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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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 or organization)
451 KINGSTON COURT, MOUNT PROSPECT, ILLINOIS 60056
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (847) 391-9400
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of Class)
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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, based upon the last reported sale price of
the registrant's Common Stock on March 20, 1997 was $75,455,474.
The number of shares outstanding of the registrant's Common Stock, par
value $.001, as of March 20, 1997 was 5,023,510.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1. BUSINESS
Because Illinois Superconductor Corporation (the "Company") wants to
provide investors with more meaningful and useful information, this Annual
Report on Form 10-K (the "Form 10-K") contains, and incorporates by reference,
certain forward-looking statements (as such term is defined in the rules
promulgated pursuant to the Securities Act of 1933, as amended (the "Securities
Act")) that reflect the Company's current expectations regarding the future
results of operations and performance and achievements of the Company. Such
forward-looking statements are subject to the safe harbor created by the
Private Securities Litigation Reform Act of 1995. The Company has tried,
wherever possible, to identify these forward-looking statements by using words
such as "anticipate," "believe," "estimate," "expect" 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 assumptions, including the factors
set forth under the heading "Risk Factors" in the Company's Registration
Statement on Form S-3 filed with the Securities and Exchange Commission on the
date hereof, which could cause the Company's future results, performance or
achievements to differ materially from those expressed in, or implied by, any
of these statements. 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 Form 10-K or to
reflect the occurrence of unanticipated events.
GENERAL
The Company develops, manufactures and markets high performance
products for wireless telecommunications markets based on its proprietary high
temperature superconductor ("HTS") materials, radio frequency ("RF") filter
design and cryogenic technologies. Superconductor materials, when cooled below
a critical temperature, are able to transmit an electrical current with either
no or minimal loss of energy. Because of this minimal energy loss,
superconductors are attractive for a wide range of commercial applications.
The wireless telecommunications industry has experienced significant
growth in recent years, which has led to increased competition among service
providers, rapid growth in base station installations and significant increases
in RF interference. By reducing the effects of this interference, the
Company's RF filter products enable cellular and Personal Communications
Services ("PCS") service providers to improve the quality and increase the
coverage, capacity and flexibility of their networks in an economical manner.
The Company's RF filter products, which are based on superconductor technology,
offer the following performance benefits:
- call quality is improved and the frequency of blocked or
dropped calls is reduced because adjacent band interference
from competing wireless service providers and other radio
services is reduced;
- coverage gaps between base stations are reduced because the
radio range of these base stations is extended, thereby
minimizing the number of base stations required in a wireless
network;
- network call carrying capacity is increased because channels
which were previously unusable due to adjacent band
interference now become available; and
- flexibility in the location of base stations is improved
because wireless service providers can locate base stations in
areas where RF interference or other restrictions currently
inhibit operations.
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The Company currently offers two product lines to address the needs of
cellular and PCS service providers. The SpectrumMaster(TM) product line is
designed primarily to improve the RF performance of cellular and PCS systems in
high interference environments, including urban areas and near airports. The
RangeMaster(TM) product line combines the interference rejection advantages of
a SpectrumMaster(TM) filter with a cryogenically-cooled low-noise amplifier.
RangeMaster(TM) is designed to serve the range extension needs of rural,
suburban or small city cellular and PCS operators. In addition, the Company is
developing other products based on its core technologies, including adapting
current products to meet the specific needs of international wireless markets
and developing RF transmitter products.
The Company has completed 14 field trials with several major cellular
service providers. As a result of these field trials and other marketing
initiatives, the Company has received orders from certain of these service
providers for commercial units. In the third quarter of 1996, the Company
began shipping its first RF filter products to the cellular market, which were
installed and accepted into customers' commercially operational base stations.
In addition, the Company has received orders for its products from certain
other customers who have not participated in field trials.
INDUSTRY BACKGROUND
The wireless telecommunications industry has experienced significant
growth, both domestically and internationally, in recent years. This growth
has been attributable primarily to the widespread availability of wireless
services, continued decreases in the price of service and equipment,
deregulation, introduction of new technologies and increased RF spectrum
availability. This growth in the popularity of wireless services has led to
significant increases in competition among service providers, numbers of base
stations and RF interference.
In addition to the growth of the wireless communications market, new
digital technologies are rapidly being introduced into the marketplace,
including Time Division Multiple Access, Global System for Mobile
Telecommunications ("GSM") and Code Division Multiple Access ("CDMA").
Although analog technology represents the most widely deployed cellular
protocol, it has several limitations, including inconsistent service quality
and inefficient use of the radio spectrum. Digital cellular technologies are
being implemented or deployed in cellular networks to address some of the
shortcomings of analog technology. Digital technologies, however, do not fully
resolve these shortcomings and have other limitations.
To date, cellular telephone has been the largest segment of the
wireless communications market. According to the Cellular Telecommunications
Industry Association ("CTIA"), as of December 1996, there were over 44
million cellular subscribers in the U.S. In addition, industry publications
indicate that the current worldwide market for wireless services is in excess
of 100 million subscribers. According to the CTIA, there are in excess of
30,000 cellular base stations in the U.S. The Company believes that there are
currently in excess of 60,000 cellular base stations worldwide and that this
number is increasing rapidly as cellular service providers increase capacity
to meet subscriber growth. PCS represents the most significant new wireless
service currently being deployed in the U.S. PCS is based on digital
technologies and is designed to provide subscribers with additional
choices of carriers, improved signal quality, increased services and greater
data transmission capabilities. Industry sources estimate that there were
approximately 6,000 PCS base stations in service at the end of 1996 and
forecast that over 100,000 PCS base stations will be built in the U.S. over
the next four years. PCS services are also being implemented in other
countries around the world.
The Company believes that competition for subscribers will continue to
intensify as the U.S. and foreign governments continue deregulating the
telecommunications industry, allocating more spectrum
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and allowing additional service providers to enter markets with new services.
Increased competition is causing service providers to differentiate themselves
on the basis of quality, price and coverage. The intensity of competition is
evidenced by an ongoing movement of customers among carriers. This customer
movement can reduce service providers' revenues while increasing their
marketing costs.
The rapid growth and increased competition experienced by the wireless
telecommunications industry have increased the difficulty of providing quality
wireless services. Wireless service providers face the challenge of providing
quality services in this environment which is increasingly characterized by RF
interference and congestion. In addition, the rapid rate of growth and
community concerns have affected the manner in which service providers locate
their base stations. Base stations provide the link between a wireless user
and the telecommunications network and are being positioned closer together,
often in the same location, which results in RF interference problems. There
has also been an increase in the use of portable handheld phones which transmit
weaker signals than mobile, or car-mounted, phones and therefore base stations
do not receive their signal as well as those from mobile phones. As a result,
cellular networks which were laid out based on mobile phone power levels have
in many areas developed coverage gaps which operators must fill in to satisfy
their goals of providing seamless coverage. Furthermore, in order to compete
with these already broadly deployed cellular networks, PCS service providers
need to deploy coverage quickly and with the lowest possible capital investment.
The Company believes that the resulting demands on system performance
will lead service providers to invest in new infrastructure technologies, such
as high performance RF filters, to address their growth and quality needs. RF
filters are used in wireless networks to process radio signals received from a
base station's antenna and provide as "clean" and strong a signal as possible
to the other radio equipment in the wireless base station system. Traditional
filters suffer substantial performance limitations due to energy loss
experienced by the types of materials used. Wireless service providers
therefore have a need for RF filtering with much higher performance
characteristics than are currently available using conventional technology.
The Company believes that the changing market conditions, the drive to
implement new technologies and the technical issues faced by wireless service
providers create significant opportunities for new equipment suppliers.
THE COMPANY'S SOLUTION
The Company's products are designed to address the high performance RF
filter needs of domestic and international commercial wireless systems by
providing the following advantages:
- Improved Call Quality. The Company's RF filter products
improve call quality by reducing dropped and blocked calls.
During field trials in urban cellular locations, the Company's
RF filter products have typically demonstrated a 20 to 40%
reduction in dropped calls caused by out-of-band interference
and base station front-end overloading. During these field
trials, the Company's RF filter products have also
demonstrated a reduction in blocked calls experienced in urban
cellular locations. The Company believes that its RF filter
products also improve audio fidelity by reducing noise and
interference.
- Increased Base Station Range. The Company's RF filter
products extend the uplink range (the distance from which a
base station can receive a signal from a portable unit) of
cellular and PCS base stations. The Company believes that
cellular service providers will be able to use its filters to
fill coverage gaps without having to install additional base
stations. The Company also believes that PCS service
providers can lower capital costs by reducing the number of
base stations required to build out new wireless networks.
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- Greater Network Capacity and Utilization. The Company's RF
filter products increase the capacity and utilization of a
wireless base station. In some cases, capacity increases
because channels which were previously unusable due to
interference are recovered. In other cases, system
utilization increases result from reductions in the number of
blocked and dropped calls and increases in the ability of the
system to permit weak signals to be processed with acceptable
call quality.
- Improved Flexibility of Base Station Location. The Company's
RF filter products allow wireless service providers to locate
base stations in areas where RF interference or other
restrictions currently inhibit operations. For example, the
Company's RF filter products enable base stations to be
located in close proximity to a number of other RF signal
transmitters. Because of the performance characteristics of
the Company's RF filter products, base stations can also be
located in less than optimal sites due to zoning or other
governmental restrictions.
PRODUCTS
The Company currently offers two product lines to address the multiple
needs of cellular and PCS service providers. The SpectrumMaster(TM) product
line is designed primarily to improve the RF performance of cellular and PCS
systems in high interference environments, including urban areas and near
airports. The RangeMaster(TM) product line combines the interference rejection
advantages of a SpectrumMaster(TM) filter with a cryogenically-cooled low-noise
amplifier. RangeMaster(TM) is designed to serve the range extension needs of
rural, suburban or small city cellular and PCS operators. All of the Company's
products are designed to be smoothly integrated into a service provider's base
station equipment. Service requirements for its SpectrumMaster(TM) and
RangeMaster(TM) products are minimal and can be performed by either a wireless
service provider or the Company's personnel. The Company's products are
currently being sold to U.S. cellular service providers, have been tested with
a PCS service provider and are being adapted and marketed to international
cellular and PCS service providers.
