOLDER FROM THE DATE HEREOF UNTIL THE TERMINATION DATE.
UNTIL THE TERMINATION DATE THIS PROXY SHALL REMAIN IN FULL FORCE AND
EFFECT AND BE ENFORCEABLE AGAINST ANY DONEE, TRANSFEREE OR ASSIGNEE OF THE
SHARES. THIS PROXY IS IRREVOCABLE UNTIL THE TERMINATION DATE AND COUPLED
WITH AN INTEREST AND IS EXECUTED AND INTENDED TO BE IRREVOCABLE IN
ACCORDANCE WITH THE PROVISIONS OF SECTION 7-107-203 OF THE ACT.
2.3 LEGEND OF STOCK CERTIFICATES. Stockholder agrees that he will
promptly (and in no event later than five days after the date hereof)
deliver to ISC all stock certificates or other instruments representing the
Shares to be inscribed with the following legend:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE
TERMS OF THAT CERTAIN OPTION AND EXCLUSIVE DEALING AGREEMENT DATED
MAY 17, 2000 BY AND AMONG A STOCKHOLDER OF SPECTRAL SOLUTIONS, INC., SSI
ACQUISITION CORP. AND ILLINOIS SEMICONDUCTOR CORPORATION ("ISC") WHICH,
AMONG OTHER THINGS, GRANTS TO ISC AN OPTION TO PURCHASE AND CERTAIN
VOTING RIGHTS WITH RESPECT TO THE SHARES REPRESENTED HEREBY AND IMPOSES
CERTAIN RESTRICTIONS ON SUCH SHAREHOLDER. THE TERMS OF SUCH AGREEMENT ARE
BINDING UPON ALL PRESENT AND FUTURE HOLDERS OF THE SHARES REPRESENTED
HEREBY.
Stockholder agrees that all stock certificates or other instruments
representing the Shares shall continue to bear such legend until the
Termination Date.
2.4 WRITTEN REQUEST TO CALL A STOCKHOLDER MEETING. Stockholder has
delivered, and will not cause to be rescinded, a written request in
accordance with Section 3.3 of the Company's By-laws to the Company that a
special meeting of the stockholders of the Company be called, and notice
thereof promptly delivered, such meeting to be held on the date immediately
preceding the Option Closing Date and to be for the purposes of removing the
Company's directors and electing the nominees designated in writing by the
Option Holder, such removal and replacement to be effective only upon the
closing of the Options in accordance with the provisions of Section 8 and
the rest of this Agreement.
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3. CERTAIN COVENANTS OF STOCKHOLDER. Except in accordance with the terms
of this Agreement, Stockholder hereby covenants and agrees as follows:
3.1 NO SOLICITATION. Stockholder shall not (nor shall Stockholder
permit any of his Affiliates or representatives to), directly or indirectly,
encourage, solicit or initiate inquiries or proposals from, or provide any
confidential information to, or participate in any discussions or
negotiations with, any person or entity (other than ISC and its Affiliates
and their respective directors, officers, employees, representatives and
agents) concerning any Change of Control Event. Stockholder will immediately
notify ISC of the terms of any proposal, discussion, negotiation or inquiry
(and will disclose to ISC any written materials received by Stockholder in
connection with such proposal, discussion, negotiation, or inquiry) and the
identity of the party making such proposal, discussion, negotiation or
inquiry which Stockholder may receive in respect of any such transaction and
will keep ISC apprised of the status of any such proposals, discussions,
negotiations or inquiries. Stockholder agrees not to release any Person
from, or waive any provision of, any standstill agreement relating to the
Company to which Stockholder is a party or any confidentiality agreement
relating to the Company between Stockholder and another person or entity.
Stockholder shall immediately cease and cause to be terminated any existing
activities, discussions or negotiations by Stockholder or any representative
of Stockholder with parties conducted heretofore with respect to any of the
foregoing and shall use all reasonable efforts to enforce the terms of all
standstill and confidentiality agreements relating to the Company to which
such Stockholder is a party or a third party beneficiary, including, without
limitation, obtaining the return or the destruction of any proprietary
information provided to any such parties.
3.2 RESTRICTION ON TRANSFER, PROXIES AND NONINTERFERENCE. Prior to the
Termination Date, Stockholder shall not, directly or indirectly: (i) offer
for sale, sell, transfer, tender, pledge, encumber, assign or otherwise
dispose of, enforce or permit the execution of the provisions of any
redemption agreement with Company or enter into any contract, option or
other arrangement or understanding with respect to or consent to the offer
for sale, sale, transfer, tender, pledge, encumbrance, assignment or other
disposition of, or exercise any discretionary powers to distribute, any or
all of the Shares or any interest therein; or (ii) except as contemplated by
this Agreement, grant any proxies or powers of attorney with respect to any
Shares, deposit any Shares into a voting trust or enter into a voting
agreement with respect to any Shares.
3.3 NOTIFICATION. Stockholder shall promptly notify ISC of his receipt
or acquisition of any Shares in addition to the Existing Shares.
3.4 DELIVERY OF DOCUMENTS. Contemporaneously with the execution of
this Agreement, Stockholder shall execute the Merger Agreement and the
Escrow Agreement. At the Closing (as that term is defined in the Merger
Agreement), Stockholder shall execute and deliver to ISC each of the other
documents to be delivered by Stockholder pursuant to the Merger Agreement.
3.5 INDEMNIFICATION. The Company and the Principal Stockholders shall
have indemnity obligations hereunder under the same conditions and
circumstances, and subject to the same limitations and procedures as set
forth in the Merger Agreement; and Article XI of the Merger Agreement shall
be incorporated herein by reference in its entirety and shall have the same
force and effect; PROVIDED, HOWEVER, that for the purposes hereof, the
"Effective Time" and the "Closing" shall be deemed to have occurred on the
Option Closing Date pursuant to Section 8 hereof; and provided, further,
that the parties to this Agreement shall also agree to indemnity with
respect to any breach of any obligation, agreement or covenant hereunder and
in connection with any inaccuracy or breach of any representation or
warranty contained herein subject to the procedures and limitations set
forth in Article XI of the Merger Agreement.
4. CERTAIN EVENTS. Stockholder agrees that this Agreement and the
obligations hereunder shall attach to the Shares and shall be binding upon any
person or entity to which legal or beneficial
4
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ownership of Shares shall pass, whether by operation of law or otherwise,
including, without limitation, each Stockholder's heirs, guardians,
administrators or successors or as a result of any divorce.
5. STOP TRANSFER. Stockholder agrees with, and covenants to, ISC that,
without the prior written consent of ISC, Stockholder shall not transfer, and
shall not request that Company register the transfer (book-entry or otherwise)
of, any certificate or uncertificated interest representing any of Stockholder's
Shares, unless such transfer is made in compliance with this Agreement.
6. TERMINATION. The obligations of Stockholder under this Agreement shall
terminate upon the first to occur of (i) the termination of the Merger Agreement
in accordance with Section 10.1(a), (ii) the termination of the Merger Agreement
by the Company pursuant to Section 10.1(b), (iii) sixty days after the
termination of the Merger Agreement pursuant to Section 10.1(b) by ISC,
(iv) sixty days after the termination of the Merger Agreement pursuant to
Section 10.1(c) or 10.1(d) if as of the date of such termination any of the
conditions set forth in Sections 8.1(c) or 8.2 have not been satisfied and/or
waived, or (v) the termination of the Merger Agreement pursuant to
10.1(c)(ii) or 10.1(d) if as of the date of such termination the conditions
specified in Sections 8.1(c) and 8.2 have been satisfied and/or waived;
provided, however, that in the event an Exercise Notice has been delivered prior
to the termination hereof, the provisions hereof shall survive until the Option
Closing Date (provided, that if any Stockholder or the Company is in breach of
its obligations pursuant hereto or pursuant to the other Option Agreements as of
the Option Closing Date, the terms hereof shall survive until twenty days after
all of such breaches have been cured). The date of the termination of this
Agreement pursuant to the preceding sentence shall be referred to herein as the
"Termination Date."
7. CONFIDENTIALITY; PUBLIC ANNOUNCEMENTS. This Agreement, the Merger
Agreement and the terms hereof and thereof are confidential and no party to this
Agreement shall disclose any of the terms of this Agreement or the Merger
Agreement, the transactions contemplated hereby or thereby or the fact that the
parties to this Agreement and the Merger Agreement are engaged in negotiations,
without the prior approval of Company, in the case of disclosure by ISC, and of
ISC, in the case of disclosure by the Stockholder.
