-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VmJjOplEVTO3PqItH/JmuXme2wViTgnZ2X8zGu91GAnfiWraN4TkqWAYwpwBBfwv XPg8sULN/K4t/Z15qC2GoQ== 0000950137-00-002332.txt : 20000515 0000950137-00-002332.hdr.sgml : 20000515 ACCESSION NUMBER: 0000950137-00-002332 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ILLINOIS SUPERCONDUCTOR CORPORATION CENTRAL INDEX KEY: 0000888693 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 363688459 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22302 FILM NUMBER: 629805 BUSINESS ADDRESS: STREET 1: 451 KINGSTON CT CITY: MOUNT PROSPECT STATE: IL ZIP: 60056 BUSINESS PHONE: 8473919400 MAIL ADDRESS: STREET 1: 451 KINGSTON COURT CITY: MT PROSPECT STATE: IL ZIP: 60056 10-Q 1 QUARTERLY REPORT 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 --------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended 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) DELAWARE 36-3688459 (State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
451 KINGSTON COURT MT. PROSPECT, ILLINOIS 60056 (847) 391-9400 (Address and telephone number of principal executive offices) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- On May 9, 2000, 30,276,167 shares of the registrant's Common Stock, par value $0.001 per share, were outstanding. ================================================================================ 2 TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Item 1. Financial Statements.................................................................................. 3 Condensed Balance Sheets as of March 31, 2000 (unaudited) and December 31, 1999..................... 3 Condensed Statements of Operations (unaudited) for the three months ended March 31, 2000 and the three months ended March 31, 1999........................................................... 4 Condensed Statements of Cash Flows (unaudited) for the three months ended March 31, 2000 and the three months ended March 31, 1999........................................................... 5 Notes to Condensed Financial Statements............................................................. 6 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
- -------------- * No reportable information under this item. 2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ILLINOIS SUPERCONDUCTOR CORPORATION CONDENSED BALANCE SHEETS
MARCH 31, DECEMBER 31, 2000 1999 ------------ ------------ (UNAUDITED) ASSETS: Current assets: Cash and cash equivalents $ 5,496,668 $ 723,711 Inventories 984,824 1,092,713 Accounts receivable, net 124,778 175,801 Prepaid expenses and other 222,917 428,475 ------------ ------------ Total current assets 6,829,187 2,420,700 Property and equipment: Property and equipment 8,098,636 8,089,169 Less: accumulated depreciation (5,634,373) (5,433,808) ------------ ------------ Net property and equipment 2,464,263 2,655,361 Restricted certificates of deposit 259,066 291,575 Patents and trademarks, net 584,895 592,823 Deferred financing fees, net 43,127 78,700 ------------ ------------ Total assets $ 10,180,538 $ 6,039,159 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY): Current liabilities: Accounts payable $ 518,988 $ 990,913 Accrued liabilities 615,272 589,043 Current portion of Senior Convertible Notes, net of discount 1,892,790 -- Current portion of other long-term debt 9,149 9,020 ------------ ------------ Total current liabilities 3,036,199 1,588,976 Senior Convertible Notes, net of discount 7,644,491 13,002,068 Accrued interest on Senior Convertible Notes 582,560 638,743 Other long-term debt, less current portion 7,661 10,074 Deferred occupancy costs 90,960 91,010 Stockholders' equity (net capital deficiency): Preferred stock; 100,000 shares authorized; No shares issued and outstanding at March 31, 2000 and December 31, 1999 -- -- Common stock ($.001 par value); 60,000,000 shares authorized; 30,274,667 and 15,753,001 shares issued and outstanding at March 31, 2000 and December 31, 1999, respectively 30,275 15,753 Additional paid-in capital 84,096,031 74,249,643 Notes receivable from stockholders -- (680,696) Accumulated deficit (85,307,639) (82,876,412) ------------ ------------ Total stockholders' equity (net capital deficiency) (1,181,333) (9,291,712) ------------ ------------ Total liabilities and stockholders' equity (net capital deficiency) $ 10,180,538 $ 6,039,159 ============ ============
NOTE: The condensed balance sheet as of December 31, 1999 has been derived from the audited financial statements for that date but does not include all of the information and accompanying notes required by generally accepted accounting principles for complete financial statements. See the accompanying Notes which are an integral part of the Condensed Financial Statements. 3 4 ILLINOIS SUPERCONDUCTOR CORPORATION CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 1999 ------------ ------------ Net sales $ 172,363 $ 511,900 Costs and expenses: Cost of sales 649,083 1,009,026 Research and development 306,328 521,563 Selling and marketing 184,525 456,515 General and administrative 1,065,230 708,519 ------------ ------------ Total costs and expenses 2,205,166 2,695,623 ------------ ------------ Operating loss (2,032,803) (2,183,723) Other income (expense): Interest income 24,380 38,356 Non-cash interest expense on Senior Convertible Notes (400,881) (114,210) Other interest expense (1,583) (15,207) Other income, net 7,957 -- ------------ ------------ (370,127) (91,061) ------------ ------------ Loss before extraordinary item (2,402,930) (2,274,784) Extraordinary item - debt extinguishment (28,297) (73,000) ------------ ------------ Net loss $ (2,431,227) $ (2,347,784) ============ ============ Basic and diluted loss per share before extraordinary item $ (0.10) $ (0.18) Extraordinary item - debt extinguishment -- (0.01) ------------ ------------ Basic and diluted loss per share $ (0.10) $ (0.19) ============ ============ Weighted average number of common shares outstanding 24,325,932 12,557,344 ============ ============
