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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 0-22302
ILLINOIS SUPERCONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 36-3688459
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
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451 KINGSTON COURT
MT. PROSPECT, ILLINOIS 60056
(847) 391-9400
(Address and telephone number of principal executive offices)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
On May 9, 2000, 30,276,167 shares of the registrant's Common Stock, par
value $0.001 per share, were outstanding.
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TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
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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
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................ 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................... 12
Item 2. Changes in Securities and Use of Proceeds............................................................. 14
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...................................................................... 14
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* No reportable information under this item.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ILLINOIS SUPERCONDUCTOR CORPORATION
CONDENSED BALANCE SHEETS
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MARCH 31, DECEMBER 31,
2000 1999
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(UNAUDITED)
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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)
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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)
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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
============ ============
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NOTE: The condensed balance sheet as of December 31, 1999 has been derived from
the audited financial statements for that date but does not include all of the
information and accompanying notes required by generally accepted accounting
principles for complete financial statements.
See the accompanying Notes which are an integral part of the Condensed Financial
Statements.
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ILLINOIS SUPERCONDUCTOR CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
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THREE MONTHS ENDED MARCH 31,
2000 1999
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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
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Total costs and expenses 2,205,166 2,695,623
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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 --
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(370,127) (91,061)
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Loss before extraordinary item (2,402,930) (2,274,784)
Extraordinary item - debt extinguishment (28,297) (73,000)
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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
============ ============
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See the accompanying Notes which are an integral part of the Condensed Financial
Statements.
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ILLINOIS SUPERCONDUCTOR CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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THREE MONTHS ENDED MARCH 31,
2000 1999
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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
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Net cash used in operating activities (2,052,111) (1,456,212)
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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)
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Net cash provided by (used in) investing activities 23,043 (33,521)
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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) --
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Net cash provided by financing activities 6,802,025 3,300,000
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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
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Cash and cash equivalents at end of period $ 5,496,668 $ 3,962,862
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See the accompanying Notes which are an integral part of the Condensed Financial
Statements.
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ILLINOIS SUPERCONDUCTOR CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the 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:
MARCH 31, 2000 DECEMBER 31, 1999
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Raw materials................ $ 575,000 $ 736,000
Work in process.............. 132,000 -
Finished product............. 278,000 357,000
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$ 985,000 $ 1,093,000
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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 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
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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:
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
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$ 10,120,000
=============
Payments due on the Senior Convertible Notes by maturity date, including
interest accrued through March 31, 2000, are as follows at March 31, 2000:
Notes, due January 2, 2001 $ 6,070,000
Notes, due May 15, 2002 9,187,000
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$ 15,257,000
=============
Interest on the Senior Convertible Notes is payable in kind or in cash, at
the Company's option. However, if the Company does not meet certain requirements
commencing November 5, 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 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
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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 forth 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).
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.
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
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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 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
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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 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
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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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Siegler Litigation
On June 5, 1996, Craig M. Siegler filed a complaint against the Company in
the Circuit Court of Cook County, Illinois, County Department, Chancery
Division. The complaint alleged that, in connection with the Company's private
placement of securities in November 1995, the Company breached and repudiated an
oral contract with Mr. Siegler for the issuance and sale by the Company to Mr.
Siegler of 370,370.37 shares of the Common Stock, plus warrants (immediately
exercisable at $12.96 per share) to purchase an additional 370,370.37 shares of
the Common Stock, for a total price of $4,000,000. The remedy sought by Mr.
Siegler was a sale to him of such securities on the terms of the November 1995
private placement. On August 16, 1996, the Company's motion to dismiss Mr.
Siegler's complaint was granted with leave to amend. On September 19, 1996, Mr.
Siegler's motion for reconsideration was denied.
On October 10, 1996, Mr. Siegler filed his First Amended Verified Complaint
and Jury Demand, seeking a jury trial and money damages equal to the difference
between $8,800,000 (370,370.37 shares at $10.80 per share and 370,370.37 shares
at $12.96 per share) and 740,740.74 multiplied by the highest price at which the
Common Stock traded on The Nasdaq Stock Market between November 20, 1995 and the
date of judgment. Mr. Siegler also preserved his claim for specific performance
for purposes of appeal. On November 1, 1996, the case was transferred to the
Circuit Court of Cook County, Illinois, County Department, Law Division. The
Company's Answer was filed on November 21, 1996, 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 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.