8. OPTION TO PURCHASE SHARES. In consideration of ISC's execution of the
Merger Agreement, ISC has requested and Stockholder agrees that the terms of
this Section 8 shall be effective, without any further action or deed, from the
date of this Agreement until the Termination Date.
8.1 GRANT OF OPTION. Subject to Section 8.2, Stockholder hereby grants
to ISC and its successors and assigns ("OPTION HOLDER") an irrevocable
option (the "OPTION") to purchase all (but not less than all) of the Shares
for the number of duly authorized, validly issued, fully paid and
non-assessable shares of Parent Common Stock and/or options issuable
pursuant to the Parent Option Plan which would be issuable to Stockholder
pursuant to the Merger Agreement were the Effective Time to have occurred at
the Option Closing (the "Exercise Price"), exclusive of shares issuable
pursuant to Section 8.4 hereof.
8.2 EXERCISE BY OPTION HOLDER. Option Holder may only exercise the
Option in accordance with Section 8.1 above by delivery of written notice
("EXERCISE NOTICE") to Stockholder: (i) on or after June 30, 2000, or
(ii) within sixty days following the termination of the Merger Agreement (a
"Triggering Termination") pursuant to (a) Section 10.1(b) of the Merger
Agreement by ISC; or (b) Section 10.1(c) of the Merger Agreement by ISC if
the conditions set forth in Section 8.1(c) or Section 8.2 of the Merger
Agreement have not been met and/or waived. A copy of the Exercise Notice
shall be provided to the Company. The Exercise Notice shall state the number
of Shares as to which the Option is being exercised (the "ACQUIRED SHARES")
and the amount of the Exercise Price; and shall include the names of the
Option Holder's nominees to the Board of Directors of the Company.
Notwithstanding anything herein to the contrary, Option Holder may not
exercise this Option unless: (x) Option Holder simultaneously exercises the
Options pursuant to the other Option Agreements such that Option Holder
shall purchase all of Acquired Shares owned by all
5
<PAGE>
of the Principal Stockholders and Designated Non-Principal Stockholders;
(y) ISC and Sub (as that term is defined in the Merger Agreement) are not in
breach under the Merger Agreement; and (z) there are no circumstances then
existing that make it reasonably likely that ISC and Sub would be unable to
satisfy the closing conditions set forth in Section 8.3 to the Merger
Agreement (except to the extent such circumstances arose after, or were the
direct or indirect result of, the termination of the Merger Agreement as the
result of a Triggering Termination).
8.3 CLOSING. If Option Holder timely delivers an Exercise Notice in
accordance with Section 8.2 above, then the closing of the purchase of the
Acquired Shares shall be at a mutually agreed upon location on a date (the
"OPTION CLOSING DATE") which is 14 days after Option Holder's election. On
the Option Closing Date, Option Holder shall deliver to Stockholder the
Exercise Price, in Parent Common Stock, upon receipt by Option Holder of
(a) certificates representing the Acquired Shares duly endorsed for transfer
to Option Holder or accompanied by duly executed stock powers, (b) a
certificate duly executed by Stockholder stating that all of the
representations and warranties contained in Section 1 of this Agreement and
(other than in the case of Designated Non-Principal Stockholders)
Article IV of the Merger Agreement are true and correct with respect to the
Acquired Shares on the Option Closing Date (in the case of Section 4.4 of
the Merger Agreement, such representation and warranty shall apply to ISC
Common Stock received on the Option Closing Date), and (c) such other
documents, certificates and instruments as Option Holder or its counsel
shall reasonably request to transfer the Acquired Shares to Option Holder on
the stock record books of Company and to vest in Option Holder on the Option
Closing Date good and marketable title to the Acquired Shares free and clear
of all liens, claims, security interests, proxies, voting trusts or
agreements, understandings or arrangements or other encumbrances whatsoever,
except for encumbrances or proxies arising under this Agreement, and in
compliance with applicable state and federal securities laws.
8.4 ESCROW. Notwithstanding the foregoing, upon exercise of the
option, ISC shall deposit into Escrow (as such term is defined in the Merger
Agreement) 5% of the aggregate number of shares of Parent Common Stock
otherwise payable pursuant to Section 8 hereof (the "Escrow Shares"), which
shares (x) shall be registered in the name of the Escrow Agent in the stock
register maintained by the Company and/or its transfer agent and
(y) simultaneous with the Option Closing Date without any further action by
any Person, shall become subject to the terms and conditions of the Escrow
established by the Escrow Agreement. Stockholder hereby irrevocably appoints
Russell Scott III (or any successor provided for pursuant to the Escrow
Agreement) as its true and lawful agent and attorney-in-fact to act in its
name, place, and stead with respect to the Escrow, and to otherwise act as
the Stockholder Representative under the Escrow Agreement, with all the
rights and powers granted to the Stockholder Representative by the Escrow
Agreement.
8.5 NO FRACTIONAL SHARES. No certificates representing fractional
shares of ISC Common Stock shall be issued upon the surrender for exchange
of certificates formerly representing the Shares or deposited into the
Escrow. In lieu of any such fractional shares, the Option Holder will be
paid cash, or cash will be deposited into the Escrow, in an amount equal to
such fraction multiplied by the average closing price of Parent Common Stock
for the ten consecutive trading days immediately preceding the second
business day prior to the Option Closing Date as reported on the principal
national stock exchange or automated quotation system of a national
securities association on which Parent Common Stock is then listed or
qualified for trading, or if there Parent Common Stock is not then so
listed, as reported on the National Association of Securities Dealer's
electronic bulletin board.
8.6 REGISTRATION RIGHTS. ISC and Stockholder agree that the rights
provided Stockholder in Sections 6.14 and 6.15 of the Merger Agreement with
respect to the registration on Form S-2 or S-3 for the resale of the Parent
Common Stock shall be incorporated into this Agreement with the same force
and effect; PROVIDED, HOWEVER, for purposes hereof, the "Effective Time"
shall be deemed to have occurred on the Option Closing Date.
6
<PAGE>
9. MISCELLANEOUS.
9.1 ENTIRE AGREEMENT. This Agreement, together with the Schedule
attached hereto and the definitions in the Merger Agreement, represent the
entire agreement and understanding of the parties hereto with reference to
the transactions contemplated herein and therein, and no representations,
warranties or covenants have been made in connection with this Agreement
other than those set forth herein or as specifically incorporated from the
Merger Agreement or the escrow agreement. This Agreement supersedes all
prior negotiations, discussions, correspondence, communications,
understandings and agreements among the parties relating to the subject
matter of this Agreement and all prior drafts thereof, all of which are
merged into this Agreement.
9.2 ASSIGNMENT. This Agreement shall inure to the benefit of, and be
binding upon, the parties hereto and their respective successors, heirs,
representatives and assigns, as the case may be; PROVIDED, HOWEVER, that no
party shall assign or delegate this Agreement or any of the rights or
obligations created hereunder without the prior written consent of the other
party. Notwithstanding the foregoing, ISC and Merger Sub shall have the
unrestricted right to assign this Agreement and all or any part of its
rights hereunder to any Affiliate of ISC, but in such event ISC shall remain
fully liable for the performance of all of such obligations in the manner
prescribed in this Agreement. Nothing in this Agreement shall confer upon
any person or entity not a party to this Agreement, or the legal
representatives of such person or entity, any rights (including, without
limitation, rights as a third party beneficiary) or remedies of any nature
or kind whatsoever under or by reason of this Agreement.
9.3 AMENDMENTS. This Agreement may be amended, superseded, cancelled,
renewed or extended, and the terms hereof may be waived, and consents may be
provided, only by a written instrument signed by ISC and the Stockholder or,
in the case of a waiver, by the party waiving compliance. No delay on the
part of any party in exercising any right, power or privilege hereunder
shall operate as a waiver thereof; nor shall any waiver on the part of any
party of any such right, power or privilege, nor any single or partial
exercise of any such right, power or privilege, preclude any further
exercise thereof or the exercise of any other such right, power or
privilege. The rights and remedies herein provided are cumulative and are
not exclusive of any rights or remedies that any party may otherwise have at
law or in equity.
9.4 NOTICES. All notices, requests and other communications to any
party hereunder shall be in writing and shall be deemed given on the earlier
of delivery thereof if by hand or upon receipt if sent by mail (registered
or certified mail, postage prepaid, return receipt requested) or on the next
business day after deposit if sent by a recognized overnight delivery
service or upon receipt if sent by telecopy or facsimile transmission as
follows:
(a) if to ISC, to:
Illinois Superconductor Corporation
451 Kingston Court
Mt. Prospect, Illinois 60056
Attention: Chief Executive Officer
Facsimile: (847) 299-9609
7
<PAGE>
With copies to:
Elliott-Associates, L.P.
