-----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, C0HSuOcUM5q/RpGieqnoJm6fQJms+uRkjiHNsGdy70V1rlRFA1l8tB6xdSz8OLNK MJnnp9u47qvNBsrfBEXxQg== 0000950137-99-003080.txt : 19990817 0000950137-99-003080.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950137-99-003080 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: 99693429 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 FORM 10-Q 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 June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------- -------- COMMISSION FILE NUMBER 0-22302 ILLINOIS SUPERCONDUCTOR CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 36-3688459 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation) 451 KINGSTON COURT MT. PROSPECT, ILLINOIS 60056 (847) 391-9400 (Address and telephone number of principal executive offices) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No ----- On August 6, 1999, 12,760,908 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.............................................. 1 Condensed Balance Sheets as of June 30, 1999 (unaudited) and December 31, 1998........................................... 1 Condensed Statements of Operations (unaudited) for the three months ended June 30, 1999 and 1998, and the six months ended June 30, 1999 and 1998......................... 2 Condensed Statements of Cash Flows (unaudited) for the six months ended June 30, 1999 and 1998......................... 3 Notes to Condensed Financial Statements......................... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................... 7 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......................... * Item 3. Defaults Upon Senior Securities................................... * Item 4. Submission of Matters to a Vote of Security Holders............... 14 Item 5. Other Information................................................. * Item 6. Exhibits and Reports on Form 8-K.................................. 15 - -------------- * No reportable information under this item. i 3 9 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ILLINOIS SUPERCONDUCTOR CORPORATION CONDENSED BALANCE SHEETS JUNE 30, DECEMBER 31, 1999 1998 ------------ -------------- (UNAUDITED) ASSETS: Current assets: Cash and cash equivalents $ 1,276,329 $ 2,152,595 Inventories 3,182,827 1,424,427 Accounts receivable, net 347,434 1,494,418 Prepaid expenses and other 288,904 479,311 ------------ -------------- Total current assets 5,095,494 5,550,751 Property and equipment: Property and equipment 8,180,116 8,285,710 Less: accumulated depreciation 5,049,045 4,761,599 ------------ -------------- Net property and equipment 3,131,071 3,524,111 Other assets: Restricted certificates of deposit 345,194 337,347 Patents and trademarks, net 646,191 615,879 ------------ -------------- 991,385 953,226 ============ ============== Total assets $ 9,217,950 $ 10,028,088 ============ ============== LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY): Current liabilities: Accounts payable $ 1,009,209 $ 464,752 Accrued liabilities 476,488 799,569 Accrued interest 330,821 129,375 Current portion of other long-term debt 8,374 13,497 ------------ -------------- Total current liabilities 1,824,892 1,407,193 Other long term debt, less current portion 14,701 - Senior Convertible Notes 13,450,000 10,350,000 Discount on Senior Convertible Notes (1,151,137) (1,047,349) Deferred occupancy costs 91,111 91,212 Stockholders' equity (net capital deficiency): Common stock ($.001 par value); 60,000,000 shares 12,761 12,557 authorized at June 30, 1999 and 30,000,000 shares authorized at December 31, 1998; 12,760,908 shares issued and outstanding at June 30, 1999 and 12,557,344 shares issued and outstanding at December 31, 1998 Additional paid-in capital 60,588,266 60,055,321 Notes receivable from stockholders (680,696) (680,696) Accumulated deficit (64,931,948) (60,160,150) ------------ -------------- Total stockholders' equity (net capital deficiency) (5,011,617) (772,968) ------------ -------------- Total liabilities and stockholders' equity (net capital deficiency) $ 9,217,950 $ 10,028,088 ============ ============== NOTE: The condensed balance sheet as of December 31, 1998 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. 1 4 ILLINOIS SUPERCONDUCTOR CORPORATION CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 1999 1998 1999 1998 ------------ ----------- ----------- ------------- Net revenues $ 317,159 $ 814,532 $ 829,059 $ 1,511,701 Costs and expenses: Cost of revenues 946,550 1,402,896 1,955,576 2,448,093 Research and development 440,057 587,343 961,620 1,338,383 Selling and marketing 447,257 461,834 903,772 829,588 General and administrative 725,356 813,608 1,433,875 1,494,825 ------------ ----------- ----------- ------------- Total costs and expenses 2,559,220 3,265,681 5,254,843 6,110,889 ------------ ----------- ----------- ------------- Operating income (loss) (2,242,061) (2,451,149) (4,425,784) (4,599,188) Other income (expense): Interest income 48,690 60,604 87,046 67,986 Interest expense (230,643) (3,157,267) (360,060) (3,161,300) ------------ ----------- ----------- ------------- (181,953) (3,096,663) (273,014) (3,093,314) ------------ ----------- ----------- ------------- Loss before extraordinary item (2,424,014) (5,547,812) (4,698,798) (7,692,502) Extraordinary item - debt extinguishment - - (73,000) - ------------ ----------- ----------- ------------- Net loss (2,424,014) (5,547,812) (4,771,798) (7,692,502) Preferred Stock dividends - (94) - (61,834) ============ =========== =========== ============= Net loss plus Preferred Stock dividends $ (2,424,014) $(5,547,906) $(4,771,798) $ (7,754,336) ============ =========== =========== ============== Basic and diluted loss per common share $ (0.19) $ (0.44) $ (0.38) $ (0.77) ============ =========== =========== ============= Weighted average number of common shares outstanding 12,630,461 12,481,244 12,594,105 10,113,927 ============ =========== =========== =============