12
<PAGE> 13
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 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
13
<PAGE> 14
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 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.
14
<PAGE> 15
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
ILLINOIS SUPERCONDUCTOR CORPORATION
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)
15
<PAGE> 16
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------ -----------------------
3.1 Certificate of Incorporation of the Company, as amended,
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-3/A, filed with the Securities
and Exchange Commission ("SEC") on August 13, 1998, Registration
No. 333-56601 (the "August 1998 S-3").
3.2 By-Laws of the Company, incorporated by reference to Exhibit 3.2
to Amendment No. 3 to the Company's Registration Statement on Form
S-1, filed with the SEC on October 26, 1993, Registration No.
33-67756 (the "IPO Registration Statement").
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.
16
<PAGE> 17
4.20 Securities Purchase Agreement dated as of March 31, 1999, by and
between the Company and Elliott Associates, L.P., Westgate
International, L.P., Alexander Finance, LP and State Farm Mutual
Automobile Insurance Company, incorporated by reference to Exhibit
4.20 to the 1998 Form 10-K.
4.21 Registration Rights Agreement dated as of March 31, 1999, by and
between the Company and Elliott Associates, L.P., Westgate
International, L.P., Alexander Finance, LP and State Farm Mutual
Automobile Insurance Company, incorporated by reference to Exhibit
4.21 to the 1998 Form 10-K.
4.22 Amendment to Securities Purchase Agreement dated as of March 31,
1999, by and between the Company and Elliott Associates, L.P.,
Westgate International, L.P., Alexander Finance, LP, State Farm
Mutual Automobile Insurance Company, Spring Point Partners, L.P.
and Spring Point Offshore Fund, incorporated by reference to
Exhibit 4.22 to the 1998 Form 10-K.
4.23 Letter Agreement, dated November 5, 1999, by and among the Company
and Elliott Associates, L.P., Westgate International, L.P. and
Alexander Finance, LP (the "Investors"), incorporated by
reference to Exhibit 10(a) to the Company's Form 8-K, dated
November 5, 1999 and filed November 15, 1999.
4.24 Letter Agreement re Modification of Covenants, dated November 5,
1999, by and among the Company and the Investors, incorporated by
reference to Exhibit 10(b) to the Company's Form 8-K, dated
November 5, 1999 and filed November 15, 1999.
4.25 Security Agreement, dated November 5, 1999, by and among the
Company and the Investors, incorporated by reference to Exhibit
10(c ) to the Company's Form 8-K, dated November 5, 1999 and filed
November 15, 1999.
4.26 Letter Agreement, dated November 12, 1999 amending the Letter
Agreement identified as Exhibit 4.23, above.*
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.*
* Filed herewith.
** Management Contract or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-Q.
17
<PAGE> 1
EXHIBIT 4.26
November 12, 1999
Illinois Superconductor Corporation
451 Kingston Court
Mount Prospect, Illinois 60056
Ladies and Gentlemen:
This letter amends the letter agreement ("Agreement") captioned
"Additional Investment" by and among Elliott Associates, L.P., Westgate
International, L.P., and Alexander Finance, L.P. ("Investors") and Illinois
Superconductor Corporation ("Company"), dated November 5, 1999, by deleting the
last two sentences of Section 12 of the Agreement and replacing those sentences
with the following:
Notwithstanding anything to the contrary contained herein or in the
Notes and Warrants, unless and until the foregoing Charter Amendment is
effected, and except with respect to determining the redemption rights
referred to above, the Notes and Warrants held by the undersigned on
the date of the Agreement after giving effect thereto and regardless of
whether such Notes and Warrants are transferred at any time (such Notes
and Warrants are the "Investor Notes and Warrants") shall represent a
right in the aggregate, allocated pro rata among them, to acquire
(including with respect to in-kind interest payments paid and to be
paid) that number of shares (but not more than that number of shares)
of Common Stock equal to the number of shares of Common Stock currently
authorized by the Company's Certificate of Incorporation reduced by the
sum of (i) the number of shares and shares subject to options
outstanding on the date hereof, (ii) the number of shares subject to
additional options granted under the Illinois Superconductor
Corporation 1993 Stock Option Plan, as amended through June, 1999
("Plan"), (iii) the
<PAGE> 2
number of shares subject to any options granted outside the Plan with
the written consent of the undersigned, and (iv) the number of shares
(including with respect to in-kind interest payments paid and to be
paid through November 5, 2000) that the Notes and Warrants other than
the Investor Notes and Warrants carry the right to acquire.