712 Fifth Avenue
New York, New York 10019
Attention: Mark Brodsky
Facsimile: (212) 974-2092
Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago, IL 60606
Attention: Michael D. Rosenthal, Esq.
Facsimile: (312) 876-7934
(b) if to Stockholder, to the address specified on SCHEDULE 1.1 hereto:
With a copy to:
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
9.5 GOVERNING LAW; CONSENT TO JURISDICTION; VENUE. This Agreement
shall be governed by and construed in accordance with the laws of the State
of Illinois. As a further inducement to ISC to enter into the Merger
Agreement, and in consideration thereof, Stockholder, ISC, Merger Sub and
Company covenant and agree (i) that any state or federal court within Cook
County, Illinois shall have exclusive jurisdiction of any action or
proceeding relating to, or arising under or in connection with this
Agreement and ISC, Merger Sub, Stockholder and Company consent to personal
jurisdiction of such courts and waives any objection to such courts'
jurisdiction, and (ii) service of any summons and complaint may be made by:
(a) personally delivering a copy of such summons and complaint to (if a
natural person) the individual to be served; (b) leaving a copy of such
summons and complaint at the individual's usual place of abode with any
person over the age of 18 who is a member of such individual's family;
(c) leaving a copy of such summons and complaint at the individual's usual
place of business with the individual's assistant or secretary;
(d) delivering a copy to an agent authorized by appointment or law to accept
service of process; or (e) any other method authorized under applicable
law..
9.6 ENFORCEMENT. Because the business, assets and capital stock of
Company is unique, any breach of this Agreement would cause ISC and its
Affiliates irreparable harm for which monetary damages would be inadequate.
Accordingly, the parties agree that the parties hereto shall be entitled to
specifically enforce this Agreement and to obtain injunctive or other
equitable remedies to prevent or redress any breach by the other party of
this Agreement, without the necessity of posting any bond or other security,
in addition to any other remedies to which such party might be entitled by
law or in equity. In the event of any breach of this Agreement, the
prevailing party shall be entitled to recover its legal fees and related
expenses and costs incurred to enforce its rights hereunder.
9.7 COUNTERPARTS; TERMS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall be considered one and the same agreement. All references
herein to Sections and Schedules shall be deemed references to such parts of
this Agreement, unless the context shall otherwise require. All references
to singular or plural or masculine or feminine shall include the other as
the context may require.
8
<PAGE>
9.8 DESCRIPTIVE HEADINGS. The section headings contained in this
Agreement are solely for convenience of reference and shall not affect the
meaning or interpretation of this Agreement or of any term or provision
hereof.
9.9 SEVERABILITY. This Agreement shall be deemed severable, and the
invalidity or unenforceability of any term or provision hereof shall not
affect the validity or enforceability of this Agreement or of any other term
or provision hereof.
9.10 DEFINITIONS; CONSTRUCTION. For purposes of this Agreement, in the
event of a stock dividend or distribution, or any change in the Preferred
Stock of the Common Stock by reason of any stock dividend, split-up,
recapitalization, combination, exchange of shares or the like, the term
"Shares" shall be deemed to refer to and include the Shares as well as all
such stock dividends and distributions and any shares into which or for
which any or all of the Shares may be changed or exchanged.
9.11 STOCKHOLDER CAPACITY. Notwithstanding anything herein to the
contrary, no Stockholder is making any agreement or understanding herein in
his capacity as a director or officer of Company, and the agreements set
forth herein shall in no way restrict Stockholder in the exercise of his
fiduciary duties as a director or officer of Company. Stockholder has
executed this Agreement solely in his capacity as the record or beneficial
holder of the Shares.
9.12 EXPENSES. Except as otherwise provided herein, all costs and
expenses incurred in connection with the transactions contemplated by this
Agreement shall be paid by the party incurring such expenses.
9.13 FURTHER ASSURANCES. Stockholders and ISC shall execute and
deliver all such further documents and instruments and take all such further
action as may be necessary in order to consummate the transactions
contemplated hereby.
9.14 DOCUMENTATION. This Agreement was initially prepared by ISC's
legal counsel as a matter of convenience only, and such document has been
thoroughly reviewed and negotiated by each Stockholder, with the opportunity
to receive assistance from his legal counsel,, and, therefore, no
interpretation will be made in favor of any of the parties or signatories or
any of their Affiliates with respect to this Agreement for the reason that
such documents were prepared by ISC's legal counsel.
9.15 WAIVERS OF TRIAL BY JURY. STOCKHOLDER AND ISC HEREBY IRREVOCABLY
WAIVE ANY AND ALL RIGHTS TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING
OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE ADDITIONAL DOCUMENTS, AND
CONSENT TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED
APPROPRIATE BY THE COURT.
[BALANCE OF PAGE LEFT INTENTIONALLY BLANK]
9
<PAGE>
IN WITNESS WHEREOF, ISC, Merger Sub and Stockholder have caused this Option
and Exclusive Dealing Agreement to be duly executed as of the day and year first
above written.
<TABLE>
<S> <C> <C>
ILLINOIS SUPERCONDUCTOR CORPORATION,
a Delaware corporation
By:
---------------------------------------
Name:
---------------------------------------
Title:
---------------------------------------
SSI ACQUISITION CORPORATION,
a Colorado corporation
By:
---------------------------------------
Name:
---------------------------------------
Title:
---------------------------------------
---------------------------------------------
STOCKHOLDER
</TABLE>
10
<PAGE>
OPTION AND EXCLUSIVE DEALING AGREEMENT
NAME OF STOCKHOLDER
The undersigned hereby acknowledges the terms of this Agreement and
covenants (i) to cause the legend required by Section 2.3 to be inscribed on
each stock certificate or other instrument representing shares of capital stock
of Company owned by Stockholder, and (ii) not to permit the registration of any
transfer in violation of Section 5 hereof. The undersigned further agrees to
issue to any transfer agent, promptly upon execution of this Agreement, a stop
transfer order relating to all shares of capital stock of the undersigned owned
of record by Stockholder existing on the date of this Agreement, such order to
prohibit any transfer of such shares without the written consent of ISC.
Furthermore the undersigned acknowledges that it has received the written
request referred to in Section 2.4, and agrees that upon receipt of a copy of
the Exercise Notice it shall cause to be called a meeting of the stockholders of
the Company for the purposes and on the date set forth in Section 2.4, and shall
cause timely notice to be delivered regarding such meeting to all of the
stockholders of the Company in accordance with the terms of the Colorado
Business Corporations Act, and the Company's Articles of Incorporation and
By-laws. Furthermore, the Company acknowledges that it has received irrevocable
resignations from each of its directors which shall become effective on the
Option Closing Date upon the closing of the Options in accordance with the
provisions of Section 8 and the rest of this Agreement, which resignations have
been validly and irrevocably accepted by the Company effective as set forth
above. Furthermore, the Company agrees that it will not permit or cause any
director to be appointed or elected after the date hereof, unless such director
tenders a resignation similar in terms to that set forth in the preceding
sentence.
<TABLE>
<S> <C> <C>
SPECTRAL SOLUTIONS, INC.
By:
---------------------------------------
Name:
---------------------------------------
Title:
---------------------------------------
</TABLE>
11
<PAGE>
ANNEX C
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
For the quarterly period ended March 31, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
For the transition period from ______________ to ______________
COMMISSION FILE NUMBER 0-22302
------------------------
ILLINOIS SUPERCONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 36-3688459
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation)
451 KINGSTON COURT
MT. PROSPECT, ILLINOIS 60056
(847)391-9400
(Address and telephone number of principal executive offices)
</TABLE>
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 May 9, 2000, 30,276,167 shares of the registrant's Common Stock, par
value $0.001 per share, were outstanding.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 3
Condensed Balance Sheets as of March 31, 2000 (unaudited)
and December 31, 1999..................................... 3
Condensed Statements of Operations (unaudited) for the three
months ended March 31, 2000 and the three months ended
March 31, 1999............................................ 4
Condensed Statements of Cash Flows (unaudited) for the three
months ended March 31, 2000 and the three months ended
March 31, 1999............................................ 5
Notes to Condensed Financial Statements..................... 6
Management's Discussion and Analysis of Financial Condition
Item 2. and Results of Operations................................. 10
Quantitative and Qualitative Disclosures About Market
Item 3. 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......... *
Item 5. Other Information........................................... *
Item 6. Exhibits and Reports on Form 8-K............................ 16
</TABLE>
------------------------
* No reportable information under this item.