See the accompanying Notes which are an integral part of the Condensed Financial Statements. 2 5 ILLINOIS SUPERCONDUCTOR CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1999 1998 -------------- --------------- OPERATING ACTIVITIES: Net loss $ (4,771,798) $ (7,692,502) Adjustments to reconcile net loss to net cash used in operating activities: Extraordinary item 73,000 - Depreciation and amortization 478,666 554,727 Gain on sale of property and equipment (12,701) - Non-cash interest expense on Senior Convertible Notes 351,021 3,155,291 Changes in operating assets and liabilities (200,999) (459,586) -------------- --------------- Net cash used in operating activities (4,082,811) (4,442,070) -------------- --------------- INVESTING ACTIVITIES: Payment of patent costs (40,318) (30,545) Acquisition of property and equipment (100,820) (22,329) Proceeds from sale of property and equipment 37,902 - -------------- --------------- Net cash used in investing activities (103,236) (52,874) -------------- --------------- FINANCING ACTIVITIES: Proceeds from issuance of Senior Convertible Notes 3,300,000 10,350,000 Additional offering costs from issuance of Preferred Stock - (120,587) Exercise of stock options 204 7,325 Increase (decrease) in other long-term debt 9,578 (42,845) -------------- --------------- Net cash provided by financing activities 3,309,782 10,193,893 -------------- --------------- Increase (decrease) in cash and cash equivalents (876,266) 5,698,949 Cash and cash equivalents at beginning of period 2,152,595 2,766,886 -------------- --------------- Cash and cash equivalents at end of period $ 1,276,329 $ 8,465,835 ============== =============== See the accompanying Notes which are an integral part of the Condensed Financial Statements. 3 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 six months ended June 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. For further information, refer to the financial statements, including the notes thereto, included in Illinois Superconductor Corporation's (the "Company") Annual Report on Form 10-K for the fiscal year ended December 31, 1998. NOTE 2 - NET LOSS PER COMMON SHARE In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which replaced the calculation for primary and fully diluted earnings per share with basic and diluted earnings per share. Basic and diluted net loss per common share is computed based on the weighted average number of common shares outstanding. Common shares issuable upon the exercise of options and warrants are not included in the per share calculations since the effect of their inclusion would be antidilutive. All the earnings per share amounts for all periods have been presented and where appropriate restated to conform to the Statement 128 requirements. NOTE 3 - COMPREHENSIVE INCOME As of January 1, 1998, the Company adopted Financial Accounting Standards Board's Statement No. 130, Reporting Comprehensive Income. Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net income or stockholders equity. During the three and six months ended June 30, 1999, total comprehensive income (loss) amounted to $(2,424,000) and $(4,772,000), respectively, compared to $(5,548,000) and $(7,692,000) for the same respective periods in 1998. NOTE 4 - INVENTORIES Inventories consisted of the following: JUNE 30, 1999 DECEMBER 31, 1998 ------------- ----------------- Raw materials........... $1,674,000 $1,084,000 Work in process......... 1,276,000 60,000 Finished product........ 233,000 280,000 ---------- ---------- Total inventory......... $3,183,000 $1,424,000 ========== ========== NOTE 5 - LONG TERM DEBT On May 15, 1998, the Company issued and sold $10,350,000 in aggregate principal amount of senior convertible notes due May 15, 2002 (the "1998 Notes") and issued warrants (the "1998 Warrants") to purchase 4,140,000 shares of the Company's common stock, par value $0.001 per share ("Common Stock"). The 1998 Notes 4 7 bear interest at 2% per annum, payable in cash or shares of Common Stock at the Company's option, and mature on May 15, 2002. Holders of the 1998 Notes may convert the principal amount, plus accrued and unpaid interest, if any, into shares of Common Stock at a fixed conversion price of $1.50 per share. Conversions were not permitted during the first 90 days following the issuance of the 1998 Notes and were limited to one-half of the original principal amount during the period from 91 to 180 days after the issuance of the 1998 Notes. On and after May 15, 2000, the Company may redeem all or a portion of the 1998 Notes at a redemption price equal to the principal amount plus accrued interest thereon, if any, under certain conditions. The 1998 Warrants have an exercise price of $3.75 per share and expire on May 15, 2001. Since the 1998 Notes were issued with a non-detachable conversion feature that was "in-the-money" at the date of issuance, a portion of the proceeds equal to the intrinsic value of the conversion feature (equal to $9,918,750, and calculated as the difference between the conversion price and the quoted market price of the Common Stock on the date of issuance multiplied by the number of shares into which the 1998 Notes are convertible) was allocated to additional paid-in capital, thus creating a discount to the