<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
August 8, 2000
------------------------------------------------
Date of Report (Date of earliest event reported)
Illinois Superconductor Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-22302 36-3688459
----------------- ------------------------ ---------------------
(State or other (Commission File Number) (IRS Employer
jurisdiction Indentificationn No.)
of incorporation)
451 Kingston Court, Mt. Prospect, Illinois 60056
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(847) 391-9400
-------------------------------
(Registrant's telephone number)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On August 8, 2000, Illinois Superconductor Corporation (the "Company")
acquired Spectral Solutions, Inc. ("SSI"), through the merger of SSI with and
into SSI Acquisition Corp., a wholly-owned subsidiary of the Company. Upon
consummation of the merger, SSI, as the surviving entity, became a
wholly-owned subsidiary of the Company. Pursuant to the merger agreement, the
Company acquired all of the outstanding stock of SSI in exchange for
3,500,000 shares of common stock of the Company (including approximately
60,000 shares of common stock of the Company reserved for SSI stock options
and 111,111 shares of common stock of the Company issued to Falkenberg
Capital, SSI's financial advisor). The total purchase price for SSI was
approximately $14.3 million, based on the $4.093 per share closing price of
the Company's stock on August 8, 2000. The terms of the merger are set forth
in an Agreement and Plan of Merger by and between the Company, SSI
Acquisition Corp., SSI and certain stockholders of SSI, dated as of May 17,
2000 (the "Merger Agreement") The Merger Agreement was filed as an exhibit to
the Company's current report on Form 8-K filed August 23, 2000. The
description of the merger is qualified in its entirety by the terms of the
Merger Agreement.
SSI develops cryogenic superconducting radio frequency ("RF") front-end
systems for the wireless telecommunications industry. SSI 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 is the successor to the business of Superconducting Core Technologies,
Inc. ("SCT"). SCT was founded in the late 1980s at about the time 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.
2
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) FINANCIAL STATEMENTS
The financial statements of Spectral Solutions, Inc. (a development stage
company) as of December 31, 1998 and 1999 and June 30, 2000 and the related
statements of operations, stockholders' equity and cash flows for the
period from November 20, 1998 (date of inception) to December 31, 1998, the
year ended December 31, 1999, and the six-months ended June 30, 2000 are
set forth in this current report on Form 8-K/A.
3
<PAGE>
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
4
<PAGE>
Spectral Solutions, Inc.
(A DEVELOPMENT STAGE COMPANY)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999 2000
-------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash $ -- $ 32,675 $ 129,186
Accounts receivable -- 22,000 --
Inventory -- 482,984 774,990
Prepaid expenses, deposits and other -- 50,422 182,960
-------- ----------- -----------
Total current assets -- 588,081 1,087,136
Property and equipment:
Leasehold improvements -- 33,831 33,831
Lab equipment -- 205,458 208,944
Manufacturing equipment -- 273,236 189,769
Software -- 6,257 11,606
Office equipment and furniture and fixtures -- 50,931 63,395
-------- ----------- -----------
-- 569,713 507,545
Accumulated depreciation -- (82,593) (120,991)
-------- ----------- -----------
-- 487,120 386,554
Other assets -- 23,125 21,855
Deposits 124,281 -- --
Goodwill, net -- 774,856 652,781
-------- ----------- -----------
Total assets $124,281 $ 1,873,182 $ 2,148,326
======== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,738 $ 230,448 $ 295,924
Accrued liabilities -- 152,238 --
Amounts due to related parties -- 686,385 --
Convertible promissory note -- 600,000 --
-------- ----------- -----------
Total current liabilities 12,738 1,669,071 295,924
Commitments and contingencies -- -- --
Stockholders' equity:
Preferred stock, $.001 par value; 12,500,000 shares
authorized; 10,246,839 shares and 16,894,839 shares
issued and outstanding at December 31, 1999 and
June 30, 2000, respectively -- 10,247 16,895
Non-voting common stock, $.001 par value;
6,000,000 shares authorized; 600,000 shares and
2,181,566 shares issued and outstanding at
December 31, 1999 and June 2000, respectively -- 600 2,181
Additional paid-in capital 165,146 3,081,814 6,492,054
Deficit accumulated during the development stage (53,603) (2,888,550) (4,658,728)
-------- ----------- -----------
Total stockholders' equity 111,543 204,111 1,852,402
-------- ----------- -----------
Total liabilities and stockholders' equity $124,281 $ 1,873,182 $ 2,148,326
======== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
Spectral Solutions, Inc.