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ILLINOIS SUPERCONDUCTOR CORPORATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
--------------- ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents............................... $ 5,496,668 $ 723,711
Inventories............................................. 984,824 1,092,713
Accounts receivable, net................................ 124,778 175,801
Prepaid expenses and other.............................. 222,917 428,475
----------- -----------
Total current assets...................................... 6,829,187 2,420,700
Property and equipment:
Property and equipment.................................. 8,098,636 8,089,169
Less: accumulated depreciation.......................... (5,634,373) (5,433,808)
----------- -----------
Net property and equipment................................ 2,464,263 2,655,361
Restricted certificates of deposit........................ 259,066 291,575
Patents and trademarks, net............................... 584,895 592,823
Deferred financing fees, net.............................. 43,127 78,700
----------- -----------
Total assets.............................................. $10,180,538 $ 6,039,159
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL
DEFICIENCY):
Current liabilities:
Accounts payable........................................ $ 518,988 $ 990,913
Accrued liabilities..................................... 615,272 589,043
Current portion of Senior Convertible Notes, net of
discount.............................................. 1,892,790 --
Current portion of other long-term debt................. 9,149 9,020
----------- -----------
Total current liabilities................................. 3,036,199 1,588,976
Senior Convertible Notes, net of discount................. 7,644,491 13,002,068
Accrued interest on Senior Convertible Notes.............. 582,560 638,743
Other long-term debt, less current portion................ 7,661 10,074
Deferred occupancy costs.................................. 90,960 91,010
Stockholders' equity (net capital deficiency):
Preferred stock; 100,000 shares authorized; No shares
issued and outstanding at March 31, 2000 and
December 31, 1999..................................... -- --
Common stock ($.001 par value); 60,000,000 shares
authorized; 30,274,667 and 15,753,001 shares issued
and outstanding at March 31, 2000 and December 31,
1999, respectively.................................... 30,275 15,753
Additional paid-in capital.............................. 84,096,031 74,249,643
Notes receivable from stockholders...................... -- (680,696)
Accumulated deficit..................................... (85,307,639) (82,876,412)
----------- -----------
Total stockholders' equity (net capital deficiency)....... (1,181,333) (9,291,712)
----------- -----------
Total liabilities and stockholders' equity (net capital
deficiency)............................................. $10,180,538 $ 6,039,159
=========== ===========
</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.
3
<PAGE>
ILLINOIS SUPERCONDUCTOR CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net sales................................................... $ 172,363 $ 511,900
Costs and expenses:
Cost of sales............................................. 649,083 1,009,026
Research and development.................................. 306,328 521,563
Selling and marketing..................................... 184,525 456,515
General and administrative................................ 1,065,230 708,519
----------- -----------
Total costs and expenses.................................... 2,205,166 2,695,623
----------- -----------
Operating loss.............................................. (2,032,803) (2,183,723)
Other income (expense):
Interest income........................................... 24,380 38,356
Non-cash interest expense on Senior Convertible Notes..... (400,881) (114,210)
Other interest expense.................................... (1,583) (15,207)
Other income, net......................................... 7,957 --
----------- -----------
(370,127) (91,061)
----------- -----------
Loss before extraordinary item.............................. (2,402,930) (2,274,784)
Extraordinary item -- debt extinguishment................... (28,297) (73,000)
----------- -----------
Net loss.................................................... $(2,431,227) $(2,347,784)
=========== ===========
Basic and diluted loss per share before extraordinary
item...................................................... $ (0.10) $ (0.18)
Extraordinary item -- debt extinguishment................... -- (0.01)
----------- -----------
Basic and diluted loss per share............................ $ (0.10) $ (0.19)
=========== ===========
Weighted average number of common shares outstanding........ 24,325,932 12,557,344
=========== ===========
</TABLE>
SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE CONDENSED FINANCIAL
STATEMENTS.
4
<PAGE>
ILLINOIS SUPERCONDUCTOR CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $(2,431,227) $(2,347,784)
Adjustments to reconcile net loss to net cash used in
operating activities:
Extraordinary item -- debt extinguishment................. 28,297 73,000
Depreciation and amortization............................. 208,492 230,756
Non-cash interest expense on Senior Convertible Notes..... 400,881 114,210
Changes in operating assets and liabilities............... (258,554) 473,606
----------- -----------
Net cash used in operating activities....................... (2,052,111) (1,456,212)
----------- -----------
INVESTING ACTIVITIES:
Decrease in restricted certificates of deposit............ 32,509 --
Payment of patent costs................................... -- (21,564)
Acquisition of property and equipment..................... (9,466) (11,957)
----------- -----------
Net cash provided by (used in) investing activities......... 23,043 (33,521)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of Senior Convertible Notes........ 4,000,000 3,300,000
Exercise of stock options................................. 47,982 --
Exercise of warrants...................................... 2,756,327 --
Payments on other long-term debt.......................... (2,284) --
----------- -----------
Net cash provided by financing activities................... 6,802,025 3,300,000
----------- -----------
Increase in cash and cash equivalents....................... 4,772,957 1,810,267
Cash and cash equivalents at beginning of period............ 723,711 2,152,595
----------- -----------
Cash and cash equivalents at end of period.................. $ 5,496,668 $ 3,962,862
=========== ===========
</TABLE>
SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE CONDENSED FINANCIAL
STATEMENTS.
5
<PAGE>
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 three months ended March 31, 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:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
Raw materials.................................. $575,000 $ 736,000
Work in process................................ 132,000 --
Finished product............................... 278,000 357,000
-------- ----------
$985,000 $1,093,000
======== ==========
</TABLE>
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,
2001, 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
6
<PAGE>
ILLINOIS SUPERCONDUCTOR CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4 -- SENIOR CONVERTIBLE NOTES (CONTINUED)
for the March 2000 Notes was allocated to additional paid-in capital, creating a
discount to the debt. This discount is being recognized as a charge to interest
expense using the effective interest method over the nine month term of the
March 2000 Notes. No further amounts were allocated to additional paid-in
capital for the excess of the fair value of the warrants over the proceeds to be
received or for the intrinsic value of the non-detachable conversion feature
that was "in-the-money" at the date of issuance, since these amounts cannot
exceed the principal amount of the notes issued.
At March 31, 2000, the amount of outstanding Senior Convertible Notes, net
of discounts and including accrued interest, recognized in the condensed balance
sheet is as follows:
<TABLE>
<S> <C>
Notes, due May 15, 2002 and bearing interest at 2%.......... $ 947,000
Notes, due May 15, 2002 and bearing interest at 6%.......... 6,697,000
Notes, due January 2, 2001 and bearing interest at 10%...... 1,823,000
Accrued interest............................................ 653,000
-----------
$10,120,000
===========
</TABLE>
Payments due on the Senior Convertible Notes by maturity date, including
interest accrued through March 31, 2000, are as follows at March 31, 2000:
<TABLE>
<S> <C>
Notes, due January 2, 2001.................................. $ 6,070,000
Notes, due May 15, 2002..................................... 9,187,000
-----------
$15,257,000
===========
</TABLE>
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, 2001, 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 three months ended March 31, 2000, $4,120,222 in aggregate
principal amount of Senior Convertible Notes, plus accrued interest, was
converted into 11,591,852 shares of common stock. During the year ended
December 31, 1999, $925,000 in aggregate principal amount of Notes, plus accrued
interest, was converted into 3,178,706 shares of common stock. There were no
conversions of Notes during the three months ended March 31, 1999.
For the three months ended March 31, 2000 and 1999, the Company recognized
extraordinary items of $28,297 and $73,000, respectively, in the condensed
statements of operations. The extraordinary charge for the three months ended
March 31, 2000 is a result of the conversions of Senior Convertible Notes and
the related write-off of a portion of deferred financing fees during the period.
The extraordinary charge for the three months ended March 31, 1999 is a result
of amendments made to certain of the Notes and related detachable warrants on
March 31, 1999. These amendments were accounted for like, and reported
7
<PAGE>
ILLINOIS SUPERCONDUCTOR CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4 -- SENIOR CONVERTIBLE NOTES (CONTINUED)
in the same manner as, a debt extinguishment. The extraordinary item of $73,000
for the three months ended March 31, 1999 represents the increase in fair value
of the detachable warrants as a result of the amendments.