SpectrumMaster(TM). The Company currently markets three models of its
SpectrumMaster(TM) filter for the cellular market. These products address the
interference rejection needs of wireless service providers with U.S. A or B
frequency band allocations and meet all analog and digital protocol
specifications in the U.S. The Company shipped the first of these products in
the third quarter of 1996.
The Company has developed its first filter products specifically
targeted to satisfy the needs of PCS service providers to increase call quality
by reducing the RF signal noise in PCS systems due to interference and radio
system noise. These products are intended to address the high performance
filter needs of service providers with PCS frequency band allocations and will
be compatible with all PCS digital protocol specifications in the U.S.
RangeMaster(TM). The Company currently markets two models of its
RangeMaster(TM) receiver front end for the cellular market. These products
address the range extension needs of cellular service providers with U.S. A or
B frequency band allocations and meet all analog and digital protocol
specifications in the U.S. The RangeMaster(TM) products permit operators to
fill coverage gaps in their networks caused by insufficient RF uplink range
without adding new base stations. The first field trials using these products
have been completed, and the Company received its first orders for these
products in the first quarter of 1997.
The Company also offers RangeMaster(TM) products specifically designed
to enable PCS service providers to minimize their infrastructure costs and
deployment times by lowering the number of base stations needed to provide
continuous wireless coverage over a given area. These products address the
need for greater base station range of service providers with PCS frequency
band allocations and are
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compatible with all PCS digital protocol specifications in the U.S. The
Company completed prototype testing of its RangeMaster(TM) receiver front end
products with a PCS service provider and expects to begin operational field
trials during the second quarter of 1997.
International Cellular Products Offerings. The Company is adapting
its SpectrumMaster(TM) and RangeMaster(TM) products for international cellular
markets to address their specific interference rejection and range extension
needs. For example, along with the adaptation of its products for various
Asian cellular and PCS markets, the Company is developing products for the
Japanese Personal Digital Cellular market that will address its unique growing
interference protection needs. In addition, the Company is developing products
for European cellular and PCS markets, including GSM filters in various
configurations.
SUPERCONDUCTIVITY AND TECHNOLOGY
Superconductor materials, when cooled below a critical temperature, are
able to transmit an electrical current with either no or minimal loss of
energy. Because of this extremely low energy loss, superconductors are
attractive for a wide range of commercial applications. In the case of direct
currents, superconductors are perfect conductors, with no energy loss at all.
In the case of alternating currents, including RF currents, some slight energy
losses occur due to the superconductor's interaction with changing magnetic
fields. Until 1986, most known superconductors operated at temperatures very
near absolute zero (0 degrees K or -459 degrees Fahrenheit). The difficulty
and expense required to maintain these temperatures limited the commercial
application of these low temperature superconductors. In 1986, researchers
discovered a class of materials which become superconducting at temperatures
greater than 77 degrees K (-320 degrees Fahrenheit). These high temperature
superconductors can be cooled with economical and reliable mechanical
refrigerators.
The Company's products are based upon its proprietary and patented
technologies, which provide several strategic advantages in the development,
manufacturing and marketing of its products. The Company considers its
technology strengths to include its thick-film HTS fabrication technology, its
high performance RF filter design technology and its cryogenics technology.
Thick-Film HTS Fabrication Technology. A number of HTS compounds have
been discovered in the last ten years. The most significant of these compounds
to the Company is yttrium barium copper oxide ("YBCO"). The Company focuses
its product application efforts on this compound for two main reasons. First,
YBCO materials are readily manufacturable using the Company's thick-film
fabrication technology. Second, this material offers superior RF electrical
performance at commercial wireless frequencies.
The Company's exploitation of HTS materials is based on thick-film
fabrication technology. The Company's technology position in thick- film HTS
fabrication is based on owned and licensed patents, as well as extensive
know-how and trade secrets. In addition, the Company has acquired HTS
thick-film fabrication technology from other parties, primarily the University
of Birmingham (UK). The Company believes that its HTS thick-film fabrication
technology overcomes many of the drawbacks of using alternative HTS fabrication
technologies (thin-film or bulk) to fabricate superconducting RF filters for
cellular, PCS and other wireless markets.
The Company's HTS thick-film fabrication process uses conventional
ceramic deposition techniques. The simplicity of the HTS thick-film
fabrication process and its reliance on proven industrial production techniques
is expected to result in a reduction in processing and materials costs over
those of thin-film and bulk HTS fabrication processes. For example, the
Company has developed a patented technique to form superconducting thick-films
on cost-effective substrates.
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The Company believes that its HTS thick-film fabrication technology
presents the most feasible way to fabricate economical RF devices in the
frequency range used in cellular, PCS and other wireless telecommunications
systems when compared to other HTS fabrication technologies. The Company
believes its HTS thick-film technology allows the design of higher performing
RF filters, handles greater levels of RF power and introduces lower levels of
RF distortion. The Company also believes its HTS thick-film technology
permits greater flexibility in RF filter design due to the ability to
economically manufacture the three-dimensional shapes required to produce very
high levels of RF performance. In addition, the Company believes that RF
products produced by its HTS thick-film fabrication process cost less to
manufacture. The Company's HTS thick-film process, unlike HTS thin-film
processes which are based on semiconductor fabrication processes, do not
require clean room facilities and require lower capital investments for a
production facility.
RF Filter Design Technology. The technology and tools for designing,
constructing and testing conventional RF filters are well established.
However, with the introduction of HTS materials, a new set of customized design
tools and techniques has been developed by the Company to support filter
product development. These customized design tools, which include electrical
circuit design and analysis software, engineering design rules and filter
assembly and testing procedures, are important competitive advantages to the
Company and are protected mainly as trade secrets. They enable the rapid
design and implementation of the Company's RF filter products.
Cryogenics Technology. Since HTS materials have to be maintained at
cryogenic temperatures (below -300 degrees Fahrenheit) in order to function,
the Company must incorporate efficient and economical cryogenic technologies
into its products. The cryocooling systems used in the Company's products
consist of two parts: the cryostat or insulating vessel, which houses the
superconducting electronic components, and the cryogenic refrigerator, which
maintains the required temperatures within the cryostat package. The Company
has created a substantial base of technology in the design, assembly and
operation of these cryogenic systems. The Company works closely with the
vendors of the refrigerator systems to design smaller, lower cost and more
reliable components. In order for the Company to produce commercially
successful products, it must design into its products cryogenic systems which
offer long life, low maintenance, high reliability and low cost.
SALES AND MARKETING
To date, the Company's sales and marketing efforts have focused on
major cellular service providers in retrofit applications. The Company expects
to continue such efforts, as well as build on its experience to establish OEM
channels and a PCS market presence. The Company currently uses a direct sales
force to sell its products. The Company also makes selective use of
consultants and agents to facilitate its sales efforts.
Although the Company believes that with increasing market acceptance
of its products it will be able to shorten the sales cycle, in general, sales
of the Company's RF filter products to larger cellular service providers in
retrofit applications have consisted of the following three steps:
- Conduct an Operational Field Trial Program. The initial step
in the Company's sales process consists of coordination with,
and active involvement of, a service provider's central
engineering organization and an appropriate regional service
area. The process includes identifying candidate cell sites
which suffer performance degradation due to high levels of
RF interference and range limitation, measuring cell site
performance before installation of the Company's RF filter
products, installing the Company's RF filter products for a
number of weeks while collecting cell site performance data,
and then compiling and interpreting the data to measure the
benefits provided by the Company's RF filter products.
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- Obtain Corporate Engineering Approval for Installation in
Service Provider Sites. Upon review of the products'
performance during the field trials, the wireless service
provider's engineering staff provides an approval so that
managers in regional service areas can purchase the Company's
RF filter products for commercial deployment in their
networks.
- Sell Products Directly to Service Providers' Regional Service
Areas. Once approval is obtained from the corporate
organization, the Company sells its products directly to
decision makers within a service provider's regional service
area.
Commercial field trials of the Company's cellular RF filter products
in operational base stations began in November 1995. The Company has completed
14 trials in eight regional markets with five major cellular service providers.
During field trials, the Company's RF filter products have demonstrated several
benefits for the cellular market, including reduced dropped calls, improved
uplink range, increased call quality and increased capacity. Certain
details of field trial experience to date are contained in the following table:
Service Provider Class Cell Site Environment Number of Trials Status
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SPECTRUMMASTER(TM)
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U.S. B-Band Cellular Urban High Interference 3 Completed
U.S. A-Band Cellular Urban High Interference 2 Completed
U.S. B-Band Cellular Adjacent to Airport 2 Completed
U.S. A-Band Cellular Adjacent to Airport 2 Completed
U.S. B-Band Cellular Antenna Farm 1 Completed
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RANGEMASTER(TM)
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U.S. B-Band Cellular Rural Range Extension 1 Completed
U.S. A-Band Cellular Rural Range Extension 2 Completed
U.S. B-Band Cellular Suburban Range 2 One Completed/One Underway
Extension
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Completed field trials have enabled the Company to begin shortening
the sales cycle with its customers. As the Company's products have become more
accepted, new customers are beginning to rely on the results of extensive
testing that other service providers have conducted. Because these field trial
results have demonstrated several benefits to the cellular market, some cellular
service provider customers have elected not to engage in their own
trials, but to purchase the units based on certain proven performance criteria.
The Company has also established marketing efforts to begin
qualification testing with original equipment manufacturers ("OEM") customers
who serve as the major suppliers to cellular and PCS service providers. As part
of its field trials with cellular service providers, the Company involves the
staff of the OEM vendor that provided the cellular infrastructure system to the
service provider. This allows the Company to demonstrate the benefits of its RF
filter products to the OEM, to demonstrate the products' compatibility with the
OEM's
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equipment and to cause the OEM to design the Company's products into their
system product offerings. As a result, the Company's cellular products are
beginning to undergo evaluation at a major OEM's test facilities.
