-----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, CVV06QSAmY5jVb0+k5Bc16KCeVpWGSi23JKL0p1XXk8D7x/H3ODooETGS5QNAHeB 4QaAITQjdQQDQM/6ChyS6g== 0000950137-99-004168.txt : 19991117 0000950137-99-004168.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950137-99-004168 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99755500 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 September 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 of incorporation) 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 November 9, 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 September 30, 1999 (unaudited) and December 31, 1998................. 1 Condensed Statements of Operations (unaudited) for the three months ended September 30, 1999 and 1998, and the nine months ended September 30, 1999 and 1998.................. 2 Condensed Statements of Cash Flows (unaudited) for the nine months ended September 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............... 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................................... 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................................................... 13 Item 2. Changes in Securities and Use of Proceeds........................................................... 16 Item 3. Defaults Upon Senior Securities.................................................................... * Item 4. Submission of Matters to a Vote of Security Holders................................................ * Item 5. Other Information.................................................................................. * Item 6. Exhibits and Reports on Form 8-K................................................................... 16
- -------------- [FN] * No reportable information under this item. 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ILLINOIS SUPERCONDUCTOR CORPORATION CONDENSED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ (UNAUDITED) ASSETS: Current assets: Cash and cash equivalents $ 171,434 $ 2,152,595 Inventories 1,910,969 1,424,427 Accounts receivable, net 1,142,278 1,494,418 Prepaid expenses and other 170,945 479,311 ------------ ------------- Total current assets 3,395,626 5,550,751 Property and equipment: Property and equipment 8,089,170 8,285,710 Less: accumulated depreciation 5,198,554 4,761,599 ------------ ------------- Net property and equipment 2,890,616 3,524,111 Other assets: Restricted certificates of deposit 349,270 337,347 Patents and trademarks, net 649,633 615,879 ------------ ------------- 998,903 953,226 ------------ ------------- Total assets $ 7,285,145 $ 10,028,088 ============ ============= LIABILITIES AND NET CAPITAL DEFICIENCY: Current liabilities: Accounts payable $ 1,404,993 $ 464,752 Accrued liabilities 534,908 799,569 Accrued interest 484,070 129,375 Current portion of other long-term debt 8,751 13,497 ------------ ------------- Total current liabilities 2,432,722 1,407,193 Other long term debt, less current portion 12,420 - Senior Convertible Notes 13,450,000 10,350,000 Discount on Senior Convertible Notes (1,057,275) (1,047,349) Deferred occupancy costs 91,061 91,212 Net capital deficiency: Common stock ($.001 par value); 60,000,000 shares 12,761 12,557 authorized at September 30, 1999 and 30,000,000 shares authorized at December 31, 1998; 12,760,908 shares issued and outstanding at September 30, 1999 and 12,557,344 shares issued and outstanding at December 31, 1998 Additional paid-in capital 60,588,790 60,055,321 Notes receivable from stockholders (680,696) (680,696) Accumulated deficit (67,564,638) (60,160,150) ------------ ------------- Total stockholders' equity (net capital deficiency) (7,643,783) (772,968) ------------ ------------- Total liabilities and stockholders' equity (net capital $ 7,285,145 $ 10,028,088 ============ ============= deficiency)
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. 4 ILLINOIS SUPERCONDUCTOR CORPORATION CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 1999 1998 ---- ---- ---- ---- Net revenues $ 1,126,733 $ 226,732 $ 1,955,792 $ 1,738,433 Costs and expenses: Cost of revenues 2,135,816 1,016,977 4,091,392 3,465,070 Research and development 402,548 643,315 1,364,168 1,981,698 Selling and marketing 307,072 418,685 1,210,844 1,248,273 General and administrative 696,577 843,265 2,130,452 2,338,090 ------------ ------------ ------------- ------------- Total costs and expenses 3,542,013 2,922,242 8,796,856 9,033,131 ------------ ------------ ------------- ------------- Operating loss (2,415,280) (2,695,510) (6,841,064) (7,294,698) Other income (expense): Interest income 31,921 123,735 118,967 191,721 Interest expense (249,331) (5,484,776) (609,391) (8,646,076) ------------ ------------ ------------- ------------- (217,410) (5,361,041) (490,424) (8,454,355) ------------ ------------ ------------- ------------- Loss before extraordinary item (2,632,690) (8,056,551) (7,331,488) (15,749,053) Extraordinary item - debt extinguishment - - (73,000) - ------------ ------------ ------------- ------------- Net loss (2,632,690) (8,056,551) (7,404,488) (15,749,053) Preferred Stock dividends - - - (61,834) ------------ ------------ ------------- ------------- Net loss plus Preferred Stock dividends $ (2,632,690) $ (8,056,551) $ (7,404,488) $ (15,810,887) ============ ============ ============= ============= Basic and diluted loss per common share $ (0.21) $ (0.64) $ (0.59) $ (1.45) ============ ============ ============= ============= Weighted average number of common shares outstanding 12,760,908 12,557,313 12,651,819 10,937,339 ============ ============ ============= =============