The Company recognized $400,881 and $114,210 of non-cash interest charges
for the three months ended March 31, 2000 and 1999, respectively as a result of
the amortization of discounts and deferred financing fees related to the Notes.
It is not practicable to estimate the fair value of the Senior Convertible
Notes at March 31, 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 during the three
months ended March 31, 2000, reflecting the carrying amount of the notes and
related interest accrued, which approximates the fair value of the warrants
surrendered.
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 Stock Option Plan (the "Plan"). 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). The DSU's represent the right to receive an
equivalent number of restricted shares of the Company's common stock. 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 are 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. The measurement date for the
DSU's and the non-qualified stock options is expected to be May 17, 2000, the
anticipated date of the Company's Annual Stockholders' Meeting. The Company will
recognize compensation expense for the DSU's over the vesting period based on
their intrinsic value (the number of DSU's multiplied by the closing price of
the Company's common stock on the measurement date).
8
<PAGE>
ILLINOIS SUPERCONDUCTOR CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6 -- STOCK OPTIONS AND WARRANTS (CONTINUED)
During the three months ended March 31, 2000, warrants for an aggregate of
2,915,574 shares of the Company's common stock were exercised for proceeds of
$2,756,327. No warrants were exercised during the three months ended March 31,
1999.
NOTE 7 -- 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.
9
<PAGE>
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 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
The Company's net sales decreased $339,537, or 66.3%, to $172,363 for the
three months ended March 31, 2000 from $511,900 for the three months ended
March 31, 1999, primarily as a result of lower
10
<PAGE>
unit volume. The Company anticipates its net sales to remain flat 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 $649,083 for the three months ended March 31,
2000 from $1,009,026 for the same period in 1999. The reduction in cost of sales
was due to the decrease in sales volume, offset by the effects of low
utilization levels and excess capacity. The Company expects the 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 decreased to $306,328 for
the three months ended March 31, 2000, from $521,563 for the same period in
1999, a decrease of 41.3%. These costs were lower due to the successful
development of the Company's core products, increased efficiency in the
Company's development processes, and personnel reductions. During the remainder
of 2000, management expects research and development expenditures to continue on
a consistent level.
Selling and marketing expenses decreased to $184,525 for the three months
ended March 31, 2000, from $456,515 for the same period in 1999, a decrease of
59.6%. The decrease in these expenses was due to a decrease in personnel and
reduced travel, trade show, delivery and advertising 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 All Temperature
Performance ("ATP-TM-") filter product.
General and administrative expenses increased to $1,065,230 for the three
months ended March 31, 2000, from $708,519 for the same period in 1999, an
increase of 50.3%. 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 application for
listing on the NASDAQ Small-Cap Market, strategic initiatives, and press
releases.
Non-cash interest expense increased to $400,881 for the three months ended
March 31, 2000 from $114,210 for the same period in 1999, an increase of 251.0%.
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 three months ended March 31, 2000 and 1999, the Company recognized
extraordinary items of $28,297 and $73,000, respectively. The extraordinary
charge for the three months ended March 31, 2000 is a result the conversions of
Senior Convertible Notes and the related write-off of a portion of deferred
financing fees during the period. The extraordinary charge for the three months
ended March 31, 1999 is a result of amendments made to certain of the Senior
Convertible Notes and related detachable warrants on March 31, 1999. These
amendments were accounted for like, and reported in the same manner as, a debt
extinguishment. The extraordinary item of $73,000 for the three months ended
March 31, 1999 represents the increase in fair value of the detachable warrants
as a result of the amendments.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company's cash and cash equivalents, including
restricted certificates of deposit, were $5,755,734, an increase of $4,740,448
from the balance at December 31, 1999 of $1,015,286. This increase primarily
reflects proceeds received during the three months ended March 31, 2000 from the
new issuance of Senior Convertible Notes and the exercise of warrants of
$4,000,000 and $2,756,327, respectively, reduced by the use of $2,052,111 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
11
<PAGE>
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 in the three months ended
March 31, 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 $6.1 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, which expires on September 27,
2000 and is subject to renewal for successive twelve month periods, 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 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. These discussions 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 transactions
will be consummated.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any material market risk sensitive instruments.
12
<PAGE>
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, and the parties have completed
discovery.
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, after which the court
entered a briefing schedule on the motion for summary judgement. Currently, the
Company is preparing a reply to the plaintiff's response to the summary
judgement motion, which will be filed in May. A hearing date has been set for
June.
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 sought to
enforce the terms of loans made to the Borrowers by the Company and evidenced by
promissory notes dated December 13, 1996, in the original aggregate principal
amount of $680,696 and the guarantee by the Guarantor of the Borrowers'
obligations under these promissory notes. The Borrowers' notes were issued to
the Company in connection with the Borrowers' exercise of warrants to purchase
shares of the Common Stock in December 1996. In September 1997, 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.
On February 22, 2000, the Company reached a settlement agreement with the
Borrowers, whereby the Company agreed to release the Borrowers' obligations
under the notes in return for the Borrowers' surrender of 210,196 warrants to
purchase common stock of the Company held by them and discharge of
13
<PAGE>
their counterclaims. As a result of this settlement, the Company recorded a
charge of $822,776 to additional paid-in capital during the three months ended
March 31, 2000, reflecting the carrying amount of the notes and related interest
accrued, which approximates the fair value of the warrants surrendered.
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.
In February 1998, the Company and the Named Directors filed a motion to
dismiss Mr. Lipman's complaint. The motion presented arguments that the claims
of Mr. Lipman and the putative class are barred by the business judgment rule
and the plaintiff's failure to fulfill the legal prerequisites for filing an
action against the Named Directors. In June 1998, the court granted the
Company's and the Named Directors' motion to dismiss the 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 alleges 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
14
<PAGE>
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.
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.
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 Edward W. Laves, Howard Hoffman, Tom L. Powers,
Mark D. Brodsky, George Calhoun and Sam Perlman and former directors 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.
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
15
<PAGE>
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).
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 March 17, 2000.
A Current Report on Form 8-K, dated and filed March 28, 2000.
16
<PAGE>
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.
<TABLE>
<S> <C> <C>
ILLINOIS SUPERCONDUCTOR CORPORATION
Date: May 12, 2000 By: /s/ GEORGE CALHOUN
-----------------------------------------
George Calhoun
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Date: May 12, 2000 By: /s/ CYNTHIA QUIGLEY
-----------------------------------------
Cynthia Quigley
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
</TABLE>
17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
--------------------- -----------------------
<C> <S>
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., 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.
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.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
--------------------- -----------------------
<C> <S>
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.*
4.27 Securities Purchase Letter Agreement dated December 28,
1999, by and among the Company and the Investors.*
4.28 Securities Purchase Letter Agreement dated March 27, 2000,
by and among the Company and the Investors.*
10.1 1993 Amended and Restated Stock Option Plan, as amended,
incorporated by reference to Exhibit A to the Company's
Proxy Statement filed with the SEC on April 7, 2000.**
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>
------------------------
* Filed herewith.
** Management Contract or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-Q.
19
<PAGE>
EXHIBIT 27
FINANCIAL DATA SCHEDULE
<TABLE>
<S> <C>
PERIOD TYPE: 3-MOS
FISCAL YEAR END: DEC-31-2000
PERIOD START: JAN-01-2000
PERIOD END: MARCH-31-2000
CASH: 5,496,668
SECURITIES: 0
RECEIVABLES: 165,118
ALLOWANCES: 40,340
INVENTORY: 984,824
CURRENT ASSETS: 6,829,187
PP&E: 8,098,636
DEPRECIATION: 5,634,373
TOTAL ASSETS: 10,180,538
CURRENT LIABILITIES: 3,036,199
BONDS: 10,136,651
PREFERRED MANDATORY: 0
PREFERRED: 0
COMMON: 30,275
OTHER SE: (1,211,608)
TOTAL LIABILITY AND EQUITY: 10,180,538
SALES: 172,363
TOTAL REVENUES: 172,363
CGS: 649,083
TOTAL COSTS: 649,083
OTHER EXPENSES: 1,556,083
LOSS PROVISION: 0
INTEREST EXPENSE: 402,464
INCOME PRETAX: (2,402,930)
INCOME TAX: 0
INCOME CONTINUING: (2,402,930)
DISCONTINUED: 0
EXTRAORDINARY: (28,297)
CHANGES: 0
NET INCOME: (2,431,227)
EPS BASIC: (0.10)
EPS DILUTED: (0.10)
</TABLE>
20
<PAGE>
ANNEX D
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Spectral Solutions, Inc.