The Company began tests of its RF filter products with a PCS service
provider in late 1996. The Company's marketing and sales personnel are working
directly with both PCS service providers and PCS OEMs to enhance the
probability of sales success in this market. The Company is undergoing
technical discussions with a PCS OEM regarding integrating the Company's RF
filter products into its PCS product line.
MANUFACTURING
The Company has focused its manufacturing efforts on maintaining
control of key technologies while avoiding the cost and complexities of
vertical integration. The Company's manufacturing operations consist primarily
of the manufacture of superconducting components from raw materials, and the
assembly, tuning, testing, quality verification and shipping of the Company's
products. All of these activities occur at the Company's manufacturing
facility in Mount Prospect, Illinois, which began operations during the third
quarter of 1996. The Company believes that manufacturing of its RF filter
products requires only moderate capital investments and is scaleable. The
Company also believes that capacity can be rapidly expanded to meet growing
demand without the need for large, upfront capital investments. The Company
purchases all of the components, except for superconducting components, for its
filter products from third party suppliers. The Company believes it has access
to adequate supplies of these purchased components, most of which are produced
to the Company's proprietary designs and specifications. The Company is using
its just-in-time manufacturing capability to maximize quality, insure
flexibility, limit management complexity and minimize inventory cost.
RESEARCH AND DEVELOPMENT
The Company's research and development ("R&D") efforts to date have
been focused on developing and improving cellular and PCS RF filter products.
These efforts have resulted in products with improved interference rejection,
reduced desired signal loss, decreased size, lower cost and enhanced
operational reliability. The Company plans to devote significant resources in
the future to continue to develop and improve these products and expand its
product lines.
The Company has evaluated and will continue to evaluate other markets
for product opportunities using its HTS technology. The Company has conducted,
and plans to continue, R&D into the technology for superconducting fault
current limiters which would act in electrical power distribution applications
much more rapidly than mechanical circuit breakers. The majority of the
Company's development efforts devoted to this technology have to date been
supported by R&D contracts from the U.S. Government. The Company has also
entered into a cooperative development agreement with a major provider of
electrical power distribution products. The goal of this program is to
determine if superconducting fault current limiters have applications in
commercial markets, including electrical grid protection, industrial machinery
protection, and protection of electrical and electronic components such as high
power radio amplifier tubes and transistors.
A key component of the Company's R&D strategy is to develop
relationships with domestic and international research groups to leverage its
internal R&D investments. The Company believes it enjoys many benefits from
these research relationships including accelerated introduction of new
technologies into its product lines, early indications of new technology
developments which could enhance or compete with its products, and high value
improvements in its current key technologies.
Another part of the Company's R&D strategy has been to contract with
and receive funding under government contracts and cooperative agreements.
Government programs under which the Company has
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received R&D funding include the Advanced Technology Program ("ATP") with the
U.S. Department of Commerce and Small Business Innovation Research ("SBIR")
contracts with a number of defense and non-defense government agencies. The
Company has pursued, and will continue to pursue, government contract
opportunities in areas which are directly applicable to its core technologies
and offer attractive commercial opportunities. The Company believes that it
receives benefits from these contracts through leveraging of its internal R&D
investments, and also by developing longer range, more speculative technology
areas.
The Company's total R&D expenses during 1994, 1995 and 1996 were
approximately $2,582,000, $5,205,000 and $6,623,000, respectively, with total
R&D expenses from inception through December 31, 1996 of approximately
$16,195,000. R&D costs reimbursed under government contracts and collaborative
agreements during 1994, 1995 and 1996 were approximately $619,000, $650,000 and
$200,000, respectively, and approximately $1,980,000 from inception through
December 31, 1996.
STRATEGIC RELATIONSHIPS
In addition to its own research staff, the Company has from time to
time entered into research relationships to leverage its internal resources by
seeking assistance in solving specific problems and providing awareness of
technical trends that influence its business. As a result, the Company has
relationships with institutions which have significant superconductivity
research programs. The Company's initial research relationship was with
Argonne National Laboratory ("Argonne"), which currently conducts one of the
largest superconductivity R&D programs in the U.S. In addition to a number of
formal joint R&D projects that the Company has had with Argonne in the past, it
is currently engaged in a two year Cooperative Research and Development
Agreement with Argonne aimed at the development of fault current limiters for
utility applications.
The Company has also entered into agreements with Lucent Technologies,
Inc. ("Lucent") through which the Company and Lucent have jointly designed and
developed technology for use in products for cellular, PCS and other wireless
telecommunications applications. The development work with Lucent was funded
from March 1993 through March 1996 primarily through an ATP cooperative
agreement awarded to the Company by the U.S. Department of Commerce, which the
Company used to offset R&D expenses. The Company's ATP agreement with Lucent
was completed in March 1996. The Company and Lucent entered into a joint
development agreement to continue joint research efforts to further the
development of superconducting filters for cellular and PCS communications
systems using CDMA technology.
The Company has also entered into a technology transfer agreement with
the University of Birmingham (UK), by which the Company purchased certain
intellectual property rights as well as design information relating to the
production of HTS thick-films. The Company is currently funding research at
the University of Birmingham's (UK) Interdisciplinary Research Centre over a
four-year period and has procured additional consulting services from
researchers involved in the program. The agreement covering these activities
ends in December 1998 and is subject to renewal.
The Company also participates in the Science and Technology Center for
Superconductivity, a superconductivity R&D center which is operated by the
University of Illinois under funding from the National Science Foundation, and
the Company is currently funding superconductor research activities at the
University of Illinois.
INTELLECTUAL PROPERTY AND PATENTS
The Company regards certain elements of its product design,
fabrication technology and manufacturing process as proprietary and protects
its rights in them through a combination of patents,
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trade secrets and nondisclosure agreements. The Company also has obtained
exclusive and non-exclusive licenses for technology developed with or by its
research partners, Argonne and Northwestern University, and expects to continue
to obtain licenses from such research partners and others. The Company
believes that its success will depend in part upon the protection of its
proprietary information, its patents and licenses of key technologies from
third parties, and its ability to operate without infringing on the proprietary
rights of others.
As of March 19, 1997, the Company has been issued six U.S. patents and
has filed and is actively pursuing applications for 23 other U.S. patents, and
is the licensee of 11 patents and patent applications held by others. Such
patents and patent applications relate to various aspects of the Company's
superconductor technology and to its current and proposed products. One of the
Company's patent applications has been filed jointly with Lucent and relates to
superconducting filters. Additional inventions are the subject of a group of
patent applications currently under preparation. Furthermore, the Company
expects to pursue foreign patent rights on certain of its inventions and
technologies critical to its products.
In 1994, the Company purchased from Ceramic Process Systems two
additional patents and the related technical know-how covering a process for
producing YBCO powder and manufacturing YBCO electrical fibers. In 1994, the
Company also purchased technology relating to the fabrication of HTS thick-film
components from the University of Birmingham (UK). This thick-film technology
complements the Company's existing patented processes for making thick-film
superconducting components.
Through collaborative relationships with Argonne and Northwestern
University, the Company has licensed patents and patent applications issued or
filed in the U.S. and in certain foreign countries arising under or related to
such collaborative relationships. These licenses primarily relate to the
processing and composition of HTS materials, including the preferential
orientation of HTS materials and the processing of YBCO on a variety of metals,
as well as design technology for some of the Company's current and proposed
products. The Company's licenses from ARCH and Northwestern University
continue for the lives of the patent rights licensed thereby, subject to
termination on certain events, and permit the Company to retain rights to its
patentable improvements to the licensed technology. Certain of the Company's
research has been or is being funded in part by SBIR and other government
contracts. Although the U.S. Government has or will have certain rights in the
technology developed with this funding, the Company does not believe that these
rights will have a material impact on the Company's current RF filter products.
COMPETITION
The market for wireless telecommunications products is very
competitive. The Company views its competition as (i) conventional RF filter
products, (ii) RF filters based on new technologies and (iii) other
superconductor-based RF products.
The Company's RF filter products compete against conventional RF
filter products produced by such companies as Celwave, certain divisions of the
Allen Telecom Group, Inc., Filtronic Comtek, Sinclair Radio Labs, Inc., K&L
Microwave, Inc., Wacom Technology Corp., EMR Corp. and TX-RX Systems, Inc.,
among others. Although these conventional RF filter products are generally
less expensive than the Company's products, the Company believes its RF filter
products are superior on a cost benefit basis.
In addition, other competitive RF filter products based on new
technologies may provide competition in the future to the Company's RF filter
products. In addition to competitive filter products, other companies
including Hazeltine Corp., Metawave Communications Corporation, Allen Telecom
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Group, Inc., Repeater Technologies, Inc. and ArrayCom, Inc., among others, are
developing products based on "smart" antenna, digital signal processing,
microcell or repeater technologies which are also aimed at reducing
interference problems or providing range extension by means other than RF
filtering. The Company does not believe that these technologies pose a direct
competitive threat at present, but cannot exclude them as competition
to the Company's RF filter products at some point in the future.
The existing market for high temperature superconductor-based products
is very small and in the early stages of development. The Company believes
that the market for superconducting products will become intensely competitive,
especially if products with significant market potential are developed. In
addition, the Company believes the superconducting products market will
continue to be characterized by rapid technological change.
A number of large multinational companies are engaged in R&D programs
that could lead to the commercialization of superconducting products, including
products for the wireless telecommunications market. These include, among
others, E.I. DuPont de Nemours & Co., International Business Machines
Corporation, TRW Inc. and Westinghouse Electric Corp. in the U.S. and Fujitsu
Ltd., Hitachi Ltd., NEC Corp., Siemens A.G., and Thomson S.A. in Japan and
Europe. The Company also believes that a number of smaller companies are
engaged in various aspects of the development and commercialization of
superconducting electronics products, including products for the cellular, PCS
and other wireless telecommunications markets. These include, among others,
Conductus, Inc., Superconductor Technologies Inc., and Superconducting Core
Technologies, Inc.
The Company believes that it competes on the basis of product
performance, cost, quality, reliability and focus on the wireless
telecommunications market. Many of the Company's competitors have
substantially greater financial resources, larger R&D staffs and greater
manufacturing and marketing capabilities than the Company.
