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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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.
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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.
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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.
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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.
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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.
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ILLINOIS SUPERCONDUCTOR CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the 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
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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.
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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.
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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
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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.
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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.
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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.
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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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Siegler Litigation
On June 5, 1996, Craig M. Siegler filed a complaint against the Company in
the Circuit Court of Cook County, Illinois, County Department, Chancery
Division. The complaint alleged that, in connection with the Company's private
placement of securities in November 1995, the Company breached and repudiated an
oral contract with Mr. Siegler for the issuance and sale by the Company to Mr.
Siegler of 370,370.37 shares of 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
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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
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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.
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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.
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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)
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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").
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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.
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