This letter amending the Agreement may be executed in multiple
counterparts which together shall constitute the amendment to the Agreement. As
modified herein, the documents relating to the Notes and Warrants remain in full
force and effect.
Sincerely,
ELLIOTT ASSOCIATES, L.P.
By: /s/ PAUL SINGER
-------------------
WESTGATE INTERNATIONAL, L.P.
By: Martley International, Inc.
Attorney-in-Fact
By: /s/ PAUL SINGER
-----------------------
ALEXANDER FINANCE, L.P.
By: /s/ BRADFORD T. WHITMORE
-----------------------------
AGREED TO AND ACCEPTED:
ILLINOIS SUPERCONDUCTOR CORPORATION
By: /s/ CYNTHIA QUIGLEY
----------------------------------
-2-
<PAGE> 1
EXHIBIT 4.27
Elliott Associates, L.P.
712 Fifth Avenue
New York, New York 10019
Westgate International, L.P.
c/o Stonington Management Corporation
712 Fifth Avenue
New York, New York 10019
Alexander Finance, L.P.
1560 Sherman Avenue
Evanston, Illinois 60201
December 28, 1999
Illinois Superconductor Corporation
451 Kingston Court
Mt. Prospect, Illinois 60056
RE: EXERCISE OF OPTION
Ladies and Gentlemen:
Reference is made to the Investment Agreement, dated as of November 5,
1999 (as amended by the letter dated November 12, 1999) (the "Investment
Agreement"), by and among you (the "Company") and the undersigned (the
"Investors"). Capitalized terms used herein without definition have the meaning
set forth in the Investment Agreement.
1. Exercise of Option.
-------------------
(a) Pursuant to Section 7 of the Investment Agreement, the Investors
hereby notify the Company of their exercise of the option, contained in such
section, to purchase additional Notes and Warrants which shall contain the terms
and provisions described in such section.
(b) Pursuant to the foregoing exercise, the Investors shall purchase
(the "Option Purchase") an aggregate of $1,000,000 principal amount of Notes and
Warrants to purchase 400,000 shares of Common Stock, in the respective amounts
set forth on Schedule I hereto, for aggregate consideration of $1,000,000 (the
"Option Purchase Price"). This option exercise shall be without prejudice to the
rights of the Investors, pursuant to Section 7 of the Investment Agreement, to
invest up to an additional $4,000,000 in the Company.
<PAGE> 2
2. Closing of Option Purchase.
---------------------------
(a) The closing of the Option Purchase shall take place at the offices
of Kleinberg, Kaplan, Wolff & Cohen, P.C. on December 29, 1999 (the "Closing
Date") at 1 p.m. Eastern Standard Time.
(b) The Notes and Warrants purchased pursuant to the Option Purchase
shall be deemed to be outstanding on the Closing Date for all purposes. Within
one day of the Closing Date, the Company shall deliver to the Investors, in
physical form, the Notes and Warrants purchased by them pursuant to the Option
Purchase. The delivery of payment by wire transfer to an account designated by
the Company by each Investor of the portion of the Option Purchase Price
applicable to it as set forth in Schedule I shall constitute a payment delivered
to the Company in satisfaction of such Investor's obligation to pay its share of
the Option Purchase Price hereunder.
(c) In addition to the foregoing, within fourteen days of the Closing
Date, the Company shall deliver in physical form, the Notes and Warrants
purchased by the undersigned from the Company on November 5, 1999.