(A DEVELOPMENT STAGE COMPANY)
Statements of Operations
<TABLE>
<CAPTION>
CUMULATIVE CUMULATIVE
PERIOD FROM PERIOD FROM PERIOD FROM
NOVEMBER 20, NOVEMBER 30, NOVEMBER 30,
1998 (DATE OF 1998 (DATE OF SIX MONTHS 1998 (DATE OF
INCEPTION) TO YEAR ENDED INCEPTION) TO ENDED INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1998 1999 1999 2000 2000
-------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 44,000 $ 44,000 $ 22,000 $ 66,000
Costs and expenses:
Cost of sales -- 278,647 278,647 20,323 298,970
Research and development -- 413,560 413,560 456,328 869,888
Marketing -- 798,037 798,037 457,642 1,255,679
General and administrative 53,603 1,177,121 1,230,724 867,692 2,098,416
-------- ----------- ----------- ----------- -----------
53,603 2,667,365 2,720,968 1,801,985 4,522,953
-------- ----------- ----------- ----------- -----------
Operating loss (53,603) (2,623,365) (2,676,968) (1,779,985) (4,456,953)
Other income (expense):
Interest income -- 965 965 191 1,156
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 9,616 16,537
-------- ----------- ----------- ----------- -----------
-- (211,582) (211,582) 9,807 (201,775)
-------- ----------- ----------- ----------- -----------
Net loss $(53,603) $(2,834,947) $(2,888,550) $(1,770,178) $(4,658,728)
======== =========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES
6
<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
Issuances of preferred and
common stock (unaudited) 1,523,025 1,523 554,900 554 1,082,923 -- 1,085,000
Conversion of convertible promissory
note plus accrued interest into
preferred stock (unaudited) 1,547,667 1,548 -- -- 617,119 -- 618,667
Issuance of common stock for
services (unaudited) -- -- 385,000 385 3,175 -- 3,560
Compensation expense related to
stock grants and options (unaudited) -- -- 641,666 642 80,995 -- 81,637
Exercise of warrants - $0.30 per share
(unaudited) 2,000,000 2,000 -- -- 598,000 -- 600,000
Conversions of advances from
stockholders into preferred stock
(unaudited) 1,577,308 1,577 -- -- 1,028,028 -- 1,029,605
Net loss (unaudited) -- -- -- -- -- (1,770,178) (1,770,178)
---------- ------- --------- ------ ---------- ----------- -----------
Balance at June 30, 2000 (unaudited) 16,894,839 $16,895 2,181,566 $2,181 $6,492,054 $(4,658,728) $ 1,852,402
========== ======= ========= ====== ========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
7
<PAGE>
Spectral Solutions, Inc.
(A DEVELOPMENT STAGE COMPANY)
Statements of Cash Flows
<TABLE>
<CAPTION>
CUMULATIVE CUMULATIVE
PERIOD FROM PERIOD FROM PERIOD FROM
NOVEMBER 20, NOVEMBER 28, NOVEMBER 28,
1998 (DATE OF 1998 (DATE OF SIX MONTHS 1998 (DATE OF
INCEPTION) TO YEAR ENDED INCEPTION) TO ENDED INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1998 1999 1999 2000 2000
--------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (53,603) $(2,834,947) $(2,888,550) $(1,770,178) $(4,658,728)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation -- 82,593 82,593 66,190 148,783
Amortization -- 131,706 131,706 84,983 216,689
Gain on sale of property and equipment -- -- -- (20,523) (20,523)
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 3,560 147,560
Other changes, net -- -- -- (76,021) (76,021)
Changes in operating assets and
liabilities (net of acquisition):
Accounts receivable -- (22,000) (22,000) 22,000 --
Inventory -- (200,255) (200,255) (292,006) (492,261)
Prepaid expenses, deposits
and other -- (50,422) (50,422) (131,268) (181,690)
Accounts payable 12,738 217,710 230,448 65,476 295,924
Accrued liabilities -- 22,238 22,238 (152,238) (130,000)
--------- ----------- ----------- ----------- -----------
Net cash used in operating activities (40,865) (2,137,957) (2,178,822) (2,118,388) (4,297,210)
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)
Proceeds from sales of property
and equipment -- -- -- 71,269 71,269
--------- ----------- ----------- ----------- -----------
Net cash (used in) provided by
investing activities (124,281) (1,045,607) (1,169,888) 54,899 (1,114,989)
</TABLE>
8
<PAGE>
Spectral Solutions, Inc.