We have audited the accompanying balance sheets of Spectral Solutions, Inc. (a
development stage company) as of December 31, 1999 and 1998, and the related
statements of operations, stockholders' equity, and cash flows for the year
ended December 31, 1999, the period from November 20, 1998 (date of inception)
to December 31, 1998 and the cumulative period from November 20, 1998 (date of
inception) to December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Spectral Solutions, Inc. at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the year ended December 31, 1999, the period from November 20, 1998 (date of
inception) to December 31, 1998 and the cumulative period from November 20, 1998
(date of inception) to December 31, 1999, in conformity with auditing standards
generally accepted in the United States.
The accompanying financial statements have been prepared assuming that Spectral
Solutions, Inc. will continue as a going concern. As more fully described in
Note 3, Spectral Solutions, Inc. has incurred operating losses since inception
and does not currently have financing commitments in place to meet expected cash
requirements through 2000. These conditions raise substantial doubt about
Spectral Solutions, Inc.'s ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 3. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
May 30, 2000
Chicago, Illinois
<PAGE>
SPECTRAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1998 1999 2000
-------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash................................................... $ -- $ 32,675 $ 101,301
Accounts receivable.................................... -- 22,000 --
Inventory.............................................. -- 482,984 552,432
Prepaid expenses, deposits and other................... -- 50,422 117,617
-------- ----------- -----------
Total current assets..................................... -- 588,081 771,350
Property and equipment:
Leasehold improvements................................. -- 33,831 33,831
Lab equipment.......................................... -- 205,458 211,878
Manufacturing equipment................................ -- 273,236 273,236
Software............................................... -- 6,257 12,407
Office equipment and furniture and fixtures............ -- 50,931 54,731
-------- ----------- -----------
-- 569,713 586,083
Accumulated depreciation............................... -- (82,593) (112,313)
-------- ----------- -----------
-- 487,120 473,770
Other assets............................................. -- 23,125 21,778
Deposits................................................. 124,281 -- --
Goodwill, net............................................ -- 774,856 729,719
-------- ----------- -----------
Total assets............................................. $124,281 $ 1,873,182 $ 1,996,617
======== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 12,738 $ 230,448 $ 64,262
Accrued liabilities.................................... -- 152,238 230,269
Amounts due to related parties......................... -- 686,385 1,051,385
Convertible promissory note............................ -- 600,000 600,000
-------- ----------- -----------
Total current liabilities................................ 12,738 1,669,071 1,945,916
Commitments and contingencies............................ -- -- --
Stockholders' equity:
Preferred stock, $.001 par value: authorized shares --
12,500,000; issued and outstanding shares --
10,246,839 and 10,893,504 at December 31,1999 and
March 31, 2000, respectively......................... -- 10,247 10,893
Non-voting common stock, $.001 par value: authorized
shares -- 6,000,000; issued and outstanding
shares -- 600,000 and 1,635,566 at December 31, 1999
and March 31, 2000, respectively..................... -- 600 1,635
Additional paid-in capital............................. 165,146 3,081,814 3,790,330
Deficit accumulated during the development stage....... (53,603) (2,888,550) (3,752,157)
-------- ----------- -----------
Total stockholders' equity............................... 111,543 204,111 50,701
-------- ----------- -----------
Total liabilities and stockholders' equity............... $124,281 $ 1,873,182 $ 1,996,617
======== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
SPECTRAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CUMULATIVE CUMULATIVE
PERIOD FROM PERIOD FROM PERIOD FROM
NOVEMBER 20, NOVEMBER 20, NOVEMBER 20,
1998 1998 THREE MONTHS 1998
(DATE OF INCEPTION) YEAR ENDED (DATE OF INCEPTION) ENDED (DATE OF INCEPTION)
TO DECEMBER 31, DECEMBER 31, TO DECEMBER 31, MARCH 31, TO MARCH 31,
1998 1999 1999 2000 2000
------------------- ------------ ------------------- ------------ -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............ $ -- $ 44,000 $ 44,000 $ -- $ 44,000
Costs and expenses:
Cost of sales...... -- 278,647 278,647 87,048 365,695
Research and
development...... -- 413,560 413,560 153,688 567,248
Marketing.......... -- 798,037 798,037 300,289 1,098,326
General and
administrative... 53,603 1,177,121 1,230,724 322,582 1,553,306
-------- ----------- ----------- --------- -----------
53,603 2,667,365 2,720,968 863,607 3,584,575
-------- ----------- ----------- --------- -----------
Operating loss....... (53,603) (2,623,365) (2,676,968) (863,607) (3,540,575)
Other income
(expense):
Interest income.... -- 965 965 -- 965
Interest expense... -- (19,468) (19,468) -- (19,468)
Non-cash interest
expense on
convertible
note............. -- (200,000) (200,000) -- (200,000)
Other income,
net.............. -- 6,921 6,921 -- 6,921
-------- ----------- ----------- --------- -----------
-- (211,582) (211,582) -- (211,582)
-------- ----------- ----------- --------- -----------
Net loss............. $(53,603) $(2,834,947) $(2,888,550) $(863,607) $(3,752,157)
======== =========== =========== ========= ===========
</TABLE>
See accompanying notes
3
<PAGE>
SPECTRAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE
---------------------- --------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE TOTAL
----------- -------- ---------- -------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at November 20,
1998 (date of
inception)............. -- $ -- -- $ -- $ -- $ -- $ --
Initial capital
contribution........... -- -- -- -- 165,146 -- 165,146
Net loss................. -- -- -- -- -- (53,603) (53,603)
----------- ------- ---------- ------ ---------- ----------- ----------
Balance at December 31,
1998................... -- -- -- -- 165,146 (53,603) 111,543
Issuance of preferred
stock.................. 10,246,839 10,247 -- -- 2,401,848 -- 2,412,095
Issuance of common stock
for services........... -- -- 600,000 600 143,400 -- 144,000
Discount on issuance of
convertible promissory
note................... -- -- -- -- 200,000 -- 200,000
Compensation expense
related to stock grants
and options............ -- -- -- -- 171,420 -- 171,420
Net loss................. -- -- -- -- -- (2,834,947) (2,834,947)
----------- ------- ---------- ------ ---------- ----------- ----------
Balance at December 31,
1999................... 10,246,839 10,247 600,000 600 3,081,814 (2,888,550) 204,111
Issuance of preferred
stock (unaudited)...... 646,665 646 -- -- 484,354 -- 485,000
Issuance of common stock
and compensation
expense related to
stock grants and
options (unaudited).... -- -- 641,666 641 80,996 -- 81,637
Issuance of common stock
for services
(unaudited)............ -- -- 8,900 9 3,551 -- 3,560
Conversion of amounts due
to related parties to
common stock
(unaudited)............ -- -- 385,000 385 139,615 -- 140,000
Net loss (unaudited)..... -- -- -- -- -- (863,607) (863,607)
----------- ------- ---------- ------ ---------- ----------- ----------
Balance at March 31, 2000
(unaudited)............ 10,893,504 $10,893 1,635,566 $1,635 $3,790,330 $(3,752,157) $ (50,701)
=========== ======= ========== ====== ========== =========== ==========
</TABLE>
See accompanying notes.