GOVERNMENT REGULATIONS
Although the Company believes that its wireless telecommunications
products themselves are not licensed or governed by approval requirements of
the Federal Communications Commission ("FCC"), the operation of base stations
is subject to FCC licensing and the radio equipment into which the Company's
products would be incorporated is subject to FCC approval. Base stations and
the equipment marketed for use therein must meet specified technical standards.
The Company's ability to sell its RF filter products is dependent on the
ability of wireless base station equipment manufacturers and of wireless base
station operators to obtain and retain the necessary FCC approvals and
licenses. In order to be acceptable to base station equipment manufacturers
and to base station operators, the characteristics, quality, and reliability of
the Company's base station products must enable them to meet FCC technical
standards.
The Company uses certain hazardous materials in its research,
development and manufacturing operations. As a result, the Company is subject
to stringent federal, state and local regulations governing the storage, use
and disposal of such materials. It is possible that current or future laws and
regulations could require the Company to make substantial expenditures for
preventive or remedial action, reduction of chemical exposure, or waste
treatment or disposal. The Company believes it is in material compliance with
all environmental regulations and to date the Company has not had to incur
significant expenditures for preventive or remedial action with respect to the
use of hazardous materials. However, there can be no assurance that the
operations, business or assets of the Company will not be materially and
adversely affected by the interpretation and enforcement of current or future
environmental laws and regulations. In addition, although the Company believes
that its safety procedures for handling and disposing of such materials comply
with the standards prescribed by state and federal regulations, there is the
risk of
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accidental contamination or injury from these materials. In the event of an
accident, the Company could be held liable for any damages that result.
Furthermore, the use and disposal of hazardous materials involves the risk that
the Company could incur substantial expenditures for such preventive or
remedial actions. The liability in the event of an accident or the costs of
such actions could exceed the Company's resources or otherwise have a material
adverse effect on the Company's business, results of operations and financial
condition.
EMPLOYEES
As of February 28, 1997, the Company had a total of 76 employees, 23
of whom hold advanced degrees. Of the employees, 19 are engaged in
manufacturing and production, 36 are engaged in research, development and
engineering, and 21 are engaged in general management, marketing, finance and
administration. The Company also employs a number of consultants and
independent contractors. The Company considers its relations with its
employees to be satisfactory.
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters in a 35,000 square
foot building located in Mount Prospect, Illinois under a lease which expires
in October 2004. This facility also houses the Company's manufacturing,
research, development, engineering, and marketing activities. The Company
believes that this facility is adequate and suitable for its current needs and
that additional space would be available on commercial terms as necessary to
meet any future needs.
Under the terms of its lease, which expires October 2004, the Company
is responsible for all real estate taxes and operating expenses. The lease
provides for a $350,000 security deposit at December 31, 1996, decreasing by
$50,000 each year, and is secured by a certificate of deposit owned by the
Company.
ITEM 3. LEGAL PROCEEDINGS
On June 5, 1996, Craig M. Siegler filed a complaint against the
Company in the Circuit Court of Cook County, Illinois, County Department,
Chancery Division. The complaint alleged that, in connection with the
Company's private placement of securities in November 1995, the Company
breached and repudiated an oral contract with Mr. Siegler for the issuance and
sale by the Company to Mr. Siegler of 370,370.37 shares of the Company's common
stock, $.001 par value per share (the "Common Stock"), plus warrants
(immediately exercisable at $12.96 per share) to purchase an additional
370,370.37 shares of the Common Stock, for a total price of $4,000,000. The
remedy sought by Mr. Siegler was a sale to him of such securities on the terms
of the November 1995 private placement.
On August 16, 1996, the Company's motion to dismiss Mr. Siegler's
complaint was granted with leave to amend. On September 19, 1996, Mr.
Siegler's motion for reconsideration was denied. On October 9, 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 discovery has commenced.
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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock has been traded on the Nasdaq National Market under
the symbol ISCO since the Company's initial public offering on October 26,
1993. The following table sets forth for the periods indicated the range of
high and low closing sale prices for the Common Stock:
High Low
------- -------
Fiscal year ending December 31, 1995
First Quarter . . . . . . . . . . . . . . . $8.50 $6.00
Second Quarter . . . . . . . . . . . . . . $11.50 $7.00
Third Quarter . . . . . . . . . . . . . . . $11.75 $7.50
Fourth Quarter . . . . . . . . . . . . . . $21.25 $10.00
Fiscal year ending December 31, 1996
First Quarter . . . . . . . . . . . . . . . $34.00 $15.50
Second Quarter . . . . . . . . . . . . . . $27.25 $19.75
Third Quarter . . . . . . . . . . . . . . . $27.25 $15.75
Fourth Quarter . . . . . . . . . . . . . . $22.25 $14.75
On March 20, 1997, the last reported sale price for the Common Stock
was $16.50, and there were 220 holders of record of the Common Stock.
The Company has never declared or paid cash dividends on its Common
Stock and the Company does not expect to pay any dividends on its Common Stock
in the foreseeable future. It is the current policy of the Company's Board of
Directors to retain any earnings to finance the Company's operations and the
expansion of its business. The payment of any cash dividends in the future
will depend upon the Company's earnings, financial condition and capital needs
and on other factors deemed relevant by the Board of Directors.
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ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data with respect to
the Company as of and for the years ended December 31, 1992, 1993, 1994, 1995
and 1996. The selected financial data as of the end of and for each of the
years in the five-year period ended December 31, 1996 have been derived from
the financial statements of the Company audited by Ernst & Young LLP,
independent accountants. The information set forth below should be read in
conjunction with the financial statements, related notes and other financial
information included elsewhere in this Form 10-K.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -------------
STATEMENT OF OPERATIONS DATA:
Revenues . . . . . . . . . . . . . $ 202,348 $ 251,977 $ 208,168 $ 27,830 $ 209,822
Costs and expenses:
Cost of government contract
revenue . . . . . . . . . . . . . 149,303 234,191 194,098 19,286 49,534
Research and development . . . . 230,895 608,373 1,962,678 4,554,946 6,422,921
Selling and marketing . . . . . . 87,943 48,587 454,968 469,600 1,834,640
General and administrative . . . 718,789 1,102,576 2,199,597 2,763,615 3,290,810
----------- ----------- ----------- ----------- -------------
(984,582) (1,741,750) (4,603,173) (7,779,617) (11,388,083)
Other income (expense):
Investment income . . . . . . . 15,586 102,260 496,392 487,543 503,911
Interest expense . . . . . . . . (25,182) (10,136) (8,582) (39,600) (29,602)
----------- ----------- ----------- ----------- -------------
(9,596) 92,124 487,810 447,943 474,309
----------- ----------- ----------- ----------- -------------
Net loss . . . . . . . . . . . . . $ (994,178) $(1,649,626) $(4,115,363) $(7,331,674) $ (10,913,774)
=========== =========== =========== =========== =============
Net loss per common share . . . . . $ (1.15) $ (2.01) $ (2.41)
Weighted average number of
common shares outstanding . . . . 3,578,485 3,641,196 4,536,034
DECEMBER 31,
-----------------------------------------------------------------
1992 1993 1994 1995 1996
--------- ------------ ----------- ---------- -----------
BALANCE SHEET DATA:
Cash and cash equivalents . . . . . $705,943 $16,739,861 $ 90,362 $ 953,093 $ 5,188,047
Working capital . . . . . . . . . . 687,484 16,597,042 9,806,670 5,458,474 5,207,923
Total assets . . . . . . . . . . . 996,909 17,632,020 14,732,501 11,105,766 13,388,496
Long-term debt/capital lease
obligations, less current
portion . . . . . . . . . . . . . 40,101 47,971 8,355 509,079 91,618
Stockholders' equity . . . . . . . 875,817 16,843,855 12,821,746 9,185,379 11,520,128
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company was founded in 1989 by ARCH Development Corporation
("ARCH"), an affiliate of The University of Chicago, to commercialize
superconducting technologies developed initially at Argonne. Since its
inception, the Company has been in the development stage, primarily engaging in
research and product development activities, both internally funded and under
government-funded contracts and cooperative agreements, recruiting technical
and administrative personnel, and raising capital. Throughout its development
stage, the Company's primary focus has been to use its patented and proprietary
HTS materials technologies to develop RF filter products designed to enhance
the quality, coverage, capacity and flexibility of cellular and PCS wireless
telecommunications services. To date, the Company has received a majority of
its revenue from government research contracts. While government research and
development contracts have historically provided the Company's primary source
of revenue, the Company believes that they will not be a significant source of
revenue in the future. The Company has incurred cumulative losses of
$26,361,562 from inception to December 31, 1996.
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During the second half of 1996, the Company made the first commercial
sales of its RF filter products. The Company has received additional orders
for its products which are scheduled for delivery during the first and second
quarters of 1997. Product revenues have been derived from sales of the
Company's RF filter products and to a lesser extent other development stage
products. The Company expects sales of its RF filter products to increase.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
The Company's revenues increased in 1996 to $209,822 from $27,830 in
1995, primarily as a result of sales of the Company's RF filter products. A
government research and development contract begun during the fourth quarter of
1995 generated $53,122 in revenues in 1996. The Company has concentrated its
efforts on its commercial product development programs and does not expect
revenues to increase dramatically unless and until it ships a significant
amount of its commercial products.
Cost of government contract revenue was $49,534 in 1996, as compared to
$19,286 for 1995. Cost of government contract revenue consists primarily of
research and development expenses associated with government contracts,
including engineering personnel, engineering materials and other overhead costs.
The increase of these costs resulted from increased activity under government
contracts. Costs associated with development stage product sales are reflected
as research and development expenses.