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)
NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 ---- ---- OPERATING ACTIVITIES: Net loss $ (7,404,488) $ (15,749,053) Adjustments to reconcile net loss to net cash used in operating activities: Extraordinary item - debt extinguishment 73,000 - Depreciation and amortization 738,422 837,552 Gain on sale of property and equipment (30,662) - Non-cash interest expense on Senior Convertible Notes 601,132 8,561,000 Changes in operating assets and liabilities 841,576 (1,670,113) ------------- -------------- Net cash used in operating activities (5,181,020) (8,020,614) ------------- -------------- INVESTING ACTIVITIES: Sales of available-for sale securities - 500,313 Payment of patent costs (53,459) (87,403) Acquisition of property and equipment (112,566) (53,635) Proceeds from sale of property and equipment 58,006 - ------------- -------------- Net cash provided by (used) in investing activities (108,019) 359,275 ------------- -------------- FINANCING ACTIVITIES: Proceeds from issuance of Senior Convertible Notes 3,300,000 10,350,000 Additional offering costs from issuance of Preferred Stock - (140,633) Exercise of stock options 204 7,325 Collection of notes receivable from stockholders - 5,000 Increase (decrease) in other long-term debt 7,674 (64,964) ------------- -------------- Net cash provided by financing activities 3,307,878 10,156,728 ------------- -------------- Increase (decrease) in cash and cash equivalents (1,981,161) 2,495,389 Cash and cash equivalents at beginning of period 2,152,595 2,766,886 ============= ============== Cash and cash equivalents at end of period $ 171,434 $ 5,262,275 ============= ==============
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 nine months ended September 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 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. NOTE 3 - COMPREHENSIVE INCOME During the three and nine months ended September 30, 1999, total comprehensive income (loss) amounted to $(2,633,000) and $(7,404,000), respectively, compared to $(8,057,000) and $(15,811,000) for the same respective periods in 1998. NOTE 4 - INVENTORIES Inventories consisted of the following:
SEPTEMBER 30, 1999 DECEMBER 31, 1998 Raw materials................ $1,369,000 $1,084,000 Work in process............. 274,000 60,000 Finished product............. 268,000 280,000 ---------- ---------- Total inventory............... $1,911,000 $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 "May 1998 Notes") and issued warrants (the "May 1998 Warrants") to purchase 4,140,000 shares of the Company's common stock, par value $0.001 per share ("Common Stock"). The May 1998 Notes (based upon their terms at the time of issue) bear interest at 2% per annum, payable in cash or shares of Common Stock at the Company's option (unless the Company does not meet certain requirements commencing November 5, 2000, in which case interest must be paid in cash). The May 1998 Notes mature on May 15, 2002 and (based upon their terms at the time of issue) are convertible (based on 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. On and after May 15, 2000, the 4 7 Company may redeem, under certain conditions, all or a portion of the May 1998 Notes at a redemption price equal to the principal amount plus accrued interest thereon, if any. The May 1998 Warrants (based upon the terms at their time of issue) have an exercise price of $3.75 per share and expire on May 15, 2001. Since the May 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 May 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 that the May 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 May 1998 Warrants issued in conjunction with the May 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 May 1998 Notes. On March 31, 1999, the Company issued and sold $3,300,000 in aggregate initial principal amount of senior convertible notes due May 15, 2002 (the "March 1999 Notes") and issued warrants (the "March 1999 Warrants") to purchase 1,320,000 shares of Common Stock. The March 1999 Notes bear interest at 6% per annum, payable in kind or in cash, at the Company's option (unless the Company fails to meet certain requirements commencing November 5, 2000, in which case interest must be paid in cash). Holders of the March 1999 Notes may convert the principal amount, plus accrued interest not paid in cash, if any, into shares of Common Stock at a fixed conversion price of $1.125 per share (based upon the terms at the time of issue). On and after May 15, 2000, the Company may redeem all or a portion of the March 1999 Notes at a redemption price equal to the principal amount plus accrued interest thereon, if any, under certain conditions. The March 1999 Warrants (based upon their terms at the time of issue) have an exercise price of $1.4625 per share and expire