debt. This discount was recognized as a charge to interest expense using the effective interest method over the period from the date of issuance to the date the 1998 Notes first became convertible (August 15, 1998 for up to one-half of the original principal amount and November 15, 1998 for the remaining principal amount). In addition, a portion of the proceeds equal to the fair value of the 1998 Warrants issued in conjunction with the 1998 Notes (equal to $1,230,000, and calculated using the Black-Scholes Approximation Formula) was allocated to additional paid-in capital, thus creating an additional discount to the debt. This discount is being recognized as a charge to interest expense using the effective interest method over the four year term of the 1998 Notes. On March 31, 1999, the Company issued and sold $3.3 million in aggregate initial principal amount of senior convertible notes due May 15, 2002 (the "New Notes") and issued warrants (the "New Warrants") to purchase 1,320,000 shares of Common Stock. The New Notes bear interest at the rate of 6% per annum, payable in cash or shares of Common Stock at the Company's option, and mature on May 15, 2002. Holders of the New Notes may convert the principal amount, plus accrued and unpaid interest, if any, into shares of Common Stock at a fixed conversion price of $1.125 per share. On and after May 15, 2000, the Company may redeem all or a portion of the New Notes at a redemption price equal to the principal amount plus accrued interest thereon, if any, under certain conditions. The New Warrants have an exercise price of $1.4625 per share and expire on March 31, 2002. Concurrently with the issuance of the New Notes, the Company amended certain terms of $5.5 million in aggregate principal amount of the 1998 Notes (the "Amended Notes") and the 1998 Warrants exercisable for an aggregate of 2,200,000 shares of the Common Stock (the "Amended Warrants") issued in connection therewith. The Amended Notes were amended to bear interest at the rate of 6% per annum, payable in cash or shares of Common Stock at the Company's option, and the fixed conversion price for the Amended Notes was reduced from $1.50 to $1.125 per share. The exercise price of the Amended Warrants was reduced from $3.75 to $1.4625 per share. A portion of the proceeds of the New Notes equal to the fair value of the New Warrants issued in conjunction with the New Notes (equal to $300,000 and calculated using the Black-Scholes Approximation Formula) was allocated to additional paid-in capital, thus creating a discount to the debt. This discount is being recognized as a charge to interest expense using the effective interest method over the three year term of the New Notes. In addition, the increase in fair value of the Amended Warrants as a result of the decrease in exercise price (equal to $41,000 and calculated using the Black-Scholes Approximation Formula) was allocated to additional paid-in capital, thus creating an additional discount on the Amended Notes. This discount is being recognized as a charge to interest expense using the effective interest method over the remaining three year term of the Amended Notes. The amendments to the Amended Notes and the Amended Warrants resulted in a $73,000 charge in the first quarter of 1999 which is shown as an extraordinary item in the Company's Statements of Operations for the six months ended June 30, 1999. The Company recognized $228,000 and $351,000 of non-cash interest charges during the three months and six months ended June 30, 1999, respectively, as a result of the amortization of the discount on the 1998 Notes, the Amended Notes and the New Notes. 5 8 During the second quarter of 1999, $200,000 in aggregate principal amount of the Amended Notes, plus accrued interest, were converted into 186,314 shares of Common Stock. The effective interest rate on the 1998 Notes is approximately 74%, the effective interest rate on the Amended Notes is approximately 81%, and the effective interest rate on the New Notes is approximately 9%. NOTE 6 - CAPITAL STOCK On June 9, 1999, the stockholders of the Company approved an increase in the total authorized capital stock of the Company from 30,100,000 shares to 60,100,000 shares and approved an increase in the number of authorized shares of Common Stock from 30,000,000 shares to 60,000,000 shares. NOTE 7 - STOCK OPTIONS AND WARRANTS On May 10, 1999, the Board of Directors granted to each employee of the Company (other than the executive officers of the Company) (collectively, the "Non-Executive Employees") the option to (i) reduce the exercise prices of up to a maximum of 15,000 of the unexercised stock options previously granted to such Non-Executive Employee under the Company's Amended and Restated 1993 Stock Option Plan, as amended (the "Plan"), to $.5625 per share (the closing price of the Common Stock on May 10, 1999) and (ii) to cause all of such stock options not otherwise scheduled to become fully vested on or before May 10, 2000 to become fully vested on such date. As a result thereof, an aggregate of 279,550 stock options previously granted under the Plan were amended as described in the preceding sentence. In addition, on May 10, 1999 the Board of Directors granted to the executive officers and certain Non-Executive Employees of the Company additional non-statutory stock options to purchase an aggregate of 343,575 shares of Common Stock under the Plan. Such stock options become fully vested on the first anniversary of the date of grant, have exercise prices of $.5625 per share (the closing price of the Common Stock on May 10, 1999), and expire 10 years from