4
<PAGE>
SPECTRAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM CUMULATIVE PERIOD CUMULATIVE PERIOD
NOVEMBER 20, FROM NOVEMBER 20, THREE MONTHS FROM NOVEMBER 20,
1998 (DATE OF 1998 ENDED 1998
INCEPTION) TO YEAR ENDED (DATE OF INCEPTION) TO MARCH 31, (DATE OF INCEPTION)
DECEMBER 31, 1998 DECEMBER 31, 1999 DECEMBER 31, 1999 2000 TO MARCH 31, 2000
------------------- ----------------- ---------------------- ------------ -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss...................... $ (53,603) $(2,834,947) $(2,888,550) $(863,607) $(3,752,157)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation.............. -- 82,593 82,593 29,720 112,313
Amortization.............. -- 131,706 131,706 46,484 178,190
Non-cash interest expense
on convertible note..... -- 200,000 200,000 -- 200,000
Compensation expense
related to stock grants
and options............. -- 171,420 171,420 81,637 253,057
Issuance of common stock
for services............ -- 144,000 144,000 -- 144,000
Changes in operating
assets and liabilities
(net of acquisition)
Accounts receivable..... -- (22,000) (22,000) 22,000 --
Inventory............... -- (200,255) (200,255) (69,447) (269,702)
Prepaid expenses,
deposits and other.... -- (50,422) (50,422) (67,195) (117,617)
Accounts payable........ 12,738 217,710 230,448 (166,186) 64,262
Accrued liabilities..... -- 22,238 22,238 81,590 103,828
--------- ----------- ----------- --------- -----------
Net cash used in operating
activities.................. (40,865) (2,137,957) (2,178,822) (905,004) (3,083,826)
INVESTING ACTIVITIES
Cash paid for acquisition of
SCT......................... (124,281) (1,009,775) (1,134,056) -- (1,134,056)
Purchases of property and
equipment................... -- (35,832) (35,832) (16,370) (52,202)
--------- ----------- ----------- --------- -----------
Net cash used in investing
activities.................. (124,281) (1,045,607) (1,169,888) (16,370) (1,186,258)
FINANCING ACTIVITIES
Proceeds from issuance of
convertible note and
warrants.................... -- 600,000 600,000 -- 600,000
Proceeds received in
connection with issuance of
preferred stock............. 165,146 1,929,854 2,095,000 485,000 2,580,000
Advances from related
parties..................... -- 686,385 686,385 505,000 1,191,385
--------- ----------- ----------- --------- -----------
Net cash provided by financing
activities.................. 165,146 3,216,239 3,381,385 990,000 4,371,385
--------- ----------- ----------- --------- -----------
Net increase in cash.......... -- 32,675 32,675 68,626 101,301
Cash at beginning of period... - - - 32,675 --
--------- ----------- ----------- --------- -----------
Cash at end of period......... $ -- $ 32,675 $ 32,675 $ 101,301 $ 101,301
========= =========== =========== ========= ===========
Cash paid for:
Interest.................... $ -- $ 800 $ 800 $ -- $ 800
Noncash operating, investing
and financing activities:
Issuance of preferred stock
as part of purchase of
SCT....................... $ -- $ 482,241 $ 482,241 $ -- $ 482,241
Purchase liability for
future payment of
acquisition costs......... -- 130,000 130,000 -- 130,000
Conversion of amounts due to
related parties to common
stock..................... -- -- -- 140,000 140,000
Issuance of common stock for
services.................. -- -- -- 3,560 3,560
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
SPECTRAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The Company was incorporated on November 20, 1998 to commercialize
superconducting technologies primarily for the wireless telecommunications
industry. Since its inception, the Company has been in the development stage,
engaging in research and development activities, recruiting technical and
administrative personnel, and raising capital.
INTERIM FINANCIAL INFORMATION
The condensed financial statements at March 31, 2000 and for the three
months then ended are unaudited but include all adjustments (consisting only of
normal recurring adjustments) which the Company considers necessary for a fair
presentation of the financial position at such date and of the operating results
and cash flows for that period. Results of the 2000 period are not necessarily
indicative of results expected for the entire year. The condensed financial
statements do not include all of the interim disclosures normally provided in
annual financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues from product sales are generally recognized when title passes to
the customer. The Company has established a program which, in certain
situations, allows prospective customers to field test the Company's products
for a period of time. Revenues from field test arrangements are recognized upon
customer acceptance of the products.
INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated over their
estimated useful lives, which range from three to seven years, using the
straight-line method. Leasehold improvements are amortized over their estimated
useful lives or the life of the lease, whichever is shorter. Amortization of
leasehold improvements is included in depreciation expense.
GOODWILL
Goodwill represents the excess of purchase price over the fair value of
assets acquired less liabilities assumed and is being amortized on a
straight-line basis over an estimated useful life of 5 years. Goodwill is
reviewed for impairment whenever events indicate that its carrying amount may
not be recoverable. The carrying value of goodwill will be reviewed if the facts
and circumstances suggest that it may be impaired. If this review indicates the
goodwill will not be recoverable, the Company estimates the future undiscounted
cash flows to be generated by the business. In the event that the sum of the
undiscounted cash flows is less
6
<PAGE>
SPECTRAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
than the carrying amount of goodwill, it would be written down to its fair
value, which is normally measured by discounting estimated future cash flows.
Goodwill is net of accumulated amortization of $131,706 and $176,843 at
December 31, 1999 and March 31, 2000, respectively.
INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
OTHER ASSETS
Capitalized patent costs are included in Other Assets and are being
amortized over five years using the straight-line method.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs related to both present and future products
are charged to expense in the period incurred.
DESCRIPTION OF CERTAIN CONCENTRATIONS AND RISKS
The Company operates in a highly competitive and rapidly changing industry.
The development and commercialization of new technologies by any competitor
could adversely affect the Company's results of operations.
LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
3. GOING CONCERN AND MANAGEMENT'S PLANS
The Company has incurred, and continues to incur, losses from operations and
the Company's available resources are not presently sufficient to fund its
expected cash requirements through the end of 2000. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
As a result of its funding requirements, during February and April of 2000,
the Company issued additional shares of preferred and common stock in exchange
for proceeds aggregating $1,085,000. In addition, the $600,000 convertible
promissory note, together with the related accrued interest outstanding at
December 31, 1999, was converted into 1,546,667 shares of preferred stock during
April 2000.
Despite the recent capital raised and the conversion of the convertible
promissory note, the Company believes that it will require substantial
additional funds during 2000 to finance its product development, manufacturing
and marketing activities. The Company is actively seeking financing in order to
obtain working capital to continue its operations according to its current
operating plan through 2000 and beyond.
7
<PAGE>
SPECTRAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. GOING CONCERN AND MANAGEMENT'S PLANS (CONTINUED)
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
its research and development programs and the manufacturing and marketing
efforts of one or more of its products, or may be required to obtain funds
through arrangements with collaborative partners or others that may require the
Company to relinquish rights to certain of its technologies, product candidates
or potential products that the Company would not otherwise relinquish. This
would materially and adversely affect the Company's business, financial
condition, results of operations and cash flows.
4. ACQUISITION
On April 14, 1999, the Company acquired substantially all of the assets and
assumed certain liabilities of Superconducting Core Technologies, Inc. (SCT),
which was in bankruptcy proceedings. The total purchase price was $1,746,297,
consisting of cash payments of $1,264,056 and the issuance of 2,009,339 shares
of preferred stock valued at $482,241. The acquisition has been accounted for
using the purchase method of accounting. Accordingly, the purchase price was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values at the date of acquisition. The statements of operations
includes the result of operations of the acquired business from the effective
date of the acquisition.
5. INVENTORY
Inventory consists of the following at December 31, 1999:
<TABLE>
<S> <C>
Raw materials............................................... $368,039
Finished product............................................ 114,945
--------
$482,984
========
</TABLE>
6. RELATED PARTY TRANSACTIONS
Two of the Company's principal stockholders have provided cash advances to
the Company, which were utilized for working capital needs. At December 31,
1999, advances outstanding to these two parties totaled $566,385. These advances
are non-interest bearing and are convertible into shares of preferred stock at a
fixed conversion price of $0.60 per share.
In January 2000, an additional $475,000 of advances were made to the Company
by these stockholders. The January advances are also convertible into preferred
stock at a fixed conversion price of $0.75 per share.
The Company is party to a consulting agreement with a company affiliated
through common ownership. Pursuant to this agreement, the Company pays the
affiliate $10,000 per month for services provided, which is payable in shares of
common stock at fixed conversion prices ranging from $0.24 to $0.75 per share.
In 1999, the Company recognized $120,000 of expenses in connection with the
agreement, all of which was payable to the affiliate at December 31, 1999. In
February 2000, the Company issued 385,000 shares of common stock for consulting
services performed through February 2000.
8
<PAGE>
SPECTRAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. CONVERTIBLE PROMISSORY NOTE
On June 8, 1999, the Company entered into a convertible note agreement
pursuant to which the Company issued and sold a $600,000 promissory note. The
note bore interest at 10% per annum, matured on September 30, 1999, and was
secured by substantially all assets. On April 5, 2000, the $600,000 principal
balance, together with accrued interest of $18,667, were converted into
1,547,667 shares of preferred stock.
In connection with the promissory note, the Company issued warrants to
purchase 2,000,000 shares of the Company's preferred stock. The exercise price
of the warrants was 75% of fair value, with a maximum exercise price of $0.30
per share. The portion of the proceeds equal to the fair value of the warrants
($200,000) was allocated to additional paid-in capital, thus creating a discount
to the debt. This discount was recognized as a charge to interest expense over
the term of the note (matured on September 30, 1999). On April 27, 2000, the
noteholder exercised the warrant at an exercise price of $0.30 per share.