(d) The Company agrees to pay the legal fees and disbursements incurred
by the Investors in connection with the Option Purchase and shall pay the
invoice for such fees and disbursements within seven days of the receipt
thereof.
3. Representations and Warranties.
-------------------------------
(a) The Company hereby restates, as of the date hereof, the
representations and warranties set forth in Section 8 of the Investment
Agreement, with respect to the Notes and Warrants being issued pursuant to the
Option Purchase, except as set forth on Schedule II, hereto. For purposes of the
foregoing restatement of representations, (i) references to Transaction
Documents shall refer only to this Agreement and, with respect to solely the
consummation of the Option Purchase, the Transaction Documents referred to in
the Investment Agreement, and (ii) the date referred to in Section 2.1(s) shall
be deemed to refer to November 15, 1999.
(b) The Investors hereby restate the representations set forth in
Section 9(a) of the Investment Agreement with respect to the Notes and Warrants
being purchased pursuant to the Option Purchase.
[signature page follows]
2
<PAGE> 3
Please indicate your acceptance and agreement of the terms contained
herein by countersigning this Agreement and returning a signed copy to the
undersigned.
Sincerely,
ELLIOTT ASSOCIATES, L.P.
By: /s/ ELLIOT GREENBERG
---------------------------------
Elliot Greenberg, Vice-President
WESTGATE INTERNATIONAL, L.P.
By: Martley International, Inc.
Attorney-in-Fact
By: /s/ ELLIOT GREENBERG
-----------------------------
Elliot Greenberg, Vice-President
ALEXANDER FINANCE, L.P.
By: /s/ Bradford T. Whitmore
---------------------------------
Bradford T. Whitmore
President: Bun Partners, Inc.
its General Partner
AGREED TO AND ACCEPTED
ILLINOIS SUPERCONDUCTOR CORPORATION
By: /s/ CYNTHIA QUIGLEY
---------------------------------------
3
<PAGE> 4
SCHEDULE I
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT AMOUNT OF
PURCHASER PURCHASE PRICE OF NOTES PURCHASED WARRANTS PURCHASED
- --------- -------------- ------------------ ------------------
<S> <C> <C> <C>
Elliott Associates, L.P. $277,778 $277,778 111,111
Westgate International, L.P. $277,778 $277,778 111,111
Alexander Finance, LP $444,444 $444,444 177,778
</TABLE>
<PAGE> 5
Schedule II to Agreement Dated December 28, 1999
------------------------------------------------
The Company generally incorporates information from its SEC filings as
disclosures for these schedules. The Company further notes that:
2.1(c): The 3rd Quarter 1999 10-Q has the Company's current capitalization prior
to giving effect to these transactions. Additional holders of 5% of the
Company's Common Stock, if any, may be disclosed in Schedules 13D or 13G filed
with the Securities and Exchange Commission. Options have continued to be
granted.
2.1(d): As recognized in Section 12 of the Investment Agreement, additional
shares must be authorized and a charter amendment is necessary to authorize such
shares.
2.1(e)/(f): See 2.1(d) above with respect to the need for a charter amendment.
The factoring agreement with Franklin Capital will be in breach if a lien is
created on the inventory and accounts without the prior written consent of the
factor. The Company will not list shares of its Common Stock, and will register
such shares as and when required by the Registration Rights Agreement as
modified by Section 5 of the Investment Agreement. The Company will reflect the
Option Purchase in a Form 8-K filing and a Form S-2 supplemental filing.
2.1(g): To the Company's knowledge, there is no pending litigation except (i)as
disclosed in the SEC filings, and (ii) Steve Levy v. Illinois Superconductor
Corporation, filed in Delaware Chancery Court on or about December 14, 1999.
2.1(h):See 2.1(e)/(f), above.
2.1(i): The Company has not recently reviewed the voluminous schedules
previously delivered and the Company does not now make or update such
representations and schedules.