on March 31, 2002. Concurrently with the issuance of the March 1999 Notes, the Company amended certain terms of $5,500,000 in aggregate principal amount of the May 1998 Notes (the "Amended Notes") and the May 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, as so amended, bear interest at the rate of 6% per annum, payable in cash or shares of Common Stock, at the Company's option (unless the Company does not meet certain requirements commencing November 5, 2000, in which case interest must be paid in cash), 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 March 1999 Notes equal to the fair value of the March 1999 Warrants issued in conjunction with the March 1999 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 March 1999 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 nine months ended September 30, 1999. 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. 5 8 The Company recognized $247,000 and $601,000 of non-cash interest charges during the three months and nine months ended September 30, 1999, respectively, as a result of the amortization of the discount on the May 1998 Notes, the Amended Notes and the March 1999 Notes. The effective interest rate on the May 1998 Notes is approximately 74%, the effective interest rate on the Amended Notes is approximately 81%, and the effective interest rate on the March 1999 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, including 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 at 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. 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. 6 9 NOTE 9 - SUBSEQUENT EVENT On November 5, 1999, the Company issued and sold $1,000,000 in aggregate principal amount of senior convertible notes due January 2, 2001 (the "November 1999 Notes") and issued warrants (the "November 1999 Warrants") to purchase 400,000 shares of Common Stock. The November 1999 Notes bear interest at of 10% per annum, payable in kind or in cash, at the Company's option (unless the Company fails to meet certain requirements commencing November 5, 2000, in which case interest must be paid in cash). Holders of the November 1999 Notes may convert the principal amount, plus accrued interest not paid in cash, if any, into shares of Common Stock at a fixed conversion price of $0.25 per share. The November 1999 Warrants have an exercise price of $0.25 per share and expire on November 5, 2004. Concurrently with the issuance of the November 1999 Notes, the Company amended certain terms of $11,800,000 in aggregate principal amount of the March 1999 Notes and the May 1998 Notes (the "Further Amended Notes") and certain terms of the March 1999 Warrants and May 1998 Warrants previously exercisable for an aggregate of 4,800,000 shares of the Common Stock (the "Further Amended Warrants") issued in connection therewith. The Further Amended Notes were amended to reduce their fixed conversion price to $0.25 per share. The exercise price of the Further Amended Warrants was reduced to $0.25 per share. Since the November 1999 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 $875,000, and calculated as the difference between the conversion price ($0.25 per share) and the quoted market price of the Common Stock on the date of issuance ($0.47 per share) multiplied by the number of shares into which the November 1999 Notes are convertible (4,000,000 shares)) will be allocated to additional paid-in capital, thus creating a discount to the debt. This discount will be recognized as a charge to interest expense using the effective interest method over the period from the date of issuance of the November 1999 Notes to the date the November 1999 Notes first become convertible. In addition, a portion of the proceeds of the November 1999 Notes equal to the fair value of the November 1999 Warrants issued in conjunction with the November 1999 Notes will be allocated to additional paid-in capital, thus creating an additional discount to the debt. This additional discount, in an as yet to be determined amount, will be recognized as a charge to interest expense using the effective interest method over the fourteen month term of the November 1999 Notes. The increase in fair value of the Further Amended Warrants as a result of the decrease in exercise price will be allocated to additional paid-in capital, thus creating an additional discount on the Further Amended Notes. This additional discount, in an as yet to be determined amount, will be recognized as a charge to interest expense using the effective interest method over the remaining term of the Further Amended Notes. The amendments described in the preceding paragraph will result in an extraordinary charge, in an as yet to be determined amount, during the fourth quarter of 1999. 