(A DEVELOPMENT STAGE COMPANY)
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
CUMULATIVE CUMULATIVE
PERIOD FROM PERIOD FROM PERIOD FROM
NOVEMBER 20, NOVEMBER 28, NOVEMBER 28,
1998 (DATE OF 1998 (DATE OF SIX MONTHS 1998 (DATE OF
INCEPTION) TO YEAR ENDED INCEPTION) TO ENDED INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1998 1999 1999 2000 2000
-------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from issuance of convertible
note and warrants $ -- $ 600,000 $ 600,000 $ -- $ 600,000
Proceeds received in connection with
issuance of capital stock 165,146 1,929,854 2,095,000 1,085,000 3,180,000
Exercises of warrants -- -- -- 600,000 600,000
Advances from related parties -- 686,385 686,385 475,000 1,161,385
-------- ---------- ---------- ---------- ----------
Net cash provided by financing activities 165,146 3,216,239 3,381,385 2,160,000 5,541,385
-------- ---------- ---------- ---------- ----------
Net increase in cash -- 32,675 32,675 96,511 129,186
Cash at beginning of period -- -- -- 32,675 --
-------- ---------- ---------- ---------- ----------
Cash at end of period $ -- $ 32,675 $ 32,675 $ 129,186 $ 129,186
======== ========== ========== ========== ==========
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 note plus accrued
interest into preferred stock -- -- -- 618,667 618,667
Conversion of stockholder
advances into preferred stock -- -- -- 1,029,605 1,029,605
</TABLE>
SEE ACCOMPANYING NOTES.
9
<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 June 30, 2000 and for the six 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 for the first six months of 2000 are not
necessarily indicative of results expected for the entire year. These 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.
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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 $216,689 at December 31, 1999 and June 30, 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.
2
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 1,547,667 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.
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.
3
<PAGE>
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 results of operations of the acquired business from the date of the
acquisition.
5. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
-------- --------
<S> <C> <C>
Raw materials $368,039 $666,720
Finished product 114,945 108,270
-------- --------
$482,984 $774,990
======== ========
</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.
4
<PAGE>
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.
5
<PAGE>
8. INCOME TAXES (CONTINUED)
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.
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.
6
<PAGE>
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.
7
<PAGE>
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.
8
<PAGE>
(b) PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma condensed consolidated balance sheet as of June 30,
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 June 30, 2000. The unaudited pro
forma condensed consolidated statements of operations for the year ended
December 31, 1999 and for the six months ended June 30, 2000 give effect to
these transactions as if each occurred at the beginning of the period
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
transactions 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 consolidated financial statements should
be read in conjunction with the historical financial statements of Illinois
Superconductor Corporation included in the Company's 1999 Annual Report on
Form 10-K, the Company's Quarterly Report on Form 10-Q for the period ended
June 30, 2000, and the historical financial statements of SSI included in
Item 7(a) of this filing.