The Company's internally funded research and development expenses for
1996 were $6,422,921 compared to $4,554,946 for 1995. The Company incurred
increased expenditures to expand its RF filter product lines, develop and
implement its manufacturing processes and also to conduct advanced research and
development activities. These expenditures consisted primarily of personnel
costs, materials and supplies expenses and costs associated with the Company's
product sales. Under the terms of a government contract entered into in March
1993 and amended in March 1994 and March 1995, the U.S. Government agreed to
share costs of certain of the Company's research and development efforts. This
contract was completed in March 1996. Funding of $200,445 for 1996 has been
offset against the related research and development costs, as compared to
$649,660 for 1995. The Company anticipates it will maintain a similar level of
research and development expenses during 1997 to expand its existing product
lines.
Selling and marketing expenses for 1996 were $1,834,640, as compared
to $469,600 for 1995. This increase was attributable to the addition of sales,
marketing and field service personnel, increases in expenditures to conduct
customer field trials and expansion of product marketing and advertising
efforts.
General and administrative expenses for 1996 were $3,290,810, as
compared to $2,763,615 for 1995. This increase was attributable to increased
administrative expense necessary to support growth in Company personnel and
higher outside service provider costs.
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Investment income increased to $503,911 in 1996 from $487,543
in 1995. This increase was primarily due to a larger average investment
portfolio during 1996, which was attributable primarily to the Company's private
placement completed in February 1996.
Interest expense decreased to $29,602 in 1996 from $39,600 in 1995
primarily due to a lower average debt balance outstanding in 1996 as compared
to 1995.
YEARS ENDED DECEMBER 31, 1995 AND 1994
The Company's revenues decreased in 1995 to $27,830 from $208,168 in
1994, primarily as a result of completing several government contracts in 1994.
A new government contract begun during the fourth quarter of 1995 generated
$21,832 in government contract revenue, and the balance of $5,998 in revenues
was the result of development stage non-RF filter product sales.
Cost of government contract revenue was $19,286 in 1995, as compared
to $194,098 for 1994. Cost of government contract revenue consists primarily
of research and development expenses associated with government contracts,
including engineering personnel, engineering materials and other overhead
costs. The decrease in these costs resulted from decreased activity under
government contracts. Costs associated with development stage product
sales are reflected as research and development expenses.
The Company's internally funded research and development expenses for
1995 were $4,554,946 compared to $1,962,678 for 1994. This increase reflects
the Company's increased commitment of resources to the commercialization of its
RF filter product lines. To support field tests of these products, the Company
continued to expand its internal research and development activities through
the hiring of additional personnel and increasing expenditures for materials
and services needed to produce field test units. Under the terms of a
government contract entered into in March 1993, and amended in March 1994 and
March 1995, the U.S. Government agreed to share costs of certain of the
Company's research and development efforts. Funding of $649,660 for 1995 has
been offset against the related research and development costs, as compared to
$619,028 for 1994.
Selling and marketing expenses for 1995 were $469,600, as compared to
$454,968 for 1994. This increase was attributable to the hiring of additional
marketing and administrative personnel, and increased expenditures for product
marketing and advertising efforts.
General and administrative expenses for 1995 were $2,763,615, as
compared to $2,199,597 for 1994. This increase was primarily attributable to
increased occupancy costs as a result of the Company's move to its new
facility and additional Company personnel.
Investment income decreased to $487,543 in 1995 from $496,392 in 1994.
This decrease was primarily due to a smaller average investment portfolio in
1995.
Interest expense increased to $39,600 in 1995 from $8,582 in 1994
primarily due to higher average debt balance outstanding in 1995 as compared
to 1994.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operations primarily through
public and private equity financings which have raised approximately
$39,000,000, net of related expenses. In February 1996, the Company completed a
private placement which raised approximately $8,334,000, net of expenses. At
December 31, 1996, the Company's cash, cash equivalents and investments,
including certain restricted
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investments, was approximately $6,038,000, reflecting a decrease of
approximately $861,000, from $6,899,000 at December 31, 1995. In December
1996, the Company received an aggregate of approximately $4,400,000 from the
exercise of warrants that were issued in the Company's private
placement completed in November 1995, approximately $1,100,000 of which was
in the form of promissory notes. Approximately $716,000 in principal amount of
these promissory notes is currently outstanding and is due on April 30, 1997.
The Company had provided notice of its intent to redeem the warrants in
November 1996.
During 1995 and 1996, the Company financed a portion of its leasehold
improvements and capital equipment additions through various borrowings
approximating $743,000, approximately $172,000 of which was outstanding at
December 31, 1996. The remaining balance is due in monthly installments
through May 1999.
The Company to date has generated limited revenues from product sales.
The Company invested approximately $3,100,000 during 1996 in the build-out of
its manufacturing facility and other manufacturing equipment. The development
and expansion of the Company's RF filter product lines will require continued
commitment of substantial funds to conduct product development and field trial
activities to establish commercial-scale manufacturing and to market its RF
filter products. The Company currently estimates that additional investments
aggregating approximately $500,000 for machinery, equipment and improvements
associated with expansion of its manufacturing operations will be made over the
next 12 months. 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 needed to support
the Company's commercialization efforts, the magnitude of its research and
product development programs, the cost of additional plant and equipment for
manufacturing and the costs involved in protecting the Company's patents or
other intellectual property. Without consideration of any funds under new
government contracts or cooperative agreements, or from the sale of its
products, the Company believes that its available cash, cash equivalents and
investments provide sufficient funds to meet the Company's current operating
plans and debt service requirements for at least until July 1997. The Company
has filed a registration statement on the date hereof covering the sale of
1,000,000 shares of Common Stock. There can be no assurance that the Company
will be successful in this or any other financing plans. If adequate funds are
not available on acceptable terms when needed, the Company may be required to
delay, scale-back or eliminate the manufacturing, marketing or sales of one or
more of its products or research and development programs. The Company
continues to evaluate its needs for capital and may pursue additional sources
of capital it considers appropriate based upon the Company's requirements and
market conditions. If the Company's planned offering is not successful,
there would be a material adverse effect on the Company's business, operating
results and financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedules, with the
report of independent auditors, listed in Item 14 are included in this Form
10-K.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company, their ages and
their positions in the Company are as follows:
NAME AGE POSITION
------------------------------- ----- -----------------------------------------------------------
Ora E. Smith (1) . . . . . . . 49 President, Chief Executive Officer and Director
Edward W. Laves, Ph.D. . . . . 49 Executive Vice President and Chief Operating Officer
Stephen G. Wasko . . . . . . . 37 Vice President, Chief Financial Officer, Treasurer and
Secretary
James D. Hodge, Ph.D. . . . . . 43 Vice President and Chief Scientist
Dennis M. Craig . . . . . . . . 38 Vice President, Manufacturing
James C. DeBelina . . . . . . . 45 Vice President, Sales and Marketing
Benjamin Golant . . . . . . . . 46 Vice President, Product Development
James Pajcic . . . . . . . . . 45 Vice President, Human Resources
Steven Lazarus (1)(2) . . . . . 65 Chairman of the Board of Directors
Leonard A. Batterson (1)(2) . . 52 Director
Michael J. Friduss (3) . . . . 54 Director
Peter S. Fuss (3) . . . . . . . 63 Director
Tom L. Powers (2) . . . . . . . 60 Director
Paul G. Yovovich (1)(2) . . . . 43 Director
- ------------------
(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Audit Committee
Mr. Smith has served as the President and Chief Executive Officer and
a director of the Company since October 1990. From 1989 until joining the
Company, Mr. Smith was the Vice President and Chief Marketing Officer of
Conductus, Inc., a superconducting electronics company. From 1979 to 1989, Mr.
Smith served in a number of executive positions with Rockwell International
Corporation, including Corporate Director of External Technology Development.
Between 1984 and 1985, Mr. Smith served as the Industrial Research Institute
Fellow in The White House Science Office. Mr. Smith holds S.B. and S.M.
degrees in Mechanical Engineering from the Massachusetts Institute of
Technology and a J.D. degree from Harvard Law School.
Dr. Laves joined the Company in December 1994 as its Executive Vice
President and Chief Operating Officer. Dr. Laves is responsible for the
Company's manufacturing functions, the continuing development of its high
temperature superconducting products for the wireless telecommunications
markets, other corporate research and development activities and the Company's
marketing and sales activities. From 1985 until joining the Company, Dr. Laves
was at Motorola, Inc. where he was Director of Wireless Local Loop Products.
From 1991 to 1993, he served as General Manager of the Cellular Infrastructure
Division of Nippon Motorola, Ltd. From 1988 to 1990, Dr. Laves managed the
development and introduction to the market of Motorola, Inc.'s CoveragePLUS
wide area Special Mobile Radio System (SMRS). Dr. Laves holds Ph.D. and M.B.A.
degrees from the University of Chicago, and received his B.A. degree from
Cornell University.
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Mr. Wasko joined the Company in November 1990, and has served as Vice
President and Treasurer since 1992. He was elected Secretary of the Company in
April 1993 and Chief Financial Officer in August 1993. Mr. Wasko is
responsible for the Company's financial and administrative operations. Prior
to joining the Company's management team, he was Manager of Commercial
Development in the Space Station Division of McDonnell Douglas Corporation.
Additionally, Mr. Wasko served as Program Manager for Technology Development on
the Rockwell International Corporation National Aerospace Plane Program and
managed external technology development activities for Rockwell from 1986 to
1988. Mr. Wasko holds a B.S. degree in aerospace engineering from the
University of Michigan, an M.S. in the same field from the University of
Southern California and an M.B.A. degree from the Harvard Graduate School of
Business Administration.
Dr. Hodge joined the Company in December 1990 as its Vice President,
Engineering and Chief Technical Officer. He has served as Vice President and
Chief Scientist since June 1995. Dr. Hodge possesses experience in the
synthesis and processing of a wide variety of ceramic materials. Additionally,
he has expertise in commercial application of materials in areas such as
electronics packaging, high intensity discharge lamps and certain fast-ion
conductors. Dr. Hodge joined the Company after serving from 1988 to 1990 as
Vice President of Engineering at CPS Superconductor Corporation ("CPS"), a
superconducting electronics company, where he was Principal Investigator on
CPS's contract to produce high strength high temperature superconducting wire
with the U.S. Government. Dr. Hodge was also a member of the technical staff
at General Electric Company's Corporate Research and Development Center. He
holds a B.S. degree from the University of Utah and a Ph.D. from the
Massachusetts Institute of Technology, both in Materials Science. He currently
holds nine patents and is the author of thirty papers in refereed journals.