2.1(k): The Disclosure Materials also include the Company's Annual Report on
Form 10-K for the year ended December 31, 1998, its Quarterly Reports on Form
10-Q for the quarters ended March 31, June 30, 1999 and September 30, 1999, and
its Current Reports on Form 8-K filed in 1999. Elliott and Grace have been
updated on the Company's financial and business situation, including at a
meeting with those investors during their due diligence in connection with their
November, 1999 investment in the Company, and as a result of affiliates of
Elliott having joined the Company's board of directors in November, 1999. That
information, including the written handouts from the aforementioned due
diligence meeting, is incorporated by reference.
2.1(l) The obligations to Franklin Capital under the factoring agreement are
pari passu with the notes held by Elliott and Grace, including the 6% Notes, but
may in certain respects have a senior lien.
2.1(p): Registration under Form S-3 may no longer be available to the Company. A
registration under Form S-2 may be available.
2.1(s): See SEC filings. Elliott and Grace are aware of the terms of the
factoring agreement with Franklin Factor.
5
<PAGE> 1
EXHIBIT 4.28
Elliott Associates, L.P.
712 Fifth Avenue
New York, New York 10019
Westgate International, L.P.
c/o Stonington Management Corporation
712 Fifth Avenue
New York, New York 10019
Alexander Finance, L.P.
1560 Sherman Avenue
Evanston, Illinois 60201
March 27, 2000
Illinois Superconductor Corporation
451 Kingston Court
Mt. Prospect, Illinois 60056
RE: Option Exercise
Ladies and Gentlemen:
Reference is made to the Investment Agreement, dated as of November 5,
1999 (as amended by the letter dated November 12, 1999) (the "Investment
Agreement"), by and among you (the "Company") and the undersigned (the
"Investors"). Capitalized terms used herein without definition have the meaning
set forth in the Investment Agreement.
1. Exercise of Option.
-------------------
(a) Pursuant to Section 7 of the Investment Agreement, the Investors
hereby notify the Company of their exercise of the option, contained in such
section, to purchase additional Notes and Warrants which shall contain the terms
and provisions described in such section.
(b) Pursuant to the foregoing exercise, the Investors shall purchase
(the "Option Purchase") an aggregate of (i) $4,000,000 principal amount of Notes
and (ii) Warrants to purchase 1,600,000 shares of Common Stock, in the
respective amounts set forth on Schedule I hereto, for aggregate consideration
of $4,000,000 (the "Option Purchase Price").
2. Closing of Option Purchase.
---------------------------
(a) The closing of the Option Purchase shall take place at the
offices of Kleinberg, Kaplan, Wolff & Cohen, P.C. on March 27, 2000, ("Closing
Date") at 1 p.m. Eastern Standard Time.
<PAGE> 2
(b) The Notes and Warrants purchased pursuant to the Option Purchase
shall be deemed to be outstanding on the Closing Date for all purposes. Within
one day of the Closing Date, the Company shall deliver to the Investors, in
physical form, the Notes and Warrants purchased by them pursuant to the Option
Purchase. The delivery of payment by wire transfer to an account designated by
the Company by each Investor of the portion of the Option Purchase Price
applicable to it as set forth in Schedule I shall constitute a payment delivered
to the Company in satisfaction of such Investor's obligation to pay its share of
the Option Purchase Price hereunder.
(c) The Company agrees to pay the legal fees and disbursements
incurred by the Investors in connection with the Option Purchase and shall pay
the invoice for such fees and disbursements within seven days of the receipt
thereof.
3. Representations and Warranties.
(a) The Company hereby restates, as of the date hereof, the
representations and warranties set forth in Section 8 of the Investment
Agreement, with respect to the Notes and Warrants being issued pursuant to the
Option Purchase, except as set forth on Schedule II, hereto. For purposes of the
foregoing restatement of representations, (i) references to Transaction
Documents shall refer only as applicable to this Option Exercise and, with
respect to solely the consummation of the Option Purchase, the Transaction
Documents referred to in the Investment Agreement, and (ii) the date referred to
in Section 2.1(s) shall be deemed to refer to December 31, 1999.
(b) The Investors hereby restate the representations set forth in
Section 9(a) of the Investment Agreement with respect to the Notes and Warrants
being purchased pursuant to the Option Purchase.