9
<PAGE>
ILLINOIS SUPERCONDUCTOR CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 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 $ 3,219,261 $ 129,186 $ (200,000) a. $ 3,148,447
Other current assets 1,091,861 957,950 -- 2,049,811
----------- ---------- ------------ -----------
Total current assets 4,311,122 1,087,136 (200,000) 5,198,258
Property and equipment, net 2,328,855 386,554 -- 2,715,409
Other assets 1,045,826 21,855 (21,855) b. 1,045,826
Goodwill, net -- 652,781 12,697,753 c. 13,350,534
----------- ---------- ------------ -----------
Total assets $ 7,685,803 $2,148,326 $ 12,475,898 $22,310,027
=========== ========== ============ ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Other current liabilities $ 1,143,781 $ 295,924 $ -- $ 1,439,705
Current portion of long-term debt
2,765,607 -- -- 2,765,607
----------- ---------- ------------ -----------
Total current liabilities 3,909,388 295,924 -- 4,205,312
Long-term debt, net of current
portion 8,446,714 -- -- 8,446,714
Other long term liabilities 90,910 -- -- 90,910
Stockholders' equity (deficit) (4,761,209) 1,852,402 12,475,898 d. 9,567,091
----------- ---------- ------------ -----------
Total liabilities and
stockholders' equity (deficit) $ 7,685,803 $2,148,326 $ 12,475,898 $22,310,027
=========== ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of this pro forma condensed
consolidated balance sheet.
10
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
1. ILLINOIS SUPERCONDUCTOR HISTORICAL
The historical amounts represent the balance sheet of Illinois Superconductor
Corporation as of June 30, 2000, as reported in the unaudited historical
financial statements of the Company.
2. SPECTRAL SOLUTIONS HISTORICAL
The historical amounts represent the balance sheet of SSI as of June 30, 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 cash on hand to fund direct costs incurred to complete the
acquisition of SSI.
b. The elimination of the unamortized balance 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 $ 13,350,534
Elimination of historical goodwill of SSI (652,781)
------------
$ 12,697,753
============
</TABLE>
d. The issuance of 3,500,000 shares of common stock based on the $4.0938 per
share closing price of the Company's common stock on August 8, 2000 and the
elimination of the historical stockholders' equity of SSI, as follows:
<TABLE>
<S> <C>
Issuance of common stock $ 14,328,300
Elimination of historical stockholders' equity (1,852,402)
------------
$ 12,475,898
============
</TABLE>
11
<PAGE>
ILLINOIS SUPERCONDUCTOR CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED 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) (1,537,111) a. (7,711,623)
----------- ----------- ----------- ------------
Operating loss $(9,471,137) $(2,623,365) $(1,537,111) $(13,631,613)
=========== =========== =========== ============
</TABLE>
ILLINOIS SUPERCONDUCTOR CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 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 $ 187,163 $ 22,000 $ -- $ 209,163
Cost of sales (979,245) (20,323) -- (999,568)
Research and development expenses
(1,020,121) (456,328) -- (1,476,449)
Selling, general and
administrative expenses (2,966,813) (1,325,334) (749,426) a. (5,041,573)
----------- ----------- ----------- -----------
Operating loss $(4,779,016) $(1,779,985) $ (749,426) $(7,308,427)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these pro forma condensed
consolidated statements of operations.
12
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
1. ILLINOIS SUPERCONDUCTOR HISTORICAL
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 the Company.
2. SPECTRAL SOLUTIONS HISTORICAL
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. Amortization of the $13,350,534 opening goodwill balance based on an 8 year
estimated life as well as the elimination of goodwill amortization in the
historical results of SSI, computed as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 2000 December 31,1999
---------------- ----------------
<S> <C> <C>
Amortization expense on goodwill
resulting from SSI acquisition $ 834,409 $ 1,668,817
Elimination of SSI historical amortization expense (84,983) (131,706)
----------- -----------
$ 749,426 $ 1,537,111
=========== ===========
</TABLE>
13
<PAGE>
(c) Exhibits
Exhibit 2.1 Agreement and Plan of Merger, dated May 17, 2000, by and
among the Company, SSI Acquisition Corp., Spectral Solutions,
Inc. and certain shareholders of SSI (previously filed).
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ILLINOIS SUPERCONDUCTOR CORPORATION
By: /s/ CHARLES WILLES
---------------------------------------
Charles Willes, Chief Financial Officer
Dated: October 20, 2000