Mr. Craig joined the Company in December 1996 as Vice President,
Manufacturing. Before joining the Company, Mr. Craig worked for eight years at
Motorola, Inc., where he most recently served as manufacturing operations
manager in the Component Products Group. During his career at Motorola, Inc.,
his responsibilities included production management, new product
implementation, cost reduction and capacity analysis and planning. Prior to
joining Motorola, Inc., Mr. Craig served as a manufacturing process development
engineer at Northrop Corporation in its defense systems division. He received
an M.B.A. degree from Lake Forest Graduate School of Management and a B.S.
degree in mechanical engineering from the University of Illinois at Chicago.
Mr. DeBelina joined the Company in October 1995 as Vice President,
Sales and Marketing. Before joining the Company, Mr. DeBelina was North
American Sales Director for DataTAC(R) network products for Motorola, Inc.
From 1985 until joining the Company, Mr. DeBelina held several other sales and
marketing management positions at Motorola, Inc. Previously, Mr. DeBelina
served both as Product Manager and Planning Manager for FMC Corporation. He
holds a B.S. degree in math and computer science from Illinois Institute of
Technology and an M.B.A. degree from the Harvard Graduate School of Business
Administration.
Mr. Golant joined the Company in January 1996 as Vice President,
Product Development. From 1989 until joining the Company, Mr. Golant was at
E.F. Johnson Company where he served as Director of Engineering, Chief Engineer
and Director of Product Marketing. His responsibilities included managing the
development of mobile, portable and base station equipment for wireless land
mobile radio systems. From 1976 to 1989, Mr. Golant was employed by Motorola
Inc.'s communications sector, leading teams to develop and commercialize a
variety of radio component and system products. He holds a B.S. degree in
electrical engineering from Lehigh University. He holds one patent in the area
of RF filter technology.
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Mr. Pajcic joined the Company in January 1995 as Human Resource
Director. He has served as Vice President, Human Resources since January 1997.
Before joining the Company, Mr. Pajcic spent 15 years at Morton International
where he most recently served as Director Employment and Human Resource
Development on the corporate staff. Prior to his employment with Morton
International, Mr. Pajcic held Human Resource positions at General Foods
Corporation and American Hospital Supply Corporation. He holds a B.S. degree
in psychology from Northwestern University and a Masters Degree in Management
from Northwestern University's Kellogg School of Management, with emphases in
Industrial Relations, Organizational Behavior and Finance.
Mr. Lazarus has served as a director of the Company since January 1992
and as Chairman of the Board since August 1993. He is a Managing General
Partner of Arch Venture Fund L.P. and served previously as President and Chief
Executive Officer of ARCH, an affiliate of the University of Chicago. The
Company was founded by ARCH in 1989. As President of ARCH, he also served as
Associate Dean of the University of Chicago's Graduate School of Business.
Before joining ARCH in 1987, he was the Group Vice President of the Health Care
Services Group of Baxter Travenol Laboratories, Inc., the predecessor of Baxter
Healthcare Corporation. During his 13 years at Baxter, he was also Senior Vice
President for Technology, with responsibilities for manufacturing, materials
management, R&D and engineering. Mr. Lazarus is a director of Amgen
Corporation and Primark Corporation, both public companies.
Mr. Batterson has served as a director of the Company since February
1990. He is the Chairman and Chief Executive Officer of Batterson Venture
Partners, L.L.C., a venture capital management company founded in 1995. Since
1987, he has been the Managing General Partner of Batterson Johnson & Wang
Venture Partners, a partnership formed with Donald Johnson and Sona Wang. The
Batterson Johnson & Wang L.P. fund, a stockholder of the Company, invests in
the following industries: publishing, communications, telecommunications,
medical, biotechnology, materials, retailing, consumer products, manufacturing,
computers and software. As Managing General Partner, Mr. Batterson manages its
daily operations, investor relationships, reporting and investment strategy.
Prior to co-founding Batterson Johnson & Wang Venture Partners, Mr. Batterson
was director of the Venture Capital Division of the Allstate Insurance
Companies. He is Chairman of the Board of LinksCorp, Inc., a golf course
management company, as well as Nanophase Technologies Corporation, a material
science company. Mr. Batterson holds a B.A. degree from Washington University
(St. Louis), a J.D. degree from Washington University Law School and an M.B.A.
degree from the Harvard Graduate School of Business Administration.
Mr. Friduss has served as a director of the Company since October
1996. Mr. Friduss is president of MJ Friduss & Associates, telecommunications
consultants to some of the largest carriers and suppliers in the
telecommunications industry. From 1992 until 1993, Mr. Friduss served as vice
president of customer service and information technology for Ameritech
Corporation. From 1989 until joining Ameritech Corporation, he served as vice
president of operations at Michigan Bell. In 1991, he founded the
Telecommunications Industry Benchmarking Consortium, a collaboration of local,
long distance and alternate access companies, whose mission is to identify and
replicate the communications industry's best practices. Mr. Friduss holds a
B.S. degree in industrial engineering from Illinois Institute of Technology and
a master's degree in management from Northwestern University. He currently
serves on the Board of Trustees of Harris Associates Investment Trust (The
Oakmark Funds) and is the editor of The Friduss Report, a newsletter focused on
the purchasing practices of the Regional Bell Operating Companies.
Mr. Fuss has served as a director of the Company since June 1995. Mr.
Fuss is a management consultant, primarily for Tellabs, Inc. ("Tellabs") as a
member of the International Executive Committee of Tellabs International, Inc.
Prior to his retirement from Tellabs in 1993, Mr. Fuss was President of Tellabs
International, Inc., which he founded in 1987 as a subsidiary. Tellabs
International, Inc. is
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responsible for all Tellabs operations outside of North America. From 1986 to
1987, he was Senior Vice President, Technical Marketing and Business
Development of Tellabs. Mr. Fuss joined Tellabs as Vice President, Engineering
in 1979. From 1977 to 1979, he was Director of R&D at Teletype Corporation and
from 1958 to 1977 he held engineering and management positions at AT&T Bell
Laboratories. Mr. Fuss holds a B.S. degree in electrical engineering from the
University of Michigan and an M.S.E.E. from New York University. He served two
years as an officer in the United States Air Force. He holds ten patents,
primarily in the area of digital signal processing. He is also a director of
Clear Communications, Inc., NetEdge Systems, Inc., Process Control Technologies,
Inc. and Batterson Venture Partners, LLC.
Mr. Powers has served as a director of the Company since October 1996.
Mr. Powers is a professor and associate director of the Advanced Manufacturing
Center at New Mexico State University in Las Cruces, New Mexico, as well as a
consultant to a number of companies. From 1989 to 1991, he was president of
the cellular systems business unit of AT&T Network Systems Group, now known as
Lucent. Under his leadership, the business unit became the market leader in
wireless infrastructure equipment in the United States, opened markets
internationally and introduced the industry's first digital cellular system.
In 1983, he became vice president of AT&T and Philips Telecommunications B.V.,
a joint venture located in the Netherlands. He joined AT&T in 1958 as a member
of the technical staff of Bell Laboratories and went on to management positions
in consumer products, customer switching systems engineering and network
planning. Mr. Powers holds a B.S. degree in electrical engineering with high
honors from the University of Arkansas and a master's degree in electrical
engineering from New York University. He also is a graduate of the Wharton
Advanced Marketing Program and the Stanford Executive Program.
Mr. Yovovich has served as a director of the Company since its initial
public offering in October 1993. He is a private investor and corporate
director. From 1993 until May 1996 he was President of Advance Ross
Corporation, a public company, which through a merger in January 1996 became a
wholly-owned subsidiary of CUC International, Inc., a public company. From
1982 through 1992, Mr. Yovovich held a number of executive positions at Centel
Corporation, a major national telecommunications company, most recently serving
as President of its Central Telephone Company subsidiary. He is also a
director of U.S. Robotics Corporation, Comarco, Inc. and APAC TeleServices,
Inc., each a public company. He holds B.A. and M.B.A. degrees from the
University of Chicago and is a C.P.A. Mr. Yovovich has advised the Company
that he will not stand for re-election when his term expires at the Company's
1997 annual meeting of stockholders.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 of the Securities and Exchange Act of 1934, as amended,
requires the Company's officers, directors and persons who own greater than 10%
of a registered class of the Company's equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the Nasdaq National Market. Based solely on a review of the forms it has
received and on written representations from certain reporting persons that no
such forms were required for them, the Company believes that during 1996 all of
the Section 16 filing requirements applicable to its officers, directors and
10% beneficial owners were complied with by such persons, except that James D.
Hodge did not timely report four transactions that took place on the same day
on a Form 4 during 1996; however, the information required was included in a
Form 5 filed February 1997.
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ITEM 11. EXECUTIVE COMPENSATION
The following table provides information concerning the annual and
long-term compensation for services in all capacities to the Company for the
years ended December 31, 1996, 1995 and 1994 of those persons who were at
December 31, 1996, either (i) the chief executive officer; or (ii) the four
other most highly compensated (based on combined salary and bonus) executive
officers of the Company whose total salary and bonus exceeded $100,000 during
1996 (collectively, the "Named Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS (1)
OTHER ANNUAL SECURITIES ALL OTHER
SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) OPTIONS (#) ($)
- ----------------------------- ----- -------- -------- ------------- ------------- -------------
ORA E. SMITH . . . . . . . . 1996 $194,250 (2) $0 75,000 $0
President and Chief Executive 1995 $185,000 $92,500 $0 n/a $0
Officer 1994 $177,100 $30,000 $73,894(3) 62,500 $0
EDWARD W. LAVES, PH.D. . . . 1996 $147,000 (2) $0 60,000 $0
Executive Vice President and 1995 $140,097 $70,000 $0 n/a $0
Chief Operating Officer 1994(4) $10,606 $25,000 $0 50,000 $0
JAMES D. HODGE, PH.D. . . . . 1996 $126,000 (2) $0 15,000 $0
Vice President and Chief 1995 $120,000 $25,000 $0 n/a $3,500(5)
Scientist 1994 $110,000 $15,000 $0 32,500 $3,500(5)
JAMES DEBELINA . . . . . . . 1996 $120,000 $5,000 $0 10,000 $0
Vice President, Sales and 1995(6) $25,000 $10,000 $0 20,000 $0
Marketing
STEPHEN G. WASKO . . . . . . 1996 $115,500 (2) $0 17,500 $0
Vice President, Chief 1995 $105,833 $38,500 $0 n/a $0
Financial Officer, Treasurer 1994 $93,750 $18,000 $0 5,000 $0
and Secretary
- ------------------
(1) None of the Named Officers had any restricted stock holdings as of December 31, 1996.