the date of grant. On June 9, 1999, the stockholders of the Company approved an amendment to the Plan providing for (i) an increase of an additional 806,468 shares of Common Stock reserved for issuance to employees, consultants and non-employee directors ("Non-Employee Directors") of the Company under the Plan; (ii) the elimination of the distinction between the number of shares reserved for issuance under the Plan to employees and consultants of the Company and the number of shares reserved for issuance to Non-Employee Directors; (iii) a change in the provisions providing for the annual automatic grant of stock options to Non-Employee Directors; (iv) discretionary grants of stock options to Non-Employee Directors as determined by the discretion of the Board of Directors; and (v) an acceleration of the time during which options granted under the Plan may be exercised upon the occurrence of certain events constituting a "Change of Control" (as defined in the Plan). On June 9, 1999, the Board of Directors granted to each Non-Employee Director a discretionary non-statutory stock option to purchase 47,000 shares of Common Stock. Such stock options become fully vested on the first anniversary of the date of grant, have exercise prices of $1.0310 per share (the closing price of the Common Stock on June 9, 1999), and expire 10 years from the date of grant. NOTE 8 - LEGAL PROCEEDINGS See "Part II. - Other Information, Item 1. Legal Proceedings" for a description of outstanding legal proceedings involving the Company. 6 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 and the restrictions imposed on the Company under its existing debt instruments which may adversely affect the Company's ability to finance its future operations, to compete effectively against better capitalized competitors and to withstand downturns in its business or the economy generally; demand for, and acceptance of, the Company's products; continued downward pressure on the prices charged for the Company's products due to competition of rival manufacturers of filters for the wireless telecommunications market; the timing and receipt of customer orders; the Company's ability to attract and retain key personnel; and the effects of legal proceedings. A more complete description of these risks, uncertainties and assumptions is included in the Company's filings with the Securities and Exchange Commission, including those described under the heading "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 and those disclosed under the heading "Risk Factors" in the Company's Registration Statement on Form S-2, as amended, filed on July 9, 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, Item 1. Financial Statements" and in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 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 italicized language set forth above. The Company was founded in 1989 by ARCH Development Corporation, an affiliate of the University of Chicago, to commercialize superconducting technologies developed initially at Argonne National Laboratory. The Company uses its patented and proprietary high temperature superconducting materials technologies to develop and manufacture radio frequency ("RF") front-end products which are designed to enhance the quality, capacity, coverage, and flexibility of cellular, personal communications services ("PCS") and other wireless telecommunications services. RESULTS OF OPERATIONS Three Months Ended June 30, 1999 and 1998 Net revenues decreased to $317,000 from $815,000, a decline of $498,000, or 61.1%. This decline was primarily related to lower unit sales volume. Also contributing to the decline in net revenues was reduced selling prices as a result of a strategic shift, or reduction, in pricing strategy during the fourth quarter of 1998. Net revenues derived from international sales of the Company's products were in U.S. dollars and were not material. Net revenues derived from leased products were in U.S. dollars and were not material. Such products were 7 10 leased to certain of the Company's customers for testing purposes, and such products were returned to the Company after completion of the tests. Cost of product sales decreased to $947,000 from $1,403,000, a reduction of $456,000, or 32.5%. The cost of product sales consisted of direct material, labor and overhead costs associated with the products that were shipped during the period. Due to low utilization levels and excess capacity in the Company's manufacturing facility, cost of product sales exceeded net revenues for the period. The Company expects the cost of product sales to exceed net revenues until it manufactures and ships a significantly higher amount of its commercial products. The Company's internally funded research and development expenses decreased to $440,000 from $587,000, a reduction of $147,000, or 25.1%. These costs were lower due to the successful development of the Company's core products, increased efficiency in the Company's development processes and the focusing of development efforts on products with a greater probability of commercial sales. The Company expects to continue reducing its research and development expenses during 1999. Selling and marketing expenses decreased slightly to $447,000 from $462,000, a reduction of $15,000, or 3.2%. This reduction was primarily due to lower exhibition and trade show expenses. General and administrative expenses decreased to $725,000 from $814,000, a reduction of $89,000, or 10.9%. This expense reduction was primarily due to lower professional fees, lower personnel expense due to a reduction in administrative staff