7 10 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, the fact that its assets are pledged 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; uncertainty about the Company's ability 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; the adverse effects on the liquidity of the Company's common stock because of its delisting from the NASDAQ National Market in June 1999; continued downward pressure on the prices charged for the Company's products due to competition of rival manufacturers of radio frequency front end products for the wireless telecommunications market; the timing and receipt of customer orders; the Company's ability to attract and retain key personnel; and the effects of legal proceedings. A more complete description of these risks, uncertainties and assumptions is included in the Company's filings with the Securities and Exchange Commission, including those described under the heading "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 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 800 MHz cellular, 1.96GHz personal communications services ("PCS") and other wireless telecommunications services. RESULTS OF OPERATIONS Three Months Ended September 30, 1999 and 1998 8 11 Net revenues increased to $1,127,000 from $227,000, an increase of $900,000, or 396%. This increase was primarily related to higher unit sales volumes. The higher sales volumes were partially offset by reduced selling prices. 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 leased products are leased to certain of the Company's customers for testing purposes, and such products are returned to the Company after completion of the tests. Cost of products sold increased to $2,136,000 from $1,017,000, an increase of $1,119,000 or 110.0%. The cost of products sold consists 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 products sold exceeded net revenues for the period. The Company expects the cost of products sold 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 $403,000 from $643,000, a reduction of $240,000 or 37.3%. These costs were lower due to the successful development of the Company's core products, increased efficiency in the Company's development processes and 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 to $307,000 from $419,000, a reduction of $112,000, or 26.7%. This reduction was primarily due to lower exhibition, trade show, and travel expenses. General and administrative expenses decreased to $697,000 from $843,000, a reduction of $146,000, or 17.3%. This expense reduction was primarily due to lower professional fees, and general office expenses. Operating loss declined to $2,415,000 from $2,696,000, an improvement of $281,000 or 10.4%. This improvement was primarily due to higher sales as well as expenses for lower research and development, selling and marketing and general and administrative. Net interest expense decreased to $217,000 from $5,361,000, a decline of $5,144,000 or 96.0%. This decrease was due to a decrease in non-cash interest charges of $5,519,000. Nine Months Ended September 30, 1999 and 1998 Net revenues increased to $1,956,000 from $1,738,000, an increase of $218,000, or 12.5%. This increase was primarily related to higher unit volume. The higher unit volume was partially offset by reduced selling prices. 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 are in U.S. dollars and were not material. Such leased products are leased to certain of the Company's customers for testing purposes, and such products are returned to the Company after completion of the tests. Cost of products sold increased to $4,091,000 from $3,465,000, an increase of $626,000, or 18.1%. The cost of products sold consists 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 products sold exceeded net revenues for the period. The Company expects the cost of products sold 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 $1,364,000 from $1,982,000, a reduction of $618,000 or 31.2%. 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 9 12 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 to $1,211,000 from $1,248,000, a decrease of $37,000 or 3.0%. This decrease was due primarily to decreased trade show, travel and delivery expenses. General and administrative expenses decreased to $2,130,000 from $2,338,000, a reduction of $208,000, or 8.9%. This expense reduction was primarily due to lower professional fees and general office supply expenses. Operating loss declined to $6,841,000 from $7,295,000, an improvement of $454,000, or 6.2%. This improvement was primarily due to lower research and development expenses. Net interest expense decreased to $490,000 from $8,454,000, a decline of $7,964,000, or 94.2%. This decrease was primarily due to a decrease in non-cash interest charges of $7,960,000. 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. 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 communications 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 10 13 customers, but has received indications that most of the Company's customers are working on year 2000 compliance. The Company's most 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 the event such 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 September 30, 1999, the Company's cash and cash equivalents, including restricted certificates of deposit, were $521,000, a decrease of $1,969,000 from the December 31, 1998 balance of $2,490,000. Amounts outstanding at September 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. Despite the completion on November 5, 1999 of the issuance and sale of $1.0 million in principal amount of November 1999 Notes (information concerning which is incorporated herein by reference from the Company's Form 8-K, dated November 5, 1999, and filed November 12, 1999), the Company believes that during the fourth quarter of 1999 or the first quarter of 2000 it will require substantial additional funds to finance its product development, manufacturing and marketing activities and otherwise to maintain its operations. 