8. INCOME TAXES
The difference between the amount of income tax benefit recorded and the
amount of income tax benefit calculated using the U.S federal statutory rate of
34% is due to a valuation allowance recorded against the Company's net deferred
tax assets due to the uncertainty related to their realization. Accordingly,
there is no income tax benefit for the year ended December 31, 1999 and the
period from November 20, 1998 (date of inception) to December 31, 1998.
At December 31, 1999, the Company has net operating loss carryforwards of
approximately $2,854,000 for income tax purposes that begin expiring in 2018.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows at December 31:
<TABLE>
<CAPTION>
1999 1998
----------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................... $ 1,141,690 $ 21,440
Intangible assets................................... 36,650 --
----------- --------
1,178,340 21,440
Deferred tax liability -- property and equipment...... (10,730) --
----------- --------
Net deferred tax assets............................... 1,167,600 21,440
Valuation allowance................................... (1,167,600) (21,440)
----------- --------
Net deferred tax (liability) asset.................... $ -- $ --
=========== ========
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
The Company leases its facility and certain equipment operating leases. The
Company pays all property taxes, maintenance and insurance on the leased assets
during the term of the leases.
9
<PAGE>
SPECTRAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Minimum rentals due under noncancelable leases with recurring terms of one
year or more at December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000........................................................ $227,437
2001........................................................ 236,504
2002........................................................ 241,789
2003........................................................ 103,500
--------
$809,230
========
</TABLE>
Total rent expense during the year ended December 31, 1999 was $201,188. No
rent expense was incurred from November 20, 1998 (date of inception) through
December 31, 1998.
10. CAPITAL STOCK AND STOCK OPTIONS
PREFERRED STOCK
Each outstanding share of preferred stock is entitled to one vote. In the
event of any liquidation, dissolution, or winding up of the Company, the holders
of shares of preferred stock are entitled to be paid either in cash or in kind,
an amount equal to their collective investment in the Company.
STOCK GRANTS AND ISSUANCES
The Company issued 600,000 shares of common stock during 1999 to a
consultant as payment for services provided. The fair value of the shares
issued, $144,000, was recognized as an expense in 1999 with a corresponding
increase to additional paid-in capital.
During 1999, the Company issued stock grants for 1,440,000 shares of common
stock to key employees and directors. The stock vests 50% after one year, with
the remaining 50% vesting monthly over the next 12 months. The Company issues
the stock upon the completion of these vesting requirements. The Company has
recorded compensation expense totaling $159,900 during the year ended
December 31, 1999 in connection with the vesting of the shares granted.
In January 2000, the Company granted an additional 200,000 shares of common
stock to an employee, of which 100,000 shares were fully vested upon the date of
grant. The remaining 100,000 shares will vest after completion of one year of
employment. The Company recorded a $75,000 charge in the three-month period
ended March 31, 2000 related to this grant.
In March 2000, 641,666 shares of common stock were issued pursuant to shares
which had become vested under the 1999 stock grants.
STOCK OPTIONS
During 1999, the Company granted stock options to purchase 120,000 shares of
common stock for $0.05 per share to certain employees of the Company. These
options generally vest 50% after one year from the date of grant, with the
remaining 50% vesting at the end of the second year. The options will expire
5 years from the date of grant. At December 31, 1999, no shares were vested or
exercisable.
10
<PAGE>
SPECTRAL SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. CAPITAL STOCK AND STOCK OPTIONS (CONTINUED)
The Company has elected to follow Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Financial Accounting Standards Board No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, (FASB 123) requires the use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, since the
exercise price of the Company's employee stock option grants is less than the
fair value of the underlying stock on the date of grant (as determined by the
Board of Directors), the Company recorded a stock option compensation charge of
$11,520 during the year ended December 31, 1999.
The pro forma effect on net loss resulting from the application of the
provisions of FAS No 123 was not significant in 1999. The fair value of these
options was estimated to be $0.36 at the date of grant using a minimum value
pricing model assuming an average risk-free interest rate of 6.07% and no
dividends. The minimum value pricing model was developed for use in estimating
the fair value of options offered by nonpublic companies. Because the Company's
stock options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion the existing models do
not necessarily provide a reliable single measure of the fair value of stock
options.
In January and February 2000, the Company granted additional options to
purchase 240,000 shares of common stock to certain employees of the Company. The
terms of the options granted in 2000 are similar to the terms for the 1999
option grants.
11. CONTINGENCIES
The Company is involved in legal proceedings which arise in the ordinary
course of its business. While any litigation contains an element of uncertainty,
management believes that the outcome of such proceedings will not have a
material adverse effect on the Company's results of operations or financial
condition.
12. SUBSEQUENT EVENT
On May 17, 2000, the stockholders of the Company entered into an agreement
to sell all of their outstanding shares of capital stock and stock options in
the Company in exchange for 3,500,000 shares of common stock of Illinois
Superconductor Corporation, a publicly-traded corporation.
11
<PAGE>
PROXY PROXY
ILLINOIS SUPERCONDUCTOR CORPORATION
451 KINGSTON COURT - MT. PROSPECT, ILLINOIS 60056
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
PROXY FOR THE JUNE 30, 2000 ANNUAL MEETING OF STOCKHOLDERS
The undersigned hereby appoints Dr. George Calhoun and Ms. Cynthia Quigley
and either of them as proxies, each with power of substitution, and hereby
authorizes them to represent the undersigned and to vote, as designated below,
all the shares of COMMON STOCK held of record by the undersigned on June 6, 2000
at the Annual Meeting of Stockholders of Illinois Superconductor Corporation, to
be held on June 30, 2000, at the offices of Sonnenschein Nath & Rosenthal,
located at 8000 Sears Tower, Chicago, Illinois 60606, beginning at 10:00 a.m.
local time, or at any adjournment or postponement thereof, upon the matters set
forth in the Notice of Annual Meeting of Stockholders and Proxy Statement,
receipt of which is hereby acknowledged.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED "FOR" THE NOMINEES LISTED ON THIS PROXY, "FOR" THE PROPOSAL TO APPROVE
THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION TO INCREASE THE COMPANY'S
AUTHORIZED CAPITAL STOCK AND THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK AND
THE NUMBER OF SHARES OF PREFERRED STOCK, "FOR" THE PROPOSAL TO APPROVE THE
AMENDMENT AND RESTATEMENT OF THE COMPANY'S 1993 STOCK OPTION PLAN, AND "FOR" THE
RATIFICATION OF APPOINTMENT OF ERNST & YOUNG LLP AS THE INDEPENDENT AUDITORS OF
THE COMPANY'S FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDING DECEMBER 31, 2000.
PLEASE SIGN, DATE AND RETURN THIS PROXY IMMEDIATELY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
(Continued and to be signed on reverse side.)
--------------------------------------------------------------------------------
TRIANGLE FOLD AND DETACH HERE TRIANGLE
<PAGE>
ILLINOIS SUPERCONDUCTOR CORPORATION
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. /X/
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE NOMINEE(S)
LISTED IN PROPOSAL 1 AND "FOR" PROPOSALS 2, 3, 4 AND 5.
[ ]
1. Election of Director: For All
Nominees: George Calhoun Samuel Perlman For Withheld Except
/ / / / / /
-----------------
Nominee Exception
2. Approval of amendment to the certificate For Against Abstain
of incorporation to increase the company's / / / / / /
authorized capital stock and the number of
authorized shares of common stock and the
number of authorized shares of preferred
stock:
3. Approval of the amendment and restatement of For Against Abstain
the company's 1993 stock option plan: / / / / / /
4. Ratification of appointment of Ernst & Young
LLP as independent auditors of the company's
financial statements for the fiscal year
ending December 31, 2000: / / / / / /
5. In their discretion, the proxies are authorized to vote on such other
business as may properly come before the meeting or any adjournments thereof:
Dated:
-------------------------------------------
-------------------------------------------------
Signature
-------------------------------------------------
Signature (if held jointly)
NOTE: Please date your proxy and sign exactly as
the name or names appears on your stock
certificate. All joint owners of stock should sign
above. Sign your full title when signing as an
executor, administrator, personal representative,
trustee, officer, etc.
/ / PLEASE CHECK THIS BOX IF YOU PLAN TO ATTEND
THE MEETING.
--------------------------------------------------------------------------------
TRIANGLE FOLD AND DETACH HERE TRIANGLE
PLEASE VOTE, SIGN EXACTLY AS NAME APPEARS ABOVE, DATE, AND RETURN
THIS PROXY FORM PROMPTLY USING THE ENCLOSED POSTPAID ENVELOPE.