and reduced postage, delivery and office supply expenses. Operating loss declined to $2,242,000 from $2,451,000, an improvement of $209,000, or 8.5%. This improvement was primarily due to lower research and development and general and administrative expenses during a period of lower revenues. Net interest expense decreased to $182,000 from $3,097,000, a decline of $2,915,000, or 94.1%. This decrease was primarily due to non-cash interest charges of $3,115,000 recorded in the 1998 period related to the Company's senior convertible notes issued in May 1998 (the "1998 Notes"). Non-cash interest charges for the three months ended June 30, 1999 were $155,000. The 1998 Notes were issued with a non-detachable conversion feature that was "in-the-money" on the date of issuance. Therefore, a portion of the proceeds was allocated to additional paid-in capital, thus creating a discount to the debt. This discount was recognized as a charge to interest expense using the effective interest method over the period from the date of issuance to the date the 1998 Notes first became convertible (August 15, 1998 for up to one-half of the original principal amount and November 15, 1998 for the remaining principal amount). Net loss declined to $2,424,000 from $5,548,000, an improvement of $3,124,000, or 56.3%. This significant improvement was due to reduced net interest expense and reduced operating losses. Six Months Ended June 30, 1999 and 1998 Net revenues decreased to $829,000 from $1,512,000, a decline of $683,000, or 45.2%. This decline was primarily related to lower unit volume. Also contributing to the decline in net revenues was reduced selling prices as a result of a strategic shift, or reduction, in pricing strategy during the fourth quarter of 1998. Net revenues derived from international sales of the Company's products were in U.S. dollars and were not material. Net revenues derived from leased products were in U.S. dollars and were not material. Such products were leased to certain of the Company's customers for testing purposes, and such products were returned to the Company after completion of the tests. Cost of product sales decreased to $1,956,000 from $2,448,000, a reduction of $492,000, or 20.1%. The cost of product sales consisted of direct material, labor and overhead costs associated with the products that were shipped during the period. Due to low utilization levels and excess capacity in the Company's manufacturing facility, cost of product sales exceeded net revenues for the period. The Company expects the cost of product sales to exceed net revenues until it manufactures and ships a significantly higher amount of its commercial products. 8 11 The Company's internally funded research and development expenses decreased to $962,000 from $1,338,000, a reduction of $376,000, or 28.1%. These costs were lower due to the successful development of the Company's core products, increased efficiency in the Company's development processes and the focusing of development efforts on products with a greater probability of commercial sales. The Company expects to continue reducing its research and development expenses during 1999. Selling and marketing expenses increased to $904,000 from $830,000, an increase of $74,000, or 8.9%. This increase was due primarily to increased personnel and trade show expenses which occurred in the first quarter of 1999. General and administrative expenses decreased to $1,434,000 from $1,495,000, a reduction of $61,000, or 4.1%. This expense reduction was primarily due to lower personnel and reduced depreciation expense. Operating loss declined to $4,426,000 from $4,599,000, an improvement of $173,000, or 3.8%. This improvement was primarily due to lower research and development expenses during a period of lower revenues. Net interest expense decreased to $273,000 from $3,093,000, a decline of $2,820,000, or 91.2%. This decrease was primarily due to non-cash interest charges of $3,115,000 recorded in the 1998 period related to the 1998 Notes. The 1998 Notes were issued with a non-detachable conversion feature that was "in-the-money" on the date of issuance. Therefore, a portion of the proceeds was allocated to additional paid-in capital, thus creating a discount to the debt. This discount was recognized as a charge to interest expense using the effective interest method over the period from the date of issuance to the date the 1998 Notes first became convertible (August 15, 1998 for up to one-half of the original amount and November 15, 1998 for the remaining principal amount). Non-cash interest charges in the 1999 period were $351,000. Net loss declined to $4,772,000 from $7,693,000, an improvement of $2,921,000, or 38.0%. Included in the 1999 net loss was a $73,000 extraordinary charge related to extinguishment of debt and amendments in March 1999 to $5.5 million in aggregate principal amount of the 1998 Notes (the "Amended Notes"). This significant improvement in net loss was due to reduced net interest expense and reduced operating losses. IMPACT OF YEAR 2000 The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. The Company has established a task force comprised of several employees to evaluate the Company's status with respect to the Year 2000 Issue. The task force has identified the following areas as possibly being affected by the Year 2000 Issue: (1) IT and non-IT systems, (2) manufacturing applications and (3) third-party relationships. For each of these areas, the Company has identified, developed and implemented corrective actions intended to ensure that its software, equipment and systems will function properly with respect