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 redesign, economies of scale in material purchases, the refinement of manufacturing processes, and the 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 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 May 1998 Notes, the 1999 Notes, the November 1999 Notes and the Further Amended 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) and are secured by the Company's assets. This may adversely affect the 11 14 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 delisted from trading on the NASDAQ National Market in June 1999 due to the Company's continuing inability to meet the net tangible assets requirement for continued listing. The Common Stock is now traded in the over-the-counter market and quoted on the National Association of Securities Dealers, Inc. electronic bulletin board. This does not provide the same liquidity for the trading of securities as 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/or any such additional funding may be on disadvantageous terms. 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, potential products that the Company would not otherwise relinquish. In particular, if the Company does not secure adequate additional financing during the first quarter of 2000 (or possibly earlier), the Company believes that it may not be able to continue as a going concern. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not have any material market risk sensitive instruments. 12 15 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, for a total price of $4,000,000, 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. 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 13 16 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 a shareholder derivative 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 his first 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 tranches of the financing. The first 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 first amended complaint in July 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. In January 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 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. 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. 14 17 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 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 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 the Company's and the named Directors' motion to dismiss with prejudice the suit as it relates to Mr. Greenwald, the named plaintiff. 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. Elliot 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 six directors of the Company, two of whom, Messrs. Mark Brodsky and Samuel Perlman, are affiliated with Elliot. 15 18 An amended complaint dated September 2, 1999 was served on the Company. The amended complaint raises the same claims alleged in the original complaint. The Company has not yet responded to the amended complaint. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Information concerning the New Notes and New Warrants sold by the Company on November 5, 1999 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 November 5, 1999 and filed on November 15, 1999. The securities sold 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 November 1999, prohibit the Company from paying dividends on its 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 August 5, 1999, reported under Item 5 and filed an exhibit. A Current Report on Form 8-K, dated November 5, 1999, and filed on November 15, 1999, reported under Item 1, "Changes in Control of the Registrant" and filed exhibits. 16 19 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: November 15, 1999 By: /s/ EDWARD W. LAVES ---------------------------------------- Edward W. Laves, Ph.D. President and Chief Executive Officer Date: November 15, 1999 By: /s/ KENNETH E. WOLF ---------------------------------------- Kenneth E. Wolf Controller and Treasurer (Principal Accounting Officer) 17 20 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").
18 21
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS 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. 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, L.P. (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 Form of letter agreement, dated November 12, 1999 amending the Letter Agreement identified as Exhibit 4.23, above, incorporated by reference to Exhibit 10(f) to the Company's Form 8-K, dated November 5, 1999 and filed November 15, 1999. 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.
19 EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 171,434 0 1,165,870 23,592 1,910,969 3,385,626 6,089,170 5,195,554 7,285,145 2,432,722 0 0 0 12,761 7,656,544 7,285,145 1,955,792 1,955,792 4,091,392 4,091,392 4,705,464 0 609,391 7,331,488 0 7,331,488 0 73,000 0 7,404,488 0.59 0.59
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