(2) The bonus for the year ended December 31, 1996 for this Named Officer has not yet been determined.
(3) $66,094 of this amount represents payments to Mr. Smith for reimbursement of income taxes attributable
to debt forgiveness from the preceding year and $7,800 of this amount represents reimbursement of
automobile expenses.
(4) Dr. Laves commenced employment with the Company in December 1994.
(5) This amount represents the balance forgiven in connection with a loan made to Dr. Hodge in April 1993.
(6) Mr. DeBelina commenced employment with the Company in October 1995.
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OPTION GRANTS IN 1996
The following table contains information concerning the grant of stock
options by the Company to the Named Officers during 1996.
PERCENTAGE
NUMBER OF OF TOTAL
SHARES OPTIONS POTENTIAL REALIZABLE
UNDERLYING GRANTED TO EXERCISE VALUE AT ASSUMED ANNUAL
OPTIONS EMPLOYEES OF BASE RATES OF STOCK PRICE
GRANTED IN FISCAL PRICE EXPIRATION APPRECIATION FOR OPTION
NAME (1)(2) YEAR ($/SH) DATE (1) TERM (2)
- ----------------------------- ---------- ----------- -------- ----------- -------------------------
5%($) 10%($)
-------- ---------
Ora E. Smith . . . . . . . . 25,000 7.9% $18.25 1/15/06 286,933 727,145
50,000 15.88% $17.25 12/20/06(3) 542,422 1,374,603
Edward W. Laves, Ph.D. . . . 20,000 6.35% $18.25 1/15/06 229,547 581,716
40,000 12.70% $17.25 12/20/06(3) 433,937 1,099,682
James D. Hodge, Ph.D. . . . . 5,000 1.59% $18.25 1/15/06 49,242 132,460
10,000 3.18% $17.25 12/20/96(3) 108,484 274,921
James DeBelina . . . . . . . 10,000 3.18% $17.25 12/20/06(3) 108,484 274,921
Stephen G. Wasko . . . . . . 7,500 2.38% $18.25 1/15/06 86,080 218,143
10,000 3.18% $17.25 12/20/06(3) 108,484 274,921
- ------------------
(1) Subject to certain restrictions, these options vest over a four-year period
as follows: one-fourth of the options vest on the first anniversary of the
grant date and one-thirty-sixth of the remaining options vest each month
thereafter. The grant dates are 10 years prior to the respective
expiration dates.
(2) Potential realizable value is presented net of the option exercise price
but before any federal or state income taxes associated with exercise.
These amounts represent certain assumed rates of appreciation only.
Actual gains are dependent on the future performance of the Common Stock
and the option holder's continued employment throughout the vesting
period. The amounts reflected in the table may not necessarily be
achieved.
(3) One-third of the options are subject to cancellation for each of three
specified performance targets that are not met by the Company by the end of
1997.
AGGREGATED OPTION EXERCISES IN 1996 AND YEAR-END 1996 OPTION VALUES
The following table provides information concerning option exercises
in 1996 by the Named Officers and concerning the Named Officers' unexercised
options at December 31, 1996.
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
SHARES OPTIONS AT YEAR-END 1996 MONEY OPTIONS AT YEAR-END
ACQUIRED (#) 1996 ($) (1)
ON VALUE --------------------------- -----------------------------
EXERCISE REALIZED
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- --------- --------- ----------- ------------- ------------ --------------
Ora E. Smith . . . . . 0 $0 34,167 103,333 $237,815 $210,623
Edward W. Laves, Ph.D. 5,000 $98,750 15,833 89,167 $156,351 $288,024
James D. Hodge, Ph.D . 20,000 371,700 40,448 50,627 $563,163 $463,209
James C. DeBelina . . . 0 $0 6,250 23,750 $36,719 $80,781
Stephen G. Wasko . . . 5,000 118,500 21,165 33,585 $245,462 $186,158
- ------------------
(1) The value per option is calculated by subtracting the exercise price from the closing price of the Common Stock
on the Nasdaq National Market on December 31, 1996 (the last business day of 1996) of $17.125.
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DIRECTOR COMPENSATION
During 1996, the Company did not provide any cash compensation to its
directors for their services on the Board of Directors. Each director of the
Company who is not an employee of the Company (the "Non-Employee Directors")
and was first elected to the Board of Directors after the adoption of the 1993
Stock Option Plan is granted non-qualified stock options ("NQSOs") to purchase
10,000 shares of Common Stock at the closing price of the Common Stock as
reported on the Nasdaq National Market on the date of their initial election to
the Board of Directors. In consideration of their service on the Board of
Directors, on the date of the annual meeting of the stockholders of the Company
each Non-Employee Director who is elected, re-elected or continues to serve as
a director because his term has not expired shall be granted NQSOs to purchase
3,000 shares of Common Stock, provided that no such automatic grant shall be
made to a Non-Employee Director who is first elected to the Board of Directors
at the first such meeting or was first elected to the Board of Directors within
three months prior to such annual meeting.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Batterson, who has been a member of the Compensation Committee
since August 19, 1993 and the Executive Committee since January 17, 1997 and
who is a member of the Board of Directors, is a general partner of Batterson
Johnson & Wang L.P., which beneficially owns more than five percent of the
outstanding Common Stock.
EMPLOYMENT AGREEMENTS
Effective January 1, 1997, the Company entered into employment
agreements with each of Mr. Smith and Drs. Laves and Hodge. Each agreement
terminates on December 31, 1997 and stipulates an annual base salary of not
less than $203,960, $170,000, and $126,000, respectively. Each agreement also
includes a provision for a bonus to be paid at the discretion of the Board of
Directors, severance payments if the executive is terminated other than for
"Cause" as defined in such agreement, and certain non-competition and
confidentiality provisions.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 28, 1997, certain
information with respect to the beneficial ownership of Common Stock by (i)
each person known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each Company director, (iii) each
Named Officer and (iv) all Company executive officers and directors as a group.
NUMBERS OF PERCENT OF
SHARES SHARES
BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OWNED(1) OWNED
- ------------------------------------------------------------------------- ------------- --------------
Batterson Johnson & Wang L.P. (2) . . . . . . . . . . . . . . . . . . . . 598,018 11.4%
Sheldon Drobny (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 426,313 8.3
Aaron Fischer (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 376,302 7.3
State of Illinois (5) . . . . . . . . . . . . . . . . . . . . . . . . . . 360,944 6.7
Stewart Shiman (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . 335,485 6.6
Ora E. Smith (7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,952 2.3
James D. Hodge, Ph.D. (8) . . . . . . . . . . . . . . . . . . . . . . . . 52,249 1.0
Stephen G. Wasko (9) . . . . . . . . . . . . . . . . . . . . . . . . . . 29,202 *
Edward W. Laves, Ph.D. (9) . . . . . . . . . . . . . . . . . . . . . . . 25,417 *
Paul G. Yovovich (10) . . . . . . . . . . . . . . . . . . . . . . . . . . 13,000 *
James C. DeBelina (11) . . . . . . . . . . . . . . . . . . . . . . . . . 8,117 *
Peter S. Fuss (9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,333 *
Tom L. Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,400 *
Leonard A. Batterson (12) . . . . . . . . . . . . . . . . . . . . . . . . 2,000 *
Steven Lazarus (9) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 *
Michael J. Friduss . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 *
All executive officers and directors as a group (14 persons) (13) . . . . 266,477 5.1
- ------------------
* Denotes beneficial ownership less than one percent.
(1) Unless otherwise indicated below, the persons in the above table have sole
voting and investment power with respect to all shares shown as beneficially
owned by them.
(2) Includes 221,515 shares issuable upon exercise of warrants presently
exercisable. The address of the stockholder is 303 West Madison Street,
Chicago, Illinois 60606.
(3) Includes 84,603 shares issuable upon exercise of warrants presently
exercisable. Includes 73,402 shares held by Drobny/Fischer General
Partnership ("DFGP"). Mr. Drobny is a general partner of DFGP and in such
capacity he shares voting and investment power with respect to shares held
by DFGP and therefore may be deemed the beneficial owner of the shares of
Common Stock directly held by DFGP. Includes 7,688 shares held by Paradigm
Venture Investors, L.L.C. ("Paradigm"). Mr. Drobny is the managing director
of Paradigm and in such capacity he shares voting and investment power with
respect to shares held by Paradigm and therefore may be deemed the
beneficial owner of the shares of Common Stock directly held by Paradigm.
The address of the stockholder is 95 Revere Drive, Suite A, Northbrook,
Illinois 60062.
(4) Includes 117,149 shares issuable upon exercise of warrants presently
exercisable. Includes 73,402 shares held by DFGP. Mr. Fischer is a general
partner of DFGP and in such capacity he shares voting and investment power
with respect to shares held by DFGP and therefore may be deemed the
beneficial owner of the shares of Common Stock directly held by DFGP.
Includes 7,688 shares held by Paradigm. Mr. Fischer shares voting and
investment power with respect to shares held by
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26
Paradigm and therefore may be deemed the beneficial owner of the shares of
Common Stock directly held by Paradigm. The address of the stockholder is
95 Revere Drive, Suite A, Northbrook, Illinois 60062.
(5) Includes 69,080 shares issuable upon exercise of warrants presently
exercisable. The Company has been advised by the Illinois Department of
Commerce and Community Affairs ("DCCA") that because of Illinois state law
and regulations, DCCA cannot exercise its voting rights with respect to
the shares of common stock it holds. As a result, pursuant to a written
proxy dated June 8, 1994, DCCA has given its irrevocable proxy for all of
the voting securities of the Company it now or hereafter owns to the
individual who is the chief executive officer of the Company. The address
of the stockholder is Illinois Department of Commerce and Community
Affairs, 100 West Randolph, Chicago, Illinois 60601.