to dates in the year 2000 and thereafter. The total cost of such year 2000 compliance activities has not been material. Although the Company continues to assess its software, equipment and systems which are potentially susceptible to the Year 2000 Issue, the Company does not expect to incur material additional costs to correct any newly identified potential problems. The Company believes that it has no material exposure to contingencies related to the Year 2000 Issue for the products that it has sold to date. The Company processes its transactions and applications utilizing a network of personal computers. In addition, the Company's telephone system, fax machines, payroll, alarm systems and other miscellaneous systems utilize computer equipment and software. The Company has identified the software and equipment which needs to be upgraded. Based on its assessment to date, the Company does not believe that significant modifications or replacement of its software systems will be required to be year 2000 compliant. Most of the software used by the Company in operational applications has been acquired within the past 18 months and is year 2000 compliant. 9 12 The Company's manufacturing activities rely on tools and test stations, each of which contain embedded technology. The Company has identified the particular hardware and software systems used in such manufacturing applications. The Company is communicating orally and in writing with suppliers of these systems and based on such conversations believes the manufacturing applications are year 2000 compliant. The Company relies on third party suppliers for raw materials, utilities and other key supplies and services. The Company, therefore, recognizes that it is vulnerable to third party suppliers that fail to remediate their own Year 2000 Issues. The Company is communicating orally and in writing with its significant suppliers to determine their year 2000 compliance status. The Company is also dependent upon its customers for sales and cash flow. The Company does not currently have any formal information concerning the year 2000 compliance status of its customers, but has received indications that most of the Company's customers are working on year 2000 compliance. The Company's most reasonably likely worst case scenario with respect to the Year 2000 Issue is that (1) its manufacturing applications may malfunction and (2) third party suppliers of raw materials and utilities and customers may be unable to remediate their own Year 2000 Issues. In such scenario, the Company could experience manufacturing interruptions, delays in distribution of its products and reduced sales. This would have a material adverse effect on the Company's operations. The Company currently has no contingency plan in event such reasonably likely worst case scenario occurs. The Company currently believes that the Year 2000 Issue will not pose significant operational problems for the Company. However, if all Year 2000 Issues are not properly identified or remediated on a timely basis, the Company's results of operations or relationships with customers and suppliers may be materially adversely affected. There can be no guarantee that the systems of other companies on which the Company relies will be timely converted or that their failure to do so would not have a material adverse effect on the Company's operations. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1999, the Company's cash and cash equivalents, including restricted certificates of deposit, were $1,622,000, a decrease of $868,000 from the December 31, 1998 balance of $2,490,000. On March 31, 1999, the Company issued and sold $3.3 million in aggregate initial principal amount of senior convertible notes due May 15, 2002 (the "New Notes") which amount was included in cash and cash equivalents at that date. The reduction in cash and cash equivalents at June 30, 1999 compared to March 31, 1999 was to fund operating losses of $2,424,000 in the three month period ended June 30, 1999. Inventories increased to $3,183,000 at June 30, 1999 compared to $2,981,000 at March 31, 1999 and $1,424,000 at December 31, 1998. The Company manufactured additional inventory in the first quarter of 1999 in anticipation of increased sales based on the strong level of sales in the fourth quarter of 1998. Amounts outstanding at June 30, 1999 from certain stockholders included $681,000 in principal amount of promissory notes plus $142,000 of accrued interest. These notes were due on April 30, 1997. The Company has filed a lawsuit to collect on the outstanding balance, but there can be no assurance when and if such promissory notes will be repaid. 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 its 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. 10 13 Despite the completion in March 1999 of the issuance and sale of New Notes, the Company believes that during the fourth quarter of 1999 it will require substantial additional funds to finance its product development, manufacturing and marketing activities. 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 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 economies of scale in material purchases, the refinement of its manufacturing processes, and the further implementation of an overhead reduction program. 