[signature page follows]
2
<PAGE> 3
Please indicate your acceptance and agreement of the terms contained
herein by countersigning this Agreement and returning a signed copy to the
undersigned.
Sincerely,
ELLIOTT ASSOCIATES, L.P.
By: /s/ PAUL SINGER
-----------------------------------
WESTGATE INTERNATIONAL, L.P.
By: Martley International, Inc.
Attorney-in-Fact
By: /s/ PAUL SINGER
-------------------------------
ALEXANDER FINANCE, L.P.
By: /s/ BRADFORD T. WHITMORE
-----------------------------------
Bradford T. Whitmore
President: Bun Partners, Inc.
its General Partner
AGREED TO AND ACCEPTED
ILLINOIS SUPERCONDUCTOR CORPORATION
By: /s/ CYNTHIA QUIGLEY
------------------------------------
3
<PAGE> 4
SCHEDULE I
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT AMOUNT OF
PURCHASER PURCHASE PRICE OF NOTES PURCHASED WARRANTS PURCHASED
- --------- -------------- ------------------ ------------------
<S> <C> <C> <C>
Elliott Associates, L.P. $1,111,112 $1,111,112 444,444
Westgate International, L.P. $1,111,112 $1,111,112 444,444
Alexander Finance, LP $1,777,776 $1,777,776 711,112
</TABLE>
<PAGE> 5
SCHEDULE II
-----------
SCHEDULES
---------
The Company generally incorporates information from its SEC filings as
disclosures for these schedules. The Company further notes that:
2.1(c): The Annual Report on Form 10-K for the year ended December 31, 1999 has
the Company's current capitalization prior to giving effect to these
transactions. Additional holders of 5% of the Company's Common Stock, if any,
may be disclosed in Schedules 13D or 13G filed with the Securities and Exchange
Commission. Options have continued to be granted.
2.1(d): As recognized in Section 12 of the Investment Agreement, additional
shares must be authorized and a charter amendment is necessary to authorize such
shares.
2.1(e)/(f): See 2.1(d) above with respect to the need for a charter amendment.
The factoring agreement with Franklin Capital will be in breach if a lien is
created on the inventory and accounts without the prior written consent of the
factor. The Company will not list shares of its Common Stock, and will register
such shares as and when required by the Registration Rights Agreement as
modified by Section 5 of the Investment Agreement. The Company will reflect the
Option Purchase in a Form 8-K filing and a Form S-2 supplemental filing.
2.1(g): To the Company's knowledge, there is no pending litigation except (i)as
disclosed in the SEC filings, and (ii) Steve Levy v. Illinois Superconductor
Corporation, filed in Delaware Chancery Court on or about December 14, 1999.
2.1(h):See 2.1(e)/(f), above.
2.1(i): The Company has not recently reviewed the voluminous schedules
previously delivered and the Company does not now make or update such
representations and schedules.
2.1(k): The Disclosure Materials also include the Company's Annual Report on
Form 10-K for the year ended December 31, 1999, its Quarterly Reports on Form
10-Q for the quarters ended March 31, June 30, 1999 and September 30, 1999, and
its Current Reports on Form 8-K filed in 1999 and 2000. Elliott and Grace have
been updated on the Company's financial and business situation, including at a
meeting with those investors during their due diligence in connection with their
November, 1999 investment and December, 1999 investment in the Company, and as a
result of affiliates of Elliott having joined the Company's board of directors
in November, 1999. That information, including the written handouts from the
aforementioned due diligence meeting, is incorporated by reference.
2.1(l) The obligations to Franklin Capital under the factoring agreement are
pari passu with the notes held by Elliott and Grace, including the 6% Notes, but
may in certain respects have a senior lien.
2.1(p): Registration under Form S-3 may no longer be available to the Company. A
registration under Form S-2 may be available.
6
<PAGE> 6
2.1(s): See SEC filings. Elliott and Grace are aware of the terms of the
factoring agreement with Franklin Factor. Pursuant to Section 7 of the
Investment Agreement, the Company issued Notes to the Investors on December 29,
1999.
7
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-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
0
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>