(6) Includes 93,642 shares issuable upon exercise of warrants presently
exercisable. Includes 7,688 shares held by Paradigm. Mr. Shiman shares
voting and investment power with respect to shares held by Paradigm and
therefore may be deemed the beneficial owner of the shares of Common Stock
directly held by Paradigm. The address of the stockholder is 95 Revere
Drive, Suite A, Northbrook, Illinois 60062.
(7) Includes 46,979 shares issuable upon exercise of options exercisable
currently or within 60 days of February 28, 1997. Excludes 291,864 shares
held by the State of Illinois and 69,080 shares issuable upon exercise of
warrants presently exercisable and held by the State of Illinois. Mr.
Smith, as the chief executive officer of the Company, has an irrevocable
proxy to vote these shares. Therefore, Mr. Smith may be deemed the
beneficial owner of the shares of Common Stock directly owned by the State
of Illinois. Mr. Smith disclaims this beneficial ownership.
(8) Includes 52,224 shares issuable upon exercise of options exercisable
currently or within 60 days of February 28, 1997.
(9) Represents shares issuable upon exercise of options exercisable currently
or within 60 days of February 28, 1997.
(10) Includes 12,000 shares issuable upon exercise of options exercisable
currently or within 60 days of February 28, 1997.
(11) Includes 7,917 shares issuable upon exercise of options exercisable
currently or within 60 days of February 28, 1997.
(12) Represents shares issuable upon exercise of options exercisable currently
or within 60 days of February 28, 1997. Excludes 376,503 shares held by
Batterson Johnson & Wang L.P. ("BJ&W") and 221,515 shares issuable upon
exercise of warrants presently exercisable and held by BJ&W. Mr. Batterson
is the managing general partner of BJ&W and in such capacity he shares
voting and investment power with respect to shares held by BJ&W and
therefore may be deemed the beneficial owner of the shares of Common Stock
directly owned by BJ&W. Mr. Batterson disclaims this beneficial ownership.
(13) Includes 192,529 shares issuable upon exercise of options exercisable
currently or within 60 days of February 28, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to promissory notes dated December 12, 1996, each of the
following persons owes the Company the following principal amounts: Sheldon
Drobny, $140,387; Aaron Fischer, $123,697; Stewart Shiman, $123,697; and
Drobny/Fischer General Partnership ("DFGP"), $17,812, which were the largest
amounts of indebtedness for such persons to the Company since the beginning of
1996. Messrs. Drobny, Fischer and Shiman each beneficially own more than five
percent of the Company's outstanding Common Stock. Messrs. Drobny and Fischer
are also general partners of DFGP which is a stockholder of the Company. The
promissory notes, which bear interest at a rate per annum equal to 8.25% with a
default interest rate of 10.25%, were issued in connection with the exercise of
warrants of the Company by Messrs. Drobny, Fischer and Shiman and DFGP. These
warrants had been called for redemption by the Company. The promissory notes
are due on April 30, 1997. Paradigm Venture Investors L.L.C., an affiliate of
Messrs. Drobny, Fischer and Shiman, is a guarantor of the promissory notes.
Additional information in response to this item appears in Item 11
under the heading "Compensation Committee Interlocks and Insider
Participation."
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
1. The following financial statements of the Company, with the
report of independent auditors, are filed as part of this Form
10-K:
Report of Independent Auditors
Balance Sheets as of December 31, 1995 and 1996
Statements of Operations for the Years Ended December 31, 1994,
1995, and 1996 and the Cumulative Period from October 18, 1989
(Date of Inception) to December 31, 1996
Statements of Stockholders' Equity for the Years
Ended December 31, 1994, 1995, and 1996 and the Cumulative Period
from October 18, 1989 (Date of Inception) to December 31, 1996
Statements of Cash Flows for the Years Ended December 31, 1994,
1995, and 1996 and the Cumulative Period from October 18, 1989
(Date of Inception) to December 31, 1996
otes to Financial Statements
2. The following financial statement schedules of the Company are
filed as part of this Form 10-K:
Schedule II -- Valuation and Qualifying Accounts
All other financial schedules are omitted because such
schedules are not required or the information required has
been presented in the aforementioned financial statements.
3. The following exhibits are filed with this Report or
incorporated by reference as set forth below.
Exhibit
Number
-------
3.1 Certificate of Incorporation of the Registrant, incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement
on Form S-1, Registration Statement No. 33-67756 (the "IPO
Registration Statement").
3.2 Bylaws of the Registrant, incorporated by reference to Exhibit 3.2
to the IPO Registration Statement.
3.3 Certificate of Amendment of Certificate of Incorporation of the
Registrant, incorporated by reference to Exhibit 3.3 to 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.
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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 February 12, 1996.
10.1 The Company's 1993 Amended and Restated Stock Option Plan,
incorporated by reference to Exhibit B to the Company's Proxy
Statement filed May 6, 1996.
10.2 Directors Indemnification Agreement, incorporated by reference to
Exhibit 10.2 to the IPO Registration Statement.
10.3 Third Amended and Restated Registration Rights Agreement dated as
of July 14, 1993, as amended, incorporated by reference to Exhibit
10.4 to the IPO Registration Statement.
10.4 Public Law Agreement dated February 2, 1990 between Illinois
Department of Commerce and Community Affairs and the Company,
incorporated by reference to Exhibit 10.5 to the IPO Registration
Statement.
10.5 Public Law Agreement dated December 30, 1991 between Illinois
Department of Commerce and Community Affairs and the Company,
amended as of June 30, 1992, incorporated by reference to Exhibit
10.6 to the IPO Registration Statement.
10.6 Representative Warrant Agreement, incorporated by reference to
Exhibit 10.7 to the IPO Registration Statement.
10.7 Subcontract and Cooperative Development Agreement dated as of June
1, 1993 between American Telephone and Telegraph Company and the
Company, incorporated by reference to Exhibit 10.9 to the IPO
Registration Statement.
10.8 Intellectual Property Agreement dated as of June 1, 1993 between
American Telephone and Telegraph Company and the Company,
incorporated by reference to Exhibit 10.10 to the IPO Registration
Statement.
10.9 Financial Assistance Award No. 70NANB3H1381 dated March 1, 1993 by
the United States Department of Commerce under the Advanced
Technology Program, incorporated by reference to Exhibit 10.11 to
the IPO Registration Statement.
10.10 License Agreement dated January 31, 1990 between the Company and
Northwestern University, incorporated by reference to Exhibit
10.13 to the IPO Registration Statement.
10.11 License Agreement dated February 2, 1990 between the Company and
ARCH Development Corporation, incorporated by reference to Exhibit
10.14 to the IPO Registration Statement.
10.12 License Agreement dated August 9, 1991 between the Company and
ARCH Development Corporation, incorporated by reference to Exhibit
10.15 to the IPO Registration Statement.
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10.13 License Agreement dated October 11, 1991 between the Company and
ARCH Development Corporation, incorporated by reference to Exhibit
10.16 to the IPO Registration Statement.
10.14 Public Law Agreement dated August 18, 1993 between Illinois
Department of Commerce and Community Affairs and the Company,
incorporated by reference to Exhibit 10.17 to the IPO Registration
Statement.
10.15 Amendment to Financial Assistance Award No. 70NANB3H1381 dated
March 1, 1994 by the United States Department of Commerce under
the Advanced Technology Program, incorporated by reference to
Exhibit 10.20 to the Form 10-K for the period during December 31,
1993.
10.16 Employment Agreement dated January 1, 1997 between the Company and
James D. Hodge, Ph.D.*
10.17 Employment Agreement dated January 1, 1997 between the Company and
Edward W. Laves, Ph.D.*
10.18 Employment Agreement dated January 1, 1997 between the Company and
Ora E. Smith.*
10.19 Single-Tenant Industrial building Lease between Teachers'
Retirement System of the State of Illinois, landlord, and Illinois
Superconductor Corporation, tenant, dated June 24, 1994,
Incorporated by reference to Exhibit 10.1 to the Form 10-Q for the
period ending June 30, 1994.
10.20 Amendment to Financial Assistance Award No. 70NANB3H1381 dated
March 1, 1995 by the United States Department of Commerce under
the Advanced Technology Program, incorporated by reference to
Exhibit 10.20 to the Form 10-K for the period ending December 31,
1994.
23. Consent of Ernst & Young L.L.P.
27. Financial Data Schedule
- ---------------
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit on this Form 10-K.
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the fourth
quarter of 1996.
29
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 24th day of
March, 1997.
ILLINOIS SUPERCONDUCTOR CORPORATION
By: /s/ ORA E. SMITH
-------------------------------
Ora E. Smith
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 24th day of March, 1997.
Signature Title
/s/ ORA E. SMITH President, Chief Executive Officer
------------------------- (Principal Executive Officer)
Ora E. Smith and a Director
/s/ STEPHEN G. WASKO Chief Financial Officer, Treasurer
------------------------- and Secretary (Principal Financial and
Stephen G. Wasko Accounting Officer)
/s/ LEONARD A. BATTERSON Director
-------------------------
Leonard A. Batterson
/s/ MICHAEL J. FRIDUSS
-------------------------
Director
Michael J. Friduss
/s/ PETER S. FUSS
-------------------------
Director
Peter S. Fuss
/s/ STEVEN LAZARUS Chairman of the Board and Director
-------------------------
Steven Lazarus
/s/ THOMAS J. POWERS
------------------------- Director
Thomas J. Powers
/s/ PAUL G. YOVOVICH
------------------------- Director
Paul G. Yovovich
30
31
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Illinois Superconductor Corporation
We have audited the accompanying balance sheets of Illinois Superconductor
Corporation as of December 31, 1995 and 1996, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996, and t