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 1999 and beyond. In April 1999, the Company hired Mesirow Financial, Inc. to assist the Company with raising additional capital and evaluating strategic alternatives. The outstanding 1998 Notes, the Amended Notes and the New Notes (collectively, the "Notes") contain restrictions limiting the Company's ability to incur additional indebtedness or to pay dividends (other than in shares of Common Stock) that 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 2000, 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 delisted for trading on the Nasdaq National Market in June 1999 due to the Company's current inability to meet the net tangible assets requirement for continued listing. The Common Stock is now traded in the over-the-counter market and quoted on the National Association of Securities Dealers, Inc. electronic bulletin board which does not provide the same liquidity for the trading of securities as Nasdaq. Consequently, if the Company is unable to list the Common Stock for trading on another securities market or exchange, the Company may be unable to obtain additional funding as needed, and such additional funding may be on terms less attractive to the Company than those of previous financings. 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, product candidates or potential products that the Company would not otherwise relinquish. In particular, if the Company does not secure adequate financing prior to or during the fourth quarter of 1999, the Company believes that it will have to substantially reduce its operating plans in order to continue its operations beyond such date. Such a reduction would materially adversely affect the Company's business, operating results and financial condition and impair the Company's ability to compete in the marketplace. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not have any material market risk sensitive instruments. 11 14 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 Common Stock, plus warrants (immediately exercisable at $12.96 per share) to purchase an additional 370,370.37 shares of 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 are in the midst of discovery. 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 seeks to enforce the terms of loans made to the Borrowers by the Company and evidenced by promissory notes dated December 13, 1996, in the aggregate principal amount of $698,508 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 Common Stock in December 1996. On September 30, 1997, the Borrowers and the Guarantor responded to the Company's complaint. Concurrently, 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. The counterclaim sought an amount of damages which the Borrowers allege "cannot currently be determined." On December 10, 1997, the Company's motion to strike the Borrowers' fraud defense and dismiss their counterclaim was granted with leave to amend. On January 14, 1998, the Borrowers filed amended defenses and counterclaims based on substantially similar allegations of supposed fraud by the Company. The Company's answer was filed on April 30, 1998, and the parties are proceeding with discovery. The Company regards the amended fraud claim as without factual or legal merit. Effective July 23, 1998, one of the Borrowers, Merrill Weber & Co., Inc., and the Company reached a settlement of 12 15 their respective claims. The Company intends to vigorously pursue recovery of the moneys owed by the other Borrowers and the Guarantor under the promissory notes and the guarantee. 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. The Company and the Named Directors regarded the suit as without factual or legal merit. Accordingly, on February 17, 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. Prior to a hearing on the Company's and the Named Directors' motion to dismiss, Mr. Lipman filed a motion on March 16, 1998, seeking both to amend his proposed putative class to include Mr. Drobny and to certify the class. On June 1, 1998, the Court granted the Company's and the Named Directors' motion to dismiss the complaint. Concurrently, Mr. Lipman withdrew his motion to amend the proposed putative class and certify the class. On June 30, 1998, Mr. Lipman filed an amended complaint against the Named Directors but excluded 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 branches of the financing. The amended complaint sought certification of a class consisting of all owners of the Common Stock during the period from May 15, 1997 through December 31, 1997, excluding the Named Directors. Mr. Lipman's amended complaint alleged that the stock owned by the putative class lost $61 million due to the financing the Named Directors selected, and sought an unspecified amount of compensatory and punitive damages. The Company and the Named Directors regarded the amended complaint as without factual or legal merit. Accordingly, the Named Directors filed a motion to dismiss Mr. Lipman's amended complaint on July 29, 1998. The Court granted the motion to dismiss in December 1998, finding that Mr. Lipman still had failed to fulfill the prerequisites for maintaining a shareholder derivative action against the Named Directors. On January 12, 1999, Mr. Lipman and two added former stockholders filed a second amended complaint against the Named Directors and again included 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 plaintiff's 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. In February 1999, the Company and the Named Directors filed a motion to dismiss the second amended complaint. The Court granted the motion to dismiss 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 13 16 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. On August 11, 1999, the Court granted the Company's and the Named Directors' motion, and dismissed the suit with prejudice. Greenwald Litigation On June 24, 1998, Jonathan Greenwald, derivatively on behalf