See the accompanying Notes which are an integral part of the Condensed Financial Statements. 4 5 ILLINOIS SUPERCONDUCTOR CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 1999 ----------- ----------- OPERATING ACTIVITIES: Net loss $(2,431,227) $(2,347,784) Adjustments to reconcile net loss to net cash used in operating activities: Extraordinary item - debt extinguishment 28,297 73,000 Depreciation and amortization 208,492 230,756 Non-cash interest expense on Senior Convertible Notes 400,881 114,210 Changes in operating assets and liabilities (258,554) 473,606 ----------- ----------- Net cash used in operating activities (2,052,111) (1,456,212) ----------- ----------- INVESTING ACTIVITIES: Decrease in restricted certificates of deposit 32,509 -- Payment of patent costs -- (21,564) Acquisition of property and equipment (9,466) (11,957) ----------- ----------- Net cash provided by (used in) investing activities 23,043 (33,521) ----------- ----------- FINANCING ACTIVITIES: Proceeds from issuance of Senior Convertible Notes 4,000,000 3,300,000 Exercise of stock options 47,982 -- Exercise of warrants 2,756,327 -- Payments on other long-term debt (2,284) -- ----------- ----------- Net cash provided by financing activities 6,802,025 3,300,000 ----------- ----------- Increase in cash and cash equivalents 4,772,957 1,810,267 Cash and cash equivalents at beginning of period 723,711 2,152,595 ----------- ----------- Cash and cash equivalents at end of period $ 5,496,668 $ 3,962,862 =========== ===========
See the accompanying Notes which are an integral part of the Condensed Financial Statements. 5 6 ILLINOIS SUPERCONDUCTOR CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the 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 -------------- ----------------- Raw materials................ $ 575,000 $ 736,000 Work in process.............. 132,000 - Finished product............. 278,000 357,000 ----------- ----------- $ 985,000 $ 1,093,000 =========== =========== NOTE 4 - SENIOR CONVERTIBLE NOTES On May 15, 1998, March 31, 1999, November 5, 1999, and December 29, 1999, the Company issued and sold $15,650,000 in aggregate principal amount of Senior Convertible Notes ("the Notes") and issued detachable warrants to purchase an aggregate of 6,250,000 shares of the Company's common stock. On March 27, 2000, the Company issued and sold $4,000,000 in aggregate principal amount of Senior Convertible Notes due January 2, 2001 (the "March 2000 Notes") and issued warrants (the "March 2000 Warrants") to purchase 1,600,000 shares of the Company's common stock. The March 2000 Notes bear interest at 10% per annum, payable in kind or in cash, at the Company's option (unless the Company does not meet certain requirements commencing November 5, 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 6 7 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 ------------- $ 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 ------------- $ 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 7 8 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 8 9 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 9 10 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 10 11 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. 11 12 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 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 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 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 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 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 EX-4.26 2 LETTER AGREEMENT 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 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- EX-4.27 3 SECURITIES PURCHASE LETTER AGREEMENT 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. 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 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 4 SCHEDULE I
PRINCIPAL AMOUNT AMOUNT OF PURCHASER PURCHASE PRICE OF NOTES PURCHASED WARRANTS PURCHASED - --------- -------------- ------------------ ------------------ 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
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 EX-4.28 4 SECURITIES PURCHASE LETTER AGREEMENT 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. 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 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 4 SCHEDULE I
PRINCIPAL AMOUNT AMOUNT OF PURCHASER PURCHASE PRICE OF NOTES PURCHASED WARRANTS PURCHASED - --------- -------------- ------------------ ------------------ 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
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 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 EX-27 5 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 5,496,668 0 165,118 40,340 984,824 6,829,187 8,098,636 5,634,373 10,180,538 3,036,199 10,136,651 0 0 30,275 (1,211,608) 10,180,538 172,363 172,363 649,083 649,083 1,556,083 0 402,464 (2,402,930) 0 (2,402,930) 0 (28,297) 0 (2,431,227) (0.10) (0.10)
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