of the Company, filed a complaint against the Company and the Named Directors in the Court of Chancery of the State of Delaware in and for New Castle County. Mr. Greenwald's complaint alleged that the Named Directors breached their duties of good faith, loyalty, due care and candor by selecting financing for the Company in 1997 which purportedly reduced the stock price and was supposedly accepted to entrench the Named Directors. The complaint sought an unspecified amount of compensatory damages, various equitable relief and attorney's fees. The Company and the Named Directors regarded the suit as without factual or legal merit. Accordingly, in January 1999, the Company and the Named Directors filed a motion to dismiss the complaint arguing that the complaint is barred by the business judgment rule and the plaintiffs' failure to fulfill the prerequisites for maintaining a shareholder derivative action against the Named Directors. In July 1999, the Court of Chancery granted the defendants' motion to dismiss the complaint finding that the plaintiffs had failed to satisfy the prerequisites for maintaining a shareholder derivative action under Delaware law. By order dated August 11, 1999, the Court of Chancery granted a motion to dismiss with prejudice the suit as it relates to Mr. Greenwald, the named plaintiff. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 9, 1999, the Company held its Annual Meeting of Stockholders. Four matters were submitted to a vote and approved by the holders of the Common Stock entitled to vote at the meeting. The number of votes cast with respect to each matter are as follows: Proposal 1 to elect one director, constituting Class III of the Company's Board of Directors, to serve a three-year term expiring at the 2002 Annual Meeting of Stockholders: 10,843,593 shares voted for Edward W. Laves, and 594,756 shares withheld. Proposal 2 to approve an amendment to the Company's Certificate of Incorporation, as amended, to increase the Company's authorized capital and the number of authorized shares of the Common Stock: 10,480,276 shares voted for this proposal, 891,309 shares voted against, and 66,764 shares abstained. No broker non-votes were cast with respect to this proposal. Proposal 3 to approve an amendment to the Company's Amended and Restated 1993 Stock Option Plan, as amended: 2,495,947 shares voted for this proposal, 1,100,805 shares voted against, and 99,873 shares abstained. 7,741,724 broker non-votes were cast with respect to this proposal. Proposal 4 to ratify the appointment by the Board of Directors of Ernst & Young LLP as the independent auditors of the Company's financial statements for the fiscal year ending December 31, 1999: 11,123,389 shares voted for this proposal, 229,570 shares voted against, and 85,390 shares abstained. No broker non-votes were cast with respect to this proposal. 14 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibits are listed in the Exhibit Index. (b) Reports on Form 8-K: On Current Report on Form 8-K, dated April 28, 1999, under "Item 5. Other Events," the Company filed a press release announcing the Company's financial results for the first quarter ended March 31, 1999. The Company also announced in such press release its hiring of Mesirow Financial, Inc. to assist the Company with raising additional capital and evaluating strategic alternatives. On Current Report on Form 8-K, dated June 23, 1999, under "Item 5. Other Events," the Company filed a revised press release announcing that the Company's Common Stock would trade, effective as of June 24, 1999, on the OTC Bulletin Board and not on the Nasdaq National Market. 15 18 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. ILLINOIS SUPERCONDUCTOR CORPORATION Date: August 13, 1999 By: /s/ EDWARD W. LAVES ---------------------------------------- Edward W. Laves, Ph.D. President and Chief Executive Officer Date: August 13, 1999 By: /s/ KENNETH E. WOLF ---------------------------------------- Kenneth E. Wolf Controller and Treasurer (Principal Financial and Accounting Officer) 16 19 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., 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"). 17 20 4.19 Form of Warrant dated March 31, 1999, incorporated by reference to Exhibit 4.19 to the 1998 Form 10-K. 4.20 Securities Purchase Agreement dated as of March 31, 1999, by and between the Company and Elliott Associates, L.P., Westgate International, L.P., Alexander Finance, LP and State Farm Mutual Automobile Insurance Company, incorporated by reference to Exhibit 4.20 to the 1998 Form 10-K. 4.21 Registration Rights Agreement dated as of March 31, 1999, by and between the Company and Elliott Associates, L.P., Westgate International, L.P., Alexander Finance, LP and State Farm Mutual Automobile Insurance Company, incorporated by reference to Exhibit 4.21 to the 1998 Form 10-K. 4.22 Amendment to Securities Purchase Agreement dated as of March 31, 1999, by and between the Company and Elliott Associates, L.P., Westgate International, L.P., Alexander Finance, LP, State Farm Mutual Automobile Insurance Company, Spring Point Partners, L.P. and Spring Point Offshore Fund, incorporated by reference to Exhibit 4.22 to the 1998 Form 10-K. 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. 18 EX-27 2 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 1,276,329 0 371,026 23,592 3,182,827 5,095,494 8,180,116 5,049,045 9,217,950 1,824,892 0 0 0 12,761 (5,024,376) 9,217,950 829,059 829,059 1,955,576 1,955,576 3,299,267 0 360,060 (4,698,798) 0 (4,698,798) 0 (73,000) 0 (4,771,798) (0.38) (0.38)
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